Recent Journal of Contemporary Accounting and Economics Articles
Naresh Bansal | Ananth Seetharaman | Xu (Frank) Wang
Abstract: We investigate the association between risk-taking incentives provided by stock-based compensation arrangements and non-GAAP financial disclosures. Controlling for compensation to stock price sensitivity, we find that managers with higher compensation to stock volatility sensitivity (vega) are more likely to be associated with voluntary non-GAAP earnings information disclosures. In addition, higher-vega managers are found to be associated with more frequent and less opportunistic non-GAAP earnings information disclosures. Robust to alternative specifications and estimations, our findings suggest that compensation arrangements can encourage managers to make more, higher-quality voluntary non-GAAP disclosures.
Ngoc Bich Tao | Marion Hutchinson
Abstract: This paper examines the role of compensation and risk committees in managing and monitoring the risk behaviour of Australian financial firms in the period leading up to the global financial crisis (2006–2008). This empirical study of 711 observations of financial sector firms demonstrates how the coordination of risk management and compensation committees reduces information asymmetry. The study shows that the composition of the risk and compensation committees is positively associated with risk, which, in turn, is associated with firm performance. More importantly, information asymmetry is reduced when a director is a member of both the risk and compensation committees which moderate the negative association between risk and firm performance for firms with high risk.
Jeyapalan Kasipillai | Sakthi Mahenthiran
Abstract: This study examines whether Malaysian public listed companies (PLCs) use deferred taxes to avoid an earnings decline. In addition, this study also examines whether corporate governance mechanisms attenuate the extent to which deferred taxes are used to manage earnings. Using a sample of 221 PLCs listed on the main and second boards of Bursa Malaysia in 2008 with a complete set of data available from 2005 to 2008, this study finds that Malaysian PLCs use both the accrual and valuation allowance components of net deferred tax liabilities to avoid a decline in earnings. The study also finds that ownership structure and board structure affect the extent to which earnings management is associated with a deferred tax component.
Simon Y.K. Fung | John Goodwin
Abstract: Most prior studies assume a positive relation between debt and earnings management, consistent with the financial distress theory. However, the empirical evidence for financial distress theory is mixed. Another stream of studies argues that lenders of short-term debt play a monitoring role over management, especially when the firm’s creditworthiness is not in doubt. To explore the implications of these arguments on managers’ earnings management incentives, we examine a sample of US firms over the period 2003–2006 and find that short-term debt is positively associated with accruals-based earnings management (measured by discretionary accruals), consistent with the financial distress theory. We also find that this relation is significantly weaker for firms that are of higher creditworthiness (i.e. investment grade firms), consistent with monitoring benefits outweighing financial distress reasons for managing earnings.
Ole-Kristian Hope | Tony Kang | Joung W. Kim
Abstract: This is one of the first large-scale studies to examine the voluntary disclosure practices of foreign firms cross-listed in the United States. We proxy for voluntary disclosure using three attributes of firms’ management earnings guidance: (1) the likelihood of issuance; (2) the frequency of earnings guidance; and (3) a guidance quality measure. After first establishing that market participants view these firms’ disclosures as credible and economically important (i.e., the disclosures are negatively related to analyst forecast errors and the implied cost of equity capital), we compare cross-listed firms’ disclosure practices with comparable US firms and explore variations in disclosure practices among cross-listed firms. We find that cross-listed firms issue less frequent and lower quality management earnings guidance than comparable US firms. We further show that the gap between US and cross-listed firms widened after passage of Regulation FD, a regulation which induced greater public disclosure of firm-specific information. Focusing on the sample of cross-listing firms, we show that firms from common-law countries disclose more than firms from code-law countries. Finally, our results indicate that cross-listed firms that do not list on an organized US exchange provide more frequent and higher quality disclosure than those that do list on organized exchanges.
