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THE POWER OF AGGREGATE BOOK-TO-MARKET INNOVATIONS: FORECASTING AND DATING THE REAL ECONOMY
ABDALLA, AHMED
Category: FA = Financial Analysis
Aggregate book-to-market (B/M) ratio reflects market-wide assessments of growth opportunities and productivity. In this paper, I find that aggregate B/M innovations predict time-series variations in the U.S. economy. More importantly, the predictive content of the innovations is incremental (or even superior in a long-horizon forecast) to that of the Survey of Professional Forecasters (SPF). A real-time dating algorithm that is based on the innovations accurately identifies the business cycle turning points for the last 40 years. Decomposing aggregate B/M into components of accounting conservatism and delayed recognition of growth reveals different implications for the macroeconomic information content of aggregate B/M.
EXTENDED AUDITOR DISCLOSURE, WORKLOAD PRESSURES AND AUDIT FEES: EVIDENCE FROM UK
ABDELFATTAH, TAREK
ELAMER , AHMED ; ELMAHGOUB, MOHAMED
Category: AU = Auditing
Although a considerable number of studies have investigated the determinants and consequences of audit fees, studies examining how and why key audit matters, workload pressure, and audit quality might influence its audit firm pricing strategies are rare. Thus, this study examines the impact of key audit matters, workload pressure and audit quality on audit fees. Consequently, we further explore whether audit quality might moderate workload pressure-audit fees relationship. Using a large sample of UK firms for a recent time period (2010–2016) in which there were substantial structural changes in the audit market regulation; our results are three-fold. First, our findings show that workload pressure has a significant and positive pressure on audit fees. Furthermore, we find that the impact of workload pressure differs between high-quality and low-quality audit firms. When clients enjoy greater audit quality, auditors in busy seasons are likely to pass on the scale economy and efficiency benefits to their audit clients and charge them less. Finally, our results indicate that audit fees are high in corporations with high key audit matters. These results are consistent with current economic and behavioral theory and previous research suggesting that workload pressures and key audit matters have pressure effects on the audit fees. Our results have significant implications for audit firms, audit committees, and policy makers.
CEO NARCISSISM AND NON-GAAP EARNINGS: LOOKING GOOD MORE OFTEN WITH LOWER QUALITY EXCLUSIONS
ABDEL-MEGUID, AHMED
JENNINGS, JARED; JOSEPH OLSEN, KARI ; SOLIMAN, MARK
Category: FR = Financial Reporting
Prior literature has found that CEO narcissism affects firms’ strategic and accounting-related outcomes and choices, with a common end of portraying the firm, and by extension the CEO, in a favorable manner. We extend this research to the non-GAAP earnings setting, which is lightly regulated, provides room for discretion, and creates an opportunity to influence others’ opinions. These characteristics make the non-GAAP earnings setting ripe for exploitation by narcissistic CEOs, whose incessant desire for self-enhancement impels them to toward bold and aggressive behavior in order to manipulate situations in their favor. We find that narcissistic CEOs are more likely to use non-GAAP earnings and do so with a greater magnitude of non-GAAP exclusions. We also find that non-GAAP exclusions are more persistent (i.e., of lower quality) with more narcissistic CEOs. Our results shed further light on why firms choose to disclose non-GAAP earnings and contributes to prior CEO narcissism research by highlighting how narcissistic CEOs take advantage of discretion in financial reporting disclosures to fuel their need for achievement and enhance their own image.
THE ROLE OF ACCOUNTING IN GOVERNING MUSEUMS AND ART GALLERIES: RHETORIC OR PARRHESIA
ABDULLAH, AMINAH
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Accounting serves multiple purposes. As a rhetorical device, accounting techniques and knowledge are used by experts to persuade and manipulate others. However, as a device of parrhesia accounting has the potential to achieve greater heights by enabling truth-telling discourse to take place between subjects and their principals. This study examines how accounting is used when governing UK national museums and art galleries (MAGs), by drawing on Foucault’s (2001) conceptions of rhetoric and parrhesia to provide theoretical insights into the role of accounting. It is based on data collected from interviews with senior government officials and from published sources. The findings suggest that the government primarily used account giving mechanisms as a rhetorical device to control subjects at a distance. Accounting had institutional effects because of its social legitimacy and endorsement by the government. Accounting controls included the use of funding agreement and regulatory framework to make MAGs accountable. Subjects from MAGs sought emancipation from the government’s control by appealing to discourse of parrhesia, and contemplating strategies to mitigate the dominant influence of government. This study thus contributes towards understanding how accounting governs subjects and (re)produces practice, and how subjects respond to accounting controls, in the context of art organisations.
SEGMENT DISCLOSURES AND ACCOUNTING ENFORCEMENT AND ANALYST DISAGREEMENT: EU EVIDENCE
ABOUD, AHMED
Category: FR = Financial Reporting
This paper investigates the effects of segment disclosures quantity and quality on analysts’ earnings forecasts dispersion in the largest European Union firms. This study also addresses the moderating impact of IFRS 8 and country level enforcement on the relationship between segment disclosures and analysts’ earnings forecasts dispersion. I find that segment disclosures quality and quantity are associated with more dispersed analysts’ earnings forecasts. However, when our test introduces the country level of enforcement, the impact of segment disclosures is reported in countries with weak enforcement only. Moreover, the findings indicate that the quality and quantity of segment disclosures are associated with more dispersed analysts’ earnings forecasts in pre-IFRS8.Thus, the introduction of IFRS8 decreases the explanatory power of segment information that harms analysts’ forecast environment.
PROXIMITY TO POLITICAL POWER AND AUDIT FEES
ADRIAN, CHRISTOFER
GARG, MUKESH; TRUONG, CAMERON
Category: AU = Auditing
This study examines how clients’ proximity to political power affects auditors’ perceptions of risk, which is reflected in the audit fees charged. We use a new concept, Political Alignment Index (PAI), as a measure of proximity to political power. Our empirical results show a positive association between PAI and audit fees. Furthermore, we also find that the positive effect of proximity to political power on audit fees is less pronounced among firms with higher managerial ability, and among firms with better corporate governance and social performance. Collectively, our findings suggest that auditors perceive firms whose headquarters are located in more politically aligned states to be riskier, and hence, are charged higher audit fees while more able managers, together with corporate governance and corporate social performance act as effective mitigating strategies.
THE ROLE OF BANK BUSINESS UNIT MANAGERS IN ESTIMATING LOAN LOSS IMPAIRMENTS AND MANAGING THE PERFORMANCE OF THEIR UNITS OVER TIME.
AGGELOPOULOS, ELEFTHERIOS
GEORGOPOULOS, ANTONIOS
Category: FA = Financial Analysis
The study proposes that bank business unit managers use the accrual of loan loss impairments, reflected in the branch’s Profit and Loss (P&L) statements, to smooth income and thus achieve better performance of their units. The paper uses a unique micro data set and examines, for the first time, the specific discretionary behavior at lower organizational levels of a representative commercial Greek bank, classified as a systemic financial institution by the ECB. The study explores income smoothing generally and during the business cycle, contrasting the expansion (1st quarter of 2006 - 3rd quarter of 2008) with the early recession period (4th quarter of 2008 - 2nd quarter of 2010) and subsequently the early recession period with the deep recession period (3rd quarter of 2008 – 4th quarter of 2012). The results generally provide evidence for income smoothing practices that reveal a reverse U-shaped form over the business cycle. Moreover, they exhibit that unsecured loans are not associated with income smoothing, although there are certain deep recession effects that change loan composition. Furthermore, they show that the geographic differentiation of loan portfolio doesn’t affect income smoothing regardless of the stage of the business cycle. The paper has considerable implications for auditors, bank managers and policy makers due to the importance of income manipulation in the performance of loan portfolio and bank profitability in general.
ACCOUNTING FRAUD IN EIGHTEENTH CENTURY VENICE: QUESTIONING THE IMPLICATIONS AND LIMITS OF AGENCY THEORY THROUGH MICRO-HISTORICAL ANALYSIS
AGOSTINI, MARISA
CELLA, RICCARDO; FAVERO, GIOVANNI
Category: HI = History
The analysis of accounting frauds has been often based on a theoretical framework derived by the traditional principal-agent model (Jensen and Meckling 1976). Despite the large effort spent in the last decades, empirical researches reveal that the fundamental problem of the agency relationship is far from being solved. Criticisms focused on four major issues: 1) in the same relation an actor can be an agent and (not only or) a principal; 2) the characterization of information asymmetries is crucial to define the role (principal and/or agent) of an actor; 3) market hypotheses lead to a misdescription of real situations; 4) the role of mutual monitoring in order to prevent moral-hazard phenomena. The aim of this paper is to question the implications and limits of this theoretical model through a micro-historical analysis. In particular, it examines accounting practices, institutions’ role and the possible ways of defining accounting fraud in pre-modern historical context through the study of a Venetian case. The three investigated fraudulent financial statements refer to the years 1781, 1782, and 1783, and regard Geminiano Cozzi’s porcelain factory. Their preparation was required by a government official (the Inquisitorato alle Arti). The present paper proposes a reconstruction of the events leading to such result, showing that an inverted relationship between principal and agent was at the origin of the accounting fraud.
DOES COMPLIANCE WITH A CORPORATE GOVERNANCE CODE AFFECT THE SURVIVAL OF FIRMS DURING A FINANCIAL CRISIS?
AHMAD, SARDAR
AKBAR, SAEED ; BRAHMA, SANJUKTA; KODWANI, DEVENDRA; ULLAH, SUBHAN
Category: GV = Accounting and Governance
Abstract This study examines the relationship of firm-level corporate governance mechanisms, such as; compliance with a prescribed code of governance, CEO characteristics and board committees, with the survival of firms during a crisis scenario. The results of our univariate analysis show significant differences in terms of firm-level corporate governance mechanisms between firms which survived and those which failed during the 2007–2009 financial crisis. In particular, most of the firms which survived during the crisis period had insider CEOs, had a higher number of board committees, and had established risk committees in their settings. Interestingly, most of the firms that failed during the financial crisis had a higher level of compliance with the UK Corporate Governance Code. The results of our probit regression analysis suggest that during the crisis period, the existence of an insider CEO and more board committees increase a firm’s chances of survival, whereas, a higher level of compliance is found to be negatively associated with the survival of firms. These findings imply that the principles-based system of ‘comply or explain’ is working well in the UK, and that moving towards mandatory compliance may not necessarily be beneficial for companies in the long-term.
THE SEC AS A CONSTRAINED AGENCY AND THE RELIABILITY OF AAERS AS AN ACCOUNTING FRAUD DATABASE
AHN, JAE HWAN
Category: FR = Financial Reporting
I examine whether Accounting and Auditing Enforcement Releases (AAERs) constitute a reliable database for accounting fraud, despite their partial coverage of misreporting cases and the resource constraints of the SEC. By comparing the characteristics of AAERs with those of securities class action lawsuits and restatements, I find that AAERs cover cases that are more likely to represent material accounting irregularities, which are characterized by aggressive adoption of accruals, strong financing needs, and significant market impact of misreporting cases. Further analyses indicate that the characteristics of AAERs can be explained by the SEC’s methods in utilizing constrained resources, in addition to AAERs’ inherently egregious nature in that they involve accountants’ collusion or serious defects in the financial auditing process. I specifically find that high-risk and systematically important firms are associated with a higher propensity for detection by the SEC, and states with higher firm population tend to have SEC regional offices. Through this optimization, the SEC may mitigate inefficiencies inherent in accounting fraud investigation processes and address the potential geographic bias, which suggests that 11 regional offices are not sufficient to regulate all U.S. firms. Overall, my findings support the relative reliability of AAERs as an accounting fraud database, and should be of interest to researchers who use AAERs to proxy for financial misreporting.
DETERMINANTS OF COST ALLOCATION AND PERFORMANCE IMPACT OF DISTORTED COST ALLOCATION
AHN, TAE-SIK (T.S.)
HWANG, INY; HYUN, JEONG-HOON; KOO, MINJAE
Category: MA = Management Accounting
Cost allocation is essential, in the sense that it provides information for management decisions (information perspective) and creates incentives for divisional managers to control costs (motivation perspective). In some circumstances, firms “distort” cost, so that the allocated cost is deviated from the optimal level, which a division expects that they are accountable for. Cost distortion can be either a result of the utilization of an aggregated, simplistic costing method or a result of ex-post discretionary adjustments that can mitigate the incompleteness of objective allocation bases, prevent divisional manipulation or trigger divisional dissatisfaction for its arbitrariness. We investigate the impact of cost distortion on divisional performance and firm performance by using Compustat-Segments database from 2008 to 2015. We find that over-allocation discourages divisional managers to improve their subsequent performance and that cost distortion negatively affects an overall firm performance. Our findings suggest that in order to motivate managers and facilitate their decisions, overhead costs should be allocated at an anticipated level.
THE EFFECT OF STOCK BASED INCENTIVES ON INDIVIDUAL MANAGER PERFORMANCE
AHRENS, CAROLIN
Category: MA = Management Accounting
The aim of this study is to shed light on the black box of stock based incentives for managers (in form of employee stock ownership plans (ESOPs)) and their effect on individual performance. Whereas prior research focused on the impact of stock based incentives for top executives on firm outcomes, the underlying mechanism of how these incentives work for managers remains open. When stock based compensation motivates managers by providing financial incentives that link to overall firm outcomes, I expect that the ESOP participation of managers increase their individual effort. Using a sample of 3,262 managers from a large European industrial firm, my findings confirm the expected positive effect of manager ESOP participation on individual performance. Moreover, I find confirmation for an enhancing effect of contextual factors showing that stock based incentives can be an especially powerful instrument to incentivize managers, who are of particular importance for firms because of (1) their influential decision-making role regarding firm outcomes, and (2) their key role in managing critical situations.
EFFECTIVE ENTERPRISE RISK MANAGEMENT (ERM) PRACTICES THROUGH ORGANISATIONAL MIND
AHRENS, THOMAS
ASDEMIR, KURSAD
Category: MA = Management Accounting
This paper borrows the concept of organisational mind from high-reliability organisations (HRO) research in order to develop some general insights into key dimensions of effective enterprise risk management (ERM) practices. Based on extant ERM field research we posit that those key dimensions should focus on sensemaking processes within organisations and their ability to link their thinking about risk to activities that seek to address those risks. Our research analysed testimonies of US investment bankers before US government investigation committees into the causes of the 2007/8 global financial crisis, subpoenaed emails and documents published by those committees, and some newspaper articles. Our findings suggest that organisational mind can facilitate effective ERM and that its absence can make ERM ineffective. For organisations that use ERM we modify the notion of organisational mind from the one that emerged from the HRO research.
ACCOUNTING FIRM ASSOCIATION MEMBERSHIP AND AUDIT FIRM GROWTH
AKAMAH, HERITA
AHN, JAEHAN; BILLS, KEN; SAUNDERS, K. KELLI
Category: AU = Auditing
In this study, we explore a topic of primary concern to small audit firms – attracting new clientele. A potential avenue available to small audit firms to enhance their visibility and legitimacy among potential audit clients is to join an affiliation of accounting firms known as an accounting association. We examine whether small audit firms with accounting association membership have greater client growth than their peer audit firms without association membership. We separately explore growth in private and public clients. Using hand-collected data, we find that small audit firms with accounting association membership gain approximately 38 percent (5 percent) more private (public) clients over a two-year period than those without association membership. We find that this growth is due to both gaining new entrants into the audit market and winning over clients from competitors. Further, we find that the reputation of an association positively affects the client growth seen by member firms.
ANALYSTS' BIAS: OPTIMISM OR OBFUSCATION
AKUBELEM, NANA OIZA
Category: FA = Financial Analysis
Abstract Research optimism by financial analysts has been extensively investigated in relation to their earning’s forecasts and recommendation. In this paper, we extend prior research on analysts’ bias by examining the difference in tone and readability of analysts’ reports issued by analysts employed by investment banks and independent research firms. We find that though the recommendations suggest higher optimism level for investment banking analysts, there was no significant difference in the tone of reports issued by both types of analysts following the same firm. Moreover, we find that the level of readability varied with the level of good news only for reports issued by investment banking analysts. Precisely, readability is lower when the reports are less optimistic, indicating a tendency to obfuscate bad news through more complex reporting. Overall the findings are consistent with an impression management perspective and provide support for the need to extend analysts’ research to the narratives which accompany their earnings’ forecasts and recommendations.
DOES CORPORATE GOVERNANCE INFLUENCE EARNINGS MANAGEMENT IN LISTED COMPANIES IN BAHRAIN BOURSE?
ALAREENI, BAHAAEDDIN
Category: GV = Accounting and Governance
Research purpose- This study considers data for listed companies in Bahrain Bourse to determine if companies practice earnings management (EM). Further, the effect of a set of corporate governance characteristics on EM practices is examined. Design/methodology/approach- The EM level was measured using discretionary accruals )DA( calculated using the Modified Jones (1995) Model. The study sample consisted of 20 companies listed during the period 2011–2015. Ordinary least squares (OLS) was used with panel data to test the study hypotheses and achieve the study aims. Findings- EM is negatively correlated with board size, confirming that a larger board is associated with a lower level of EM practices. Further, board independence is positively correlated with EM, suggesting that the larger the number of independent directors, the higher the level of EM practices. In addition, internal ownership is positively related to EM, confirming that the higher level of internal ownership increases EM practices. CEO duality does not appear to have any effect on EM in Bahrain Bourse. More interestingly, the findings reveal that companies practice EM through income-increasing DA. Research limitations/implications- Financial data and data related to other corporate governance characteristics are lacking. Practical implications- The results of this study provide empirical support for the development of new regulations and amendments and necessary corrective decisions regarding the effectiveness of applying corporate governance code in Bahrain Bourse. More specifically, this study reveals an urgent need for new amendments to restrict EM practices in Bahrain Bourse. Originality/value- This study enriches the EM literature by covering Bahrain as an Asian country, which has not been sufficiently examined in relation to this topic. Further, this study provides a clear picture of the level of EM practices in Bahrain Bourse to multiple parties.
DOES ACCOUNTING QUALITY REALLY IMPROVES WITH VOLUNTARY IFRS ADOPTION? EVIDENCE FROM SWITZERLAND.
ALBRAHIMI, ALBIAN
Category: FR = Financial Reporting
Using a single country setting of Swiss firms, this paper investigates whether accounting quality improves for firms voluntarily adopting IFRS. Prior research finds mixed evidence on accounting quality improvements around the voluntary IFRS adoption. The Swiss setting allows to isolate the effect of the change from accounting standards from the effect of changes in reporting enforcements. Furthermore, I exploit the fact that many firms, early adopted IFRS long time ago (hereafter, "benchmark firms"), although IFRS is not mandatory in Switzerland. I examine whether firms adopting IFRS have better accounting quality metrics in the post-adoption period. I find that voluntary adopters exhibit significant improvement in accounting quality metrics in the post-adoption period. Additionally, I examine whether firms that "seriously" adopt IFRS exhibit higher accounting quality improvements. Classifying the adopters in non-serious or serious adopters based on their actual reporting changes around the adoption, I find that the non-serious adopters do not face accounting quality improvements in the post-adoption period. Overall, the evidence points towards the explanation that accounting quality is mainly shaped by reporting incentives.
CONFLICTING INSTITUTIONAL LOGICS IN THE FIELD OF FINANCIAL REPORTING ENFORCEMENT: INSIGHTS FROM AN EMERGING ECONOMY
ALBU, CATALIN NICOLAE
ALBU, NADIA; HOFFMANN, SEBASTIAN
Category: IC = Interdisciplinary/Critical
This paper mobilizes an institutional logics perspective to analyze the dynamics and changes Romania experienced when adopting the European Union’s financial reporting enforcement system. The Romanian context is characterized by the juxtaposition of market-based principles imported with the aim of achieving the economic prosperity of developed countries in the Western world and a state logic inherited from the communist past. This longitudinal case study builds on a content analysis of publicly available documents and proceedings in the realm of financial and capital market regulation in Romania, and data gathered through semi-structured interviews. An intended radical change in logics, accompanied by slow assimilation processes in an unstructured institutional field, allows for competing logics to co-exist. Material change in practices relies on the support of the institutional infrastructure, such that intermediaries play an important role in offering, elaborating on and interpreting frames in line with the new logic. However, the old logic is not replaced; rather, the new logic’s practices are slowly altered and adapted to the local context, or blended with existing practices. This is reflective of gradual and incremental developments. The slow process of change echoes the general notion of reforming processes in emerging economies and their unstructured fields.
STATE’S INSTITUTIONAL WORK IN THE ACCOUNTING REGULATORY SPACE. INSIGHTS FROM AN EMERGING ECONOMY
ALBU, NADIA
ALBU, CATALIN NICOLAE
Category: IC = Interdisciplinary/Critical
We adopt an institutional work lens, and the regulatory space concept, to analyze how the Romanian State responds to the significant expansion of transnational and other local actors’ roles in accounting regulation, and how it engaged in institutional work to maintain a dominant role. Our case provides evidence of the State mixing various types of institutional work, that are usually performed by different actors, to maintain its strong position in the regulatory field. We find that the State accepts international standards and advice, overtly, without frictions or resistance, yet covertly maintaining power through its regulatory process, including the use of timing and meaning of regulations, the education work around them, and the limited consultation process. The regulatory process in Romania allows for the continuance of local practices and thinking under the label of international standards, as a result of the theorizing, educating, policing and deterring work of the State. Our study informs the international literature about the forces for regulatory change or inertia, an issue of interest to understanding how various types of regulatory regimes work in local contexts.
ACCOUNTING CONSERVATISM AND DEBT COVENANT INTENSITY IN PRIVATE DEBT CONTRACTS
ALEDO MARTINEZ, JUANA
ABELLÁN MARTÍNEZ, DIEGO; GARCÍA LARA, JUAN MANUEL; LIN, CECILIA
Category: FR = Financial Reporting
Agency costs exist due to the conflict of interests between shareholders and debtholders. Corporate managers may act on behalf of shareholders that result in taking certain actions detrimental to the welfare of the debtholders. The agency theory of covenants (ATC) suggests that the agency cost of the debt can be mitigated by restricting managerial opportunistic behavior with covenants written into the debt contracts to better align manager’s interests with those of the debtholders. This paper examines whether firms with more covenant intensity in their private debt contracts exhibit timelier recognition of economics losses. Additionally, we examine whether conservatism plays a role in the design of the covenants in private debt agreements. We find a negative relation between covenant intensity and the degree of timely loss recognition. This finding is consistent with Nikolaev’s (2010) finding that the presence of private debt and covenants attenuate the relationship between conservative financial reporting and the use of public debt covenants in contract We also find a firm’s degree of conservatism prior to debt issue influences the debt covenant design of the lending agreements.
PERFORMANCE BUDGETING AND INSTITUTIONAL WORK AS A ‘CREATIVE DISTRACTION' OF ACCOUNTABILITY RELATIONS IN A MUNICIPALITY
ALEKSANDROV, EVGENII
BOURMISTROV, ANATOLI; GROSSI, GIUSEPPE
Category: MA = Management Accounting
The paper explores how relations between performance budgeting (PB) and accountability are formed in practice over time. This is a qualitative case study of one municipality within Russia as it begins to use performance information in budgeting under central government pressures. With triangulation of 25 interviews, document analysis and field observations, institutional work theory was employed to guide the study. The paper demonstrates the dynamic properties of relations between PB and accountability via the 'creative distraction' metaphor. Specifically, it was observed that PB was a 'distraction' mechanism, which, on the one hand, strengthened vertical managerial accountability and 'vertical power' between municipal and upper-level authorities, while, on the other hand, distracting the municipality from real municipal needs (public and political accountabilities), by separating municipal departments into independent units. Nevertheless, this 'distraction' was at the same time 'creative', as it produced creative effects on accountability within PB development over time (e.g. redirecting the irrelevant constraints of performance information in budgeting into necessary manipulations, including balancing managerial and political accountabilities for municipal survival). The demonstrated 'creative distraction' of PB in changing accountability from vertical ('distraction') to horizontal ('creative') is explained by actors' institutional work progression over time.
DEBT FINANCING AND COLLATERAL: THE ROLE OF FAIR-VALUE ADJUSTMENTS
ALESZCZYK, ALEKSANDER AMADEUSZ
DE GEORGE, EMMANUEL; ERTAN, AYTEKIN; VASVARI, FLORIN
Category: FR = Financial Reporting
Using a large hand-collected sample of business combination disclosures provided by non-financial US acquirers, we investigate whether fair-value adjustments (FVAs) of targets’ assets allow acquirers to increase their debt capacity. We find that the average corporate acquirer reports an economically significant increase of 183 percent in the value of the target’s total non-cash assets. We also document that FVAs are associated with a substantial increase in the debt issuance of the combined entity during the three-year period after the acquisition. This additional debt is issued at lower interest rates, has longer maturities, and is more likely to be secured. The increase in new debt issuance during the post-acquisition period is associated with FVAs on tangible assets and positive FVAs, suggesting that the reporting of previously unrecognized asset values increases the value of the collateral on acquirers’ balance sheet. Our results indicate that asset fair value measurement increases debt capacity and improves credit terms, consistent with lenders fixating on balance sheet values when establishing borrowers’ collateralizable asset base.
INDIVIDUAL AUDITOR COMPETENCES AND THE PRICING OF AUDIT SERVICES
ALEXEYEVA, IRINA
Category: AU = Auditing
The study examines whether partner special competencies, such as industry expertise, public company expertise and client-specific expertise, are associated with a fee premium. It further investigates whether the association between partner competencies and audit fees is dependent on gender. Using a sample of 225 public Swedish companies audited from 2006-2015 (1461 firm-years) by 182 partners affiliated to Big 4 audit firms, partner industry expertise and client-specific expertise are found to be associated with higher audit fees. A further finding is that partners with special competencies are dominantly men. However, male public company specialists receive significantly lower audit fees than their female counterparts. This finding suggests that female auditors who are public company experts may have exceptional track records, which can strengthen their powers when negotiating audit price. Taken together, the results indicate that partner special competence is valued by clients.
INSTITUTIONAL CROSS-OWNERSHIP AND CORPORATE DISCLOSURE
ALI, ASHIQ
FAN, ZHONGWEN; LI, NINGZHONG
Category: GV = Accounting and Governance
The majority of U.S. public firms are held by institutional blockholders that simultaneously block hold other firms in the same industry, a phenomenon referred to as institutional cross-ownership. We examine the effect of institutional cross-ownership on corporate voluntary disclosure. We argue that institutions play a coordination role to reduce competition among the peer firms they cross-hold, in order to increase their portfolio value. Such coordination reduces the proprietary costs of disclosure and promotes information sharing among peer firms through public disclosure to facilitate tacit collusion. Consistent with this argument, we find that firms with greater institutional cross-ownership provide more management earnings forecasts. Cross-sectional analyses provide further support to the above explanation. We find that the above result is driven by dedicated institutions and quasi-indexers, and not by transient institutions. Also, the result is more pronounced when the cross-holding institutions cross-hold more same-industry firms. Our main finding is robust to a difference-in-difference analysis using a quasi-natural experiment of financial institution mergers, as well as to alternative measures of voluntary disclosure.
GOVERNANCE STRUCTURE AND FINANCIAL FLEXIBILITY: A COMPARISON STUDY OF BANKING SYSTEM
ALJUGHAIMAN, ABDULLAH
SALAMA, ALY; ZENG, YAN
Category: GV = Accounting and Governance
This paper investigates the influences of governance structures for Islamic (IBs) and Conventional (CBs) banks on their financial flexibility positions. By employing a sample of 28 IBs and 37 CBs in 11 MENA countries covering the period from 2009–2015, we conclude that while larger board size effectively improves the financial flexibility of CBs, it reduces the IBs’ financial flexibility. Such different board size effects can be explained by three main characteristics of IBs: Shari’ah compliance risk, lack of protection for stakeholders’ rights, and lower complexity level. Furthermore, we find that the more effective the SSB, the better the IBs’ financial flexibility as the SSB members with higher multi-directorship may bring accumulated knowledge and expertise to improve the monitoring quality on Shari’ah compliance. Our findings can offer valuable insights for both policymakers and regulators in the banking sector.
PROPHETS, OPPORTUNISTS OR CAMP FOLLOWERS? ASSESSING THE ROLE OF AIS RESEARCH BASED ON A CONTEXTUAL STUDY OF THE POPULATION OF PUBLISHED PAPERS IN CLOUD COMPUTING AND BLOCKCHAIN
ALLES, MICHAEL
Category: IS = Accounting and Information Systems
Alles, Kogan and Vasarhelyi (2008) and O’Leary (2008) proposed frameworks designed to help AIS academics undertake research that would be more likely to add value to the wider AIS constituency and be more in sync with the maturity cycle of the underlying technology being investigated. A decade later, I examine how well these frameworks fit the subsequent evolution of AIS research. I do so by analyzing the population of published research into the mature technology of cloud computing and then leveraging that analysis to examine the likely path of future AIS research into the emerging technology of blockchain. The conclusion I reach is that while the cloud computing research has developed in ways that are inconsistent with Alles, Kogan and Vasarhelyi (2008) and O’Leary (2008), that literature does validate the reasons those frameworks were proposed in the first place. The AIS research into cloud computing lacks any great insights and fails to add much value either to the fields of AIS or of cloud computing. A more systematic approach is necessary if the forthcoming AIS research into blockchain is to avoid the same outcome. The reality is that most technologies will advance regardless of what AIS researchers do or do not do. It is, rather, the relevance and impact of AIS research that suffers when AIS researchers act opportunistically and in isolation from the wider technological ecosystem.