Reza M. Monem
Abstract: Linck et al. (2008) investigate the determinants of board structure in the US, an environment that features high litigation risk and low ownership concentration. In contrast, using a hand-collected data set that includes information from more than 1000 firms, this paper investigates the determinants of board structure in Australia, an environment that features low litigation risk and high ownership concentration. Multivariate analyses suggest that whereas board size and board independence increase with firm size, CEO duality decreases with firm size. Additional tests suggest that high ownership concentration increases board size, decreases board independence and increases CEO duality. These results imply that if high litigation risk against directors (as in the US) plays a monitoring role in corporate governance, ownership concentration appears to offer an alternative governance mechanism in countries such as Australia, which feature low litigation risk.
Wan Nordin Wan-Hussin | Hasan Mohammed Bamahros
Abstract: This paper investigates the association between the internal audit function attributes and audit delay using a sample of 432 publicly traded firms in Malaysia in 2009. In this unique setting, we capitalize on the publicly available data concerning the investment in and the sourcing arrangement of internal audit function. We find a negative relationship between the costs incurred for the internal audit function and audit delay. However, we do not find any significant association between the internal audit function sourcing arrangements and audit delay. Additionally, we find that greater audit committee independence and longer auditor–client tenure shorten audit delay, and more frequent audit committee meetings and higher misstatements in the preliminary unaudited earnings are associated with a longer audit delay.
Wei Shi | Rencheng Wang
Abstract: In this paper, we present a theoretical model and empirical evidence on the effects of dynamic internal control performance on external financing choices of a company. Using both within-sample and difference-in-difference analysis, we find that after issuing internal control weakness (i.e. ICW) reports under SOX 404, the ICW companies rely more on debt financing and less on equity financing than in previous periods. This effect is more pronounced for the companies with low ex ante probability of internal control weakness. In addition, we show that after correcting the previously reported ICWs, these ICW companies rely more on equity as opposed to debt financing. This result is more pronounced for smaller companies. Our findings suggest that increased (decreased) information asymmetry induced by ineffective (effective) internal control over financial reporting leads a company to follow specific external financing choices to meet its financial deficits.
Yan Sun | Weihong Xu
Abstract: We investigate whether management earnings forecasts fully incorporate information in historical accounting conservatism. We find that management earnings forecasts are more optimistic for firms with greater accounting conservatism in the previous year. We further examine whether this conservatism-related optimistic bias in management earnings forecasts varies with managers’ difficulty predicting earnings accurately, managers’ opportunistic incentives, and the firms’ litigation risk. We find that the negative association between management forecast errors and conservatism increases, to various extent, with the firms’ operating cycles, earnings volatility, and the width of forecast range but does not change with proxies for opportunistic incentives or litigation risk. These results suggest that forecast difficulty is the primary reason for managers’ failure to incorporate conservatism fully in their earnings forecasts.
Capital gains taxes and the market response to public announcements in an indexation-based tax regime
Greg Clinch | Mahmoud Odat
Abstract: This paper addresses the impact of capital gains taxes on the market price and trading volume response to public announcements in an indexation-based tax regime. Our analysis indicates that indexation makes share prices more responsive to public announcements. Moreover, ‘over responsiveness’ induces negative correlation between short-term price changes around the public announcement and subsequent long-term price movements. This effect is greater when anticipated inflation is higher. Our analysis also indicates that trading volume is increasing in price changes around the public announcement.
The timing of changes in CEO compensation from cash bonus to equity-based compensation: Determinants and performance consequences
Zoltan Matolcsy | Yaowen Shan | Vinay Seethamraju
Abstract: This study examines the determinants and performance consequences of changes in CEO compensation structure. The study uses the unique setting when Australian companies have changed from cash bonus to equity-based compensation. While most US CEOs receive some form of equity-based compensation, Australian CEOs have not always been paid equity-based compensation. According to efficient contracting theories, we argue that the change to equity-based compensation is driven by changes in firm characteristics and by the occurrence of CEO turnover, the latter of which provides a less costly opportunity for such change. Our results are consistent with the above arguments. We also document a significant negative association between changes in compensation structure and subsequent firm performance in the following year, even after controlling for CEO turnover and poor governance environments. Overall, our results suggest that the initial change to equity-based compensation is part of an error learning process made by firms that leads them towards efficient CEO compensation contracts.