PERCEPTION OF EXTERNAL AUDITORS CONCERNING THE INFLUENCE OF CORPORATE GOVERNANCE MECHANISMS ON THE QUALITY OF EXTERNAL AUDIT
ALMASRIA, NASHAT ALI
DI , JING
Category: AU = Auditing
The corporate governance literature indicates efforts to investigate the relationship between internal Corporate Governance Mechanisms (CGMs) and Audit Quality (AQ). However, empirical findings prior to this study are inconclusive and not comprehensive enough to address all CGMs in terms of its effect on AQ; hence, this study extends the scope of previous empirical evidence by investigating the impact of internal audit factors, audit committee and board of director as the main CGMs on AQ. Mainly, this study aims to investigate and understand the point view of the Jordanian external auditors concerning the impact of internal CGMs on AQ. As a result, this research contributes to the existing literature both in theoretical and practical fronts by developing a theoretical and conceptual framework that aimed to establish a relationship between internal CGMs and AQ characteristics. Professional standards and previous empirical results highlighted that the client’s internal governance mechanisms can contribute to the external audit service in different ways either direct or indirect way. This research used questionnaire survey to understand the perceptions of external auditors as the importance specified by them to several internal CGMs. As a descriptive, correlation and regression findings illustrate that the work performance of internal audit and audit committee performance are the most important factor that effect on AQ.
AUDIT FEES AND FINANCIAL CRISIS: EVIDENCE FROM THE SPANISH MANUFACTURING INDUSTRIES
ALMEIDA, BRUNO
SILVA, ALEXANDRE
Category: AU = Auditing
The international financial crisis plunged the Spanish economy in a downturn spiral from 2008 to 2010, with seven consecutives recession periods. During this period Spanish companies faced growth and liquidity problems and credit constrains, which increased their business risk. The international literature emphasizes that there is a relationship between business risk and audit fees. This study considers if there is a relationship between time (the three years period when Spanish recession was higher and the following three years period) and audit fees. Consequently we analyzed the financial statements and the audit fees charged by auditors in the Spanish manufacturing industries from 2008 to 2013. The results obtained, despite positive and negative correlations between audit fees and other variables of our model, are not totally conclusive, nor are they consistent, pointing to a tenuous relationship between time and audit fees, and partially corroborates the American reality, but not the facts occurred in Australia, China and Sweden, by providing a mixed analysis.
AUDIT FEES AND FIRMS’ LIFE CYCLE STAGES
ALMEIDA, JOSE ELIAS
PUNDRICH, GABRIEL
Category: AU = Auditing
We argue that life cycle has implications on audit fees. In particular, we predict that auditor price clients driven by the inherent audit risks represented on each life cycle. Our sample consists of U.S. public firms from 1996 to 2016 from Thomson Reuters Eikon. Our findings show that firms in introduction and decline stages pay lower audit fees and, independently of the life cycle stage, all firms pay higher fees to Big Four audit companies. In addition, we find evidence that Big Four auditors avoid non-audit services to decline firms as a way to reduce litigation and reputation risks. Our results are robust also using an international sample.
REPATRIATION TAXES AND SUBSIDIARY-LEVEL INVESTMENT EFFICIENCY
AMBERGER, HARALD JOHANNES
MARKLE, KEVIN S.; SAMUEL, DAVID M. P.
Category: TX = Taxation
This paper examines the effect of repatriation taxes on the investment decisions made by foreign subsidiaries of multinational corporations (MNCs). Using a global sample of MNCs, we provide evidence that a foreign subsidiary’s investments are less aligned with local growth opportunities when its parent faces repatriation taxes on its earnings. This negative effect of repatriation taxes on investment efficiency is weaker when the parent monitors the subsidiary more closely and when the parent has a stronger need for the subsidiary’s earnings to be repatriated. We interpret these results as evidence that agency conflicts between a firm’s central management and the foreign subsidiary’s local management drive the observed inefficiency. We confirm our results and establish a causal relationship using natural experiments in the U.K. and Japan, which both eliminated repatriation taxes from their international tax systems in 2009. Our results suggest that repatriation taxes reinforce agency conflicts within MNCs, leading to economically less efficient investment decisions at the subsidiary level.
DO U.S. ANALYSTS IMPROVE THE LOCAL INFORMATION ENVIRONMENT OF CROSS-LISTED STOCKS? EVIDENCE FROM RECOMMENDATION REVISIONS
AMEL-ZADEH, AMIR
DELLA BINA , ANTONIO
Category: FA = Financial Analysis
We investigate the role of U.S. analysts in facilitating home market information transmission for firms from 40 countries cross-listed in the U.S.. Recommendation revisions by U.S. analysts lead to significantly higher (lower) abnormal returns (volumes) in the home market compared to those by local analysts. This U.S.-location premium to information production cannot be explained by a bonding or certification role of U.S. analysts or differences in broker or analyst characteristics. Our results suggest that U.S. analysts facilitate U.S. investors’ access to foreign firms’ home markets and improve the information environment particularly in countries where the local analyst advantage is smaller.
CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE VIA TWITTER BY TOP LISTED UK COMPANIES: A DATA SCIENCE APPROACH
AMIN, MARIAN
ELRAGAL, AHMED; MOHAMED, EHAB
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Abstract Ongoing advancements in technology have changed dramatically the disclosure media that companies adopt. Such disclosure media have evolved from the traditional paper-based ones, to the internet as the new platform to disclose information via companies’ designated websites, currently however, the new media for disclosures are the social media. Among the important disclosures that companies make are corporate social responsibility (CSR) disclosures, which are deemed indispensable nowadays, given the growing social awareness among societies. The aim of this paper is to investigate corporate social media accounts for CSR disclosure, as well as, identify its determinants. The sample of the study is comprised of 168,785 tweets posted on the Twitter accounts belonging to the FTSE 350 constituents during the period 2008-2016. Topic modeling is applied to identify CSR disclosure tweets and logistic regression is run to identify the determinants of CSR disclosure on Twitter. Results show that companies use Twitter to make corporate disclosures including CSR, and some board characteristics are found to significantly affect such CSR disclosures.
ACCOUNTING CONSERVATISM AND CORPORATE SOCIAL RESPONSIBILITY
ANAGNOSTOPOULOU, SERAINA
TSEKREKOS, ANDRIANOS; VOULGARIS, GEORGIOS
Category: FR = Financial Reporting
We examine the association between accounting conservatism, expressed in the form of asymmetric timeliness of recognition of economic gains and losses, and Corporate Social Responsibility (CSR). Our aim is to assess whether financial responsibility towards capital providers, as manifested through a conservative stance in financial reporting, is associated with a social responsibility orientation. Our evidence overall suggests that higher levels of conservatism are negatively associated with a CSR orientation by firms. Managers, hence, appear to prioritize responsibility in financial reporting, and relevant costs incurred, over costs for promoting CSR-related investments, arguably considered beneficial for a larger number of stakeholders. We find this negative association to be more prominent in the post-2008-09 crisis period; we interpret this as an indication that the prevailing economic conditions can impact on managerial choices over CSR and financial responsibility, with the latter being a priority in an adverse economic environment.
INFORMATION DISCLOSURE PRACTICES: ARE SPANISH ENTERPRISES OWNED BY THE PUBLIC ADMINISTRATION COMPLYING WITH LEGAL REQUIREMENTS?
ANDRADES-PEÑA, FRANCISCO JAVIER
HERRERA, JESUS; LARRÁN, MANUEL; MARTINEZ, DOMINGO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper examines the amount of information reported by Spanish enterprises owned by the central State as well as by local and regional governments (all categorized under the term SOEs) according to compliance with legal requirements of the Spanish Law 19/2013 on Transparency and Good Governance. Likewise, this paper also analyses how different variables can affect the amount information reported by such SOEs. To accomplish this task, we will conduct a web-content analysis of web pages of all Spanish enterprises owned by the central State as well as we will examine the content of web pages of a sample of Spanish enterprises owned by regional and local governments. The results show that, in spite of the obligations of information disclosure for public sector entities indicated in the Spanish Law 19/2013 on Transparency and Good Governance, the amount of information reported by Spanish SOEs is quite reduced and limited. The most influential factor for explaining the extent of information reported is the nature public of ownership.
WOMEN INVOLVED IN THE FINANCIAL REPORTING PROCESS AND FINANCIAL REPORTING QUALITY
ANDRE, PAUL
ALLEMAND, ISABELLE; BRULLEBAUT, BÉNÉDICTE; SCHATT, ALAIN
Category: GV = Accounting and Governance
We examine how the presence of women involved in the financial reporting process of public companies, and especially the interactions between them (i.e. the simultaneous presence of a woman CFO, women sitting on the audit committee, and women auditors), impacts financial reporting quality. For our sample of large French companies, we find that women do not affect financial reporting quality when interactions are not considered. However, the interactions between women involved in the financial reporting are associated with lower discretionary accruals and higher C-scores (our measure of conservatism), as expected because women are generally more risk averse and have greater ethical sensitivity. Furthermore, our result holds only for non-family firms, which is also expected because there is a greater demand for earnings quality in such firms. In addition, it appears that woman CFOs play a key role in these interactions. Overall, our results support the idea that women affect positively financial reporting quality only if several women are involved at various stages of the financial reporting process and only in specific contexts (i.e. non-family firms). These new results should be of great interest for researchers, investors and regulators.
LEARNING FROM PEERS? THE SPILLOVER EFFECT OF GOODWILL IMPAIRMENT ON PEER FIRMS’ INVESTMENT BEHAVIOR
ANDREICOVICI, IONELA-IRINA
Category: FR = Financial Reporting
This paper examines whether the reporting of significant goodwill impairment by a firm (impairment firm, hereafter) affects the corporate investment behavior of other firms in the same industry (peer firms, hereafter). I contend that peer firms learn from the impairment firm’s admissions of failure to extract value from past investments and improve the quality of their corporate acquisitions. Employing a difference-in-differences design on a sample of European acquirers over the period 2003-2016, I find that in the three-year window after the impairment firm’s reporting, acquirers’ cumulative abnormal returns surrounding acquisition announcements are higher if they are peer firms. In addition, when I distinguish between the reasons that led to goodwill impairments loss recognition by the impairment firms, I find that the learning effect on peers’ subsequent investment decisions exists only when the impairment firms provide an external reason for goodwill impairment, as opposed to an internal reason. Further, I find that after the impairment firm’s announcement, peer firms adjust their over-investments to the level predicted by their growth opportunities. In the wake of standard setters’ plans to revise the rules for goodwill and goodwill impairment, these results provide important empirical insights into how goodwill impairment signals valuable information that extends beyond the boundaries of the firm.
AUDIT TEAM DISTANCES AND AUDIT QUALITY THREATENING BEHAVIOURS
ANNELIN, ALICE
CHE, LIMEI
Category: AU = Auditing
This paper examines the association between audit team members’ audit quality threatening behaviours (AQTBs) and three types of team distances: objective distance as the geographical distance measured in kilometres, subjective distance as the perception of proximity, and communication distance as the extent of communication via technology. The occurrence of AQTB has been well documented and evidence shows that AQTBs adversely affect audit quality. To the best of our knowledge, this study is the first to investigate how the three types of team distances are related to team members’ AQTBs, which could shed some new insights on the “black box” of audit teams (Francis 2011). Using survey data supported by partners in a Big 4 firm in Sweden, we find that team members with greater subjective and communication distances have more AQTBs, while objective distance is not significantly associated with AQTBs. Supplementary analysis shows that the positive association between subjective distance and AQTBs mainly occur among team members that are based in the main offices, while the positive association between communication distance and AQTBs is mainly driven by team members not located in the main offices.
CEO COMPENSATION AND RETURN TO THE SHAREHOLDER: AN EMPIRICAL VIEW FROM THE EARNINGS QUALITY IN THE EUROPEAN UNION
ARAUJO, JULIANO
RIBEIRO, MAISA
Category: GV = Accounting and Governance
Agency Theory predicts the compensation can be a way of main control the actions of the agent. In this study, we evaluated the influence of the practices of earnings quality on executive compensation as a way to propose indicators to support the policies of executive compensation for performance. The sample is composed of 393 companies that disclosed the information on executive compensation in the period from 2007 to 2016, countries that comprise the European Union. The statistical technique applied was panel data that, after the validation testing of the model chosen by random effects. The results allow us to affirm that executive compensation packages are linked to the persistence of profits in larger companies. It was also found that the use of accruals reflect negatively on executive compensation, such that the practice of smoothing result, and the timely recognition of losses, even with weak relationship, presented a positive signal in relation to the compensation. The findings of the survey allowed to understand the influence of the practices of earnings quality on executive compensation in the member countries of the European Union and has contributed to the understanding of the market in general and for the academy, to expand the research on executive compensation and measures the performance of companies and analyze performance measurements distinct from those used until then.
IMPRESSION MANAGEMENT AND THE ROLE OF OMISSION BIAS AMONG ANNUAL REPORT PREPARERS
ARESU, SIMONE
JONES , MICHAEL JOHN ; MELIS, ANDREA
Category: FR = Financial Reporting
Cognitive biases have been frequently found in social sciences. Most of the experimental studies have adopted a user’s perspective, investigating whether and how users are subjected to biases when analyzing financial and non-financial information. Less experimental studies, on the other hand, have adopted a preparer’s perspective, although conjecturing the influence of biases on preparers’ choices. The aim of this experimental paper is to investigate whether preparers of corporate reporting are affected by omission bias when deciding the most suitable representation (both in financial and moral terms) of the company’s performance. Omission bias is the human being’s tendency to evaluate a wrongful omission (e.g. an omission of negative information) less harshly than a wrongful commission (e.g. a distracting information that obfuscates a result). The paper adopts a between-subjects design and focuses on specific formats frequently adopted to portray financial and non-financial trends: graphs. Public scrutiny is used as a moderating variable, to represent the pressure to report transparently that preparers face. The study contributes to the impression management literature, by investigating whether and how preparers are subjected to omission bias and whether pressure for true and fair disclosure affects their reporting decisions. The research also provides useful insights to preparers and users, by showing the reasons and expected consequences of biased and unbiased disclosure.
TRANSACTIONAL AND RELATIONAL APPROACHES TO POLITICAL CONNECTIONS AND THE COST OF DEBT
ARIFIN, TAUFIQ
HASAN, IFTEKHAR ; KABIR, REZAUL
Category: GV = Accounting and Governance
This paper highlights how debtholders value political connections. Specifically, it investigates whether lenders favor transactional connection as opposed to repeated relational connection. Tracing firms in a politically volatile emerging democracy, the paper confirms that firms with transactional political connection strategy experience a relatively lower cost of debt than those with relational strategy. Results are more pronounced for firms with high risk of financial distress.
INCREMENTAL INFORMATION CONTENT OF THE DISAGGREGATION OF OTHER COMPREHENSIVE INCOME
ARTHUR, NEAL
CHEN, XUEYING; CLOUT, VICTORIA; HUYNH, TINA
Category: FR = Financial Reporting
Abstract We examine incremental information content of disaggregation of other comprehensive income (OCI). OCI has been reported in the income statement under IFRS since 1 July 2009 amid a debate about whether all OCI items should be reclassified (recycled) into income subsequent to recognition in OCI. Current US and IFRS standards differ in that IAS 1 (but not US GAAP) requires OCI items that will be reclassified to be reported separately in the statement of OCI. We investigate whether disaggregated (realised and unrealised) components of OCI have differential predictive ability. The results suggest that the disaggregated components of cash flow hedge, available for sale financial assets, and foreign currency reserve gains and losses all have differential predictive ability. These gains and losses have predictive ability for firm operating performance measured using both operating income and cash flows from operating activities. Additionally, asset revaluation gains and losses were found to be significantly positively associated with future firm performance. There is no association between defined benefit gains and losses and future firm performance. The inferences are robust to a number of sensitivity tests. The results have relevance to regulators and managers reporting under US GAAP.
CASE STUDY RESEARCH IN AUDITING: A METHODOLOGICAL REVIEW AND EVALUATION
ASCHAUER, EWALD
SCHOBER, DANIELA
Category: AU = Auditing
This study is the first that attempts to gather and examine case studies within the academic field of auditing. Our review comprises all journals ranked in the ‘Accounting’ category in the 2015 ABS Journal Guide. The paper identifies areas for improvement regarding the methodological rigor of case studies; moreover, it identifies voids in the auditing literature and hence potential topics for future case study research. The study provides guidance to authors and reviewers for the development of rigorous case studies, offering means for reviewers, editors and readers of case studies to assess their quality. Many of the analysed and reviewed case studies lacked satisfactory methodological details concerning research design, data collection and analysis.
MANAGEMENT COMMENTARY ARTICULATING STRATEGY AND BUSINESS MODEL: MEASUREMENT AND IMPACT
ATHANASAKOU, VASILIKI
ATHANASAKOU, VASILIKI ; EL-HAJ, MAHMOUD ; RAYSON, PAUL ; WALKER, MARTIN ; YOUNG, STEVEN
Category: FR = Financial Reporting
We measure annual report commentary articulating an entity’s strategy and business model, and then examine the capital market impact of enhancing such disclosure. Our empirical disclosure proxy is based on n-grams drawn from popular strategy textbooks and the academic strategy literature. Validation tests confirm that our measure: (a) correlates with manual classifications of strategy reporting quality produced by domain experts; (b) covaries predictably with firm-level drivers of strategy-focused disclosures identified by prior research; and (c) captures the structural break in reporting practice reflecting the regulatory mandate for a subset of London Stock Exchange firms to explain their strategy and business model. Using a difference-in-differences design that exploits this exogenous and measurable increase in strategy-focused disclosure, we show that enhanced commentary on strategy and business model reduces investor uncertainty and increases the speed at which annual report information is incorporated into stock price.
THE IMPACT OF GLOBAL AND INDUSTRIAL DIVERSIFICATION ON AUDIT FEES
ATTAR, NEGIN
Category: AU = Auditing
Prior literature has mainly looked into the impacts of global and industrial diversification on the firm value and shareholders’ beliefs. However, I am willing to investigate the auditor’s belief of a diversified firm and if auditor views a globally or industrially diversified firm as a client with high business risk. I hypothesize that in auditor’s opinion, a globally/industrially diversified firm is a more risky client compare to a focused firm and this riskiness is not only due to the operational complexity, which has been widely discussed in the prior literature, but also due the large information asymmetry gap between managers and outsiders. In fact, the indirect effect of information asymmetry on the audit fee and global/industrial diversification is larger than the operational complexity. Moreover, I hypothesize that a strong internal corporate governance negatively moderates this relationship and auditor charges a globally/industrially diversified firm with a stronger internal corporate governance for a lower audit fee.
WHY ARE JOINT AUDITS IMBALANCED?
AUDOUSSET-COULIER, SOPHIE
KERMICHE, LAMYA; PIOT, CHARLES
Category: AU = Auditing
The question of the benefits of joint audit on audit quality and audit market competition is subject of heated debates among standard setters (European Commission 2010) and professional bodies (Ratzinger-Sakel et al. 2012). To achieve the goal of maintaining the highest audit quality standards, joint audits arrangements should enable the effective involvement of the two independent auditors (Bennecib 2004; Deng et al. 2014). This raises questions about how auditors share the audit work and about the necessity to regulate the balance of power between joint auditors. We use the French joint audit setting to study the determinants of imbalanced joint audits. We find audit complexity (foreign operations) to be a key driver of joint audit imbalances, specifically in the presence of a mixed joint audit college (i.e., a Big 4 paired with a non-Big 4). We also find a significant decrease in joint audits imbalances before and after the French auditing standard requiring a balanced repartition of the audit work (NEP 100.07). Finally, we observe that the frequency of collaborations between the two co-auditors is positively associated with the joint audit imbalance. This effect is stronger for mixed joint audits, and can thus be interpreted as a ‘dominance’ effect exerted by Big 4 auditors on smaller ones. This study is among the first to enlighten the role played by supply-side effects (differences in auditors’ production functions) in the (presumed) effectiveness of joint audits.
EARNINGS FORECASTS: THE CASE FOR COMBINING ANALYSTS' ESTIMATES WITH A MECHANICAL MODEL
AZEVEDO, VITOR
BIELSTEIN, PATRICK; GERHART, MANUEL
Category: FA = Financial Analysis
We propose a novel method to forecast corporate earnings, which combines the accuracy of analysts' forecasts with the unbiasedness of a mechanical model. We build on recent insights from the earnings forecasts literature to select variables that have predictive power with respect to earnings. Our model outperforms the most popular methods from the literature in terms of forecast accuracy, bias, and earnings response coefficient. Furthermore, using our estimates in the implied cost of capital calculation leads to a substantially stronger correlation with realized returns compared to extant mechanical earnings estimates.
INFORMATION AND MACROECONOMIC FORECASTERS’ STRATEGIC BEHAVIOR: EVIDENCE FROM US PRESIDENTIAL ELECTIONS
BAFUNDI, ANDREA
IMPERATORE, CLAUDIA
Category: FA = Financial Analysis
In this paper, we shed new light on macroeconomic forecasters’ strategic behaviors by examining the characteristics of their forecasts as a function of US Presidential elections. In line with strategic behaviors’ theoretical models, we document significant differences in macroeconomic forecasts depending on US Presidential election cycle and analysts’ access to private information, as proxied by political donations to Presidential Party. Empirical evidence shows that forecasters are more accurate and far away from the consensus in the period leading up to the Presidential election when the greater uncertainty leads them to pay more effort in their forecasting activity. Once the President is elected and the uncertainty is partially reduced, analysts rely more on the common consensus so that more inaccuracy is observed. We also find that forecasters with access to private information tend to be more accurate under normal circumstances while this is not the case in the periods surrounding the Presidential election as the possession of private information triggers them to take more risks to stand out of the crowd as the best forecaster. Lastly, results suggest that the strategic behavior of individual forecasters dampens the predictive ability of the consensus forecast with respect to corporate profits.
THE EFFECT OF CORPORATE COMPLIANCE WITH SARBANES-OXLEY ACT PROVISIONS ON FINANCIAL REPORTING QUALITY
BAJRA, UJKAN
ČADEŽ, SIMON; KUTAN, ALI M.
Category: GV = Accounting and Governance
This paper presents empirical evidence on whether compliance with the Sarbanes-Oxley Act of 2002 (SOX) affects the quality of financial reporting for publicly traded companies in the European Union that are cross-listed in the United States. Focusing on Sections 302 and 404 in the SOX on financial reporting quality (FRQ) and using a novel approach to operationalization of the SOX, the empirical research integrated in this paper advances understanding of corporate governance, in particular, FRQ for both practitioners and policymakers. Specifically, this study shows a significant and direct effect on FRQ of both Sections 302 and 404 of the SOX. In addition, the relationship between the SOX provisions and FRQ is robust at the component levels. Overall, our evidence shows that greater compliance with the SOX provisions increases the quality of corporate governance as whole. However, we find that the number of EU firms cross-listed in US markets has dropped significantly since the SOX passed.
MANAGEMENT CONTROL STRATEGY AND CORPORATE SOCIAL RESPONSIBILITY AT MICHELIN
BAKER, CHARLES RICHARD
COHANIER, BRUNO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The purpose of this paper is to study the evolution of the management control strategy of Michelin Company with respect to corporate social responsibility. Since the founding of Michelin in 1889, the Managing Directors have focused on controlling the company in a manner that aims at being responsible to its customers, its employees and to the local community. After the transformation of the Company into a global enterprise, as well as the listing on international stock exchanges, the Managing Directors decided on a change in the management control strategy of the Company in the direction of becoming a more environmentally and socially responsible enterprise. This paper traces and discusses this strategic management decision and suggests how long established companies can make the transition to social and environmental sustainability.
THE USE OF ENVIRONMENTALLY EXTENDED INPUT-OUTPUT ANALYSIS TO MEASURE AND EVALUATE THE CARBON AND EMPLOYMENT FOOTPRINT OF EQUITY INVESTMENTS
BALATBAT, MARIA
CHARD, GEORGE; WIEDMANN, THOMAS
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
There is little doubt that carbon emissions from human activities is the primary cause of anthropogenic global warming. Equity investment is a major stimulant of economic activity and therefore carbon emissions, but it is also a potential enabler in transitioning to a sustainable economy. This study aims to quantitatively determine the carbon and employment footprint of selected Australian equity investments using Environmentally Extended Input-Output Analysis and evaluate the potential impacts of socially responsible investment and divestment. We examine three superannuation funds managed by Australian Super and obtained the equity holdings and representative facilitated industry output of these investments. We then attributed a carbon footprint proportional to the carbon emissions of that industry over the 2014-15 Australian financial year. The analysis similarly calculates the representative employment footprint of these investments to observe the wider impacts of a transition to a low-carbon economy. The results of this study indicate that SRI criteria can significantly reduce the carbon footprint of an equity portfolio. Specifically, this study finds a 29% difference in carbon footprint per dollar invested between SRI and non-SRI funds. Furthermore, the employment generated per dollar invested was not affected by the SRI criteria. Divestment scenarios revealed that the carbon or employment footprint of a portfolio can be significantly reduced or increased.
EXPLORING THE RELATION OF CSR ACTIVITIES WITH OPERATING ACTIVITIES
BALLAS, APOSTOLOS
FILIOU, ANASTASIA ; NAOUM, VASSILIOS CHRISTOS; VLISMAS, ORESTES
Category: MA = Management Accounting
We explore the relation of CSR activities with SG&A cost stickiness and asymmetric sales response by using a data sample of 7.464 firm-year observations of European firms for the period 2009-2015. Our empirical findings indicate that SG&A expenses exhibit cost stickiness (anti-stickiness) in the case of firms with high (low) intensity of CSR activities. It seems that the sales revenues exhibit asymmetric responses towards changes on SG&A expenses. A possible explanation is that firms with high intensity of CSR activities tend to adopt a prospector’s strategy and they are characterised with high intensity of intangible investments.
THE ROLE OF THE CONTROLLER IN THE PERSPECTIVE OF STRATEGY AS PRACTICE: A THEORETICAL ESSAY
BARBOSA LAVARDA, ROSALIA ALDRACI
SCHAFER, JOICE; SCUSSEL, FERNANDA
Category: MA = Management Accounting
This theoretical essay aims to explore how the controller participates in the strategy formation process, from the perspective of strategy as a practice. In this sense, we propose a new approach for management accounting studies by bringing together two fields of knowledge – accountability and strategy – under a constructivist perspective that investigates the role of the controller as a business partner and a strategy practitioner. To achieve this goal, we developed a bibliographic review on the main issues related to the role of the controller in organizations and a general explanation of the theoretical model of strategy as a practice proposed by Jarzabkowski and Spee (2009). From the intersection between the two themes, three general propositions were developed relating the elements of strategy as practice (practice, praxis and practitioners) to the role of the controller, which serve as a basis for the development of future research. The implications of this theoretical essay limit itself by the theoretical and empirical aspect, but it opens the way for future avenues of research and theoretical or empirical studies that contribute to the advances of research on management accounting.
‘SERVING TWO MASTERS’: SENSEMAKING IN THE CONFLICT BETWEEN FINANCIAL ACCOUNTABILITY TO SHAREHOLDERS AND STEWARDSHIP ACCOUNTABILITY TO THE ENVIRONMENT
BARKER, RICHARD
KASIM, TIM
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper examines the equivocality in corporate ‘accountability’ arising from the pursuit of corporate sustainability, which invokes competing objectives of profitable growth and minimal environmental impact. We focus on the role of accounting in enabling the ‘sensemaking’ process of corporate sustainability managers in reconciling the conflict that they face (Weick, 1995; Weick, 2001). We focus on ‘carbon accounting’, an accounting practice that fosters the reconciliation of the competing objectives of profitability and minimal environmental impact, in contrast to the traditional financial accounting or other sustainability accounting practices that are focused on serving one objective or the other. Drawing on semi-structured interviews with sustainability managers from 30 large UK-based companies, we find a sensemaking pattern related to carbon-intensity and occupational background. In addition, we find carbon accounting ‘guiding’ the sensemaking by reducing equivocality around the issue of climate change. Building on Weber & Glynn (2006), we argue that carbon accounting enabled the sustainability managers to reconcile the two competing objectives by simultaneously (1) triggering sensemaking through the external demand for accounting, (2) providing carbon accounting categories for reducing the equivocality of the issue, and (3) by providing carbon accounting metaphors for reducing the ambiguity of their role.
ARE THEY READY? ACCOUNTING ACADEMICS’ PERSPECTIVES OF THE PREPAREDNESS OF NEW STUDENT COHORTS.
BARNES, LISA
LONG, WARRICK; NORTHCOTE, MARIA; WILLIAMS , ANTHONY
Category: ED = Accounting Education
The research reported here has as its central question of how do Australian accounting academics perceive the preparedness of students to study accounting at university. The research looks at how well prepared new cohorts of accountancy students are to engage. The research found that accounting academics identified four success factors required for students to study accounting at first year university level, identifying those needing to be addressed prior to beginning study, and others within the course of study itself. These four success factors included the ability to participate in the course with an apropos level of English language proficiency, to commence with a certain level of assumed knowledge which is then further extended, to develop and utilise higher order thinking skills, and finally to effectively communicate thoughts and ideas through written and verbal means. The findings, of the study reported here, provide insight into what students need as preparation to study accounting at university, using the Success Factor Timeline (SFT). The SFT bring together disparate concepts into one framework for consideration of student selection procedures and course design. It also provides appropriate scaffolding for first year students to better enable them for success, based on attributes they need to possess before commencing university studies, and attributes they can learn whilst at university.
THE (NOT-SO) GREAT BRITISH WEATHER? EXPLORING CORPORATE ACCOUNTABILITY IN RESPONSE TO CLIMATE CHANGE-INDUCED WEATHER RISK
BARONE, ELISABETTA
ATKINS, JILL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We explore the extent to which companies in the UK food retail and production industries are disclosing information on weather-related risk, especially in relation to climate change-induced weather risk, in their annual/integrated reports, their sustainability reports and on their corporate websites. We also consider the impact of climate change in other countries which affect the companies under study, due to their inclusion in the supply chain, as well as disclosures relating to non-food areas of their businesses. More specifically, the paper also seeks to assess the quality and consistency of these disclosures, from a critical perspective and draws conclusions as to whether these weather disclosures are discharging adequate accountability to stakeholders in terms of their information content, depth of discussion and detail. For example, we consider whether the information sources used for corporate weather forecasting and subsequent decision-making are being disclosed to stakeholders? Do companies disclose detailed information regarding their weather risk mitigation strategies? Further, do companies provide information concerning any weather derivatives they use in their reports and accounts and if so, how much detail do they provide? We also consider whether companies disclose opportunities arising from climate change-induced weather variability as well as the associated risk.