Non-cash compensation with production externalities and agency problems related to an agent’s consumption choice
Abstract: This paper considers remuneration in terms of a good that helps improve or facilitate production in an agency paradigm. In the presence of this production externality, agency problems arise when the agent has an access to an external market for the good or has private, pre-contract information about the production environment. This paper characterises the optimal compensation packages in a variety of settings. The research findings explain various pay practices, such as payment in terms of reimbursement for a certain good and the selective payment of non-cash compensation.
The impact of IAS 39 on the risk-relevance of earnings volatility: Evidence from foreign banks cross-listed in the USA
Rong-Ruey Duh | Audrey Wen-hsin Hsu | Paulo Alexandre Pimenta Alves
Abstract: We examine the impact of adopting International Accounting Standard 39 – Financial Instruments: Recognition and Measurement (IAS 39) by non-US commercial banks cross-listed in the US on earnings volatility and its risk relevance. As IAS 39 requires the recognition of unrealized fair-value gains and losses for a larger set of financial and derivative-financial instruments, and the impairment charges for loans and receivables, we expect and find that IAS 39 adoption increased earnings volatility in IFRS-adopting firms from 2005 onwards. Furthermore, both hedge accounting and the fair value option under IAS 39 are designed to reduce mixed-measurement volatility and to improve the sensitivity of firm risk measures to earnings volatility. We also find that the relationship between credit ratings (proxy for risk) and earnings volatility increases for IFRS-adopting firms after 2005. The evidence is consistent with the argument that IAS 39 increases the credit relevance of earnings volatility.
Siewan Ren | Anna Wright | Anne Wyatt
Abstract: This paper examines the use of stock options by Australian IPOs. Stock options in this setting exhibit heterogeneity of ‘in the moneyness’ attributes. We can therefore identify incentive ‘out of the money’ options and reward ‘at or in the money’ options and study their usage. The setting also features options granted to employees (CEO, executives, non-executive directors, and managers) and external parties (e.g., underwriters, lenders, seed capitalists, and promoters). We examine the motives for granting stock options with different ‘in the moneyness’ attributes to employees and external parties, as well as the performance outcomes. Our results suggest ‘in the moneyness’ attributes of options vary according to uncertainties about growth options, general operating risks, and/or agency risks relating to the use of IPO proceeds; however, these relations do not translate into robust links from the option grants to future performance.
Sidney Leung | Bin Srinidhi | Gerald Lobo
Abstract: Family control of listed firms in Hong Kong is substantively different and materially higher than in the US which could offer different insights into the effects of family ownership on corporate transparency. Using a sample of listed Hong Kong firms and idiosyncratic volatility as a proxy for firm-specific stock price informativeness, we find that family firms exhibit higher idiosyncratic volatility of stock prices than similar non-family firms. Further, the relation between family ownership and idiosyncratic volatility is weaker for firms with higher leverage but stronger in periods before equity issues. Additionally, we find that family firms disclose more information, particularly related to operations, than nonfamily firms in annual reports. These results are consistent with the argument that family firms disclose more information than their nonfamily peers to reassure skeptical outside investors that they are not expropriating their investment.
Paul A. Griffin | David H. Lont
Abstract: This paper offers new findings about how audit fees vary around auditor dismissals and resignations. For dismissals, we find evidence of lower than normal fees before and after an auditor change, consistent with the view that both incumbent and successor auditors adjust fees downward to retain the client. Our evidence also shows that incumbent and successor auditors charge unusually high fees before and after a resignation. We interpret the higher than normal incumbent fees as an indication that resignation companies reflect unusual levels of audit effort or risk, which the incumbent auditor captures as additional fees. Eventually, however, the additional fees are insufficient, inducing the incumbent to resign. A fee premium by the successor auditor after resignation also supports this view.