CORPORATE TAX DEPARTMENTS: AN EMPIRICAL ANALYSIS
BARRIOS, JOHN
GALLEMORE, JOHN
Category: TX = Taxation
Corporate tax departments represent the average firm’s most direct and substantial investment in tax compliance and planning, and they likely play an important role in determining the firm’s tax outcomes. However, despite the ubiquity and perceived importance of tax departments, we know very little about them because of a lack of available data. We overcome this problem by collecting data on tax department employees of large, publicly traded U.S. corporations from a professional networking website. Our objectives are threefold. First, we provide descriptive evidence on the individuals that work in corporate tax departments and on the characteristics of those departments. Second, we examine which characteristics of tax departments are associated with firm tax outcomes. We find that average employee experience, rather than department size, is associated with greater tax avoidance. Third, we examine employee movements between tax departments of sample firms, and whether certain movements are associated with changes in firm tax planning outcomes. We find that firms experience increases in tax avoidance upon hiring employees from more tax aggressive firms. Our findings indicate that there is substantial heterogeneity across corporate tax departments, and suggest that the human capital in tax departments plays an important role in the tax outcomes of firms.
A DESCRIPTIVE CASE STUDY ON THE INTERPLAY OF LEVERS OF CONTROL FRAMEWORK AND INNOVATION
BARROS, RÚBEN
FERREIRA, ANA MARIA DIAS SIMÕES DA COSTA
Category: MA = Management Accounting
A recent research stream has emphasized that management control systems (MCS) do not have the negative effect that has been associated with control in the traditional literature. In this change, Simons’ framework has played a preponderant role, in which the nature of the relationship between each lever and innovation is explored. However, an important aspect of the framework that has been somehow neglected from the literature is the need for balance within the four levers and the dynamic tensions that arise from their uses. In response, this study resorts to a case study approach in an innovative company to shed some light on how organizations attempt to balance their MCS packages within the four Simons’ levers concerning the innovative effort and how the dynamic tensions they create contributes to it. In the case company, interactive systems present the most visible lever use, but notwithstanding, the other three levers are also present creating tensions within them. Diagnostic and boundary systems complement each other to create dynamic tension with the combined use of interactive and belief systems. With these dynamic tensions, managers can do more than balance innovation and the achievement of financial goals, ensuring that new developments take place in fields that are profitable. On one hand, diagnostic and boundary systems reduce the uncertainty associated with these developments and, on the other hand, interactive and belief systems create the favourable environment.
STOCK PRICE MANAGEMENT AND SHARE ISSUANCE: EVIDENCE FROM EQUITY WARRANTS
BARTH, MARY
GEE, KURT; ISRAELI, DORON; KASZNIK, RON
Category: FR = Financial Reporting
The question we address is whether firms manage stock prices prior to share issuances. Prior literature largely interprets negative returns following share issuances as evidence of market timing. Other studies interpret similar evidence as firms managing investor expectations. Although these are not mutually exclusive explanations, establishing expectations management as an explanation for the returns requires that issuance timing is fixed. Warrant exercise can result in share issuances and warrant expiration dates are fixed years in advance. Thus, we use return patterns before and after warrant expiration dates to determine whether firms manage investor expectations, and thus stock prices, prior to share issuances. We find evidence consistent with firms managing stock prices to induce (prevent) warrant exercise when issuing the new shares is anti-dilutive (dilutive) to existing shareholders. Our findings reveal that firms engage in stock price management around equity issuance in a setting where market timing cannot explain the results.
THE ROLE OF INSTITUTIONAL ENTREPRENEURS WITHIN THE EUROPEAN EPSAS PROGRAM: EVIDENCE FROM THE ITALIAN CASE
BARTOCCI, LUCA
ARGENTO, DANIELA; NATALIZI, DANIELE
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The impasse of European Public Sector Accounting harmonization represents a critical point on the European agenda. By issuing Directive n. 85 in 2011, the European Commission has assumed an active role in the promotion of an international program of Public Sector Accounting harmonization. This paper aims to investigate the dynamics of the “European Public Sector Accounting Standards” (EPSAS) program, run by the Task Force of Eurostat with the goal of setting up and implementing one accounting system to be used by all the European Member States. Through the theoretical lens of institutional entrepreneurship, this study investigates the role, actions and skills of the “change actors” involved in the accounting harmonization process at the intersection between the international and national levels by focusing on the Italian case. The findings reveal the importance of the actions undertaken by the identified institutional entrepreneurs and suggest that a synchronization of strategies is necessary to mobilize national contexts towards the goal of European Public Sector Accounting harmonization.
THE IMPACT OF MAYORS’ CORRUPTION ON SPANISH MUNICIPAL SPENDING
BASTIDA, FRANCISCO
BENITO, BERNARDINO; GUILLAMÓN, MARÍA-DOLORES; RÍOS, ANA-MARÍA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
We investigate the impact of mayors’ corruption on the size and structure of Spanish municipal budgets. The theory posits that total expenditure is higher in corrupt governments: we find it €77.08 higher per capita in our sample. Moreover, the literature predicts that mayors, as agents, will spend more on those items directly connected with corruption and bribes, rather than those items demanded by the citizens (principals). Thus, we show that total expenditure, capital, trash collection and police are higher when corruption exists. Literature predicts that corrupt mayors spend less on items that provide fewer opportunities to collect bribes: we conclude that spending on health is not higher with corrupt mayors, thus our data show that mayors are not manipulating this expenditure. Corrupt mayors spend on average 1.46 years on duty after being charged. This indicates that in Spain, sadly, resigning the mayoralty is not automatic when facing criminal charges for corruption.
THE EFFECT OF THE INTENSITY OF A CUSTOMER-FOCUSED STRATEGY ON CUSTOMER ACCOUNTING TECHNIQUES USED BY A GLOBAL COURIER COMPANY AND A EUROPEAN BANK.
BATES, KEN
EGGLETON , IAN; FOWLER, CAROLYN
Category: MA = Management Accounting
This paper uses a contingency-based, case study methodology to investigate how CA measures are used to support a customer focused strategy in a global courier company and a European bank. The global courier company uses activity-based costing to measure historical customer profitability analysis (CPA), and this CPA discloses significant differences in profitability between two customer segments. However, there is only a need for CPA at the individual customer level within the strategic customer segment, due to the heterogeneity of these customers. Customers are never actually ‘fired’ on the basis of CPA, but persistently unprofitable customers may be ‘discouraged’ by notice of significant price rises. In contrast, the European bank will not measure CPA, at either segment or individual customer level, because such information will likely drive inappropriate behaviour. All staff are trained to give equally excellent service to all customers in order to support the bank’s exceptionally customer-focused brand image. Of interest is that both companies extensively use measures of customer satisfaction and net promoter score to help drive their customer-focused strategies. Staff categorise these as non-financial CA measures, and hence this paper provides evidence that, contrary to most prior definitions of CA in the literature, CA usage in practice includes non-financial customer related measures. This paper provides a revised and more inclusive definition of customer accounting.
BEYOND TRADITIONAL AND ALTERNATIVE BUDGETING: BUDGETING AS A FRAMEWORK
BATT, CATHERINE ELISABET
Category: MA = Management Accounting
Budgeting has been defined as Traditional or alternative. The literature has shown both methods as being competitive methods. The aim of this paper is a first attempt to look at budgeting as a framework and interconnect the different elements of budgeting together.
LIKEABILITY AND LENIENCY: AN EXPERIMENTAL STUDY ON COGNITIVE PROCESSING IN PERFORMANCE EVALUATIONS
BAUCH, KAI ALEXANDER
KOTZIAN, PETER; WEIßENBERGER, BARBARA E.
Category: MA = Management Accounting
In this paper, we investigate determinants of leniency bias in subjective performance evaluations in a multi performance measure context as well as the cognitive processing mechanisms underlying this bias by conducting a laboratory experiment with 220 student participants in six conditions. First, based on psychological theories, we provide experimental evidence that individuating information leads to inflated, i.e., more lenient, evaluations. While evaluations of dislikeable subordinates are less inflated, we do not find evidence that leniency is fostered by ambiguity. Second, by integrating the Mouselab software in our experimental design, we show that even though aberrant performance measures receive more attention, this does not affect leniency bias. Furthermore, by empirically obtaining participants’ weighting schemes, we can also exclude adapted weighting as the mechanism underlying leniency bias. Thus, our contribution is twofold: First, we provide evidence that leniency already emerges through individuating information and only its extent is dependent on the direction of affect induced. Second, we extend accounting literature on leniency bias by showing that this bias is not driven by the cognitive processing mechanisms of attention or weighting, thus narrowing the field for potential debiasing instruments in performance evaluation.
DOES STOCK PRICE CRASH RISK SUBSIDE WHEN THE IRS IMPOSES STRICTER CORPORATE TAX ENFORCEMENT?
BAUER, ANDREW
FANG, XIAOHUA; PITTMAN, JEFFREY
Category: TX = Taxation
We analyze whether tough tax enforcement generates a positive externality by lowering information asymmetry stemming from managers’ bad news hoarding activities evident in stock price crash risk. Supporting this prediction, we find a negative relation between the threat of an IRS audit and stock price crash risk. Our strong, robust evidence is consistent with recent theory that outside investors learn more about firms when corporate tax enforcement is stricter. In results consistent with another prediction, we find that the role that IRS audit rates play in constraining crash risk intensifies when firms experience worse agency conflicts arising from CEO characteristics. Collectively, our research implies that external monitoring by tax authorities protects shareholders against managers suppressing negative firm-specific information that engenders stock price crash risk, particularly when CEOs have a wider scope and stronger incentives to hoard bad news.
THE EFFECTS OF PSYCHOLOGICAL OWNERSHIP ON TEAM MEMBER JUDGMENTS AND COMMUNICATION
BAUER, TIM
ESTEP, CASSANDRA; GRIFFITH, EMILY
Category: AU = Auditing
Teams working on collaborative tasks are a critical aspect of how organizations function, and increases in the complexity of team structures might undermine the performance of some team members. In this study, we experimentally examine whether and how psychological ownership improves judgments and communication of individual team members. We find that increasing team members’ psychological ownership improves their performance on a complex task by causing deeper information processing that improves judgments. Further, psychological ownership increases team members’ urgent communication but only when it is warranted, suggesting that psychological ownership prompts team members to communicate more effectively about the “right” issues rather than increasing communication indiscriminately. This study suggests that team structures, task framing, and other interventions designed to promote psychological ownership hold promise for improving performance and communication in teams with increasingly complex structures that might otherwise undermine the performance of certain team members.
VENTURING BEYOND THE RULE OF THUMB IN THE VALUATION OF SMALL ACCOUNTING PRACTICES: AN EXPLORATION IN THE ITALIAN MARKET BASED ON THE VALUE RELEVANCE OF FINANCIAL AND NON-FINANCIAL INFORMATION
BAVAGNOLI, FRANCESCO
BUZZONI, GIANGIACOMO; MANDIROLA, CORRADO ; SALINELLI, ERNESTO
Category: FA = Financial Analysis
The study explores the prediction accuracy of a P/Sales multiple - derived from the regression of transaction values on value drivers identified consistently with prior studies - in the highly standardized and homogenous context of the transfer of Small Accounting Practices. We find that the regressed P/Sales multiple significantly outperforms other multiples - often adopted as rule of thumb valuation metrics in the industry - such as simple industry harmonic-averaged P/Sales or P/EBITDA. The median absolute error is 4.70% for the regressed multiple vs 11.30% for the best alternative metric (P/Sales harmonic mean). Moreover, we observe that non-financial information specific to the context of Small Accounting Practices, namely the location in big cities, is value relevant and complements financial and deal characteristics information.
WHAT’S MY TARGET? ANALYST FORECAST DISPERSION AND EARNINGS MANAGEMENT
BEARDSLEY, ERIK
ROBINSON, JOHN; WONG, PAUL
Category: FR = Financial Reporting
We investigate whether the dispersion of analysts’ earnings forecasts affects the extent to which firms manage earnings at year-end. Using effective tax rate (ETR) manipulation in the fourth quarter as a unique setting to examine this question, we find that firms manage earnings to a greater extent when the consensus analyst forecast is more precise (i.e., less disperse). In addition, we find that as analyst forecasts become less disperse late in the year, firms are more likely to decrease fourth quarter ETR to meet or beat the earnings benchmark. We also report that a greater proportion of firms that would have missed expectations without ETR manipulation actually meet or beat the earnings benchmark when dispersion is low. Overall, this study contributes to the earnings management literature by identifying the dispersion of analyst forecasts as an important but previously unexplored determinant of firms’ year-end earnings management activity.
PERFORMATIVITY AND COUNTERPERFORMATIVITY OF SOCIAL MEASURES. A STUDY OF THE USES AND IMPACTS OF PSYCHOSOCIAL RISKS INDICATORS
BEAU, PAULINE
SPONEM, SAMUEL
Category: IC = Interdisciplinary/Critical
The purpose of this article is to explore the production and the effects of social performance measures. We study how two organizations measure psychosocial risks. Facing a complex and uncertain phenomenon, these two organizations tried to make it more comprehensible and less anxiety-provoking by reifying it through measurement indicators. We observe the performative and counterperformative effects of these indicators, at the organizational and individual level. In the cases we observed, we show that psychosocial risk indicators facilitate the ignorance of tensions, organizational responsibility and suffering of individuals.
GLOBAL STANDARDS WITHOUT THE U.S.? INSTITUTIONAL WORK AND THE U.S. NON-ADOPTION OF IFRS
BECKER, KIRSTIN
DASKE, HOLGER; PELGER, CHRISTOPH
Category: IC = Interdisciplinary/Critical
When the SEC started considering the potential use of IFRS for its domestic registrants in 2007, it initiated a five-year controversial debate on the desirability of an institutional change of the U.S. financial reporting system. Finally, the SEC did not decide to adopt IFRS. To make sense of U.S. actors’ strategies to enable or prevent an institutional change, we adopt an institutional theory perspective and investigate U.S. actors’ use of different forms of institutional work that followed and supported different institutional logics and either aimed at changing or maintaining the U.S. accounting system. Our findings build on a content analysis of U.S. actors’ feedback that the SEC received in the period 2007-2011. Our analysis documents a decline in the support for institutional change over time which was accompanied by a change in the prevalence of a local community logic at the expense of a global community logic. We find that institutional challengers first successfully mobilized a mixture of institutional change and maintenance strategies. Yet, institutional incumbents finally succeeded in hamstringing the change movement by establishing an ever increasing number of hardly surmountable barriers. In this context, the financial crisis – as well as shifts in the broader societal order – seemed to have affected the dynamics of the institutional change movement as well as the appeal of the two contrary community logics.
SAFEGUARDING THE UNKNOWN? QUALITY OF RESEARCH IN THE PERFORMANCE MEASUREMENT ERA AT UNIVERSITIES
BEDFORD, DAVID
GRANLUND, MARKUS; LUKKA, KARI
Category: MA = Management Accounting
In this study we examine the practical meaning and employment of the notion of research quality in the academe. This study is inspired by a worry that the difficult-to-define notion of quality in research is potentially getting too simplistically determined by its measurable proxies, and whether academics, especially manager-academics, realise this risk, and how they deal with it. While previous studies provide relatively good visibility to the landscape of performance measurement in the university sector, we know little about how performance measurement systems (PMS) are mobilized locally, especially as to how one of the fundamental virtues of scientific work, that of quality, is perceived and managed. To examine these matters empirically, we conducted a comparative case study of two university faculties in a European country. Despite differences in the local PMS, manager-academics are found to share similar understandings of the meaning of quality in research. However, there were variations in the willingness and perceived need to exert their agency regarding how quality is operationalised. This is partly a function of how restrictive the local PMS is in terms of what constitutes desired academic performance, and the degree to which the PMS is relied upon to make judgemental evaluations of research quality. We conclude by commenting on how forces both outside and within universities are driving a more narrow understanding of what quality in research means in practice.
QUALITY AND DETERMINANTS OF JUDGEMENT AND ESTIMATION UNCERTAINTY DISCLOSURES: EMPIRICAL EVIDENCE FROM GERMANY
BEER, JULIANE
Category: FR = Financial Reporting
Recently, there has been a debate about disclosure regulation emphasising the principles-based judgement and estimation uncertainty disclosures, as required by IAS 1, and related disclosure quality that companies provide. Concerns include that companies only provide boilerplate discourses on judgements and estimation uncertainties lacking company specific information or content as well as background. Because IAS 1 (revised 2007) provides only little guidance on where and in what format to disclose information on judgements and estimation uncertainties it is at the discretion of the reporting entity whether to provide a more extensive disclosure strategy or to reduce the disclosure level to its minimum but considered as regulatory appropriate. This paper investigates the quality and determinants of judgement and estimation uncertainty disclosures in Germany. Results show that disclosure quality has significantly improved over time. Companies provided lower levels and rather box-ticking judgement and estimation uncertainty disclosures shortly after the latest amendments to IAS 1 than in the subsequent years. Further, findings suggest that the disclosure level is dependent on industry characteristics, entry barriers and group pressure. Also, results indicate that financial needs, leverage, profitability and listing status, are related to the decision to provide higher disclosure quality.
THE SCIENTIFIC LANDSCAPE OF INTERNAL AUDIT RESEARCH - A BIBLIOMETRIC ANALYSIS
BEHREND, JOEL
EULERICH, MARC
Category: AU = Auditing
Addressing the heavily increased attention on the topic of internal auditing in the post-SOX era, the research conducted aims to ascertain the impact of internal auditing on research and the different scientific sub-areas that define it. The work seeks to extent the existing scant body of literature reviews that has focused on the topic by pursuing an empirical approach. In this context, co-citation analysis is used in combination with social network analysis in order to empirically investigate different existing research fields of internal auditing and to discover the core work that has been done in this area. The scientific landscape of internal auditing can be characterized as profoundly fragmented and deeply rooted into different areas of adjacent accounting research fields. Identified subcategories from which research on internal audit is derived can be summarized as Corporate Governance, Au- ditor Independence, Auditing Professionalization, Audit Committee Effectiveness, Reliance on Internal Auditing, Internal Control over Financial Reporting, and finally the Regulatory Framework. Additionally, results show that there exists a pivotal nucleus of research which comprises various topics that focus solely on the internal audit function. The study is limited to the analysis of major accounting journals namely The Accounting Review, Contemporary Accounting Research, Journal of Accounting Research, Journal of Accounting Economics and Accounting, Organizations and Society.
THE IMPACT OF INTERNATIONAL OWNERSHIP ON THE PERFORMANCE OF MICROFINANCE INSTITUTIONS: A GLOBAL SURVEY
BEISLAND, LEIF ATLE
DJAN, KWAME; MERSLAND, ROY
Category: GV = Accounting and Governance
While a substantial number of studies have explored the influence of foreign ownership on business performance, little research has focused on the impact of international shareholders on the performance of firms operating as social enterprises. By using data from the global microfinance industry, this study examines the influence of international ownership on the financial and social performance of social enterprises. We use secondary data provided by third party rating agencies on 181 microfinance institutions operating in 62 countries across the globe. Our results reveal that international investors are associated with higher social performance and improved loan portfolio quality. On the other hand, MFIs with international ownership appears to have lower financial performance than their local counterparts.
BUSINESS MODEL DISCLOSURE IN INTEGRATED REPORTS OF POLISH COMPANIES
BEK-GAIK, BOGUSŁAWA
RYMKIEWICZ, BARTOSZ
Category: IC = Interdisciplinary/Critical
The issue of the manner of disclosing information on the business model (BM) is currently one of the most important issues in modern reporting. The development of IIRC guidelines for integrated reporting indicated the key importance of such disclosures. As a result of the emergence of integrated reporting, there was a problem of disclosure of information on the BM, in particular on what to disclose and how to do it. Companies have addressed this issue in different ways, which in practice has resulted in a wide variety of forms of disclosing this type of information. Therefore, the authors have attempted to analyze how to disclose information on the BM. Firstly, it was examined whether companies disclose this type of information at all and, if so, in what form. In particular, whether the company has separated an independent chapter or sub-chapter on the description of the BM within the integrated report. Further, the method of disclosing this type of information was analyzed, taking into account the tone of the expression (positive, negative or neutral) and the type of disclosed information, whether quantifiable or non-quantifiable, forward-looking or concerning current or past events and elements of the BM according to the IIRC guidelines. For this purpose, a method of content analysis and comparative analysis was used. The article also deals with the problem of the lack of uniformity in the business model nomenclature among Polish enterprises.
CORPORATE SOCIAL RESPONSIBILITY AND TEXTUAL FEATURES OF FINANCIAL DISCLOSURES
BEN AMAR, WALID
SOLIMAN, MARWA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper examines the association between corporate social responsibility (CSR) and textual attributes of financial disclosures. We rely on readability and tone ambiguity as proxies for linguistic complexity of 10K filings. We find that firms with high CSR orientation provide more readable disclosures and use less ambiguous tone in their annual reports. These findings are consistent with the notion that managers in CSR firms adhere to high ethical standards and commit to improving the transparency of their firms’ financial disclosures. Our results are robust to different measures of readability and to accounting for potential endogeneity.
WHAT CONDITIONS THE EFFICIENCY IN DRINKING WATER SUPPLY? AN EMPIRICAL EVIDENCE
BENITO, BERNARDINO
BASTIDA, FRANCISCO; FAURA, ÚRSULA; GUILLAMÓN, MARÍA-DOLORES; RÍOS, ANA-MARÍA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The purpose of this paper is twofold. First, it aims to assess the efficiency in drinking water supply of the Spanish municipalities over 5,000 inhabitants. Second, it examines the hypothesis that this efficiency is conditioned by a group of environmental variables. In contrast with moni-toring reports based on descriptive methods, this paper uses the Double Data Envelopment Analysis (DEA) bootstrap procedure to investigate efficiency determinants. Our results show that there is a positive effect of population density on the level of efficiency in the public service covered by our study. Moreover, we find that the most tourist municipalities are more efficient at managing water supply service. Our findings also suggest that when the provision of drinking water is managed directly by the local government the level of efficiency is higher. Finally, we do not find a significant impact of the citizens’ income level, ideology and political strength on the level of efficiency in drinking water supply.
THE AUDITOR'S CIVIL LIABILITY IN EUROPE AND ITS IMPACT ON AUDIT FEES
BENSLIMENE, IMEN
Category: AU = Auditing
This study analyses the impact of the regulation related to the civil liability of auditors in Europe and its impact on the level of fees paid by European firms. The originality of this study is that it focuses on the regulatory aspects, which are generally ignored by previous research. The diversity of regulations that govern statutory audits in 14 European countries provides us with the opportunity to analyse how auditors’ liability regulation affects audit fees. For a sample of 4,293 European firms, our main results show that, in addition to classical determinants of audit fees (auditor reputation, investor protection, firm size, leverage, audit risk…), the auditors’ liability regulation impact audit fees significantly. Fees are higher when the auditor’s liability is based on tort law, and unlimited.
ANTECEDENTS OF THE ABANDONMENT OF A MANAGEMENT ACCOUNTING SYSTEM - THE CASE OF VALUE-BASED MANAGEMENT
BERGER, LUKAS
Category: MA = Management Accounting
While the implementation and diffusion of Value-Based Management (VBM) has sufficiently been examined in management accounting research, little is known about the abandonment of this management accounting system (MAS). Hence, our study investigate the factors influencing the (de-) institutionalization and abandonment of VBM. Organizational characteristics and their impact on the abandonment process are considered by analyzing, if they lead to a change of internal focus promoting the de-institutionalization and abandonment of a value-based management approach. Our research is empirically analyzed by using data of 1,855 firm-year observations from a European sample between 2000 and 2016. After controlling for various possible confounding effects, our results indicate that diversification and capital-intensity reduce the probability of VBM abandonment, whereas the increasing amount of mergers and acquisitions as well as top management team turnovers having a significant impact on the abandonment. We additionally find that financial expertise on board of directors strengthen the institutionalization of VBM and hence lessen the probability of an abandonment.
THE SAY ON PAY IN CANADA: THE INVISIBLE HAND
BERTHELOT, SYLVIE
BERTHELOT, SYLVIE; COULMONT, MICHEL; SERRET, VANESSA
Category: GV = Accounting and Governance
Say on Pay (SOP) gives shareholders the right to vote on executive ompensation. Unlike in a number of other countries, SOP is not prescribed by regulation in Canada, although more and more firms are now adopting this practice voluntarily. The benefits for firms that voluntarily implement SOP have been little documented from an empirical perspective. This study addresses this issue. Results suggest that the voluntary adoption of Say on Pay is positively related to higher long-term executive compensation and that SOP vote results appear negatively related to the rise of executive compensation.
COMMUNICATION OF BUSINESS MODEL REPORTING IN COMPANY REPORTS – A STUDY OF REPORTING PATTERNS IN SWEDEN
BEUSCH, PETER
ARVIDSSON, SUSANNE; JONÄLL, KRISTINA; RIMMEL, GUNNAR; SABELFELD, SVETLANA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The purpose of this study is to explore the patterns of BM reporting in Swedish companies over time and to analyze the role of in the development of these patterns. Motivation for the focus on BM is its alleged key role in integrated reports and its ability to reflect organizations entire value creation process. The study discusses BM, as framed by and a wider research perspective, by using Maas et al.’s (2016) framework that is connecting the internal performance improvement perspective (PIP) with external accounts of this value creation, the transparency perspective (TP). The paper rests on a disclosure study with a mostly quantitative approach in combination with minor qualitative elements. To examine patterns and trends, we investigate the seven years period 2010-2016 where we focus on 300 annual-, sustainability-, combined- and integrated reports from the largest companies listed on the Swedish Stock Exchange. The findings reveal three patterns of BM reporting, non-coupling, loose-coupling and strong-coupling the internal (PIP) and external (TP) perspective. Most companies providing integrated reports appear to have started a development of communication practices that have their roots in the IR framework (IIRC, 2013). The patterns of BM reporting in the reports overall demonstrate that the fulfilment of integrated reporting requirements, in the future, might experience the above articulated stages. Results might differ depending on industry domain.
FINANCIAL STATEMENT READABILITY AND TAX AGGRESSIVENESS
BEUSELINCK, CHRISTOF
BLANCO, BELEN; DHOLE, SANDIP; LOBO, GERALD
Category: TX = Taxation
This paper investigates whether firms with aggressive tax planning strategies have less readable financial reports, in an attempt to confuse outsiders about the underlying tax risk. In theory, tax-planning increases firm value through tax savings but can lead to a discount if applied too aggressively. Therefore, managers have an incentive to obfuscate their aggressive tax planning activities. One means of doing so is to make financial statements less readable and thus make risky tax planning activities more difficult to interpret for outsiders. Consistent with the information-based agency problem perspective of complex financial statements, we find a robust positive relation between financial statement readability and various proxies for tax aggressiveness. We further show that the association between financial statement readability and tax aggressiveness is weaker after the installation of Schedule M-3, a regulatory requirement for a detailed reconciliation of book income to tax income intended to make firms' aggressive tax planning activities more apparent to the Internal Revenue Service (IRS). Collectively, this evidence suggests that managers apply complex financial reporting strategies when the benefits of hiding tax aggressive policies exceed the costs, but rely less on obfuscation through such complexity when the benefits of obfuscation attempts are small.
IS IT WORTH HAVING THE SOPRANOS ON BOARD? CORPORATE GOVERNANCE POLLUTION AND ORGANIZED CRIME IN ITALY
BIANCHI, PIETRO ANDREA
MARRA, ANTONIO; MASCIANDARO, DONATO ; PECCHIARI, NICOLA
Category: GV = Accounting and Governance
We examine the economic consequences of the presence of organized crime in the private sector. Using a novel and original database of Italian firms, we develop and test two competing hypotheses about the relation between organized crime and firm financial policy, i.e., money laundering hypothesis and liquidity hypothesis. We find that firms with at least one director, whose criminal record displays potential involvement with criminal organizations (i.e., tainted firms), are used for money laundering purposes, thereby showing lower levels of cash holdings. We further explore the economic consequences for tainted firms, and we find that they are more likely to file for bankruptcy, show higher levels of cost of capital, and are more tax aggressive than non-tainted firms. Results from this study are informative to regulators, policy makers and politicians, interested in preventing the pollution of criminal organizations in the legal economy.
READABILITY, TONE AND AUDIT FEES: SOME AUSTRALIAN EVIDENCE
BICUDO DE CASTRO, VICENTE
GUL, FERDINAND; MIHRET, DESSALEGN; MUTTAKIN, MOHAMMAD
Category: AU = Auditing
We examine whether readability and tone of corporate annual reports are associated with audit pricing decisions. A unique dataset drawn from annual reports of non-financial firms listed on the Australian Stock Exchange for the period from 2002 to 2014 is generated using textual analysis. We find that annual report readability—where longer reports are regarded as less readable—is inversely associated with audit fees, and annual reports with a more optimistic tone are associated with reduced audit fees. The effect of negative tone on audit fees tends to increase as readability of the annual report decreases, suggesting that both attributes of the annual report influence auditor’s risk assessment. Overall, the findings suggest that linguistic attributes of annual reports matter to the auditor.
FINANCIAL REPORTING QUALITY OF CO-OPERATIVE FIRMS
BIGUS, JOCHEN
RIEDIGER, MONIKA
Category: FR = Financial Reporting
In this paper, we compare the financial reporting quality of co-operative firms and private stock corporations in Germany. Both types of firm typically have a relatively large number of owners, but profit maximisation is not a primary goal of co-operatives. Co-operative firms must be run by their owners; in contrast, ownership and control may be separated in stock corporations. Owners of co-operative firms are generally held liable for the firm’s liabilities with their private assets; this is not the case for shareholders of corporations. We therefore expect agency problems of equity and debt to be less severe in the case of co-operatives. As a result, we expect – and find – that co-operative firms generally exhibit lower financial reporting quality (FRQ) than corporations, as measured by timely loss recognition, income smoothing and the propensity to avoid reporting small losses. However, high levels of debt may urge stock corporations, more so than co-operatives, to additionally target information needs of creditors and to meet debt covenant requirements. Consequently, in the case of highly leveraged firms, stock corporations and co-operatives differ less as regards FRQ.
THE VALUE RELEVANCE OF SEGMENT ACCOUNTING DATA TO PRIVATE EQUITY INVESTORS WHEN SELECTING TARGET ACQUISITIONS: AN AUSTRALIAN ANALYSIS
BIRT, JACQUELINE
JOSHI, MAHESH; KEND, MICHAEL; SAFARI, MARYAM
Category: FR = Financial Reporting
The private equity market in large economies has outperformed other key asset classes. In this study, we investigate the role of segment data in selecting target companies by private equity investors. The aim of the study is to examine a matched sample of targeted and non-targeted Australian listed companies and identify whether segment accounting data is value relevant to private equity bidders when they decide to select target acquisitions. In this study we use the extended Ohlson model to capture the market impact of the segment data. We find that segment data is value relevant for all firms in our sample. When we disaggregate our sample into targeted versus non-targeted firms we find that the explanatory power of the model for targeted firms has higher explanatory power and the segment variables are highly value relevant for the targeted firms. Our study contributes to the scant literature on disclosure issues surrounding targeted companies and also the segment disclosure literature. The research is timely as standard setters have recently issued an exposure draft on segment reporting to improve presentation and disclosure (IASB, 2017).
THE ROLE OF PUBLIC SECTOR ACCOUNTING HARMONIZATION IN GOVERNMENT PERFORMANCE
BISOGNO, MARCO
CUADRADO BALLESTEROS, BEATRIZ
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Several studies have noted that public sector accounting harmonization through IPSAS or accrual-basis accounting enhances the information quality and citizens’ participation. Accordingly, we expect that more and better information improves the decision-making process, which affects the government effectiveness, namely governance. This study aims to investigate how public sector accounting harmonization affects the quality of governance by using a sample of 33 OECD countries in 2010–2014. Our findings highlight the relevance of IPSAS implementation to enhance good governance.
HOW DOES DISCRETION IN INSTITUTIONAL DESIGN AFFECT FINANCIAL REPORTING ENFORCEMENT INTENSITY
BISSESSUR, SANJAY
LITJENS, ROBIN
Category: FR = Financial Reporting
Prior literature on the effects of financial reporting regulation show that outcomes vary predictably with legal institutions. However, evidence on how relatively minor differences in legal rules translate into major economic outcomes remains scarce. This paper examines the association between inputs and outputs of institutional enforcement design and heterogeneity in the intensity of financial reporting enforcement in the European Union (EU). We find that enforcer incentives are incrementally important to legal institutions in explaining enforcer intensity, suggesting that enforcer incentives are an important mechanism for regulatory effects. Countries where individual country institutional design choices provide enforcers with relatively high discretion are more likely to the use a deterrence enforcement strategy. We infer the importance for regulation of the manner in which legal institutions are used, rather than the law per se, by showing incremental effects of enforcer incentives to the rule of law for both enforcement strategy and enforcement outcomes as measured by compliance cost. We interpret these findings that consistent implementation of legal institution -in addition to strenght of legal institutions- determines the effect of financial reporting regulation. Our results illustrate how accounting harmonization under disparate prior conditions can lead to divergence of financial reporting outcomes through enforcement intensity.
EXAMINING ENTREPRENEURS' KNOWLEDGE BASED VIEW OF THE FIRM: LNFLUENCING FINANCIAL INFORMATION IN INNOVATIVE ACTIVITIES
BLOMKVIST, MARITA
JOHANSSON, JEANETH; RODGERS, WAYMOND
Category: FR = Financial Reporting
This study focuses on knowledge management and entrepreneurs’ perceptions in terms of knowledge sharing, the use of financial statement information and how these impact on their strategic business judgments and decision choices in innovative SME firms. Using a strategic decision making process model we test our assumptions regarding entrepreneurs´ knowledge routines implemented by non-Gazelle companies in strategic business decision. Combining survey data and financial data from a unique archival database we test our propositions on Swedish SMEs. The results of the structural equation analysis implied that non-Gazelle companies are propelled primarily by non-financial information captured by the expertise of managers and investors. Traditional financial information does not include entrepreneurs´ decision making however, the results indicate that entrepreneurs risk awareness is reported as a part of the frame why entrepreneurs´ make decisions.
A NOVEL MEASURE OF CEO FRAUD AVERSION: USING MACHINE LEARNING TO ANALYSE CODES OF CONDUCT
BOGACHEK, OLGA
GIETZMANN, MILES; GROSSETTI, FRANCESCO
Category: GV = Accounting and Governance
We use Latent Dirichlet Allocation (LDA) topic modeling algorithm to analyze Codes of Conduct of S&P 500 firms in order to introduce a novel measure of Chief Executive Officer (CEO) fraud aversion. This measure reflects the CEO’s personal belief on the importance of anti-fraud communication within the firm. The presented method allows us to estimate CEO fraud aversion index without directly observing it. We find a negative association between the CEO fraud aversion index and the firm fraud tolerance level based on subsidiaries locations.
EARNINGS QUALITY OF PRIVATE AND PUBLIC FIRMS: BUSINESS GROUPS VERSUS STAND-ALONE FIRMS
BONACCHI, MASSIMILIANO
MARRA, ANTONIO; ZAROWIN, PAUL
Category: FA = Financial Analysis
We compare the earnings quality of private and public firms. Prior evidence is mixed and inconclusive as to which is greater. The research question is important, because it examines whether market demand for high quality reporting or managerial opportunism dominates in determining public firms’ quality. We focus on organizational structure, because stakeholder demand for earnings quality and tax related incentives for earnings management differs between business groups and stand-alone firms, and public companies are structured as business groups, whereas private firms are business groups or stand-alone entities. Based on a comprehensive sample of 11 European Union countries from 2004–2014, we find that public firms have higher earnings quality than private firms overall, but when we compare public and private business groups, private firms are higher. Our results imply that opportunism trumps demand in determining public firms’ earnings quality and reconcile the inconclusive results in the literature, which are driven by not separating stand-alone from business groups in the analysis.
DISCLOSURE REGULATION AND CORPORATE ACQUISITIONS
BONETTI, PIETRO
DURO, MIGUEL; ORMAZABAL, GAIZKA
Category: FR = Financial Reporting
This paper examines the effect of disclosure regulation on the market for corporate control. We exploit the implementation of the Transparency Directive of 2004, which imposed on European public firms tighter disclosure requirements in periodic financial reports and major shareholdings notifications. We find a substantial drop in the number of control acquisitions after the introduction of the regulation, a decrease that is concentrated in countries with lower pre-levels of acquisition costs. We also find that takeover premiums are higher and acquirers’ stock returns at the acquisition announcement are lower under the new disclosure regime. Additional analyses show that the documented patterns appear to be driven by the tightening of the disclosure requirements for major shareholdings. Overall, our evidence suggests that tighter disclosure requirements can impose significant acquisition costs on bidders and thus slow down the market for corporate control.
MANAGEMENT COMMENTARY DISCLOSURE IN ITALIAN PUBLIC UNIVERSITIES: TOWARDS A NEW ACCOUNTING LANGUAGE?
BONOLLO, ELISA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Since 2015, Italian public universities have been obliged to adopt accrual accounting with accrual financial reporting documents, including the Management Commentary (MC). Contents for MC are not defined by law in details, so, apart from a minimum set of information, universities can decide what to disclose. From the assumption that the adoption of a new accounting system represents a change of language –a different way to ‘construct reality’– and not a mere technical issue, this paper aims to investigate the contents of the MC at public universities; first, by comparing them with the year-end narrative documents based on traditional public accounting, and then by verifying whether contents vary according to certain variables. The results of the content analysis highlights that the attention paid to financial resources has decreased during the transition from traditional public accounting to accrual accounting and that there are positive correlations between forward-looking information and size, debt sustainability, and central government funds of universities.
PUBLISHING ACCOUNTING PAPERS IN ENGLISH: A GRADUATE BRAZILIAN PANORAMA
BORBA, JOSÉ ALONSO
BORBA, JOSE ALONSO; FERREIRA, DENIZE MINATTI; OLIVEIRA, MONIQUE CRISTIANE ; SCHAPPO, FILLIPE
Category: ED = Accounting Education
On one hand, Brazil’s universities and national development agencies (CNPq and Capes), among others, have encouraged the internationalization of scientific production in English. On the other, the English language has come to be considered the lingua franca of science by the hard sciences and increasingly by the area of accounting as well. This study aims to the objective to identify and analyze the characteristics of English publications made by Brazilian graduate professors in Accounting. We have investigated the publications of 346 professors in 26 Brazilian Graduate Programs in Accounting over a period of 17 years. The results show that the publishing of papers in the English language has grown over the years. However, the focus of these Journals has been broad, diverse and of low impact. There has typically been a lack of papers by Brazilian researchers in top journals and/or journals which are specifically dedicated to the area of accounting.
HOW RELIABLE ARE THE HURTT PROFESSIONAL SKEPTICISM SCALE AND THE ROTTER INTERPERSONAL TRUST SCALE FOR AUDIT EXPERIMENTAL RESEARCH?
BORITZ, J. EFRIM
PATTERSON, KATHARINE; ROTARU, KRISTIAN; WILKIN, CARLA
Category: AU = Auditing
This study uses an experimental context to compare the results obtained from two well accepted scales that have been designed to measure stable personality traits - the Hurtt Professional Skepticism Scale (HPSS) and the Rotter Interpersonal Trust Scale (RITS). Our findings indicate that HPSS and RITS measures of skepticism and trust, respectively, vary by case presented and order of measurement. Both scales may have components that are sensitive to states rather than being pure measures of traits. Also, HPSS and RITS do not appear to be substitutes for one another, as the RITS does not behave as the inverse of the HPSS across cases and orders of administration. Lack of trust (the inverse of RITS) does not appear to be synonymous with skepticism as measured by the HPSS.
PREDICTING AUDITORS FIRM WITH TEXT MINING ON INTERNAL AUDIT DISCLOSURE
BOSKOU, GEORGIA
BOSKOU, GEORGIA; KIRKOS, EFSTATHIOS; SPATHIS, CHARALAMBOS
Category: AU = Auditing
Abstract This study aims at exploring whether internal audit (IA) is connected with the firm of the selected auditor (Big4 and Non-Big4). It includes a research analysis in order to determine the choice of auditor firm through internal audit disclosure. For this reason we use of text mining techniques as a tool to exploit a large amount of accounting information in annual reports. The results show that there is a strong relationship between internal audit disclosure (terms, N-Grams), as they are presented in the annual reports, and the choice of auditor’s firm. It also highlights the role of internal audit and its relation with external audit. The results extend prior research and deepen our understanding of the determinants of the auditor firm selection. Practitioners and Regulators may find this information useful in an effort to “persuade” governments and officials to revise their laws. At the same time, accounting firms will be motivated to re-examine their procedures so that a high-quality audit work is ensured. Keywords: internal audit disclosure, text mining, auditor selection, big4 accounting firms, auditing companies, internal audit.
DOES CORPORATE ENVIRONMENTAL DISCLOSURE ENHANCE ANALYST FORECAST ACCURACY SYSTEMATICALLY?
BOYER-ALLIROL, BÉATRICE
DUMONTIER, PASCAL
Category: FA = Financial Analysis
Using a sample of European listed companies, we examine the relation between corporate environmental disclosure and analyst forecast accuracy. To measure the quality and magnitude of environmental corporate disclosure we construct a disclosure index based on both the Global Reporting Initiative (GRI) guidelines and the environmental key performance indicators defined by the European Federation of Financial Analysts (EFFAS). Our evidence shows that forecast accuracy increases with the extent of environmental disclosure. However, when making a distinction between hard and soft disclosure, we find that soft disclosures are more effective in enhancing forecast accuracy. Additional tests provide evidence that environmental disclosures are especially useful to analysts when the firm is structurally opaque or environmentally sensitive, and when shareholding is widely dispersed.
CORPORATE GOVERNANCE AND SUSTAINABLE BUSINESS CONDUCT - EFFECTS OF BOARD STRENGTH AND STAKEHOLDER ENGAGEMENT ON CORPORATE SUSTAINABILITY PERFORMANCE AND DISCLOSURE
BRAAM, GEERT
MANNING, BART; REIMSBACH, DANIEL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study posits that, in the absence of extensive mandatory regulation, board strength and stakeholder engagement play significant roles in explaining variations in sustainability reporting quality (SRQ) and the underlying corporate sustainability performance (CSP). In addition to these direct effects, we also explore the potential indirect effects of these corporate governance (CG) mechanisms on SRQ via CSP because SRQ and CSP are interrelated constructs. Using a panel data set of Dutch firms, our results show that the CG mechanisms positively affect SRQ, while CSP is negatively related to SRQ. The latter finding provides support for legitimacy theory, suggesting that inferior sustainability performers adjust their reporting behavior by adhering to more reporting standards, rather than by directly improving their CSP. The results also indicate that stakeholder engagement is positively related to SRQ via CSP in the longer term, suggesting that active stakeholders, over time, may drive companies toward more sustainable business conduct.
ACCOUNTING TECHNOLOGIES AND THE PERMEABILITY OF SOCIAL WORK BOUNDARIES
BRACCI, ENRICO
CHOW, DANNY; GREATBATCH, DAVID
Category: IC = Interdisciplinary/Critical
In this paper, we explore the encroachment and entrenchment of accounting logics and technologies in social work through a case study of three English local government children’s services departments. Our paper bridges the gap between two important strands in the literature. The first strand highlights the way in which New Public Management (NPM) ideas, principally represented by the ascendancy of accounting notions of efficiency and control, is becoming more widely adopted by many advanced country governments around the world faced with financial and political pressures to be more vigilant with the public purse (Olson, Humphrey, and Guthrie 1998; Guthrie et al. 2005). Such pressures have been exacerbated by the 2008-09 financial crisis as government borrowing has greatly increased to fund deficits. The second strand draws attention to the frictions generated when calculative logics intersect with the caring ethos of professions such as health and social work. Our study thus aims to illuminate, in the under-explored area of social services, the interactions between accountants, accounting technologies and the social work managers and front line workers as they adapt to an economic climate with increasingly scarce resources. In particular, we seek to understand how ideas and instruments of accounting are being used in this managing process and its subsequent implications/consequences on the system of social care for children and on professional social workers.
PREDICTIVE ABILITY OF ALTERNATIVE METHODS OF DEFERRED TAX
BRADBURY, MICHAEL
HOOKS, JILL; MEAR, KIM
Category: FA = Financial Analysis
This study is motivated by the International Accounting Standards Board’s (IASB) staff findings on practice issues related to IAS 12. These issues include a fundamental re-think of the balance sheet method under IAS 12 and a question over the usefulness of IAS 12 disclosures. IAS 12 states that the recognition of deferred tax should be related to future tax payments. We therefore examine the ability of alternative deferred tax methods to predict future tax payments. We use the adoption of International Financial Reporting Standards in New Zealand to examine the income statement method (pre-IFRS) and the balance sheet method (post-IFRS adoption) of deferred tax allocation. The results show that taxes payable (or the flow through) method results in the lowest prediction errors regardless of the tax allocation method. Furthermore, the disclosure of the components of temporary differences, as required by IAS 12, has no predictive power. The paper discusses policy implications of these findings.
THE EFFECTIVENESS OF PEER-LEVEL CALIBRATION COMMITTEES
BRAGA DE AGUIAR, ANDSON
BOL, JASMIJN; CARLOS COELHO, ANTÔNIO; LILL, JEREMY
Category: MA = Management Accounting
The process of having supervisors discuss, compare, justify, and potentially adjust their subordinates’ performance ratings in a meeting with their peers is referred to as peer-level calibration. Calibration committees are widely used, and promoted as a “best-practice” by many consulting firms. Other professionals, however, are less positive about the calibration, which has led to an ongoing debate. We inform this debate by examining the effectiveness of peer-level calibration. Specifically, we examine the main proposed benefits of peer-level calibration: 1) increased amount of information used to determine ratings, 2) increased consistency in applied rating criteria, and 3) elimination of rating bias. As predicted, our results indicate that calibration increases the amount of information used and the consistency in applied rating criteria. Our inferences related to bias are less straightforward. Although through calibration the performance ratings meet the organization’s desired distribution, which arguably suggests that calibration limits supervisors’ ability to be lenient, we find evidence that specific supervisors are still able to provide their subordinates with higher, more lenient ratings. That is, we find evidence of supervisor specific incentive-driven bias. Thus, our results indicate that calibration has clear benefits but that it does not solve all problems inherent to subjective performance evaluation.
SETS OF ERM PRACTICES IN NON-FINANCIAL FIRMS: AN EXPLORATORY STUDY
BRAUMANN, EVELYN
Category: MA = Management Accounting
This study examines enterprise risk management (ERM) implementation in non-financial firms and focuses on different risk management practices that are deployed in an ERM program. As non-financial firms have different risk management requirements as compared to highly regulated financial firms, certain types of organizations may find their equilibrium at lower levels of ERM implementation and with a different set of risk management practices. Using cluster analysis to classify firms based on their formal risk management practices, I identify four configurations (packages) of ERM components. These configurations allow profiling the companies based on firm-specific, industry-specific, and environmental characteristics that are derived from considerations about costs and benefits from ERM implementation, firm heterogeneity, governance regimes, and regulatory requirements. This study contributes to ERM literature by addressing the question about what types of organizations implement ERM, and shedding more light on the internal structure and patterns of ERM practices in non-financial firms dependent on their context. The research is based on survey data obtained from 121 non-financial companies.
COSTS AND BENEFITS OF ACCOUNTING SERVICES - EVIDENCE FROM EUROPE
BRAVIDOR, MARCUS
BRAVIDOR, MARCUS; LOY, THOMAS R.
Category: FA = Financial Analysis
We empirically analyze the benefits associated with the costs of accounting-related services in 18 European countries. We use the revenues earned from accounting-related services as an estimate of compliance costs and explore whether the cross-country and temporal variation of these costs is associated with benefits for firms (e.g., in the form of lower corporate tax burdens) and/or the public (e.g., through increased earnings quality). Prior studies focused on audit and non-audit (e.g., tax advisory) fees paid by listed companies. Our dataset also includes SMEs and individuals. Empirical results indicate increased spending on accounting-related services is related to decreasing earnings quality, as measured by accrual-based earnings management and real activities management. However, we find no evidence that companies use discretionary spending to decrease their effective tax rates indicating that accounting services are primarily used to comply with tax laws. Country-level governance mechanisms partially mitigate this relation. Differences in the quality of financial reporting and tax regulation do not alter the benefits from accounting-related services. We attribute these results to an increased demand in accounting advisory services to identify avenues for earnings management and tax planning. Additionally, either the advisory effect of accounting regulation supersedes the effect of audits, which should restrict earnings management, or companies demand accounting services to smooth earnings for tax purposes.
GENDER DIVERSITY IN THE AUDIT COMMITTEE: DO WOMEN IMPROVE VOLUNTARY DISCLOSURES?
BRAVO URQUIZA, FRANCISCO
REGUERA-ALVARADO , NURIA
Category: GV = Accounting and Governance
The main objective of this paper is to analyse the association between female representation in the audit committee (AC) and the quality of the voluntary information disclosed by Spanish firms. Moreover, this paper examines whether the role of women is moderated by the busyness of the AC and the intensity of its activity. A theoretical approach based on the agency theory and economic sociology theories is employed to justify why women in the AC may lead to better disclosure practices. Our sample is composed of Spanish listed firms in the Madrid Stock Exchange for the period 2012-2015. Our results highlight that there is a positive association between gender diversity in the AC and the quality of the voluntary information disclosed by firms, which results in greater transparency and relevance. In addition, the busyness of the AC negatively moderates the influence of female AC members. These findings extend the academic debate on the benefits obtained from having women serving on the AC. Given the importance of voluntary disclosure in capital markets, and its potential benefits for firms, understanding the relationships between gender diversity in the AC and the quality of information disclosure would help regulators and owners to implement adequate corporate governance mechanisms. Our evidence also contributes to the ongoing debate concerning the need to also take into consideration the context in which women work in order to better understand their influence.
DO REWARDS ENCOURAGE PROFESSIONAL SKEPTICISM?
BRAZEL, JOE
LEIBY, JUSTIN; SCHAEFER, TAMMIE
Category: AU = Auditing
It is an open question whether auditors have credible incentives to exercise professional skepticism. We focus on costly skepticism (i.e., skepticism that is appropriate and generates incremental costs, but does not identify a misstatement), which is essential in high-pressure settings but typically unrewarded by audit supervisors. We theorize and find that rewarding costly skepticism may backfire and decrease skepticism on subsequent audit tasks where evidential red flags are present. We reason that auditors interpret the reward as a non-credible, better-than-expected outcome, leading auditors to view subsequent tasks from a risk-averse gain frame. As a result, auditors self-interestedly seek to avoid the risks and effort of exercising additional skepticism. This effect decreases auditors’ sensitivity to red flags and auditors’ willingness to inform their manager about severe red flags, compromising audit quality. Encouragingly, auditors who have experienced a history of rewards for costly skepticism are more motivated to exercise skepticism. A survey finds that audit supervisors are likely to reward costly skepticism when their own supervisors encourage the behavior and promote consultation within the team. Overall, our results suggest firms may benefit from a culture shift emphasizing credible rewards for costly skepticism, but that firms currently may not “get what they reward.”
SHORT-SELLERS’ DARLINGS: TARGET FIRMS’ OPERATIONAL COMPLEXITY AS A SOUGHT-AFTER FEATURE?
BRENDEL, JANJA
Category: FA = Financial Analysis
This paper examines whether short-sellers have a preference to engage in transactions with target firms that indicate a higher operational complexity than non-targeted firms. Having access to information on short-selling transactions with information on the short-sellers’ identity and the targeted firms on a transaction based level, it is possible to differentiate between different groups of short-sellers (e.g. hedge funds, banks). Moreover, one can divide the short-sellers into groups of investors with different geographical locations. The analyses indicate a preference for complex target firms in the sample. The paper further investigates whether this preference only exists for certain investor groups. Using a binary choice model, I find that targets are generally selected upon profitability, the existence of institutional ownership and a high complexity score. Complex targets are also more likely to be targeted by hedge funds. After accounting for the frequency of transactions across investor groups, complexity remains a significant firm characteristic in the sample. Results indicate that different groups of short-sellers seem to prefer different firm characteristics, implying potential differences in these different investors types’ information needs with regards to the target firms.
HOW DOES FINANCIAL-REPORTING REGULATION AFFECT MARKET-WIDE RESOURCE ALLOCATION?
BREUER, MATTHIAS
Category: FR = Financial Reporting
I investigate the impact of mandatory reporting and auditing of firms’ financial statements on industry-wide resource allocation. Using size-based reporting and auditing requirements for limited liability firms in 26 European countries, I document reporting regulation, mandating a greater share of firms in an industry to disclose a full set of financial statements, fosters a competitive and dispersed type of resource allocation in product and capital markets, but does not unambiguously improve the efficiency of resource allocation. By contrast, I find auditing regulation, mandating a greater share of firms to obtain a financial-statement audit, imposes a net fixed cost of operating on firms, deterring entry of smaller firms. I do not find any other effects of auditing regulation on industry-wide resource allocation in my setting. My findings suggest reporting regulation substitutes a transactional type of resource allocation based on public information for a relational one based on private information. This substitution, however, fails to spur economic growth. With respect to firms’ auditing, my findings suggest it lacks significant industry-wide externalities compensating for firms’ costs of mandatory auditing.
THE VALUE OF AN INTEGRATED REPORT TO INTERNAL AND EXTERNAL STAKEHOLDERS: A CASE STUDY
BRIDGES, CAROLINE M
HARRISON, JULIE; HAY, DAVID
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper examines the value to stakeholders of integrated reporting. Integrated reporting (<IR>) has attracted attention as a new form of corporate reporting since the International Integrated Reporting Council (IIRC) was formed in 2010. There have been calls for research in how the principles of <IR> have been applied by organisations (de Villiers, Venter, & Hsiao, 2016, Humphrey, O’Dwyer, & Unerman, 2016). This paper analyses documentary evidence from integrated reports and interviews with stakeholders from one organisation, and applies legitimacy theory to understand their different experiences. The results indicate that the adoption of <IR> was seen by internal stakeholders as an example of pragmatic legitimacy at a time of organisational uncertainty. Subsequently, they saw the potential of <IR> and integrated thinking to provide benefits to the organisation although the benefits were yet to be realised. The external stakeholders also viewed the adoption of <IR> as evidence of pragmatic legitimacy and they were interested in the change in reporting structure, but this had little effect on their view of the organisation. Further, they considered improvements in comparability were required. The results from this paper contribute to the growing evidence on the adoption of <IR> by organisations globally. The results can assist the IIRC as they engage in developing <IR> and other organisations considering adopting the framework.
A CONTENT ANALYSIS OF ORGANIZATIONS’ INTERNAL WHISTLEBLOWING POLICIES
BRINK, ALISA
GAO, LEI
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Regulations and major stock exchanges require public firms to disclose their adoption of a code of ethics that includes formal whistleblowing procedures. Formal whistleblowing policies guide employees through the ethical decision-making process and promote reporting unethical behaviors. However, there has been limited guidance on the design of whistleblowing policies, and prior research calls for investigations of the design and implementation of effective internal whistleblowing policies. Through a whistleblowing procedures framework, we performed a content analysis of 50 whistleblowing policies to analyze the content characteristics and linguistic characteristics of public firms’ whistleblowing policies. Results of this study identify trends and patterns within whistleblowing policies. Key findings include that firms prefer employees to report to their supervisor, however there is little discussion of supervisors’ responsibilities after receiving reports. In addition, the use of uncertainty words is highest when companies describe disciplinary actions in response to wrongdoing. Further, readability analysis suggests that companies’ whistleblowing policies are difficult to read and sections relating to investigation procedures, wrongdoer disciplinary actions, and anti-retaliation policies are relatively more difficult to read than the rest of the policy content. We discuss implications for firms with the aim of improving the effectiveness of stated whistleblowing procedures.
COMMERCIALIZATION OF AUDIT FIRMS AND AUDITORS’ SUBJECTIVE WELL-BEING
BROBERG, PERNILLA
KARLSSON , KAROLINE ; PONOMAREVA , YULIYA ; UMANS, TIMURS; VINBERG , EMMY
Category: AU = Auditing
The paper explores how commercialization of audit firms relates to individual well-being of auditors. Drawing on conservation of resources and social identity theories, we predicted that commercialization of audit firms would enhance auditors’ subjective well-being in its overall happiness and job-related dimensions. We further argue that this relation will be contingent on whether auditors are employed in Big 4 or non-Big 4 audit firms. We tested our hypotheses-based data from a survey of 166 Swedish auditors. The results suggested that auditors feel best at the workplace characterized by increasing commercialization. We also found that the positive relationship between commercialization and subjective well-being is stronger for auditors working for one of the Big 4. These findings provide support to the notion of normalization of commercial orientation within the audit profession in general while highlighting the differences between Big 4 and non-Big 4 firm auditors in their experience of commercialization.
WHERE DO INVESTOR RELATIONS MATTER THE MOST? EVIDENCE FROM GERMANY AND THE U.K.
BROCHET, FRANCOIS
DOUMET, MARKUS; LIMBACH, PETER
Category: GV = Accounting and Governance
We examine the value of investor relations (IR) in a cross-country setting. We posit that the marginal benefit of investment in IR is greater in civil law countries relative to common law countries, where capital market institutions are generally more developed and tailored to a more diffuse ownership structure. Using a large panel of survey-based annual IR rankings of German and U.K. companies, we find that IR quality exhibits a stronger positive (negative) association with Tobin’s Q, cost of capital, information asymmetry and uncertainty in Germany. The results are robust to a difference-in-difference design around the implementation of stronger transparency and governance standards in Germany (BilMoG). Overall, the evidence suggests that in a common law country like the U.K., IR is a more competitive environment with lower marginal benefits relative to a civil law country like Germany.
INTERNATIONAL TAX SPILLOVERS AND CAPITAL STRUCTURE
BROK, PETER
Category: TX = Taxation
Do multinational groups exploit their capital structure in order to obtain tax benefits that stand alone domestic firms cannot obtain? I test theoretical predictions about the effects of corporate taxes and the multinational group structure using a new dataset mapping the entire corporate group structure of a large sample of European multinationals. I identify three distinct effects. First is the local income effect, corresponding to the standard trade-off theory. Second is the substitution effect, predicting that an increase in foreign tax rates leads to a decrease in domestic leverage. Third is the global income effect: in multinational groups the holding companies can provide capital and extend guarantees to firms lower in the hierarchical structure, reducing the probability and cost of bankruptcy, therefore allowing higher leverage. The three effects have conflicting signs, and I show under which circumstances each effect dominates in response to changes in foreign and domestic corporate tax rates. I also discuss the policy implications of these results.
NONCURRENT ASSETS AND LIABILITIES, CONSERVATISM, AND THE PREDICTION OF ACCRUALS FROM THE STATEMENT OF CASH FLOWS
BROUSSEAU, CARL
Category: FA = Financial Analysis
I suggest improvements to existing accrual prediction models. Prior literature uses models designed to explain how working capital accruals map cash flows from operations into earnings and how this mapping reflects accounting conservatism. However, with the exception of fixed asset depreciation, accruals associated with noncurrent balance sheet accounts are typically not modeled, leading to a large proportion of these accruals that is deemed abnormal. I show that these unmodeled accruals have grown in importance over time and that a significant portion of them can be predicted by utilizing a fundamental property of accrual accounting : most noncurrent assets and liabilities will eventually be expensed as accruals, especially during bad times. I propose an augmented model that has significant incremental explanatory power.
DETERMINANTS OF THE RATCHET EFFECT: EVIDENCE FROM RETAIL BANKING
BRÜCK, CHRISTIAN
KNAUER, THORSTEN; NIKIFOROW, NICOLE; SCHWERING, ANJA
Category: MA = Management Accounting
Target ratcheting involves deriving target levels for the next period by adjusting current performance data. The practice of target ratcheting can evoke dysfunctional behavior, such as the ratchet effect, the phenomenon of employees strategically withholding effort in anticipation of future upward revisions of their targets. Prior research has mainly considered the existence of the ratchet effect and explored how it affects firm performance. We extend this stream of research and investigate determinants that could enhance or mitigate the ratchet effect. Using a unique dataset from a survey among bank employees, we observe that risk aversion, intra-organizational competition, and job insecurity are positively associated with the ratchet effect. Furthermore, we predict and find that target participation and career ambitions are negatively associated with the ratchet effect. Collectively, our findings suggest that firms should be aware that the ratchet effect can differ systematically.