Peter M. Clarkson | Julie Walker | Shannon Nicholls
Abstract: This paper investigates the effect of increased shareholder oversight and disclosure about executive remuneration on the pay–performance relation, while controlling for contemporaneous changes in corporate governance practice. Our sample consists of 240 ASX-listed firms with annual reports available for each year over the period 2001–2009, a period which straddles the timing of regulatory change. We initially document the conjectured improvements in remuneration disclosure and shareholder oversight in the form of the advisory vote on the remuneration report. Following, we find as predicted a general strengthening of the pay–performance relation over the study period, with the increased sensitivity of reported CEO remuneration to firm performance being primarily related to enhanced remuneration disclosure and the non-binding shareholder vote on the remuneration report. Our results lead us to conclude that enhanced oversight over executive remuneration arrangements brought about by regulatory change has positively impacted the executive remuneration process by strengthening the pay–performance relation and making the process appear more accountable.
Do political connections affect the role of independent audit committees and CEO Duality? Some evidence from Malaysian audit pricing
Mark A. Bliss | Ferdinand A. Gul | Abdul Majid
Abstract: This study examines whether political connection to firms affects the association between audit committee independence and demand for higher quality audits. In line with Carcello et al. (2002), our findings show that there is a positive association between audit committee independence and audit fees thus supporting the hypothesis that more independent audit committees demand higher audit quality. However, we find that this relationship is weaker for politically connected (PCON) firms suggesting that the independence of audit committees in Malaysian PCON firms may be compromised. Additionally, we provide evidence that PCON firms that have CEO duality are perceived by audit firms as being of higher risk than CEO duality firms without political connection.
Ming-Chin Chen | Sanjay Gupta
Abstract: Overseas dividend remittance is an important vehicle for multinational corporations (MNCs) to move funds among their global subsidiaries. Using firm-level data from 2001 to 2004 for Taiwan-based MNCs with subsidiaries in China, this paper provides empirical evidence on the effect of imputation credits on overseas dividend remittances. We find that imputation credits have a positive effect on increasing foreign dividend payouts, thereby reducing the efficiency loss induced by the tax cost for within-firm dividends of MNCs. We also document evidence that parent companies’ net fund flows from related-party transactions with their subsidiaries are negatively correlated with dividends repatriated from those affiliates, supporting the notion that transfer-pricing may be substituting for within-firm dividend remittance. Our results contribute to understanding the links between taxation and related-party transactions and subsidiary dividend repatriation decisions of MNCs.
Peter Clarkson | J. Douglas Hanna | Gordon D. Richardson | Rex Thompson
Abstract: In this study, we investigate the impact of IFRS adoption in Europe and Australia on the relevance of book value and earnings for equity valuation. Using a sample of 3488 firms that initially adopted International Financial Reporting Standards (IFRS) in 2005, we are able to compare the figures originally reported for the 2004 fiscal years to the IFRS figures that were provided in 2005 as the 2004 IFRS comparative figures. As part of the inquiry, we introduce a cross-product term, equal to the product of EPS and BVPS, into the traditional linear pricing models. The estimated coefficient on the cross-product term is statistically significant and negative, as theory suggests in the presence of important nonlinearities. Further, there is increased non-linearity in the data subsequent to IFRS adoption, with the increase being most pronounced for firms in Common Law countries. With non-linear effects controlled for, there is no observed change in price relevance for firms in either Code Law or Common Law countries, contradicting the results from the linear pricing models. The results also suggest that the distribution of measurement errors becomes more similar across Code Law and Common Law countries after the adoption of IFRS, removing one difference between these groups. Thus, IFRS enhances comparability, an inference that would not be possible had we confined the analysis only to linear pricing models.
Management earnings forecasts and the quality of analysts’ forecasts: The moderating effect of audit committees
M.H. Carol Liu | Zili Zhuang
Abstract: This study investigates whether effective audit committees influence the association between management earnings forecasts and the properties of analysts’ forecasts. We posit that this influence on the part of an audit committee would likely result from increased responsibility for monitoring voluntary disclosure. Using the four attributes that the Blue Ribbon Committee (1999) and prior research suggest as being indicative of audit committee effectiveness, we find that analysts’ forecasts exhibit higher accuracy and lower dispersion with the issuance of management forecasts for those firms employing audit committees that are composed exclusively of independent directors, include an accounting expert, and act with due diligence. We also find that effective audit committees strengthen the association between management and analyst forecast accuracy. Our evidence, therefore, supports the notion that effective corporate governance influences the reliability of voluntary disclosure, and thereby benefits the users of financial information.
Shih-Cheng Lee | Chien-Ting Lin
Abstract: We estimate the proportion of firm value that is related to governance mechanisms in a cointegrated system based on the Feltham and Ohlson (1995) accounting-based valuation model. Using a comprehensive set of 32 governance measures in five categories for Taiwan firms, we find that governance measures related to ownership structure and the divergence between cash flow rights and control rights capture variations in stock prices over time. Controlling for book value, net operating assets, and abnormal operating earnings which account for up to 59% of firms’ equity value over time, the governance measures in addition track at least 39% of the equity value of these firms. We further identify that the shareholdings of board directors and supervisors, shareholdings of the controlling family, the critical control level of a firm, and the voting rights of the largest shareholder for ultimate control are sufficient governance measures to track changes in firm value. Our results shed some light on the extent of the equity value that can be generated by a firm’s governance practices and the types of corporate governance mechanisms that are especially important for firms with similar ownership structure and controls.
Yee-Boon Foo | Mazlina Mat Zain
Abstract: This study examines the relationship between board independence, board diligence and liquidity in Malaysia, an emerging market. Liquidity is proxied by three measures; relative volume, relative quoted depth and proportion of zero-returns. The results using a sample of 481 public-listed firms in Malaysia show that more independent and diligent boards are associated with higher liquidity.
Fadzlan Sufian | Muzafar Shah Habibullah
Abstract: The present paper provides new empirical evidence on the impact of economic freedom on banks’ performance. The empirical analysis is confined to the Malaysian banking sector during the period of 1999–2007. We find that overall economic freedom and business freedom exerts positive impacts, implying that higher (lower) freedom on the activities that banks can undertake and entrepreneurs to start businesses increases (reduces) banks’ profitability. The empirical findings seem to suggest that corruption has a corrosive impact on Malaysian banks’ profitability. Interestingly, the impact of monetary freedom is negative, demonstrating the importance of government intervention in determining the profitability of banks operating in the Malaysian banking sector.
The complementary relationship between financial and non-financial information in the biotechnology industry and the degree of investor sophistication
Jeffrey L. Callen | Ilanit Gavious | Dan Segal
Abstract: We examine whether financial and non-financial variables, separately and in tandem, are value relevant in explaining market returns, equity values and the degree of investment by sophisticated investors for a sample of drug development companies. Patent counts, number of collaborations and probability-adjusted portfolios of drugs under development are the non-financial information metrics used in this study. Earnings are the main financial information variable. We show that news about these non-financial measures is significantly associated with abnormal returns. We also find that earnings are value relevant in explaining cumulative abnormal returns and equity prices around earnings announcement dates despite the fact that R&D expenditures are large and usually expensed as incurred. We further show that non-financial information is value relevant in explaining annual returns, equity prices and degree of investment by (long-horizon) sophisticated investors. Moreover, non-financial variables are value relevant after controlling for financial variables suggesting that the two types of variables are complements.