BUILDING UP A PROTECTIVE SHIELD: HOW EXTERNAL PRESSURE AND CORPORATE FRICTION DETERMINE CORPORATE TAX RISK HANDLING STYLE
BRUEHNE, ALISSA
SCHANZ, DEBORAH
Category: TX = Taxation
Our study’s objective is to shed light on the `black box' of corporate tax risk handling. We argue that the driving forces behind a firm's tax risk handling style are key determinants of the eventual tax risk a firm faces and of potential accompanying consequences, which may arise from corporate tax risk exposure. Thus, understanding what drives corporate tax risk handling style is crucial, but requires knowledge of within-firm dynamics, which prior archival studies on tax risk have not been able to gather. Drawing from semi-structured interviews with 42 tax risk experts (e.g., tax directors and executive board members of German DAX and M-DAX firms, tax consultants, regulatory body representatives), we aim to fill this gap by developing a theoretical model that explains the emergence of different tax risk handling styles among firms. Our results suggest that most of the tax department's tax risk handling efforts are concerned with setting up a `shield' that protects the executive board from impinging external pressures. We find that the executive board is directly exposed to three types of external pressure: public, peer, and regulatory pressure. Our theoretical model indicates that varying external pressure strength, management focus, and the occurrence of short-term corporate frictions during the implementation of the protective shield can lead to variation in corporate tax risk handling styles.
THE CO-INFLUENCE OF GOING CONCERN OPINIONS AND EARNINGS ANNOUNCEMENTS ON THE ITALIAN STOCK MARKET RETURNS: WHICH HAS THE SUPREMACY?
BRUNELLI, SANDRO
CARLINO, CHIARA; CASTELLANO, ROSELLA; GIOSI, ALESSANDRO
Category: AU = Auditing
The purpose of this paper is to feed the debate as regard to investor reactions to auditor opinions containing a Going Concern Opinion (GCO’s). The topic is reinforced taking into account that other financial reporting events close to GCOs releases could affect stock market returns as well. According to the prevalent literature we individuated in the Yearly Earnings Announcements (EA) the more important co-founding event. Using the event study methodology (ES), focusing on short event windows, we detect whether there is an immediate market reaction to these two events, as might be expected assuming efficient stock markets. For the robustness of findings we used two different tests known in the ES literature. The results achieved shedding a light on the negative impact of both GCOs and EA on stock market returns. To isolate the weight of each effect per se, we propose two additional event studies dividing the total sample between firms/observations when the EA follow the GCOs from those firms/observations where the EA are released before. We found that negative effects on stock returns are mainly due to EA. Notwithstanding the two tests used, to better isolate the effects it would be appropriate specifying a different market model and relaxing the assumption of constant volatility of Abnormal Returns (AR) implied in all considered tests. This study, have a multilateral usefulness for auditors, investors, regulators and academics.
AN EX –ANTE ASSESSMENT OF THE IMPACT OF AGI: FIRM LEVEL EVIDENCE FROM BELGIAN TAX RETURN DATA
BUYL, PIETER
ROGGEMAN, ANNELIES
Category: TX = Taxation
In its relaunched proposal for a Common Consolidated Corporate Tax Base (CCCTB), on October 25th 2016, the European Commission (EC) introduced the idea to give taxpayers an allowance for growth and investment (AGI) according to which increases in their equity result in a notional interest deduction. Obtaining real tax return data from the Belgian Government we are able to simulate the AGI system into the Belgian corporate tax system in tax year 2013. Moreover, as Belgium applies a traditional allowance for corporate equity (ACE) system, this unique research setting enables to analyse the differences between a traditional and incremental approach. On the aggregate level, our simulation results show that introducing the AGI system result in a revenue gain of 75.37% compared to a traditional ACE system. To be budget neutral, the corporate tax rate of 33.99% applicable in tax year 2013 can be lowered to 19.35%. At the firm level, our analysis shows the heterogeneous distribution of the impact across the sample. We find that replacing the notional interest deduction (NID) by the AGI system especially harms very large firms. Furthermore, profitability, (the change in) the equity ratio and firm age seems to be important determinants of the difference in the effective tax burden between the AGI system and the Belgian corporate tax system in tax year 2013.
SOCIAL NORMS, GEOGRAPHY, AND CSR ACTIVISM
CAHAN, STEVEN
CHEN, CHEN; CHEN, LI
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We examine whether the social norms that institutional investors are exposed to in their home locality affect their willingness to support corporate social responsibility (CSR) activism in other parts of the US. We find that the shareholdings of non-local institutional investors from localities with strong CSR norms are positively related to the likelihood that a firm is targeted by a CSR-related shareholder proposal, the percentage of votes cast in favor of that proposal, and the likelihood that the proposal is ultimately successful. Our results are robust to a variety of alternative specifications. Further, we find that these relations are stronger if the target firm is located in an area with weak CSR norms. Thus, our results suggest that non-local institutional investors are influenced by the social attitudes they face at home, and these local norms can affect their support for CSR activism aimed at investees outside their home region. In particular, institutional investors from areas with strong CSR norms can act as a conduit for promoting better CSR practices, especially for investees located in areas with weak CSR norms.
VOLUNTARY IFRS ADOPTION AND EARNINGS QUALITY AMONG UNLISTED FIRMS: THE RELEVANCE OF COUNTRIES’ INVESTOR PROTECTION AND FIRMS’ REPORTING INCENTIVES
CAMPA, DOMENICO
CAMERAN, MARA
Category: FR = Financial Reporting
This paper investigates the impact of voluntary International Financial Reporting Standards (IFRS) adoption on financial reporting quality (measured by earnings quality: EQ) of unlisted companies. Using a large international sample (3,284 unique entities and 25,984 firm-year observations) of EU companies and a methodology that takes into careful consideration selection bias, we find a positive relationship between EQ and IFRS adoption, affected by the level of investor protection of countries and firms’ reporting incentives. More precisely, we observe that IFRS have a positive impact on EQ in countries with a weaker investor protection but no effect in institutional settings with stronger institutions. We also find that EQ improves only among companies that are not subsidiaries of EU listed entities, which can simplify the group consolidation process by imposing the use of the same GAAP to all of the companies belonging to the group. Finally, additional analyses highlight EQ enhancement only a few years after IFRS adoption.
CAN TRANSPARENCY BE MEASURED IN LOCAL GOVERNMENTS? THE CASE OF SOCIAL SERVICES IN SPAIN
CAÑIZARES ESPADA, MANUELA
MUÑOZ COLOMINA, CLARA ISABEL; PÉREZ ESTÉBANEZ, RAQUEL; URQUÍA GRANDE, ELENA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The purpose of this paper is to design and propose a new measurement methodology for social services transparency in municipalities. The methodology includes an empirical study in the municipalities of Spain. The need for a transparency culture in concrete areas of the municipalities is explored. Based on the information published in the 38 Spanish municipalities’ websites, the paper performs an experimental quantitative study using a multivariant analysis. The municipalities chosen for the research were those that contained the most population, disclosed a higher quantity of information on and easier access to their website. The paper’s conceptual framework is organized by combining both the Spanish legal context and the bibliography review, based on the latest transparency models. The research proposes a new methodology to measure transparency in municipalities (TAYSS), taking into account the social services information published on the websites that the citizens have access to. Factors considered include the degree of ease and time consumed by citizens when accessing the website. This research leads to interesting conclusions, both for public sector researchers and practitioners in Spain and Europe. Some conclusions indicate that transparency continues to be difficult to reach, information is not as accessible for the citizen as expected, and that differences appear among the municipalities – something that can be explained through the legal changes implemented over the last years.
INSTITUTIONAL WORK AND THE OFFSHORING OF AUDIT PRACTICE
CANNING, MARY
BERGSMA , REINOU BERGSMA ; BOOMSMA, ROEL; O'DWYER, BRENDAN
Category: AU = Auditing
The practice of offshoring audit work to lower wage locations has become increasingly prevalent among Big 4 professional services firms and represents a significant shift in financial audit practice. Yet, we have limited knowledge of how offshoring has been legitimized as a new way of undertaking audit work, particularly how key actors effect the institutionalisation of offshoring within these firms. This study, which draws on an in-depth case study with audit practitioners in a Big 4 professional services firm, investigates how offshoring became institutionalised within the firm. We mobilise the concept of institutional work to theorise this process. Our study offers evidence of both a failed and a successful attempt at embedding offshoring in audit. It highlights the fluctuating influence of different forms of boundary creation work in these attempts and how boundary creation and boundary spanning work interacted as the change process unfolded. The paper enhances our understanding of how integration between local and offshore audit teams evolves to safeguard audit quality. We uncover a willingness to accept certain levels of inadequacy in the offshoring process in the expectation that the overall quality of audit work will eventually improve. Finally, the paper unveils discrepancies in the claimed changes in audit assistants’ roles and calls for more research focusing on these role changes as offshoring becomes further embedded in audit practice.
JOINT EFFECTS OF TYPE OF ACCOUNTING STANDARDS, THE STRENGTH OF THE REGULATION AND AUDITOR’S CHARACTERISTICS ON EVIDENCE DEMANDS
CAO, JUNE
CORAM, PAUL
Category: AU = Auditing
There has been a significant worldwide movement to adopt International Financial Reporting Standards (IFRS) which are more principles-based compared to many of the more rules-based national accounting standards which they replaced. There has been limited research on how auditors respond to this type of change in the reporting environment. Specifically, we develop an experiment to test the joint effects of principles-based versus rules-based accounting standards and the strength of the financial regulatory regime on auditors’ evidence demands. We manipulate the type of accounting standards (principles-based, rules-based) and the strength of the financial regulatory regime (stronger, weaker) in a between-subjects experiment using Chinese auditors. We find that auditors are likely to have more evidence demands and more diagnostic evidence demands under principles-based accounting standards. This influence is more pronounced under the stronger financial regulatory regime. The US has not adopted IFRS standards, so conducting this research in a major country where IFRS standards are being used does provide important evidence on the reaction of auditors in this type of environment. The fact that auditors are collecting more and higher quality evidence where there are principles-based standards and strong regulation shows that auditors are playing their part in ensuring quality financial reporting outcomes as IFRS standards are implemented around the world.
PEER FIRM RESPONSES TO SEC ENFORCEMENT ACTIONS: EVIDENCE FROM CEO COMPENSATION DESIGN
CAO, WENJIAO
Category: FR = Financial Reporting
This study investigates peer firms’ responses to SEC’s explicit accusations of compensation issues in the Accounting and Auditing Enforcement Releases (AAERs). Examination of Fortune 500 firms subject to AAERs between 1992 and 2013 reveals that peer firms redesign their CEO compensation following such releases, manifested in significant decreases in CEO discretionary pay-for-performance sensitivity and sensitivity from CEO newly-granted equity holdings relative to control firms. Compensation redesigns are concentrated in peer firms with excessive pre-enforcement CEO equity incentives. I also find that fraud firms named in a compensation-mentioning release (CMR) are 633 percent more likely to be dropped from the compensation peer group than those named in a compensation-not-mentioning release (non-CMR). The findings suggest that peer firms use information from AAERs in their compensation design, indicating a potential channel for the deterrence effects of SEC enforcement actions.
MORE THAN SKIN-DEEP? BEAUTY AND THE PERFORMANCE OF SELL-SIDE FINANCIAL ANALYSTS
CAO, YING
GUAN, FENG; LI, ZENGQUAN; YANG, GEORGE
Category: FA = Financial Analysis
We examine whether physical attractiveness of sell-side financial analysts affects their information acquisition and job performance. Based on ratings of photos of 2,328 Chinese financial analysts, we find that physical attractiveness is positively associated with the accuracy of analysts’ earnings forecast and the informativeness of their stock recommendations. The superior performance of attractive analysts is likely attributable to their information advantage; More attractive analysts are more likely to update stock recommendations prior to the announcement of significant corporate news, and their corporate site visits are more informative to investors. We argue that the information advantage of attractive analysts is likely due to the physical attractiveness stereotype, in which firm managers perceive attractive analysts as having more desired qualities even though this may not be the case. Consistent with theories of stereotypes, we find that increased reliance of managers on financial analysts, strong monitoring by institutional investors, and familiarity with analysts all help reduce managers’ stereotype and hence the superior forecast performance of attractive analysts.
EMPLOYEE TREATMENT, LABOR INVESTMENT EFFICIENCY AND FIRM PERFORMANCE
CAO, ZHANGFAN
REES, BILL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Using a sample of 20,583 US firm-year observations that represents more than 3,000 individual firms over the period of 1995 to 2015, we investigate the link between employee treatment and labor investment efficiency. We argue that firms reduce information asymmetry by signaling its ability to honor implicit claims via employee-friendly treatment policies and predict that firms with better employee treatment performance have higher level of labor investment efficiency. Our empirical results confirms our prediction. We find strong and robust evidence that firms with more employee-friendly practices have lower level of abnormal net hiring. Moreover, we find employee treatment concerns distort normal labor hiring and specifically lead to underinvestment in labor, thus lowering firms’ labor investment efficiency. Finally, we find employee-friendly treatment facilitates higher labor productivity and profitability whereas abnormal net hiring reduces labor productivity and profitability. Taken together, our findings high- light the important role of employee treatment in contributing to firms’ investment behavior and value creation.
HOW DO FISCAL PRESSURES SHAPE THE ROLE OF MANAGEMENT CONTROL PRACTICES IN HOSPITALS?
CARR, MICHELLE
FLOOD, BARBARA; PIERCE, BERNARD
Category: MA = Management Accounting
This paper explores how fiscal pressures induced by an economic crisis shape the role and interactions with management control practices. Drawing upon case study evidence, the study demonstrates that the volume, detail and frequency of budget information being collated intensified, the significance of operational information declined and the focus of the activity information altered. In addition, the findings reveal how management at different hierarchical levels adopted defensive mechanisms in order to cope with the fiscal crisis, signifying the absence of a contagion effect. The study suggests that the strategies adopted, while initially successful in eliminating organisational slack, may also have induced harmful side effects. The provision of disaggregated budget information aligned with internal structures would have permitted budget information to be used in a more flexible manner and allowed individuals to consider the implications of their decisions. This study provides value to practitioners and researchers in that it offers valuable insights about management control outcomes in a hospital context.
JUSTIFICATIONS OF ACCOUNTING RELIABILITY
CARRINGTON, THOMAS
EKLÖV ALANDER, GUNILLA
Category: IC = Interdisciplinary/Critical
This study addresses the question of how accounting reliability is constructed and justified in practice. By paying attention to the translations and trials of strength (Latour, 1987) of the accounting numbers, three movements that takes the numbers through obligatory points of passage are identified and described. The three centres of calculations identified in this way betray three different, and yet all empirically important aspects of accounting reliability. Interestingly, these aspects are different from the aspects identified in other empirical accounts, where other types of accounting numbers are analysed (and empirically important). This underlines how accounting reliability is not a singular (or set of) predefined qualitative criteria inherent in well prepared accounting numbers. Instead, accounting reliability, suggests the results of this investigation, are best understood as statements about the different movements of the process of translation that leads to the construction of accounting facts.
WHEN ACCOUNTING MET BROADCASTING: STRATEGIC CHANGE IN THE BBC
CARTER, CHRIS
MCKINLAY, ALAN ; SPENCE, CRAWFORD
Category: IC = Interdisciplinary/Critical
Strategic change in public sector organizations – especially in the form of increasing infiltration of ideas and practices emanating from the private sector – has been well documented. This paper argues that accounting and other calculative practices have only been accorded limited roles in extant accounts of public sector strategic change initiatives. This paper suggests that public management research would benefit from a greater appreciation of how calculative practices are deeply imbricated and constitutive of organizational life. In turn, the paper argues that the field of interdisciplinary accounting has much to learn from public administration, especially in terms of leadership. The overarching argument is that understanding strategic change in public organizations can be enhanced by bringing together insights from the academic fields of Public Administration and Interdisciplinary Accounting. This is particularly the case where an accounting innovation is central to a strategic change programme. We illustrate this thesis through a case study of strategic change in the world’s largest public service broadcaster – The British Broadcasting Corporation (BBC). It is shown how, during the tenure of one organizational leader – John Birt, accounting technologies increasingly territorialized spaces, subjectivized individuals, was used to mediate between the organization and the State, and permitted adjudication on what was efficient and value for money within the organization and what was not.
LABOR MARKET EFFECTS OF SPATIAL LICENSING REQUIREMENTS: EVIDENCE FROM CPA MOBILITY
CASCINO, STEFANO
TAMAYO, ANE; VETTER, FELIX
Category: AU = Auditing
We exploit the staggered introduction of CPA Mobility provisions in the U.S. to study the effects of spatial licensing requirements on the labor market for accounting professionals. Specifically, we examine whether removing licensing-induced geographic barriers affects CPA wages, employment levels, and the quality of the professional services provided. We find that, subsequent to the adoption of CPA Mobility provisions, wages of accounting professionals decrease by 1.1% on average. The documented effect on wages is more pronounced for states with lower supply of CPAs, for early-adopting states, and for CPAs holding senior positions. Moreover, we assess whether increased wage pressure is associated with deteriorating service quality and find no supporting evidence. Overall, our evidence is consistent with the idea that the removal of occupational licensing barriers increases the elasticity of labor supply. Our findings inform the current regulatory debate on occupational licensing.
A QUANTITY-QUALITY INDEX FOR SOCIAL AND ENVIRONMENTAL DISCLOSURES
CASTILLA POLO, FRANCISCA
RUIZ-RODRÍGUEZ, MARÍA CONSUELO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper reviews social and environmental disclosures (SED) carried out by the 100 companies included in the Corporate Reputation Business Monitor, MERCO Business for 2016, during the period 2014-2016. The research objective was to analyse these disclosures both from the point of view of the quantity of information disclosed and the references about their quality, which constitutes a novelty with respect to previous literature. For the above reason, the methodological design included the construction of a weighted index based on two unweighted indexes related to the quantity revealed and the quality detected. Our results show that the quantity-quality SED index stands at an average value of 66.3 pages, a value that comes from the combination of the average SED quality index, 55.4%, and the average SED quantity index, 119.5 pages. While SED are considerable from a quantitative point of view, that is, there are many being carried out, they do not reach very high levels of quality, which is good to counteract the final value of the quantity-quality index that we propose. Likewise, there is a negligible reduction in the indices calculated during the period studied. This study involves an important advance in the identification of the relative quality of SED, opening a new line of research that will be key to comparing this type of disclosures in a more homogeneous way among specific studies in this topic. Likewise, these results will be of interest for future actions aimed at regulating the improvement of the quality of social reporting in the hands of managers, investors and regulators.
WHAT DRIVES CORPORATE CLIMATE CHANGE RISK DISCLOSURES IN 10K FILINGS? A LEGITIMACY PERSPECTIVE
CASTRO-HERRERA, DIANA
BEN AMAR, WALID; MARTINEZ, ISABELLE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
In 2010, the Securities and Exchange Commission (SEC) issued an interpretive guidance regarding material climate change risk disclosures. However, managers still enjoy a significant discretion to decide on the level of compliance with the guidance due to lack of enforcement by the SEC and the absence of consensus on the materiality of climate-related risks. This paper investigates the drivers that motivate firms to comply (or not) as well as the specificity of their disclosures about material risks related to climate change under a mandatory reporting regime. Our empirical analysis is based on a sample of S&P 500 firms over the period 2013–2016 and 10K textual climate-related disclosures from the CERES Sustainability Disclosure Tool. We find that firms disclose information about their material climate change risks in response to legitimacy threats except for specific climate change risks as these disclosures may supply relevant information to investors on firms’ risk exposure. While the SEC guidance has enhanced corporate compliance with climate-related risk disclosure requirements, the quality of such disclosures remains limited.
DEMOGRAPHY, IDEOLOGIES AND FINANCE - A HISTORY OF CALCULATION AND SWEDISH PENSIONS
CATASUS, BINO
BAY, CHARLOTTA; SUNDSTRÖM, ANDREAS; SVÄRDSTEN, FREDRIK
Category: IC = Interdisciplinary/Critical
This paper reports from a study of four pension reforms in Sweden over the last century. The paper tests the dominant idea that pension systems as well as accounting technologies are a part of the neoliberal influenced financialization of the private sphere. Although corroborating the proposition about financialization, the paper suggests that programs such as financialization is temporal because they are challenged by obligatory points of controversy. These obligatory points of controversy recur over time as issues that pension systems need to handle with decisions and calculations. The study finds that the obligatory points of controversy, however, are never solved because they interact and are in flux. In Sweden, the three controversies that are repeated are the discussion of demography, finance and ideology. These three issues forces the decisionmaker to answer such issues as “what is it to be Swedish?”, “can we afford this?” and “what is our idea of involvement between of the state/the private sector?”
EXTERNALITIES OF CREDIT DEFAULT SWAPS ON CORPORATE DISCLOSURE
CEDERGREN, MATTHEW
LUO, TING; ZHANG, YUE
Category: FR = Financial Reporting
We investigate the effects of credit default swap (CDS) trading on customers on management forecasts by the supplier firms. We find that firms which derive a greater proportion of their revenue from CDS-referenced customers tend to lower forecast issuance, suggesting that enhanced information revelation in customers’ CDS market decreases suppliers’ disclosure benefits, creating a disincentive for managers to issue forecasts. We further find that this effect manifests for good news forecasts, but not for bad news forecasts, because of the litigation risk associated with withholding bad news. Our results are robust to a variety of sensitivity tests that control for potential self-selection in CDS-referenced customers, and our results strengthen when we focus on supplier firms which themselves are not referenced by CDSs. Our findings add to the literature examining the externality effects of CDSs on corporate decisions of entities outside of those directly referenced by CDSs.
DESIGN OF MANAGEMENT COMPENSATION PACKAGES WITH PERKS - FORMULA APPORTIONMENT VS. SEPARATE TAXATION
ÇELEBI, HÜLYA
Category: MA = Management Accounting
Globalization, changes in business structures and the economic environment entail changes in management compensation packages and challenge the widely used corporate income taxation (CIT) system of Separate Taxation (ST). For instance, within the framework of CCCTB, Formula Apportionment (FA) is proposed as an alternative to ST within the EU. Further, changes in management compensation packages demonstrate an increasing trend for work-related perks as incentivization tools. This study aims at analyzing how these trends in management compensation and CIT affect the optimal composition of compensation packages in multijurisdictional entities (MJEs), which have remained disregarded in international taxation. For this purpose a standard principal-agent setting is used. The outcomes of the model show that, under ST, the optimal composition of compensation packages depends on the tax deductibility of perks and CIT rates, which has a proportional decreasing effect on the principal’s total surplus. In contrast, the outcomes show that under FA the optimal packages depend additionally on the factors used for tax base allocation as well as on the impact of a perk on these factors. This means CIT under FA does not only impact the amount of the variable payment and perk provided, but also the kind of perk offered as well as the manner it is financed. So, FA, esp. with payroll as the sole allocation factor, provides an important tax planning tool for the principal or MJEs.
BUDGET STABILITY, FINANCING AND SOCIAL RESPONSIBILITY IN SPANISH MUNICIPALITIES
CHAMIZO-GONZALEZ, JULIAN
CANO-MONTERO, ELISA-ISABEL; GUTIERREZ-PONCE, HERENIA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
In this paper, we analyze the most relevant relationships between budgetary stability, the Municipal Financing System (SFM) and social expenditure policies, as fundamental pieces to define the level of Corporate Social Responsibility (CSR) that can be assigned to Spanish municipalities. We have started from the budgets of the 9,500 municipalities and other local Spanish entities, presented to the Spanish Court of Auditors in 2014, and available on the website of the Ministry of Finance. Based on this information, we developed a database (more than 1,500,000 records, big data, treated by data mining techniques) to perform an exploratory analysis of the most significant factors explaining the relationship between budgetary stability, financial sufficiency and sustainability of welfare policies. Based on the above and the level of budgetary expenditures in the Basic Public Services programs (EA1) and the Social Promotion Protection Actions program (EA2), we propose two indicators to measure the level of CSR attributable to each municipality. The main findings of our research are summarized in three conclusions: that municipalities with budget deficits prioritize the reduction of their debt with financial institutions while delaying payment to their suppliers; that the relationships between the income and expenditure policies of each municipality have a direct impact on their level of CSR; and that, using a logit probability model, the hypothesis according to which the CSR of the municipalities can be explained by the size of their population and the way in which they are financed, is confirmed.
CREDIT RATING AGENCIES’ ANALYTICAL ADJUSTMENTS AND CREDIT RATING DECISIONS: AN INTERNATIONAL ANALYSIS
CHAN, ANN LING-CHING
CHEN, VINCENT YU-SHEN
Category: FA = Financial Analysis
We investigate the extent to which quantitative adjustments made by credit rating agencies (CRAs) are incrementally useful in explaining credit ratings and whether the extent of this incremental usefulness varies across countries. We find that financial ratios that incorporate CRA’s analytical adjustments (adjusted ratios), on average, have a greater explanatory power for credit ratings decisions than unadjusted ratios (reported numbers from financial statements). However, the incremental usefulness of analytical adjustments varies across countries and with different institutional factors. Specifically, we observe that this incremental usefulness is greater in countries with higher corporate disclosure transparency and lower value relevance of accounting information. In further analyses, we find that legal origins and IFRS adoption do not exert an influence on the usefulness of adjustments. Overall, these findings provide insight into how quantitative accounting adjustments affect credit rating decisions in an international setting.
THE IMPACT OF CLIENT PRESSURE AND CLIENT’S FINANCIAL CONDITION ON AUDITORS’ JUDGEMENTS TO REPORT KAMS IN THE AUDITOR’S REPORT
CHAND, PARMOD
PRASAD, PRANIL
Category: AU = Auditing
New requirements for the reporting of KAMs is one of the most significant changes to audit reports in the last four decades. This study examines the effects of client pressure and client’s financial condition on auditors’ judgements to report KAMs. The results indicate that, when presented with a mix of equally significant positive and negative KAMs, there is a tendency to report more negative than positive matters in the auditor’s report. There is also a tendency to report negative before positive KAMs. Furthermore, the study finds that client pressure not to report negative KAMs has a significant effect on auditor judgement. Specifically, auditors who face high client pressure present fewer negative KAMs compared with auditors who face no client pressure. Finally, the study suggests that, due to auditor concerns with litigation risk, the findings indicate that auditors with clients in poor financial condition would report more negative KAMs than auditors with healthy financial condition clients. The findings are significant to national and international auditing standard-setters, accounting firms, and those who rely on audit reports.
THE EFFECT OF CLIENT-SPECIFIC EXPERIENCE ON THE DISCLOSURE QUALITY OF KEY AUDIT MATTERS: EVIDENCE FROM TAIWAN
CHANG, YU-TZU
CHI, WUCHUN ; STONE, DAN
Category: AU = Auditing
Recent reforms in auditor reporting standards motivate examining the relationship between audit partner tenure and the nature and quality of disclosures of Critical or Key Audit Matters (KAMs). This study reports Taiwanese data (n = 1,378 companies) that results from recently expanded auditor reporting requirements related to publicly held companies. Results indicate that audit partners with longer tenure disclose more risk information (measured by the quantity and the length of KAMs). In addition, we find that client complexity affects risk disclosure readability and that audit partners’ client-specific experience does not improve report readability. Our study contributes to the auditing literature by examining audit firm reports resulting from new Taiwanese reporting regulation regime in Taiwan. Specifically, the results suggest that client complexity and audit partner tenure influence auditor reporting. These findings, which suggest that regulatory changes may lead to unexpected implementation effects, are of interest to audit firms, regulators, investors, and academics.
THE IMPACT OF LABOR UNIONIZATION ON MONITORING COSTS
CHANTZIARAS, ANTONIOS
DEDOULIS, EMMANOUIL; LEVENTIS, STERGIOS
Category: GV = Accounting and Governance
This paper analyzes the impact of labor unionization on monitoring costs. Our findings show that monitoring costs are significantly higher in unionized firms. We demonstrate that the more complex industrial relations structures which characterize unionized firms increase monitoring risks and corporate costs. We further show that monitoring agents consider political ideology supportive to labor unions as enhancing relevant costs. Additionally, we demonstrate that monitoring costs are lower in the presence of employee share ownership. We conclude that labor unionization increases the costs of monitoring agents; a burden which is amplified or mitigated based on the structure of industrial relations.
CEO TENURE, INTERNAL GOVERNANCE, AND EARNINGS MANAGEMENT
CHAO, CHIA-LING
HORNG, SHWU-MIN
Category: FR = Financial Reporting
This study examines whether key subordinate executives have the incentive and ability to constrain CEOs’ earnings management behavior during their tenure as CEO. In contrast with the mainstream U.S. results in the literature concerning the potential for using discretionary accruals and real activities manipulation jointly to manage earnings, our results suggest that discretionary accruals and real activities manipulation are partial complements for earnings management, and that their magnitudes are determined simultaneously. We also document that that CEOs have incentive to increase earnings in the early years and the final year of their service, presumably to favorably influence the market's perception of their ability as well as protect their reputation. Using the number of years to retirement and their compensation relative to the CEO’s to capture subordinate executives’ incentives and influence within the firm, respectively, we find that CEOs are less likely to use accrual-based earnings management and real activities manipulation to increase reported income in the early years and the final year of their service in firms with stronger internal monitoring. These results are robust to different sample specifications.
THE ROLE OF THE COMPANY SECRETARY IN FACILITATING BOARD EFFECTIVENESS: REPORTING AND COMPLIANCE
CHAPPLE, ELLIE (LARELLE)
JOHNSTON, JOSEPH; NOWLAND, JOHN
Category: GV = Accounting and Governance
This study investigates how company secretaries influence board practices and financial reporting. The company secretary traditionally is a sub-board role, with administrative responsibility over firms’ records and reporting. More recently, this position is operationalized inn combination with other executive functions, such as Chief Financial Officer (CFO) or legal counsel. We propose that joint company secretary/CFOs place more emphasis on financial reporting quality, joint company secretary/legal counsels place more emphasis on financial reporting compliance and company secretaries of multiple companies schedule fewer meetings. Using 4,997 firm-year observations of listed companies during 2004-2013, we find that joint company secretary/CFOs hold more audit committee meetings and are associated with less earnings management and a greater likelihood of a clean audit opinion. Companies with joint company secretary/legal counsels are more timely filers and company secretaries of multiple companies schedule fewer committee meetings. These results indicate that company secretaries have a significant influence on board practices and financial reporting, with the type of influence dependent on the role and busyness of the company secretary.