Jason L. Hall | Paul B. Tacon
Abstract: We examine whether it is profitable to trade according to the recommendations of analysts who made accurate earnings forecasts in a prior year. Prior research has shown that analysts who made the most accurate earnings forecasts in the current period also made the most profitable recommendations during that period. Unfortunately, our research shows that these accurate forecasters cannot be identified on the basis of their track record. While there is statistically significant evidence that forecasting ability is persistent, it is not sufficient to generate profitable stock recommendations in the future. We also attempted to identify superior analysts with respect to the combination of forecast accuracy and recommendation profitability. Even with this finer segmentation of analysts there is no difference in their ability to make profitable recommendations in the future. Furthermore, regardless of forecasting ability, analysts are pre-disposed to recommend stocks with low book-to-market ratios and positive price momentum. This bias may impede their ability to make profitable recommendations.
Paul A. Griffin | Ning Zhu
Abstract: This paper finds that CEO stock options influence the choice, amount, and timing of funds distributed as a buyback. These results favor a managerial opportunism motive for buybacks over other theories and support two key research expectations – that buybacks impose option-induced agency costs on outside shareholders, and that managers benefit from weak governance and unclear accounting in this choice. CEOs increase their insider selling following a buyback, which also supports a managerial opportunism perspective. Once we control for these agency factors, we find no evidence that buyback activity associates reliably with EPS accretion from the reduction in common shares. We conclude that the popular use of stock buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between buybacks and CEOs’ use of stock options as additional compensation.
Y. Wu | C. Gaunt | S. Gray
Abstract: Early models of bankruptcy prediction employed financial ratios drawn from pre-bankruptcy financial statements and performed well both in-sample and out-of-sample. Since then there has been an ongoing effort in the literature to develop models with even greater predictive performance. A significant innovation in the literature was the introduction into bankruptcy prediction models of capital market data such as excess stock returns and stock return volatility, along with the application of the Black–Scholes–Merton option-pricing model. In this note, we test five key bankruptcy models from the literature using an up-to-date data set and find that they each contain unique information regarding the probability of bankruptcy but that their performance varies over time. We build a new model comprising key variables from each of the five models and add a new variable that proxies for the degree of diversification within the firm. The degree of diversification is shown to be negatively associated with the risk of bankruptcy. This more general model outperforms the existing models in a variety of in-sample and out-of-sample tests.
Jeff P. Boone | Inder K. Khurana | K.K. Raman
Abstract: In this paper, we isolate a context – the 1995 Public Securities Litigation Reform Act – where information risk (accruals quality) is likely to change, and investigate whether the increase in accounting discretion associated with litigation reform is viewed by investors as basically opportunistic (i.e., as distorting reported earnings) or as improving the ability of reported earnings to reflect economic value. We measure accounting discretion using both positive (i.e., income-increasing) as well as absolute performance-adjusted abnormal accruals. Our analysis focuses on a constant sample of firms over a 10-year (1992–2001) period, and is structured in two stages. In the first-stage, we utilize an instrumental variable technique that isolates the increase in accounting discretion associated with the 1995 Act. In the second-stage, we relate the predicted increase in accounting discretion associated with litigation reform – obtained from the first-stage regression – to the ex ante equity risk premium for Big N audit clients. Our results suggest that the increase in accounting discretion associated with the 1995 Act was viewed by investors as basically opportunistic. Further, the exogenous nature of the 1995 Act suggests that the observed increase (and pricing) of accounting discretion is related to litigation reform rather than some omitted firm-specific operating characteristic. Overall, our findings suggest that litigation reform affects firm value through managers’ exercise of accounting discretion and cost of equity capital channels.
A cross-country comparison of corporate governance and firm performance: Do financial structure and the legal system matter?
Anne Anderson | Parveen P. Gupta
Abstract: We blend the corporate governance and the financial structure/legal system literature streams to study whether firm performance is enhanced when its governance structure embodies the demands of the host country’s financial structure and legal system. Using a sample of 1736 unique firms representing 22 countries, we find that the joint effect of a country’s financial structure and legal system does matter when explaining the relationship between performance and the overall level of corporate governance in a given country. The results also suggest that firms operating in the market/common combination countries tend to command higher market valuations than firms with a comparable level of corporate governance that operate in the bank/civil combination countries.
Alternative explanations for the association between market values and stock-based compensation expenditure
Zoltan Matolcsy | Suzanna Riddell | Anna Wright
Abstract: The relation between stock-based compensation and market values has been tested previously in the literature, but the empirical findings are inconsistent: both negative and positive relations have been documented. The objective of this study is to provide an explanation for why both negative and positive relations between stock-based compensation expenditure and market values can be consistent with rational markets.We argue that stock-based compensation can be used either as a reward for past performance or as an incentive for future performance. We predict that there is a negative relation to market values when stock-based compensation is granted primarily as a reward to chief executives for past performance, while there is a positive relation when stock-based compensation is used to provide incentives for enhanced future performance. This prediction is tested on a sample of 259 firm-year observations for the period 1999–2004 using an instrumental variables approach, where the sample is classified into the ‘reward’ and ‘incentive’ groups on the basis of prior period performance and option characteristics. Our findings are that there is a positive association between stock-based compensation expenditure and market values for the ‘incentive’ group, but we find overall an insignificant relation for the ‘reward’ group. A number of sensitivity tests confirm the main findings.
Elizabeth A. Rainsbury | Michael Bradbury | Steven F. Cahan
Abstract: This study examines the association between the quality of audit committees on financial reporting quality and external audit fees in an environment where the formation of audit committees was unregulated. The study uses a sample of 87 New Zealand firms in 2001 when no regulations or listing rules existed for audit committees. The results show no significant association between the quality of an audit committee and the quality of financial reporting. These results are robust to alternative measures of earnings quality. Similarly, the quality of audit committees has little impact on the level of fees paid to external auditors. The results suggest that the benefits of ‘best practice’ audit committees may be less than anticipated by regulators and policymakers.
Abstract: In this paper, I examine the existence of earnings surprise anomaly for a sample of actively traded stocks in the Bombay Stock Exchange during 2001–2006. I also examine if sophisticated institutional investors, in particular transient investors, exploit the earnings surprise anomaly. My results indicate that using a standard time series model to forecast earnings, there is clear evidence of a post-earnings announcement drift in the Indian market, even after controlling for common factors that affect risk and transaction costs. However, I find very little evidence that indicates transient investors exploit the earnings surprise mispricing. Attribution analysis of hedge portfolio returns based on increases in ownership by transient investors indicates that earnings surprise does not play a role; risk and liquidity does. A direct test of what causes increase in ownership by transient investors provides little support for the role of earnings surprise. Robustness tests also indicate that while earnings surprise is mispriced by the market, the level of transient investor ownership does not mitigate this effect.
Wuchun Chi | Chiawen Liu | Taychang Wang
Abstract: This study explores the relationship between accounting conservatism and corporate governance. There are two competing perspectives about the possible relationship. One is that the demand for conservatism is greater in situations with more agency problems. Therefore, a weaker governance structure will lead to a more conservative accounting. An alternative perspective is that adequate governance results in better monitoring of management and hence will favor the implementation of conservative accounting. Using the firm-year specific C-Score developed by Khan and Watts [Khan, M., Watts, R.L., 2007. Estimation and validation of a firm-year measure of conservatism. Working Paper, Sloan School of Management, MIT, Cambridge], our empirical results indicate that firms with weaker governance structures tend to be more conservative. These findings are consistent with the view that conservatism is a substitute for other corporate governance mechanisms.