AN EMPIRICAL ANALYSIS OF ANALYSTS’ SHORT-RUN STOCK TIPS
CHARITOU, ANDREAS
KARAMANOU, IRENE; KOPITA, ANASTASIA
Category: FA = Financial Analysis
Using a unique hand collected sample of 1509 short-run trading tips, we examine the information content of this new analysts’ product and its association with long-term research output. We document that analysts prefer to provide short-run trading tips for firms with better performance and greater investor interest. Short-run trading tips are incrementally informative, conditional on existing stock recommendations. We also find that favorable (unfavorable) short-run research is associated with more favorable (unfavorable) stock recommendations in the long-run, also resulting in greater market reaction to upcoming recommendation changes. Results are consistent with short-run price estimates being associated with more informative recommendations’ changes.
IMPACTS OF THE FIGHT AGAINST CORRUPTION ON ACCOUNTING QUALITY
CHE, LIMEI
CHEN, YUNSEN; YOU, HONG; ZHENG, DENGJIN
Category: FR = Financial Reporting
This study uses a more direct measure of corruption and quasi-natural experiments to investigate the impact of government’s fight against corruption on accounting information quality of listed firms in China. We focus on municipal-level top government officials that are corrupt (corrupt officials) and their affiliated firms, i.e., listed firms operating in the jurisdiction of corrupt officials. As the arrests of corrupt officials occur as shocks to the public, we treat these events as quasi-natural experiments. We argue that listed firms affiliated with corrupt officials that have top positions in the municipalities have low incentives to provide high quality accounting information before the investigation of these officials, and supply higher quality of accounting after the event. Using a difference-in-difference method and a propensity score matching approach for the control firms, we show that accounting quality of affiliated firms is higher after the arrest of corrupt officials than before the event, compared to control firms. The increase in accounting quality is greater when corrupt officials have more power and affiliated firms have stronger political connections. Finally, we examine the channels affiliated firms use to improve accounting quality and find that they switch to higher quality auditors, have better internal control, and issue more management forecasts.
THE IMPLICATION OF UNRECOGNIZED INTANGIBLE ASSETS ON THE RELATION BETWEEN MARKET VALUATION AND DEBT VALUATION ADJUSTMENT
CHEN, CHANGLING
CEDERGREN, MATTHEW; CHEN, KAI
Category: FR = Financial Reporting
Under SFAS 159, U.S. firms have the option to measure debt liabilities at fair value, which results in unrealized gains and losses from debt valuation adjustments (DVA) when a firm’s own credit risk changes. Critics have raised concerns on the counterintuitive net income consequence of DVA, namely, when a firm’s credit risk increases (i.e., bad news), debt values decrease and resulting DVA gains increase the firm’s income (i.e., good news). Prior research posits that the counterintuitive income effect of DVA is attributable to incomplete fair value accounting for the asset side of the balance sheet. Specifically, DVA gains or losses are not properly offset by opposite fair value adjustments of unrecognized intangible assets (UIA) in income. In this paper, we examine market valuation reactions to DVA gains and losses, conditioning on the level of UIA. We first develop a model to demonstrate the mitigating effect of UIA on the relation between equity returns and DVA. Using a sample of U.S. bank holding companies during 2007–2013, we show that while the association between equity returns and DVA is positive when the level of UIA is low, the association decreases and turns from positive to negative with increased levels of UIA. Our findings suggest that the market appears to understand the offsetting relation between DVA and changes in UIA fair values resulting from a firm’s own credit risk change.
STABILITY AND REGIME CHANGE: THE EVOLUTION OF ACCOUNTING STANDARDS
CHEN, HUI
LI, YANG
Category: FR = Financial Reporting
We regard accounting regulation as a politico-economic institution and analyze its evolution in a dynamic voting model. We show that, as long as the society sufficiently cares about the future, accounting regimes are intrinsically persistent with self-regenerating interest groups. While a high-disclosure regime is immediately stable, a low-disclosure regime also settles into a steady state after some rounds of adjustment. Further, we show that a high-disclosure regime is robust to deviation, as no interest group has incentives to change. In a low-disclosure regime, however, the regulator can induce a transition by committing to a future high disclosure quality. This commitment will gain the support of even unsuccessful businesses, whose control of the economy resulted in the status quo in the first place. These results are consistent with the observed development of accounting regulation. Perhaps most importantly, we show that accounting policy tends to evolve in the direction of higher efficiency.
THE HUMAN FACTOR AND THE ACCURACY OF ENVIRONMENTAL CAPITAL EXPENDITURE PROJECTIONS OF THE ENVIRONMENTALLY SENSITIVE INDUSTRIES
CHEN, JASON
CHEN, JENNIFER
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We examine whether managerial ability affects the accuracy of environmental capital expenditure projections of the environmentally sensitive industries (ESI). Prior studies examined and found that firms in the ESI manipulated their projected environmental capital expenditures as a tool to achieve corporate legitimation. Some studies in that stream of literature also indicate that human interactions are needed to understand how some firms decide to disclose environmental financial information. However, the considerable difficulty of accessing key individuals to these firms prevent researchers from examining how human ability impacts the disclosure differences. In order to bridge this gap, we draw on the literature of managerial ability as proxy to study the latent human element behind firms’ different disclosure practices in the ESI. Also, following Chen, Chen, and Patten (2014), we examine the impact of a significant accounting event of SOX on managerial ability to study whether SOX had a positive impact on managerial ability and, in turn, improved firms’ projection accuracy. Finally, based on Baik, Farber, and Lee (2011), we investigate whether firms with complex operations and financial reporting affect their projection errors. We find, overall, that managerial ability is negatively correlated with firm’s projection errors. It appears that the higher the managerial ability the less projection errors were made in the annual 10-Ks. Furthermore, results appear to suggest that SOX has a positive effect to improve managerial ability and, in turn, less projection errors. Finally, firms with complex operations and financial reporting appear to make less projection errors than their counterparts with less complex operations and financial reporting procedures. These results suggest that higher managerial ability has a positive impact to reduce a firm’s overall environmental capital expenditure projection errors.
AN EXPLORATORY STUDY ON THE ASSOCIATION BETWEEN MANAGERIAL HETEROGENEITY AND THE QUALITY OF ENVIRONMENTAL FINANCIAL DISCLOSURE
CHEN, JENNIFER
CHEN, JASON
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
A stream of literature examined and found that firms in the environmentally sensitive industries (ESI) manipulated their projected environmental capital expenditures as a tool to achieve corporate legitimation. Results in these studies indicate that human factors such as managerial heterogeneity may affect the quality and accuracy of how environmental financial information is disclosed. However, whether managerial heterogeneity is a determinant in different corporate environmental financial disclosures has largely been assumed, yet not investigated. Due to the inconclusive results of prior literature examining the impact of managerial heterogeneity on corporate financial disclosure and reporting quality, This study postulate three possible outcomes that managerial heterogeneity may have (1) no, (2) a negative, and (3) a positive effect on corporate environmental financial reporting quality. Managerial ability defined in prior literature is used to proxy for the managerial heterogeneity to test its effect on corporate environmental financial disclosure and reporting quality in the ESI. Results indicate that firms with higher managerial ability have higher environmental financial disclosure and reporting quality. The results showed that human factors are a determinant of corporate environmental financial disclosure and reporting quality as prior studies suggested indicating a positive correlation between managerial ability and the quality of corporate financial reporting.
PRESS RELEASE MANAGEMENT AROUND ACCELERATED SHARE REPURCHASES
CHEN, KAI
Category: FR = Financial Reporting
There has been a growing trend in accelerated share repurchases (ASRs) in the last decade. In an ASR, a firm commits itself to repurchasing a specified dollar amount of shares through an investment bank during a pre-agreed period, with a substantial number of shares instantly delivered on the ASR inception date. I predict that firms have incentives to maximize ASRs’ benefits of immediacy and enhanced credibility and minimize their opportunity costs by using press release management to deflate stock prices prior to ASRs. I find that firms increase the coverage of their negative press releases during the pre-inception period. Moreover, I find that firms use press release management prior to ASRs in a manner that best aligns with their ex ante motivations for ASRs. Press release management prior to ASRs appears to be successful in deflating pre-ASR stock prices, and the market does not appear to see through the earlier press release management at ASR announcements.
THE PROFITABILITY OF INSIDER TRADING AND AUDIT COMMITTEE DIRECTORS’ FINANCIAL EXPERTISE
CHEN, KEN Y.
ELDER, RANDAL; HUNG, SHENGMIN
Category: GV = Accounting and Governance
Prior literature suggests that insider trading profitability increases with the extent of information asymmetry between insiders and outsiders. Corporate governance mechanisms can be used to mitigate the information asymmetry between shareholders and managers. Using 28,587 sample observations from year 2001 to year 2014, we find that firms with an audit committee that possesses accounting and finance expertise have a lower degree of insider trading profitability than firms without a financial expert on the audit committee. Because the corporate information environment plays an important role in mitigating governance-related agency conflicts among managers, outside directors, and shareholders, we also incorporate a measure of information cost. We find that as the cost of acquiring information increases, the negative relation of audit committee financial expertise with insider trading profitability is moderated.
THE IMPACT OF BASEL III ON CHINESE BANKS’ FINANCIAL REPORTING
CHEN, LILY
EMANUEL, DAVID; LI, ZIXUAN; YANG, MU
Category: FR = Financial Reporting
In 2011 when Basel III was released, the Chinese Banking Regulatory Committee (CBRC) issued a corresponding regulation (Chinese Basel III). It provides new rules for capital adequacy and loan loss provision ratios, and thus may have an impact on the earnings quality (and earnings management incentives) of Chinese banks. This study examines this issue. We also test whether different types of banks experience divergent impacts from Chinese Basel III. As far as we are aware this is the first study to include regional banks in any analysis of earnings quality (earnings management). This study is based on a sample of 682 bank-years from 2008 to 2015. Evidence is found that earnings smoothing exists in Chinese banks and Chinese Basel III reduces this incentive. There is no difference between national and regional banks. The results support the capital management hypothesis and Chinese Basel III encourages this. In addition, the new regulation has divergent effects on national and regional banks. The study indicates that Chinese banks shift their incentives in “earnings management” since they implemented Chinese Basel III. There is no difference between city and rural banks, at least in terms of the metrics used in this study. That conclusion challenges the popular belief that small rural banks engage in this behaviour in a more pervasive manner than the large city banks that are subject to more attention.
DO FIRMS REPURCHASE SHARES TO SIGNAL? EVIDENCE FROM EARNINGS QUALITY
CHEN, NI-YUN
Category: FA = Financial Analysis
The announcement of share repurchases has been interpreted as a positive signal from managers. However, several studies find that managers intentionally mimic signaling to mislead investors. Since managerial mindset is invisible to investors, this study proposes using earnings quality as an indicator of managerial mindset. The results show that compared with low-quality firms, high-quality firms are more likely and frequent to announce share repurchases and conduct block share repurchases during the buyback period. Moreover, high-quality firms result in better operating and stock performance over two-year period following the repurchase announcement. The results support that earnings quality connects to managers’ motivation behind share repurchases. For high-quality firms, the announcement of share repurchases acts as a positive signal because it indicates managers’ favorable outlook on future performance.
CORPORATE SOCIAL RESPONSIBILITY AND BOND YIELD SPREAD: A NEW PERSPECTIVE OF THE COEXISTENCE OF STRENGTH AND CONCERN
CHEN, TSUNG-KANG
Category: FA = Financial Analysis
This study examines the idiosyncratic risk effect on corporate credit risk from the perspective of the coexistence of strength and concern in corporate social responsibility (CSR) activities by employing American bond observations from the years 2003 to 2013. Empirical results of this study show that the coexistence of strength and concern in CSR activities (CoSC_CSR) significantly and negatively relates to corporate bond yield spread when controlling for CSR performance and other variables of firm characteristics and bond features. In addition, the CoSC_CSR effect on bond yield spread is mainly through the channels of a firm’s incomplete information, asset volatility, and profitability, which constitute the core components of structural credit models. Moreover, the empirical results also show that the CoSC_CSR effect becomes weaker when a firm has higher CSR performance or higher market share. Finally, our results remain hold when considering endogeneity issues.
DOES TEAM MATTER? TEAM EFFECTS OF CREDIT RATING ANALYSTS ON CREDIT RATINGS
CHEN, VINCENT
AGARWAL, SUMIT ; LIU, XUEJIO ; ZHANG, WEINA
Category: GV = Accounting and Governance
We investigate whether rating teams have specific effects on credit ratings. Our study is motivated by the fact that credit risk analysis of credit rating agencies begins with assigning rating analysts to an analytical team, which normally comprises of two individual analysts. Using a sample of credit ratings issued by Moody’s Investor Services from 2001 to 2012, we find that team matters and that team fixed effects are incrementally greater than individual analyst fixed effects in explaining credit rating decisions. We further show that team fixed effects are associated with several of analyst’s demographic characteristics, including gender, the length of rating history with clients, industry expertise, firm coverage, and job title. Additionally, our analyses report that team fixed effects are greater when rating teams are faced with higher information uncertainty. Finally, our results indicate that team characteristics are associated with rating bias. Specifically, a rating team with more industry experts is negatively associated with optimistic and pessimistic credit ratings while a team with two analysts having longer rating history with clients is positively related to rating optimism. Overall, our findings suggest that team assignment of analysts is not trivial because a rating team with a balance of analysts’ interests and backgrounds produces higher quality of credit ratings.
TERRORIST ATTACKS, MANAGERIAL SENTIMENT, AND CORPORATE DISCLOSURES
CHEN, WEN
WU, HAIBIN; ZHANG, LIANDONG
Category: FA = Financial Analysis
This study investigates the effect of managerial sentiment on corporate disclosure decisions. Using terrorist attacks in the United States as adverse shocks to managerial sentiment, we find that firms located in the attacked metropolitan areas issue more negatively biased earnings forecasts. The effect is stronger when 1) firms face high operating risks, 2) firms have inexperienced and less confident CEOs, and 3) explosive weapons are used in the attacks. In addition, affected firms shorten forecast horizons as pessimistic sentiment induces the appraisal of uncertainty. Finally, firms in the attacked areas exhibit a more pessimistic tone in their 10-K/10-Q filings. Our main findings are robust to the exclusion of 9/11 attacks and a battery of robustness tests.
DOES EMPLOYEE OWNERSHIP REDUCE STRIKE RISK? EVIDENCE FROM U.S. UNION ELECTIONS
CHEN, XIANGLONG
CHEN, XIANGLONG; LEE, EDWARD; STATHOPOULOS, KONSTANTINOS
Category: GV = Accounting and Governance
This paper investigates the effect of employee stock options (ESO) on the behaviour of labour unions, specifically their decision to initiate strikes. By exploiting the unique setting of union elections in US firms, we employ a triple-difference specification and find that firms offering high levels of equity incentives to their employees are exposed to significantly lower likelihood of union strikes. We interpret this moderating effect of ESO on the post-unionisation strike risk as evidence consistent with ESO playing an important role in realigning the interests of organised labour with those of their employers following the unionisation event. Consistent with the interest realignment conjecture, additional tests using both difference-in-difference (DID) and regression discontinuity design (RDD) present strong and robust evidence that firms strategically grant significantly more option incentives to employees in response to the increased strike risk due to unionisation. The increase in option incentives is more pronounced in non-right-to-work states, where labour unions enjoy stronger bargaining power than those in right-to-work states.
TARGET DIFFICULTY AND CORPORATE RISK TAKING
CHEN, XIAOLING
KIM, MINJEONG; LI, LAURA YUE ; ZHU, WEI
Category: MA = Management Accounting
This study empirically examines the relation between the difficulty level of CEOs’ internal performance targets and corporate risk taking. We predict a U-shaped relation between target difficulty and corporate risk taking such that firms exhibit higher risk taking when performance targets are very easy or very difficult and lower risk taking when target difficulty is medium. Using recently available data on performance targets in CEOs’ annual bonus plans in 2,477 firm-year observations, we find results consistent with our hypothesis. Our results are robust to alternative measures of target difficulty, alternative measures of risk taking, and alternative research specifications. Cross-sectional analyses reveal that the U-shaped relation between target difficulty and risk taking is more pronounced when CEOs have less equity incentives and are less powerful. We contribute to the target setting literature by providing the first archival evidence on the relation between target difficulty and corporate risk taking. The prior literature on executive compensation and corporate risk taking has focused exclusively on executives’ equity incentives. We complement this literature by providing evidence on the impact of performance targets in annual bonus plans on risk taking.
INTERNATIONAL DIVERSIFICATION, COUNTRY-SPECIFIC FACTORS AND ANALYSTS’ FORECASTS
CHEN, XIAOMENG
HAIDER, SYEDA ; WU, HAI
Category: FA = Financial Analysis
We investigate whether firms’ foreign country exposures to legal and institutional, political, and cultural factors, which are known to affect firms’ operations, investing decisions, and financial performance, are associated with the properties of analysts’ forecasts. Using a sample of U.S.-based internationally diversified firms, we find that firms’ exposures to country-specific factors including weak enforcement environment and high political risk in host countries are associated with large consensus forecast errors and dispersion. There is also weak evidence suggesting that firms’ exposures to large culture difference in the dimension of power distance between home and host countries are positively associated with forecast errors. This research suggests that investors should exercise their vigilance while using analysts’ earnings forecasts for firms that have higher dependencies for revenues from foreign countries with weak enforcement environment and high political risk.
THE IMPACTS OF BONUS AND PENALTY ON CREATIVITY: INSIGHTS FROM AN EYE-TRACKING STUDY
CHEN, YASHENG
HUANG, BINGYI
Category: MA = Management Accounting
This study explores the impacts of incentive contracts on the creative process and the resulting creativity of a design job. Using an eye-tracking device to track the designers’ eye movements during an artwork design task, we found that designers working under a piece-rate plus competitive bonus plan allocated more effort to the idea generating process than designers under a piece-rate minus penalty for defectives plan. We also found that the effort allocated to idea generating and the intensity of the effort devoted to design improvement are critical for producing creative designs. In contrast, the effort allocated to the design evaluating process contributes to product quantity, but cripples design output creativity. The findings of this study suggest that properly-designed incentive contracts can increase employees’ creativity by directing their efforts towards the idea-generating process in a creative task.
INVESTOR DIVERGENCE OF OPINION AND M&A CHARACTERISTICS: A NEW APPROACH
CHEN, YIFEI
PALMON, DAN
Category: FA = Financial Analysis
we adopt a new measure of investor divergence of opinion derived from analysts’ conditional forecasts revisions and analyze the relation between divergence of opinion and M&A related target characteristics. We find the new measure of divergence of opinion is negatively associated with takeover likelihood, positively associated with takeover completion likelihood and negatively associated with cumulative target abnormal announcement returns. Our evidence also suggests that the new measure is superior to traditional measures of divergence of opinion. Finally, we argue that cumulative target abnormal announcement return contains a value-creating component and a takeover premium component and the former dominates the latter.
THE ROLE OF CONTROLLABILITY ATTRIBUTION IN MEDIATING THE RELATIONSHIP BETWEEN TOP-DOWN (BOTTOM-UP) ROLLING BUDGETING AND JOB PERFORMANCE
CHEN, YU-LIN
HUANG, MEICHU
Category: MA = Management Accounting
Integrating transactional stress theory (Lazarus and Folkman, 1984) with attributional process (Weiner, 1985), this study investigated the role of a manager’s controllability attributions on the relationship between top-down(TD)/bottom-up (BU) rolling budgeting and job performance. The controllability attributions refer to whether a cause is under the volitional control of an individual. We argue that relative to BU approaches, TD rolling-budget approaches in the issuance of guidelines, the development of the budget proposals, and the negotiation of final budgets all are more positively associated with managers’ controllability attribution, which are in turn positively associated with higher levels of job performance. Field-based survey data from 102 managers in solar industry in Taiwan provides support for our prediction that controllability attribution mediates the relationship between rolling-budget approaches and job performance.
INTERNATIONAL EVIDENCE ON THE EFFEECTS OF ELECTORAL SYSTEM AND CULTURE ON EARNINGS MANAGEMENT
CHEUNG, KWOK TONG SAMUEL
GUL, FERDINAND A. ; LAI, KAREN M.Y. ; MIHRET, DESSALEGN; PENFOLD, ADAN
Category: FR = Financial Reporting
This study examines whether a country’s electoral system and culture are associated with earnings management (EM). Consistent with the ideas developed by Pagano and Volpin (2001, 2005) that countries with proportional electoral systems (PES) have lower investor protection than countries with majoritarian electoral systems (MES), we find that countries with PES are associated with higher EM, proxied by signed abnormal accruals after controlling for macro-economic factors. Similarly, consistent with Hofstede’s (1980) model of national culture and findings of prior studies we document that individualism is positively associated with EM while uncertainty avoidance is negatively associated with EM. However, in additional tests we show that both culture and electoral systems jointly affect EM; the higher EM in individualistic countries is exacerbated (weaker) in PES (MES) countries, while the negative association between earnings management and uncertainty avoidance is weaker (stronger) in PES (MES) countries.
FAMILY SUCCESSION AND COST OF BANK LOANS: EVIDENCE FROM CHINA
CHI, HSIN YI
WENG, TZU-CHING
Category: GV = Accounting and Governance
The purpose of this study is to examine the effect of family succession on cost of bank loan and nonprice contractual terms. Using a unique dataset from China, we find that lending banks are more likely to charge higher interest rate and tighter contractual terms, such as maturity of loans and collateral requirement for second-generation family firms. This indicates that information risk and default risk may arise after subsequent family succession. However, we find that second-generation family firms can reduce their cost of bank loan through engaging in top-tier auditors or connecting politician relationship to enhance credibility of financial reporting or possible future bailout from Chinese government.
INFORMATION TYPE, TIMING, AND COMMUNICATION IN TEAMS.
CHI, QINWEI
LI, WENJING; YIN, HUAXIANG
Category: MA = Management Accounting
Team members often have private information about each other's input and output. A team manager can elicit information from team members to accurately assess their performance and to fairly reward them. This study experimentally investigates whether stipulating the type of information to be communicated (i.e., individual input or output) affects the motivation of team members to expend efforts and whether such effect depends on the timing when team members are informed about the type of information to communicate (i.e., ex ante vs. ex post, relative to team members'effort decisions). We predict and find that eliciting input information relative to output information increase team members'effort when team members are informed about this policy ex ante. Contrary to our expectation, results show that eliciting input information relative to output information reduces effort when team members are informed about this policy ex post. Our results suggest that if employees know about the type of information to communicate ex ante,managers can improve the effectiveness of information communication in teams by eliciting input information rather than output information.
THE EFFECTS OF R&D CAPITALIZATION ON THE TRADE CREDIT AND THE DURATION OF CUSTOMER-SUPPLIER RELATIONSHIP
CHIEN, FEI-LIANG
CHIEN, CHIA-HUI; LIU, PEI-YI ; YOUNG, CHAUR-SHIUH
Category: MA = Management Accounting
This study aims to analyze the consequences of R&D capitalization in customer-supplier relationships. Specifically, we examine the effect of firms’ R&D capitalization on customer-supplier relationships from two perspectives: trade credit and relationship continuity. Using a sample of U.S. software firms from 2001 to 2012, we document a negative relationship between a firm’s R&D capitalization and trade credit. We also use duration analysis to investigate the association between R&D capitalization and customer-supplier relationship continuity, and find that an increase in capitalized R&D is associated with longer relationships. These results suggest that firms that capitalize R&D costs are perceived by customers as having future advantages, which thus induces customers to settle accounts payable more quickly and are more willing to continue the business relationship.
THE EFFECTS OF RISK MANAGEMENT ON MANAGEMENT FORECAST BEHAVIOR
CHIOREAN, RALUCA
CAMPBELL, JOHN ; CAO, SEAN ; CHANG, HYE SUN
Category: FR = Financial Reporting
Prior research examines several reasons why managers voluntarily disclose information, but provides relatively little evidence as to whether day-to-day operational decisions influence a manager’s disclosure choice. In this study, we examine whether a particular operational activity – risk management through the use of derivatives – affects whether a manager decides to issue earnings forecasts. Using a large hand-collected sample of derivatives users and non-users, we find that derivatives users are more likely to issue earnings forecasts relative to non-users. We then find that this result is stronger when the use of derivatives makes it less costly for managers to issue forecasts and to meet or beat those forecasted earnings. Interestingly, however, we find no evidence that managers provide these forecasts when investors are more likely to demand them. Overall, our results suggest that operational decisions can influence management forecast policy, but only when these decisions make it easier for the managers to predict future earnings. This study thus provides evidence that voluntary disclosure has a role, but with limitation, in helping investors understand the complexity of derivatives.
MANAGERIAL ABILITY AND OVERINVESTMENT
CHIOU, YAN YI
CHIU, WAN-CHIEN ; CHU, HSUAN-LIEN
Category: MA = Management Accounting
We examine the impact of managerial ability on overinvestment. We find that a firm hires a manager with superior ability significantly mitigates overinvestment problem because of excess free cash flow. Furthermore, overinvestment is not necessary to bring negative effect to firm value, and it should depend on managerial ability. A manager with higher ability may over invest some objectives which are still profitable.
THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY ON THE MARKET PRICING OF FUTURE EARNINGS
CHIU, CHIUNG-LIN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
In recent years, corporate social responsibility has become an increasingly important topic for academic research and been formally adopted by organizations as a key function. Some companies in Taiwan have been recognized for demonstrating such positive outcomes; however some negative examples seem to increase over the time, such as environmental safety and food safety issues. The purpose of this study is to investigate how the positive and negative disclosure activity of corporate social responsibility affects the relation between future earnings and current stocks return. Employing future earnings response coefficient methodology, we find that positive CSR disclosure activity improve the informativeness of stock returns on future earnings whereas negative CSR is associated with stock prices that are less informative about future earnings. This research provides some corporate social responsibility assessment for capital markets, and also serves as a reference to policy makers or management when making decisions about corporate social responsibility.
THE EFFECT OF AUDIT SUPPORT SYSTEMS ON AUDIT QUALITY
CHIU, HSIEN-LIAN
CHOU, LING-TAI
Category: AU = Auditing
This study is to examine the effect of audit support systems on audit quality. Audit firms can ensure compliance with auditing standards and their firms’ audit methodology, enhance risk management, and facilitate knowledge sharing among audit personnel within firms using audit support systems. On the other hand, adopting audit support systems may be associated with threats of inappropriate use such as overreliance on systems, mechanistic behavior, working backward and working around systems. We are uncertain whether adopting audit support systems actually improves audit quality. To address the empirical issue, we conduct a study of the audit support system used at one Big 4 audit firm in Taiwan. We document that audit quality is higher when audit support systems are adopted. We also find that firm-level non-specialists or novice audit partners benefit more from adopting audit support systems in improving audit quality. However, there is no evidence that the association between adopting audit support systems and audit quality is moderated by auditor tenure.
THE PERSISTENCE AND PRICING IMPLICATIONS OF CHANGES IN MULTINATIONAL FIRMS’ FOREIGN CASH HOLDINGS
CHIU, PENG-CHIA
CHEN, NOVIA; SHEVLIN, TERRY
Category: FR = Financial Reporting
Using a hand-collected sample of U.S. multinational firms’ foreign and domestic cash holdings, we evaluate the association between changes in foreign and domestic cash and one-period ahead future earnings. Because the changes in the cash holdings are components of cash flows which itself is a component of current period earnings, a higher coefficient on the change in cash components is interpreted as higher earnings persistence. In contrast to the common belief that accumulating cash in foreign subsidiaries is suboptimal, we find that changes in foreign cash are as persistent for future earnings as changes in domestic cash. We further document that foreign cash changes are more persistent when foreign operations offer better growth opportunities and when repatriation taxes are lower. Next, we investigate whether investors efficiently price the earnings persistence implications of changes in foreign and domestic cash. Our results suggest that investors under-react to positive changes in foreign cash. Further, we find that investors’ under-reaction to positive foreign cash changes is more pronounced when foreign growth is higher and repatriation taxes are lower. Overall, our evidence suggests that retaining cash in foreign subsidiaries, on average, does not lead to lower future earnings. Our finding that investors under-estimate the persistence of positive changes in foreign cash is consistent with calls for more transparent disclosure on foreign cash and foreign operations.
THE CHANGE IN RATING STANDARD ON R&D EXPENDITURES
CHO, HYUNGJIN
CHOI, SERA
Category: FA = Financial Analysis
This study investigates the change in the relation between corporate credit ratings and R&D expenses. Using U.S. firms with a credit rating from 1987 to 2013, the empirical analysis shows that the negative relation between credit ratings and R&D expenditures has become weaker over time. We also provide empirical evidence that the positive relation between R&D expenditures and earnings volatility for sample firms has become weaker. Thus, rating agencies seem to understand the change in the association between R&D expenditures and uncertainty and have modified their rating standards related with R&D expenditures accordingly. Additional results suggest that the weaker negative relation between credit rating and R&D expenditures in later years is unlikely to be attributable to the change in sample composition, the recognition of intangible assets and the change in the profitability of R&D expenditures.
CORPORATE TRANSPARENCY AND CEO COMPENSATION CONTRACTS: EVIDENCE FROM SFAS NO. 131
CHO, YOUNG JUN
SEO, HOJUN
Category: FR = Financial Reporting
Taking the inability of shareholders to observe managerial actions as a given, agency theory suggests that tying CEO pay to firm performance mitigates agency problems. Using the adoption of SFAS 131 as improvement in corporate transparency, we examine how a change in the observability of managerial actions affects a pay-performance relation in CEO compensation designs. SFAS 131 requires firms to define segments as internally viewed by managers, rendering managerial actions in internal capital allocation more observable to external shareholders. We find that the sensitivity of CEO pay to stock performance is significantly reduced after the adoption of SFAS 131 for firms affected by the standard. Also, we find that such a reduction is more pronounced for (1) firms with lower CEO ownership where inherent agency costs due to the separation of ownership and control are higher and (2) firms with higher operating uncertainties where CEOs bear greater risks by linking pay to stock performance. Overall, findings in our study suggest that corporate transparency substitutes for incentive contracts as an alternative monitoring mechanism.