Effects of country-level legal, extra-legal and political institutions on auditing: A cross-country analysis of the auditor specialization premium
Bin Srinidhi | Chee Yeow Lim | Mahmud Hossain
Abstract: In this cross-country study of the specialist auditor premium, which spans the US and 12 other countries, we provide evidence that country-level institutional strength increases average audit fees, but reduces the incremental demand for specialist auditors. This finding supports the hypothesis that strong institutions and the demand for specialist knowledge act as substitutes in providing the requisite assurance of financial statements.
Samir Trabelsi | Réal Labelle | Pascal Dumontier
Abstract: This study analyses the determinants and consequences of internet financial reporting (IFR). Our evidence indicates that firms use the internet to report complementary information on firm background, management forecasts, intangible assets and on social and environmental issues. Our results indicate that the decision to provide additional voluntary financial disclosures through corporate websites is mostly influenced by share turnover, the future profitability of the firm and the level of competition in the industry. Last, we find that the extent of voluntary disclosure on corporate websites is related positively to forecast accuracy, and negatively to the dispersion of analysts forecasts, suggesting that such disclosures provide useful information to analysts.
The Effects of International Financial Reporting Standards on the Accounts and Accounting Quality of Australian Firms: A Retrospective Study
John Goodwin | Kamran Ahmed | Richard Heaney
Abstract: We examine the effect of Australian equivalents to International Financial Reporting Standards (IFRS) on the accounts and accounting quality of 1,065 listed firms, relying on retrospective reconciliations between Australian Generally Accepted Accounting Principles (AGAAP) and IFRS. We find that IFRS increases total liabilities, decreases equity and more firms have earnings decreases than increases. IFRS earnings and equity are not more value relevant than AGAAP earnings and equity and while adjustments for changes in accounting for provisions and intangibles other than goodwill are value relevant, they weaken associations with market value. Goodwill adjustments improve associations with market value. We also find that the reconciliation note for the earnings adjustments contained no new information.
Bita Mashayekhi | Mohammad S. Bazaz
Abstract: This study uses data from companies listed in the Tehran Stock Exchange (TSE) for the years 2005–2006 to investigate the role of corporate governance indices on firm performance. We use board size, board independence, board leadership and institutional investors on the board as corporate governance indices and EPS, ROA and ROE as firm performance surrogates. Our regression results show that board size is negatively associated with firm performance. Moreover, the presence of outside directors strengthens the firms' performance. We find, however, no relationship between leadership structure and firm performance. Likewise, the presence of institutional investors on the board of directors is not positively associated with firm performance.
Report on the Joint Journal of Contemporary Accounting and Economics (JCAE) and Auditing: A Journal of Practice and Theory (AJPT) Symposium 2008
Peter Cheng | Jack L. Li | Wilson H.S. Tong
Abstract: Studies on management turnover in Chinese companies typically find that turnover decisions are associated with companies' accounting performance. Using a sample of Chinese company turnovers during 2000–2003, we disaggregate their net-earnings into core, recurring non-core, and other non-recurring components. Analyzing these earnings components, we show that turnover decisions for government firms are related negatively only to recurring earnings which consist of operating, administrative and financial expenses. Leverage also plays a significant role suggesting the concern that high debt levels may reduce the impacts of the Chinese SOE reforms. However, turnovers in private firms are associated with poor core earnings, a result similar with profit-maximizing firms in developed economies.
Paul A. Griffin | David H. Lont | Yuan Sun
Abstract: This study documents that audit fees, and hence audit quality, and governance reflect two countervailing relations, namely, a fee increase because of exogenous changes in expected liability that require greater auditing and other mechanisms to attain better governance, and a fee reduction because auditors reduce the price of risk to reflect the benefits of better governance. The study period provides an interesting setting to test these relations because it covers the passage of the Sarbanes-Oxley legislation, which imposed a substantial cost on many companies to strengthen governance, including increased auditing and internal control spending. Yet, after controlling for such increased spending, our results also suggest that better governance reduces the cost of auditing.