WHEN AND WHY CEOS RELY ON PEERS’ INFORMATION IN THEIR INVESTMENT DECISION
CHOI, AHRUM
CHO, HYUNGJIN; JUNG, TAEJIN
Category: MA = Management Accounting
This paper investigates when and why CEOs rely on peers’ information in their investment decision. Labor market evaluates CEO’s ability based on similarity among CEOs’ behaviors because it indicates that CEOs are receiving correlated informative signals. Thus, CEOs who are subject to greater concern on their reputation in the labor market will rely more on peers’ information in their investment decision to show that they are receiving similar signals with others. Based on this argument, we test whether CEOs are more likely to rely on peer’s information in their investment decision when their reputational concern is high (e.g., early years or final year of CEO tenure). Using data from S&P 1500 firms, we find that investment sensitivity to peers’ information is higher when CEOs are in their early years of tenure. In addition, CEOs who plan to move to another firm are more likely to rely on peers’ information in their final year of tenure. We further show that these findings are stronger when CEO is far from retirement, CEO is hired from outside of the firm, CEO is a less able manager, there are more replaceable CEOs in the labor market and peers’ stock prices are more informative. These results help us understand the effect of CEO’s reputational concern on a firm’s investment decision.
DOES MANAGERIAL DISCRETION AFFECT VALUE RELEVANCE OF GOODWILL IMPAIRMENT UNDER IFRS? KOREAN EVIDENCE
CHOI, JONG-SEO
NAM, HYUN-JEONG
Category: FR = Financial Reporting
This study examines managers’ use of discretion in determining goodwill impairment losses and the differential value relevance of goodwill and goodwill impairment losses depending on management discretions driven by underlying incentives in the Korean context. We find that only the incidence of goodwill for discretionary group is associated with managerial incentives such as big-bath, income smoothing, recent CEO change or loss avoidance, while that of normal group is rather associated with firms’ performance and economic conditions. Such a finding is consistent with investors perceiving losses differently depending on management discretions. Further, we confirm that market investors have different valuation of goodwill impairment loss between groups, where they perceive normal impairment loss as a reliable reduction in goodwill value and discretionary impairment loss as a positive signal about future earnings. Finally, we re-estimate the value relevance of goodwill and goodwill impairment loss using each of impairer and non-impairer group between normal versus discretionary observations. We find the evidence of bubbled goodwill for discretionary impairers that leads to the adverse value relevance of goodwill and goodwill impairment compared to normal impairers. The results also show improved information content of basic accounting metrics by accelerating write-off of the bubbled goodwill. We also find that discretionary non-impairers diminish the value relevance.
AUDITOR INDUSTRY SPECIALIZATION AND AUDIT PRICING AND EFFORT
CHOI, SEUNG UK
BAE, GIL S. ; LEE, JAE EUN
Category: AU = Auditing
Using audit hours as well as fees, we find that auditor industry expertise is both a firm-level and partner-level phenomenon, which suggests that industry expertise captured by accounting firms is dispersed among engagement partners through knowledge sharing and transfers within audit firms. We also find that the higher audit fees by expert auditors are due to more hours and not higher rates. While spending more hours allows expert auditors to extract higher fees in total, the finding that expert firms/partners exert greater effort does not support the suggestion that expert auditors are in general more efficient in audit production. However, we find weak evidence that audit hours for expert auditors are lower in industries and companies with homogenous operations and comparable accounting than in other industries and companies. This finding suggests that knowledge transfers more likely take place in homogeneous and comparable industries, leading to production efficiency that moderates the increase in audit hours charged by experts.
THE EFFECT OF PERFORMANCE MEASURES, TYPES OF MOTIVATION AND PROACTIVE BEHAVIOUR ON CREATIVITY: EVIDENCE FROM RESEARCH AND DEVELOPMENT MANAGERS
CHONG, VINCENT
BINDL, UTA; MASSCHELEIN, STIJN
Category: MA = Management Accounting
This study examines the effects of performance measurement system (PMS), types of motivation and proactive behaviour on employees’ creativity. PMS consists of both nonfinancial measures and financial measures. We rely on an online survey approach to collect data. Our respondents consisted of U.S. senior managers employed in the research and development function of the manufacturing industries. Our results indicate that the reliance of nonfinancial measures for employees’ performance evaluation is positive and significantly related to intrinsic motivation, which in turn, positively affecting employees’ creativity. Our results further reveal that there is positive and significant interaction between intrinsic motivation and employees’ creativity. The use of nonfinancial measures also has a positive and significant direct effect on employees’ creativity. In addition, our results indicate that the reliance of financial measures for employees’ performance evaluation is negative and significantly related to autonomous extrinsic motivation and intrinsic motivation. These findings suggest that financial measures reduce employees’ motivation. Despite our results reveal that financial measures are related to controlled extrinsic motivation, but controlled extrinsic motivation in turn has no significant impact on employees’ creativity. The use of financial measures does not promote employees’ creativity.
INDUSTRY CENTRALITY AND THE ANTICIPATION OF FUTURE GDP CHANGES BY FIRMS
CHOU, SHIH-CHU
CREADY, WILLIAM
Category: IC = Interdisciplinary/Critical
This paper examines whether macro informational advantages of firms, conceptualized as a notion of excess centrality by Anjos and Fracassi (2015), are predictive of future macroeconomic conditions. We compare investing and financing decisions between high and low centrality conglomerates, captured by their periodic financial reporting measures, in order to extract managers’ anticipation of sector and macro level shocks. Using a sample of conglomerates, we document that cross-sectional differences in aggregate investing and equity financing decisions are incrementally predictive of future real GDP growth. Additional evidence suggests that internal equity financing possesses stronger predictive power than external equity financing and that professional macro forecasters fail to fully incorporate the information derived from these cross-sectional variations associated with industry centrality.
ACCOUNTING FOR MODERN SLAVERY: AN ANALYSIS OF AUSTRALIAN LISTED COMPANY DISCLOSURES
CHRIST, KATHERINE
BURRITT, ROGER; RAO, KATHY
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The study is the first to gather data and analyse voluntary disclosures about modern slavery practices of Australian listed companies. A review of literature leads to development of a set of modern slavery search terms. Content analysis using these terms is then applied to annual, sustainability, corporate social responsibility and online reports of the top 100 companies by capitalization listed on the Australian Stock Exchange. Evidence gathered about modern slavery reveals the main source of disclosure is company websites. About one third of the sample publish a separate modern slavery statement online, largely following UK practice. A wide range of themes on modern slavery are disclosed with bribery and corruption and human rights issues dominant. This contrasts with the focus on global supply chain issues which are to the fore in the literature. The study provides a baseline of understanding for future research into the practices of Australian companies in accounting for modern slavery prior to the signalled introduction of future legislation which will mandate reporting for modern slavery in global supply chains.
LABOR UNION AND REAL EARNINGS MANAGEMENT
CHUN, HONGMIN
SHAWN, HYUK; SHIN, SANGYI
Category: GV = Accounting and Governance
This study examines the effect of labor union on the extent of real earnings management using 3,375 firm-year observations of listed Korean firms over 2002–2008. The empirical results suggest that labor unionization rate is positively associated with real earnings management and the absolute value of each real earnings management proxy. Further, these empirical results are more pronounced in non-chaebol firms. The additional robustness tests using union existence as a supplementary proxy of labor union strength and 2SLS regression supports above findings. Thus, we conclude that labor unions push managers to increase real earnings management to create a favorable negotiation environment for wage maximization and hired managers collude with labor union to receive cash-based bonus incentive.
THE ECONOMIC CONSEQUENCES OF IFRS ADOPTION ON PROJECT FINANCE
CHUNG, DEMI
MONROE, GARY; NGUYEN, PHUC
Category: FR = Financial Reporting
The UK government adopted International Financial Reporting Standards (IFRS) in 2009/10. Compared with the UK GAAP, most of the accounting changes under IFRS related to Project Finance (PF). In this paper we examine the economic consequences of IFRS adoption in the UK public sector, specifically on the cost of PF financing and on earnings management by public sector grantors. We present evidence to show that the majority of public sector grantors experience a lower PF debt spread after the IFRS adoption. Our evidence further indicates earnings management because grantors possessing high-value PF related depreciable assets are more likely to impair these assets after IFRS adoption. The results are robust across several model specifications and sensitivity tests. Collectively, these results provide timely insights on the benefits and costs of IFRS adoption by governments and should therefore be of interest to both regulators and policymakers. Implications of this study extend to the effects of adopting International Public Sector Accounting Standards by governments.
HOW DOES FINANCIAL REPORTING QUALITY RELATE TO SELF-REGULATORY ENFORCEMENT? AN EXAMINATION OF THE ROLE OF STOCK EXCHANGE
CHUNG, YU-HSUAN
CHIU, AN-AN; CHUNG, YU-HSUAN ; HUANG, SHAIO YAN
Category: GV = Accounting and Governance
The first line of defense in firm supervision is stock exchange regulatory enforcement. This study investigates the association between stock exchange self-regulatory enforcement and firms’ financial reporting quality by using credit record files, which records the exchange’s sanction of firms in the Shenzhen Stock Exchange of China. Our results find that low reporting quality in the previous year affects the likelihood that firms would be sanctioned by stock exchange. In addition, sanctions firms will improve the accruals quality of corporate financial reports in a subsequent year.
APPLYING INTERPERSONAL RELATIONSHIPS AND INTEGRITY TO STRENGTHEN ACCOUNTANTS’ CONTINUING PROFESSIONAL ETHICS EDUCATION
CHURYK, NATALIE
REINSTEIN, ALAN; TAYLOR, EILEEN
Category: ED = Accounting Education
Despite a focus on ethics, professional accountants’ actions continue to play a central role in unethical business decisions and actions. While many studies show that college ethics courses can help develop students’ ethical awareness, few studies have explored how to effectively extend ethics education to practicing professional accountants. While ethics requirements in the U.S. are common, ethics education programs often focus on rules and regulations, rather than on providing tools to solve ethical dilemmas. To improve accountants’ ethical awareness and behavior, CPE providers should discuss business as a moral activity, emphasizing its effects on the community and human relationships. We suggest that effective ethics education and training should be based on the concepts of interpersonal relationships, evidenced in major Western religions (e.g. the Golden Rule) and integrity, evidenced by a consistent positive approach in all aspects of one’s life. We propose a three-stage model, which provides a context for ethical reasoning. Moral understanding at the top level satisfies the lower levels, encompassing codes of conduct and rules and regulations. CPE providers can use such an approach to create ethics courses that resonate with professionals and build lifelong ethical awareness.
HYBRIDITY AS AN INSTRUMENTAL VALUE EMBEDDED: MANAGEMENT ACCOUNTING AND ACCOUNTANTS IN HYBRID ORGANIZATIONS
CINQUINI, LINO
CAMPANALE, CRISTINA; GROSSI, GIUSEPPE
Category: MA = Management Accounting
The aim of this paper is to investigate the implications of hybridity on organizational forms and practices, management accounting expertise and tools. Findings rely on two cases of co-management and co-production , as relevant examples of hybrid organizational forms. Findings, informed by the Pragmatic Costructivism approach, show the existence of the instrumental value of hybridity surrounding organizational forms, modes of governing, and management accounting tools and professions. The value of hybridity consists in the integration of different disciplines (such as sociology, psychology and healthcare). Specifically, our research shows that in hybrid organizations, management accounting tools and the accounting professions have been hybridised by the influence of other disciplines such as sociology, psychology and healthcare that prevail over financial and accounting disciplines. In turn, it seems that hybrid accountants and tools are particularly appreciated to support decision making in these contexts, while traditional tools are less appreciated. Findings suggests that in case of hybrid organizations, hybrid management accounting tools and hybrid roles are recommended to enable hybrid organizations and their success and support the management of costs and performance.
COMPARING FORECAST ACCURACY AND EXPLAINABILITY OF LINEAR VERSUS NON-LINEAR REAL OPTION VALUATION MODELS USING HISTORICAL DATA
CLUBB, COLIN
CHEN, MINGYU; DRIOUCHI, TARIK
Category: FA = Financial Analysis
We examine the forecast bias, forecast accuracy and explainability of linear accounting-based equity valuation models (Ohlson, 1995; Feltham and Ohlson, 1995, 1996) and non-linear accounting-based equity valuation models with real options (Hwang and Sohn, 2010; Ashton et al. 2003; Zhang, 2000) using all historical data in the UK. Empirical results show that non-linear equity valuation models with real options reveal lower forecast bias, higher forecast accuracy and stronger explainability than linear equity valuation models. More specifically, we utilize the Hwang and Sohn (2010) real option adjustment in Ohlson and Feltham Framework and find the adjusted models perform better than their original linear versions. We also empirically estimate the valuation models in Ashton et al. (2003) and Zhang (2000). Further subsample tests demonstrate that the superior performances of the non-linear equity valuation models with real options are owing to their option characteristics. Our empirical research provides large-sample evidence in UK which compares the performance of both linear models with linear information dynamics and non-linear models with real options. It answers the call for more empirical work which focuses on the actual impact of real options in accounting-based equity valuation (Burgstahler and Dichev, 1997; Zhang, 2014; Ataullah et al. 2006, 2009).
TO SHARE OR NOT TO SHARE: THE IMPORTANCE OF PEER FIRM SIMILARITY TO AUDITOR CHOICE
COBABE, MATTHEW
BILLS, KENNETH ; PITTMAN, JEFFREY; STEIN, SARAH
Category: AU = Auditing
A firm’s decision on whether to choose the same auditor as a close competitor reflects a trade-off between exercising caution to protect its proprietary information and pursuing the benefits of auditor expertise. Using a pairwise similarity measure based on descriptions from regulatory filings, we find that peer firms are more likely to engage the same auditor when their product offerings are more similar. Importantly, we find this relation is greater when the focal firm experiences more litigation risk, but is moderated when the focal firm operates in a highly competitive or innovative industry, is a market leader, or has a “cozy” relationship with its auditor. We extend prior research on auditor choice by analyzing whether firms perceive that the upside stemming from auditor expertise dominates the downside of greater vulnerability to proprietary information leakage to competitors, as well as the role that auditor and client characteristics play in this decision.
HOW DO FIRMS RESPOND TO A SHIFT FROM MANDATORY TO VOLUNTARY DISCLOSURE? EVIDENCE FROM CORPORATE CHARITABLE DONATIONS DISCLOSURES IN THE UK
COHEN, NAVA
Category: FR = Financial Reporting
This paper analyzes firms’ commitment to CSR-related disclosure using a rare regulatory shift from mandatory to voluntary social disclosure in the UK, which leaves out the requirement for firms to disclose their corporate charitable donations on their annual reports. I examine firms’ responses along a number of different dimensions including disclosure levels and corporate charitable spending. My analysis use hand-collected data from firms’ disclosures of corporate charitable activities on their annual reports. I develop a disclosure index to measure disclosure levels of corporate charitable donations. Using pre-post tests on 150 UK firms, I find that following the mandatory-to-voluntary disclosure shift, firms disclose less information on their corporate charitable donations and decrease their charitable donations. My results demonstrate the lack of firms’ commitment in their social disclosure as long as it is not legally required. However, the decline in disclosure and charitable giving levels is less pronounced for firms with good corporate governance mechanisms. Overall, the shift from mandatory disclosure to voluntary results in the existence of negative externalities.
THE UNIVERSITY INFLUENCE ON MORAL ORIENTATION OF SWEDISH ACCOUNTING STUDENTS: SELECTION AND EDUCATION
COLLIN, SVEN-OLOF
SCHMIDT, MANUELA
Category: ED = Accounting Education
Today the auditor’s moral orientation and capacity is debated. This morality is presumably influenced at the audit firm, but could be grounded at the university. University influence their graduates through selection, the self-selection of student’s entry and exit, and through education, the teaching and the socialization through interaction. We surveyed 296 Swedish student’s moral orientation at one university with three different business programs. We found a university effect, both selection and education, where students at the accounting and auditing program increased significantly more in Idealism compared to the other business students. We believe this indicate that the university contributes to more auditor fit moral standards.
SOVEREIGN CREDIT RATING: MODELLING, VALUATION AND PROFESSIONAL JUDGEMENT
COLUMBANO, CLAUDIO
EZZAMEL, MAHMOUD
Category: IC = Interdisciplinary/Critical
This paper draws on public documents and interviews to examine the valuation process used by credit rating agencies (CRAs) to construct sovereign credit ratings. It underscores the interaction of rating analysts’ professional judgement with sovereign rating methodologies to produce these ratings by focusing on three specific processes: converting uncertainty into calculable risk (encoding), constructing abstract categorization tables, and producing official ratings (commensuration). The paper shows that professional judgment is pervasive throughout these three valuation processes and that sovereign ratings are not the outcome of an individual decision-making process, but are constructed through the collective contribution of numerous professionals in CRAs. The paper also reflects on the dilemma faced by CRAs in wanting to jealously protect professional judgement while simultaneously avoiding creating an impression that the credit ratings they produce are subjective given the pressure from regulators and users to demonstrate that credit ratings are an objective product of robust statistical modelling.
DRIVERS OF CORPORATE INCOME TAX INSTALLMENT BEHAVIOR
COMPAGNIE, VINCENT
ORENS, RAF
Category: TX = Taxation
This study identifies drivers of corporate income tax (CIT) installment behavior using a sample of Belgian private firms for the period 2003 till 2015. CIT collection occurs several months after the period in which the corresponding taxable net gains are realized. This delay creates difficulties concerning timely government policy evaluations and government budget calculation. Therefore, governments aim to match CIT collection to the period that the taxable net gains are realized, through an installment system. However, not all firms pay adequately in advance as demonstrated by rising insufficient installment rates in Belgium. We employ multinomial logit regression to assess whether installment behavior is driven by 1) a late payment interest and 2) firm characteristics. Our results are in favor of the Belgian government combatting rising insufficient installment rates through adjusting the late payment interest upwards. Our findings also suggest that a firm’s financial situation influences their CIT installment behavior.
THE ACCOUNTING OF CULTURAL HERITAGE ASSETS OF ITALIAN UNIVERSITIES’ MUSEUMS: GROKING THE THIRD MISSION
CORAZZA, LAURA
CISI, MAURIZIO; SCAGNELLI, SIMONE DOMENICO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Higher Education Institutions (HEIs) are becoming more aware of the role they might play for the sustainable development and social value creation of societies and countries. The so-called third mission translates in actions the dialogue between universities and societies, and universities and stakeholders. In Italy, recent normative changes towards accrual account-ing have asked universities to measure and disclose their cultural heritage assets. The switch from “pure” financial accounting requirements cash-based to a more mature accrual accounting system posed the challenge of the intellectual capital valorization. The cultural heritage comprises “uni-versity collections, museums, archives, libraries, botanical gardens, astro-nomical observatories, monuments of significance”. The current lack of accounting principles to be used in preparing such disclosures have re-quired universities to revaluate or impair their heritage book values. The study comments the role of accounting in shaping the reality within the context of Italian Public Universities.
ACCOUNTING REFORMS IN THE PAPAL STATES: BUDGETARY PRACTICES UNDER THE PAPACY OF GREGORY XVI AND POPE IX (1831-1870)
CORDERY, CAROLYN
ANTONELLI, VALERIO ; CORONELLA, STEFANO
Category: HI = History
The Papal States represent a unique and long period in Italian government and in the government of the Roman Catholic Church prior to Italy’s unification in 1870. The 40-year period prior to unification was a particularly tumultuous period when the Papal States struggled for survival, faced military and popular challenges and became increasingly indebted. Accounting, influenced by other European powers, was perceived to be an important tool that could assist in enhancing the Papal States’ sustainability. Thus, the period studied is ideal for analysing the interplay of accountants and governmental officials as these latter attempted to utilise accounting budgets and financial statements for state control. This period also examines and extends the concept of a sacred-secular divide to a state government beset by resource constraints and challenged to fulfil its theological aims.
DRIVERS OF SUSTAINABILITY REPORTING QUALITY IN LATIN AMERICAN BUSINESS GROUPS
CORREA GARCIA, JAIME ANDRES
GARCIA-BENAU, MARIA ANTONIA; GARCIA-MECA, EMMA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper aims to study the factors determining the quality of sustainability reporting in Latin American business groups, departing from a gap found in the literature and from the interest in the particular characteristics of this type of organizations. Based on Legitimacy Theory and Stakeholders Theory and applying a logistic regression model, this study is pioneer in establishing how some distinct corporate variables of business groups and their Board of Directors influence disclosure quality of CSR practices in these groups in emerging economies. The results show a negative relationship between control concentration in the groups and the quality of sustainability reporting; while foreign ownership, the age of the business group and the size of the Board of Directors showed a positive incidence on reporting best practices. These results form the basis to conduct further studies on voluntary disclosure in business groups and their subsidiaries, identifying new drivers that explain this relationship.
WHAT DRIVES SOPHISTICATED ENVIRONMENTAL PERFORMANCE MEASUREMENT SYSTEMS? AN EMPIRICAL INVESTIGATION OF ANTECEDENTS AND ITS OUTCOMES
COSKUN, HÜLGEN
FIRK, SEBASTIAN; WOLFF, MICHAEL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper contributes to the research field of Corporate Environmental Responsibility (CER) and specifically Environmental Accounting by studying differences in the use and implementation of Environmental Performance Measurement Systems (EPMS). Therefore, we developed a framework to assess the extent of EPMS implementation. Based on a hand-collected dataset that compromises 3,157 firm-year observations from 16 European countries between 2005 and 2014, we analyze the effect of potential ecological costs on the extent of EPMS implementation. Furthermore, we shed light on environmental expertise provided by board members, institutional investors and political stakeholders. After controlling for various cofounding effects, we identified that the potential ecological costs encourage more extensive EPMS implementation. Moreover, we find a positive moderation of environmental expertise provided by board members, institutional investors and political stakeholders on this relation. Moreover, we find that the extent of EPMS implementation leads to improved firm performance when firms are prone to ecological costs.
IS PREDICTABILITY IMPROVED BY REPORTING OCI AS A PERFORMANCE METRIC ON THE STATEMENT OF COMPREHENSIVE INCOME?
COSTA, FABIO
ROSA, REGINA ; TIRAS, SAMUEL
Category: FR = Financial Reporting
Accounting researchers have challenged the notion whether reporting OCI as a performance metric has predictive value. Regardless of how OCI is reported, the accounting for OCI is as a direct adjustment to equity which bypasses earnings. The research design of most studies on OCI is such that they cannot address whether requiring OCI be reported as performance has predictive value incrementally to that attributable to the accumulation of OCI in equity. Using a sample of IFRS adopting countries within the European Union, we find that including OCI as a performance metric in our model provides a modest incremental improvement in predictiveness, relative to the significant improvement attributable to the accumulation of OCI in equity, and only when OCI is decomposed into components. We do not find aggregated OCI improves predictiveness, but do find individual OCI components have predictive value which vary in magnitude and sign, suggesting that aggregation obfuscates the predictive usefulness of specific OCI components. Together, our findings that the reporting of individual OCI components has predictive value, but the aggregation of these components does not, suggests that the shift towards reporting OCI as performance would more likely improve predictive usefulness under the two-statement approach for reporting CI, than under the single-statement approach that presents CI as the bottom-line summary statistic.
THE FIRM VALUATION PROCESS IN M&A TRANSACTIONS: EVIDENCE FROM FAIRNESS OPINIONS IN ITALY
COURTEAU, LUCIE
Category: FA = Financial Analysis
One of the major sources of inefficiencies in M&A transactions is the asymmetry of information between the bidder and the target. Several disclosure strategies are used by bidders to convince target shareholders to tender their shares but also to convince their own shareholders about the value of the proposed deal. Target managers also try to communicate to their shareholders their appreciation of the offer. To these aims, experts are often called to express an independent opinion on the offer price, in a document called the Fairness Opinion (FO). While FOs have been found to have no effect on deal efficiency in the US, this study re-examines the issue by considering the actual content of the document, in terms of the valuation process that leads to the expert opinion, in the context of Italian M&As where FOs often provide detailed information about this process. The results show that even in a setting where weak enforcement of disclosure regulations allows bidders and targets to choose the level and detail of disclosure, the quality of the content of FO have only weak association with the success of the deal, both in terms of bidder announcement returns and of post-deal market and operating performance.
FINANCIAL STATEMENT COMPARABILITY AND THE PROVISION OF AUDIT SERVICES
CREADY, WILLIAM
LI, LIUCHUANG; QI, BAOLEI
Category: AU = Auditing
This study examines the impact of financial statement comparability, as captured by the comparability measures developed in De Franco, Kothari, and Verdi (2011), on the provision of audit services. Prior research documents that financial statement comparability is associated with improved user decision making and better governance. We provide evidence that these informational benefits from comparability also extend to the external audit. Specifically, higher levels of comparability improve the quality of the information produced by the firm, lower audit risk levels, and increase external audit efficiency. Consequently, comparability reduces the overall audit fee.
IS PRIVATIZATION RELATED TO CORRUPTION? AN EMPIRICAL ANALYSIS OF EUROPEAN COUNTRIES
CUADRADO-BALLESTEROS, BEATRIZ
PEÑA-MIGUEL, NOEMI
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This study analyses the relationship between privatization and corruption in Europe over the period 1995 to 2013, taking into account the problems surrounding the issue of causality. There have been researches into the role of privatization in reducing corruption, but decisions about privatization itself are made by politicians, so corruption could affect also decision-making about privatizations. The empirical findings suggest that perceived corruption decreases as the number of privatization transactions increases, but the effect is contrary when privatizations are a more important in terms of annual revenues. Furthermore, our results indicate that overall, privatizations carried out since the early 1980s have not been effective in reducing corruption in Europe. Indeed, privatizations reforms are more carried out in the less corrupt countries.
CEO AND BOARD TENURE AND REPORTED PERFORMANCE OF NOT-FOR-PROFIT ENTITIES
CZERNKOWSKI, ROBERT MARIUSZ J.
LIM, STEPHEN
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
We investigate the association between the reported performance of local government officials and their continuation in office. We examine both the council board (elected by the public) and the general manager (elected by the council board). Our study is motivated by the State government’s desire to increase local government accountability, by reporting more performance metrics to the public, as well as the different institutional setting of not-for-profit entities compared to the private sector. Greater transparency should lead to increased predictability of electoral outcomes and manager retention. However, voter apathy, and the lack of contesting candidates, may weaken the link between performance and continuation. Examining the 2012 NSW local government elections and general manager turnover between 2007 to 2015, we find limited evidence of local government performance affecting electoral outcomes or manager retention. Overall, our study emphasises that greater transparency is not a panacea for holding management accountable if stakeholders are apathetic.
CORPORATE CHOICE OF VOLUNTARY CARBON ASSURANCE PROVIDERS: AN INTERNATIONAL INVESTIGATION OF THE TRADE-OFF BETWEEN INDEPENDENCE AND COMPETENCE
DATT, RINA
LUO, LE; QAINGLIANG, TANG
Category: AU = Auditing
Driven by a dearth of literature on carbon emission assurance providers globally, this study investigates corporate incentives for the choice of assurance provider being accounting firms versus non-accounting firms. This study examines 3469 firm-year observations across 44 countries in the Carbon Disclosure Project (CDP) from 2010-2014. We hypothesize that firms under higher legitimacy threat are more likely to choose accounting firms, while companies desiring to improve carbon management mechanisms tend to choose technical consultation firms. Accounting firms are perceived as more independent assurers with higher ethical standards and auditing experience, but technical consultation firms are believed to have climate change expertise hence they are more competent to deal with technical problems of carbon control. Results indicate that firms with higher carbon emissions in countries with stringent national climate protection and stakeholder-orientation are more likely to choose accounting firms. On the other hand, firms with better carbon governance mechanism are more likely to choose technical consultation firms rather than accounting firms. In particular, companies with Corporate Social Responsibility (CSR)/environmental committee, carbon reduction incentives, and higher carbon disclosure scores that had adopted carbon reduction initiatives are more likely to choose technical consultation firms as their carbon assurer. The results of this study are consistent with the legitimacy, signal and institutional theoretical framework.
DOES ACCOUNTING CONSERVATISM DISCIPLINE QUALITATIVE DISCLOSURE? EVIDENCE FROM TONE MANAGEMENT IN THE MD&A
D'AUGUSTA, CARLO
DEANGELIS, MATTHEW
Category: FR = Financial Reporting
Recent research shows that investors react to the tone of qualitative disclosure and that firms strategically manipulate tone to bias investors’ perceptions (i.e., they engage in “tone management”). We investigate whether accounting conservatism, which has been found to be effective in constraining management opportunism in other settings, mitigates upward tone management (UTM) in the MD&A. We hypothesize that timelier recognition (higher verification) of losses (profits) in the income statement makes it harder for managers to opportunistically downplay bad news (magnify good news) when discussing current performance. Consistent with this hypothesis, we find that abnormal tone is negatively associated with several accounting conservatism proxies. Additionally, we hypothesize and find that this association is stronger among firms that have higher incentives to manipulate tone (i.e., firms that are older, more accrual intensive and under stronger pressure to manipulate reported performance). These results are robust to several sensitivity tests that employ alternative measurements and models. In supplemental analyses, we find no evidence that conservatism encourages downward manipulation and that conservatism constrains UTM most strongly in backward looking information.
MODELING OF THE RELATIONSHIP BETWEEN OPPORTUNISTIC POLITICAL CYCLES AND THE EXPLANATORY FACTORS OF CONTRACTING OUT OF PUBLIC SERVICES
DE LA HIGUERA MOLINA, EMILIO JOSÉ
CAMPOS ALBA, CRISTINA MARÍA; GARRIDO RODRÍGUEZ, JUAN CARLOS; PÉREZ-LÓPEZ, GEMMA; PLATA DÍAZ, ANA MARÍA; ZAFRA GÓMEZ, JOSÉ LUIS
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
A major question for public managers is whether municipal services should be rendered in-house or contracted out. In view of the negative perceptions often aroused by contracting out, this paper analize the political decision through a modeling of the relationship between political cycles and the factors that explain the processes of contracting out. According to this modeling, the probability of municipal services being contracted out is greater in the postelectoral years; moreover, during this period the decision is taken more quickly. In this theoretical model, not all political, economic and fiscal factors have an equal impact on the contracting-out decision during each year of the electoral cycle. The model was applied to a sample of 2,274 Spanish municipalities, with respect to a broad time horizon (2002-2014), and the results obtained confirm our hypotheses regarding dynamic-opportunistic behaviour in the contracting out of local public services.
PROFESSIONAL ACCOUNTING BODY AFFILIATION: UNDERSTANDING THE DRIVERS OF MEMBERSHIP ATTRACTION IN VIETNAM
DE LANGE, PAUL
BOUILHERES, FREDERIQUE; SCULLY, GLENNDA
Category: ED = Accounting Education
This study investigates the professionalization process of accounting in Vietnam through the lens of professional accounting bodies’ membership. In particular it analyses accounting students’ intentions to affiliate with a professional accounting body in Vietnam as well as factors affecting foundation candidates of a particular professional body’s decision to remain or cease affiliation with this body (N=312). The study of the accounting profession through potential members of professional associations in Vietnam serves to depart from the traditional Anglo professionalization model and contribute to the literature on the development of accounting in emerging economies. Additionally, Vietnam offers a model of professionalization with complex dependencies including imperatives of the State and the ‘professions’ and thus provides a rich tapestry of comparison with other State-controlled transitional economies.
ACCOUNTING PRACTICE AND MILITARY BUDGET BEFORE AND DURING THE SECOND WORLD WAR IN ITALIAN ROYAL AIR FORCE
DE LUCA, FRANCESCO
DI BERARDINO, DANIELA
Category: HI = History
This paper aims to unveil the accounting practice adopted during the Second World War (WWII), by focusing the attention on the specific role of the Italian Royal Air Force (RAF). The paper aims to contribute to the literature on military accounting because few studies analyze the Italian accounting practice during the war and no study considers the WWII in this country. This paper seeks to verify the adaption degree of accounting procedures and the spending allocation criteria, according to the extraordinary demands of resources and the strong political and social changes fostered by the war. The analysis of the archival documentation in the period 1936-1943 shows how the budgetary system was a strong tool of political power. Organizational instability within military ministries, the inefficient allocation criteria of resources, an inadequate control of expenditure, the lack of reporting transparency and the strong power of war industry may thus explain the Italian defeat in the WWII. The organizational structure of Air Force Ministry, the accounting instructions, and the budgetary system, during the period, have been analyzed together with the debates in the Parliament during the XXIX and the XXX Legislatures, concerning the military budget, the temporary expenses, and the supply procedures during the war.
AUDIT PRACTICE: EMPIRICAL EVIDENCE OF A TRADE-OFF BETWEEN QUALITY AND EFFICIENCY
DE MARTINIS, MICHAEL
HOUGHTON, KEITH
Category: AU = Auditing
This study contributes to auditing research by providing rare insights on auditors’ actual audit practice and how they interact with auditees. Using proprietary, working paper data from a non-Big 4 firm, it examines whether the business risk auditing (BRA) approach, in heightening the auditor’s awareness of auditee business risk (ABR), is associated with higher quality and more efficient audits. A model of auditee (chief executive officer or similar) perceived audit quality is estimated including variables measuring auditor assessed ABR directly associated with the BRA approach and audit production efficiency. The proprietary data consists of 60 large audit engagements of a major public sector audit provider when its implementation of the BRA approach was in its infancy. Results reveal that high ABR audit engagements are positively associated with auditee perceived audit quality, corresponding with greater audit fees and hours, and a richer mix of audit resources. However, implementation of the BRA approach also results in an unexpected trade-off between perceived audit quality and audit production efficiency.
REDUCING SUSTAINABILITY RISK FOR INVESTORS: THE EFFECT OF TIME HORIZON OF SUSTAINABILITY TARGET REALIZATION AND SUSTAINABILITY INCENTIVES
DE MEYST, KAREN
CARDINAELS, EDDY; VAN DEN ABBEELE, ALEXANDRA
Category: MA = Management Accounting
Investors are often exposed to significant sustainability risk when contracting with other firms. In this study, we examine how the time horizon of the realization of sustainability targets affects firms’ effort to reduce sustainability risk as well as investors’ willingness to invest. We presume that firms’ sustainability effort and investors’ investments will be lower when the outcomes of sustainability targets realize over a longer time period than when they realize over a short period. To test our hypotheses, we use a multi-period investment game with a 2x2 between-subjects design in which an investor can invest in a firm. Whether the investor can retrieve the return on his investment depends on whether the firm stays below a sustainability target. We manipulate whether the realization of sustainability targets has a short time horizon (outcomes realize within one period) or a long time horizon (outcomes realize over three periods), and whether sustainability incentives are provided within the firm or not. Results show an effect reversal of time horizon on firms’ effort in the absence compared to in the presence of sustainability incentives, indicating that in the absence of incentives less effort is spent on targets that realize over a long time period, but that the effect strongly reverses when incentives are present. We also find that in the absence of sustainability incentives, investors shun away investments more when outcome realizations have a longer time horizon.
EMPLOYMENT PROTECTION AND TAX AVOIDANCE
DE VITO, ANTONIO
JACOB, MARTIN; MÜLLER, MAXIMILIAN
Category: TX = Taxation
I exploit changes in employment protection legislation across OECD countries to examine how labor laws affect tax avoidance. Over the 1996-2013 period, I find that labor reforms strengthening employment protection lead firms to increase tax avoidance by 1.3 percentage points. Furthermore, I show that increases in tax avoidance are larger for low capital-intensive firms, as well as for firms operating in industries and countries with higher dismissal costs or weak enforcement. Because firms substitute labor with capital, their pre-tax margins are higher, which increases tax avoidance benefits. Overall, these results point to the institutional complementarities between labor laws and taxes.
PROFESSIONAL CHANGE AS REVOLUTION OR EVOLUTION? - THE DUTCH YOUNG PROFS FROM AN INSTITUTIONAL-THEORY PERSPECTIVE
DE VRIES, MARLIES
DETZEN, DOMINIC; WONG, ANNIE
Category: IC = Interdisciplinary/Critical
Institutional change unfolds only under the right conditions and when actors use appropriate strategies. This paper studies an attempt at such change by a unique vehicle in the Dutch accounting profession – the Young Profs – which enables young professionals’ participation in professional debates. Based on observations of the group's meetings and events, as well as interview data, we analyze the ways in which the Young Profs’ attempt to influence existing institutional arrangements. Employing a contingency model of institutional entrepreneurship, we find that the group’s impact on the profession is limited and that they are unlikely to enact major change. This is primarily due to the group’s position at the periphery of the field, where they do not apply appropriate tactics to initiate change. They are also missing out on a clear and appropriate framing of change that mobilizes allies to join their efforts. The study adds to recent research on the impact of early-career professionals on their firms and the profession more widely.
THE USEFULNESS OF FAIR VALUE ACCOUNTING IN EXECUTIVE COMPENSATION
DEFOND, MARK
HU, JINSHUAI; HUNG, MINGYI; LI, SIQI
Category: MA = Management Accounting
Abstract We investigate the effect of fair value accounting on the usefulness of earnings in executive compensation contracts. Our analysis uses a shock-based difference-in-differences research design that exploits the 2005 worldwide mandatory adoption of IFRS, and employs a firm-level measure of the fair value treatment effect. We find that earnings pay-performance sensitivity (PPS) declines among the IFRS adopters that are most affected by IFRS’s fair value provisions relative to the IFRS adopters that are least affected by its fair value provision. Our findings are consistent with the notion that IFRS, on average, improves the usefulness of earnings in executive compensation contracts, but that its fair value provisions offset this improvement. These results are robust for industrial firms but hold only weakly for financial firms. We further find that the results are primarily driven by firms in countries with strong enforcement, and that increased earnings management, rather than increased earnings volatility, is the most likely channel through which fair value accounting impairs earnings PPS. Our findings contribute to the literature on the contracting usefulness of fair value accounting by presenting evidence that suggests fair value accounting impairs the usefulness of earnings in compensation contracts.
DEVELOPING AN INDUCED MODEL OF MANAGEMENT ACCOUNTING CHANGE: A LONGITUDINAL CASE STUDY
DELLO SBARBA, ANDREA
CINQUINI, LINO; GIANNETTI, RICCARDO; MITCHELL, FALCONER
Category: MA = Management Accounting
This study is a further development of the induced model of the management accounting change process proposed by Innes and Mitchell (1990), augmented by Cobb et al (1995) and Kasurinen (2002) and critiqued by Llewellyn (1993). It is based on a longitudinal case study and it employs force field analysis (Lewin 1943) as a means of presenting and interpreting the empirical dynamics of the change situation. Two new aspects are introduced to the existing change model. First, there is the development and use of an organisational mechanism to sensitise actors to motivator and catalyst forces and also to ensure that the necessary facilitators were in place to circumvent change barriers and so effect management accounting change. Second, a new behavioural sub-process, that became evident as change was tracked over time, was added. It comprised three stages: change experience; change evaluation; and change revision.
RELATIONSHIP BETWEEN INTELLECTUAL CAPITAL DISCLOSURE, AUDIT RISK AND AUDIT FEES: THE EFFECT OF THE GLOBAL FINANCIAL CRISIS
DEMARTINI, MARIA CHIARA
BERETTA, VALENTINA; TRUCCO, SARA
Category: AU = Auditing
Within Voluntary Disclosure, Intellectual Capital information represents the internal value of the company, composed of three variables: the human capital, the relational capital, and the organizational capital. In particular, the effect of Intellectual Capital Disclosure on the assessment of Audit Risk and Audit Fees charged to audited companies has been confirmed by the Literature. Nowadays, in fact, the definition of the risk is no more based only on financial information, but it encompasses the whole analysis of the company. This encourage firms to be more transparent and, therefore, to increase their voluntary disclosure in order to reduce their Audit Risk. By pertaining to the relationship between IC disclosure and Audit Fees, many authors affirmed that the variation of the Audit Fees is determined by the variation in the auditor’s effort. In order to test the significance of Intellectual Capital Disclosure on the assessment of Audit Risk and Audit Fees, an empirical analysis has been done. In particular, the period of the Global Financial Crisis has been investigated in order to test whether the different economic conditions affect the relevance of Intellectual Capital Disclosure. This analysis aims at contributing to the Literature related to the Intellectual Capital Disclosure and its role in Auditing.
THE VALUATION PROPERTIES OF THE RATING TO ECONOMIC PROFIT
DEMIRAKOS, EFTHIMIOS
BALLAS, APOSTOLOS
Category: FA = Financial Analysis
Drawing upon accounting theory and the empirical evidence that supports the existence of a strong positive association between the price-to-book (P/B) and the return on equity (ROE), HSBC’s financial analysts construct an intuitive and readily understandable fundamentals-based investment criterion, called Rating to Economic Profit (REP). REP involves comparing a stock’s enterprise value to invested capital multiple (EV/IC) with the ratio of its return on invested capital (ROIC) to its weighted average cost of capital (WACC). A fairly priced stock has a REP value of one. While variations of this model are used in practice by financial analysts, the academic community has mostly ignored REP. In this study, we provide a theoretical analysis of this valuation method based on the dividend discount and residual income valuation models. We justify its use as an investment appraisal technique, provide some extensions of the basic REP formula, and discuss practical implementation issues. We also offer some illustrative examples from equity research reports, which may serve as insightful teaching cases facilitating the work of accounting educators.
THE SINGLE SUPERVISORY MECHANISM - A CURSE OR A BLESSING FOR BANKS’ FINANCIAL REPORTING QUALITY?
DEMIRTAS, MELANIE
Category: FR = Financial Reporting
This paper uses the introduction of the Single Supervisory Mechanism (SSM) in the euro-banking area in 2014 to investigate the effect of strict and homogenous banking regulation on banks’ financial reporting quality and financial reporting credibility. Using a difference-in-differences design I exploit that the change in supervision affected only some but not all banks in the euro-area. Using timely recognition of loan loss provision (LLP) as a first proxy to account for financial reporting quality, early analyzes reveal that banks, exposed to stricter banking supervision do not increase however significantly decrease the timely recognition of loan loss provision, thus, according to previous literature would reflect a decrease in financial reporting quality. However, this result might be explained by the disciplining effect of the new regulatory body on banks’ risk behavior, to ensure a safe financial system and to make banks more resilient, which is also supported by additional analyses that shows that SSM-banks significantly increase their net-loan charge offs after the SSM took over its role as banking supervisor.
SHORT SELLING AND POLITICALLY MOTIVATED NEGATIVE INFORMATION HOARDING
DENG, XIAOHU
JIANG, XIAOHONG, CHRISTINE; YOUNG, DANQING
Category: GV = Accounting and Governance
Extant literature documents that managers have an incentive to hoard bad news due to political concerns. In this paper, we test the proposition that short selling has an attenuating effect on the politically motivated suppression of bad news. We examine the stock price behavior of Chinese public firms around two highly visible political events - meetings of the National Congress of the Chinese Communist Party and Two Sessions (The National People’s Congress Conference and The Chinese People’s Political Consultative Conference) from 2002-2016, and find that political bad news hoarding has been reduced after short selling becomes available. We establish causality by employing a difference-in-differences approach based on a controlled experiment of short selling regulation changes in China. We also find this reduction in bad news hoarding to be more pronounced in firms with stronger political connection (higher state ownership, larger size, and more politically sensitive) and higher accounting opacity, which further confirms our finding. This study sheds new light on the real effects of short sellers on political impact on capital market.
HOW UNDERSTANDING THE CONCEPTUAL FRAMEWORK ASSISTS IN UNDERSTANDING THE ISSUES IN ITS CONSTRUCTION
DENNIS, IAN
Category: FR = Financial Reporting
ABSTRACT Understanding the conceptual framework (CF) assists in understanding the issues in its construction. Existing characterisations of the CF as a theory of accounting and as the outcome of a political process are examined and found to be capable of different interpretations. Recent work on the CF is used to establish what is wanted in its construction and to identify the issues that arise in realising it. Various attempts to deal with these issues by those who construct CFs are examined. They are re-described in the light of a better understanding of the nature of a CF by showing them as attempts to resolve these issues. The paper concludes that progress in constructing a future CF will only be made if the nature of the CF is grasped and issues that need to be dealt with given the new characterisation are confronted head-on.
CONSTRUCTING LEGITIMATE COSTING DATA REPORTS INTO CLINICAL ROUTINES
DERICHS, DAVID
MALMI, TEEMU; SIVAK, EDWARD
Category: MA = Management Accounting
Based upon a case study of MetroHealth Medical Center this paper develops and documents the implementation of an intervention to change physician practice patterns (clinical routines). Its goal is the reduction of unwarranted variation in cost per patient, while preserving medical treatment quality. Large differences in hospital care costs per treatment persist within hospitals. Illness severity, patient preference and to a degree organizational infrastructure explain part of that variation. But everyday clinical practice is also characterized by variation that is clinically unwarranted with adverse effects on quality and productivity. Reducing unwarranted variation is one effective avenue to manage costs without compromising quality. A large part of this unwarranted variation is caused by physician decisions. Identification and management of differing practice patterns is hence a good avenue for change. Collectively, these clinical practice patterns are, however, difficult to change as they are rooted in a complex control problem of competing professional logics within the institution. This paper develops an intervention to change physician practice patterns. The intervention aims to answer the following two research questions following research question: (1) What attributes legitimize productivity information to change organizational routines? (2) How does legitimized productivity information bridge the gap between a system of dual hierarchies?
INFORMATION RISK AND CREDIT DEFAULT SWAP MARKETS
DESAI, PRAJAKTA
DESAI, PRAJAKTA
Category: FA = Financial Analysis
This study examines the association between earnings attributes as proxies of information risk and credit default swap (CDS) spreads around compliance with the Sarbanes-Oxley Act of 2002 (SOX). I find a strong association between CDS spreads and earnings attributes. In particular, I find that information risk proxies of accounting-based and market-based earnings attributes matter to the CDS markets before compliance with SOX. This is consistent with the CDS market gathering information from all possible sources before SOX. However, after SOX, the CDS markets find accounting-based attributes to be relatively more important than market-based attributes. In terms of economic significance, a one percentage decrease in the accrual quality leads to an increase in CDS spreads by 13 basis points. This association between CDS spreads and information risk is stronger for foreign private issuers (FPIs) than for U.S. firms. This may be due to the switch for FPIs from prior reporting exemptions to the higher disclosure requirements of SOX. Overall, this study establishes that CDS markets use earnings attributes as proxies for information risk.
LANGUAGE AT WORK IN PROFESSIONAL SERVICE FIRMS
DETZEN, DOMINIC
LÖHLEIN, LUKAS
Category: IC = Interdisciplinary/Critical
This paper examines how professional service firms manage the linguistic tensions between global Englishization and local multilingualism. It achieves this by analysing the work of Big Four audit firms in Luxembourg, where three official languages co-exist: Luxembourgish, French, and German. In addition, expatriates bring with them their native languages in a corporate environment that uses English as its lingua franca. The paper combines the institutionalist sociology of the professions with theoretical concepts from sociolinguistics to study the multifaceted role of language in professional service firms. Empirically, the paper draws from 25 interviews with current and former audit professionals. The client orientation of the Big Four segments each firm into language teams based on the client’s language. It is thus the client languages, rather than English as the corporate language, that mediate, define, and structure intra- and inter-organizational relationships. While the firms emphasize the benefits of their linguistic adaptability, the paper reveals tensions along language lines, which undermines the firms’ homogeneity. This paper connects research on global professional service firms with that on the role of language in multinational organizations. In light of the increasingly global workforce of the Big Four, it draws attention to the linguistic divisions within the firms that question the existence of a singular corporate culture.
THE INTERPLAY OF CFOS AND CEOS WITH REGARD TO INVESTMENT EFFICIENCY – A REGULATORY FOCUS PERSPECTIVE
DETZEN, NINA
FIRK, SEBASTIAN; WOLFF, MICHAEL
Category: MA = Management Accounting
Recent literature suggests that CFOs’ responsibilities go beyond corporate accounting and involve increasingly strategic areas such as corporate investment decisions. However, CFOs may not directly oversee these investment decisions, but contribute indirectly by advising and guiding the CEOs. Based on this, we analyze the interaction between CFOs and CEOs to better understand their influence on corporate investment decisions. We draw on regulatory focus theory to derive hypotheses on their interaction. We predict that a CEO’s promotion focus (i.e., striving for gains and desiring advancement and growth) is positively associated with excessive investment spending and expect that this tendency can be mitigated by a CFO’s prevention focus (i.e., avoiding losses and desiring stability and security). We test these predictions empirically on a large longitudinal sample of 3,738 firm-years between 2005 and 2014. Our results document a positive impact of a CEO’s promotion focus on overinvestment and the proposed negative moderation of a CFO’s prevention focus on this relationship. Moreover, additional tests indicate a positive impact of a CEO’s promotion focus on firm performance that is amplified by a CFO’s prevention focus.
MANAGING ORGANIZATIONAL LEGITIMACY: THE CASE OF COOPERATIVE BANKS
DEVILLE, AUDE
BÉNET, NATHALIE; VENTOLINI, SÉVERINE
Category: MA = Management Accounting
Are performance measurement systems (PMSs) a way to strengthen organizational legitimacy? This question is explored in the banking sector and more specifically in a cooperative bank. This hybrid organization faces two different logics that seem to be contradictory, that is, a solidarity logic (common good) and a competitive logic (profit). We use Stark’s (2009) notion of organizing dissonance to study how PMSs are implemented in these organizations to maintain internal legitimacy. We examine how PMSs can be used to reinforce (or not) organizational legitimacy in a context of multiple evaluative principles. Our findings show that PMSs are used to promote organizational legitimacy vis-à-vis internal stakeholders. More particularly, their effectiveness in doing so is linked to the fact that they are coupled to other management processes (e.g. organizational socialization).
WHO IS MY ALTERNATIVE PEER? AN ANALYST-ADJUSTED PERFORMANCE APPROACH TO IDENTIFY COMPARABLE FIRMS
DEVIVE, OLGA
RENDERS, ANNELIES; VAN PETEGHEM, MATHIJS
Category: FA = Financial Analysis
This study examines whether and when peers identified using analyst-adjusted earnings more accurately forecast a target firm’s future valuation ratios compared to peers identified based on GAAP numbers. Using a sample of U.S. listed firms over a 2003-2014 time horizon, we find that analyst numbers lead to a fundamentally different set of selected peers (zero or one peer in common) for 22% of target firm observations. These target firms tend to be more complex, more innovative, or more strongly involved in M&A’s and restructuring activities. These may be settings in which analysts’ superior skills can better assess the informativeness of reported firm fundamentals. Additionally, the different peer selection is found to have a stronger predictive power towards future target firm performance, effectively constituting an effective unsophisticated method of evaluating potential investments. The predictive power of analyst number-based peers increases in settings where firms reporting a negative profit margin following GAAP numbers, which turns into a positive profit margin after analyst adjustments. Given the additional information content included in analyst numbers, we show that analyst based peer selection and multiple calculation substantially outperforms GAAP-based multiple valuation. Towards investors, our findings provide a relatively easy way to improve investment strategies, with identifying circumstances in which analysts indeed generate added value.
DETERMINANTS OF INTRA-GROUP INTERLOCKING IN ITALIAN LISTED BUSINESS GROUPS
DI CARLO, EMILIANO
CAIFFA, MARCO; FATTOBENE, LUCREZIA
Category: GV = Accounting and Governance
The phenomenon of intra-group interlocks (IgI) has not received adequate attention from scholars. Even more limited are studies on interlocking directorship among listed companies that belong to the same business group. The prevailing theory that scholars use to explain the IgI is undoubtedly the resource dependency theory that sees that phenomenon as beneficial for the group performance. However, the empirical results on the effect of IgI on business group performance are controversial. This study wants to contribute to the understanding on why board members of listed parent companies sit (or do not sit) in the listed subsidiary boards, suggesting how to interpret the strength of IgI. The results show that for listed groups the agency theory better explains the determinants of IgI phenomenon, having several implications for regulators, scholars and practitioners.
ON-LINE FORMATIVE ASSESSMENT, ELECTRONIC DEVICES, AND STUDENTS’ PERFORMANCE
DI MEO, FABRIZIO
MARTÍ-BALLESTER, CARMEN-PILAR
Category: ED = Accounting Education
We test through a partial least square structural equation model the associations among the use of on-line quizzes for learning activities in an introductory course of accounting, the use of different electronic devices to solve on-line quizzes, on-line quiz performance, and learning performance, and find that the on-line quizzes factor positively affects students’ learning performance, but not students’ quiz performance, probably because some students used quizzes, which had unlimited attempts until a satisfactory grade was achieved, to study the content of the course, rather than to self-assess their knowledge. We also find that computers and tablet PCs for learning activities do not affect students’ learning performance, while mobile phones negatively affect students’ learning performance with respect to their peers, probably because the users of mobile phones for learning activities are also intensively engaged in other activities. Finally, the use of any of the electronic devices does not affect students’ quiz performance.
SOCIAL CAPITAL AND SHAREHOLDER ACTIVISM: EVIDENCE FROM SHAREHOLDER GOVERNANCE PROPOSALS
DIMITROV, VALENTIN
GAO, FENG
Category: GV = Accounting and Governance
We examine whether firms’ social capital reduces shareholders’ demand for corporate governance changes. Using corporate social responsibility (CSR) performance as a proxy for social capital, we find a negative relation between CSR performance and the likelihood of shareholder governance proposals at annual meetings. We also find a negative relation between CSR and the percentage of votes in support for these proposals. When CSR performance is better, governance proposals that pass increases firm value by a greater amount and are more likely to be implemented. Collectively, our results demonstrate that social capital builds shareholder trust, which leads to better governance outcomes.
SIGNALING VALUE OF CEO’S EXTERNAL DIRECTORSHIPS
DING, WENHONG
YANG, YONG
Category: GV = Accounting and Governance
We study whether a board learns from its CEO’s performance as an outside director in other firms. We use the outside directorship firm’s stock return as a proxy for the CEO-director’s performance and find that the CEO’s forced turnover at the home firm is associated with her directorship firm’s stock returns. The effect is stronger when the home firm’s internal signal credibility (reflected in the presence of internal control weaknesses and occurrence of financial fraud) is weaker, when the home firm’s information environment is less transparent and when the directorship firm is smaller or has a more stable information environment. The effect is also stronger when the directorship firm and the home firm belong to the same industry. We also find some evidence that financial fraud at the directorship firm would reduce the home board’s reliance on accounting information when setting the CEO’s compensation contracts. Overall, our evidence suggests a benefit of CEO’s external directorships to the home firm that is not explored before.
PERCEPTION OF MANAGEMENT ACCOUNTING SYSTEMS BY MANAGERS: A SELECTION APPROACH USING CLUSTER ANALYSIS
DOBROSZEK, JUSTYNA
ZARZYCKA, EWELINA ; ALMĂȘAN, ALINA ; CIRCA, CRISTINA
Category: IS = Accounting and Information Systems
The aim of this paper is to make a contribution to the existing management literature from the perspective of the developing economies of Central and East Europe by exploring the perception of Management Accounting Systems among managers employed in businesses in Poland and Romania. This aims to shed a light on the perception of the Management Accounting Systems by managers through the application of Social Perception Theory and the DeLone and McLean Model. The study hopes to add to a better understanding of the importance and usefulness of the information received as well as the satisfaction of its users. The research data was collected through an empirical study in the form of an online survey sent to selected companies operating in Poland and Romania. In order to analyse the data obtained from the study, cluster analysis was applied. The findings prove that there are differences in managers’ perception and evaluation of the selected types of information provided by Management Accounting Systems. The differences refer to the perception of non-financial information, information for strategic tasks and the quality and content of information included in the reports. The results confirm the findings of studies conducted in developed countries.
IS POLITICAL COMPETITION A DRIVER OF FINANCIAL PERFORMANCE ADJUSTMENTS? AN EXAMINATION OF SWEDISH MUNICIPALITIES
DONATELLA, PIERRE
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Few prior studies have addressed adjustments of reported financial performance (i.e. earnings management) in jurisdictions were municipalities use accrual accounting systems. Although financial reporting in municipalities is prepared in a highly political environment, the majority of previous studies have neglected political explanatory factors. This study examine whether political competition is a driver of financial performance adjustments in Swedish municipalities. The results indicate that political competition motivates preparers to engage in making adjustments of reported financial performance, as long as governing parties have a majority of the seats in council.
ASSET DISPOSAL AS A METHOD OF REAL EARNINGS MANAGEMENT: EVIDENCE FROM THE UK
DONNELLY, RAY
CAMPA, DOMENICO
Category: FR = Financial Reporting
We examine asset sales as a method of real earnings management around the benchmarks of loss avoidance and last year’s earnings. Evidence is reported of asset sales to boost or reduce earnings near the benchmark of last year’s earnings. For the benchmark of zero earnings our results are moderated by the opening balance of accruals: only firms with high levels of accruals use asset sales to boost earnings to avoid a loss and only firms with low levels of accruals use asset sales as part of a big bath. We suggest that firms with high accrual balances find it difficult to use additional income increasing accruals but find it more convenient to write off accruals rather than sell assets to artificially reduce earnings. IFRS is associated with reduced use of asset sales for gains and especially with reduced asset sales for losses. We ascribe this to IFRS introducing additional scope for judgement and estimation in relation to the valuation of long-lived assets.
THE AUDIT COMMITTEE’S APPROVAL OF THE AUDIT PARTNER AND ITS EFFECT ON AUDIT QUALITY
DOWNES, JIMMY
DRAEGER, MICHELLE; SADLER, ABBIE
Category: AU = Auditing
The main purpose of the audit committee is to oversee the audit function and approve the selection of the auditor. Prior literature examines the effectiveness of the audit committee’s approval of the auditor selection process and mainly concludes that management has the power to select the firm’s auditor with little rebuttal from the audit committee. This study examines whether the audit committee approves the selection of the audit engagement partner and whether this approval influences the audit quality (discretionary accruals, accruals quality, and restatements) provided. Using a hand-collected sample to identify audit committee’s approval of the selection of the audit partner, the findings suggest that audit quality is greater during periods when the audit committee approves the partner selection compared to periods when they do not. This finding contrasts prior literature by providing a setting where the audit committee exhibits an important layer of corporate governance. The findings are relevant to understanding the approval process of the audit partner during the partner rotation process.
COSTS AND OUTCOMES - THE CHALLENGES OF COSTING A GLOBAL SOCIETAL CHALLENGE
DOYLE, GERARDINE
CULLEN, KATE; GIBNEY, SARAH ; O'DONNELL, SHANE; QUIGLEY, ETÁIN
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper explores the notion of evaluating costs alongside outcomes. This is performed through the application of Time-Driven Activity-Based Costing (TDABC) to patient costing alongside collection of data on patient outcomes. A chronic condition, type 2 diabetes, was chosen as the empirical context. Through the lens of TDABC the care pathways for the medical condition were documented. The costs of care for five patient profiles were derived from the process maps. Analysis of patient costs and qualitative interviews with health care professionals suggest that the current fragmented care is sub-optimal, resulting in undiagnosed complications, leading to increased severity of disease with high costs and burden of care at the acute hospital level, with a consequent national economic burden. We conclude that while there were many challenges collecting this costing and outcome data using the TDABC methodology, with the aid of electronic patient records this method offers a framework for designing a new reimbursement method, one-year bundled payments, which in turn has the potential to act as a key enabler of value-based health care.
GENDER DIFFERENCES IN FINANCIAL ANALYSTS: STOCK RECOMMENDATIONS AND THEIR MARKET IMPACTS
DUMONTIER, PASCAL
GE, JINGWEN; TARAMASCO, OLLIVIER
Category: FA = Financial Analysis
We examine the innovativeness in stock recommendations made by female analysts compared with male analysts. Male analysts issue more innovative recommendations than female analysts. Further, market does not discount the innovative recommendations issued by male analysts. Consistent with existing evidences for gender difference in overconfidence, our findings suggests that compared to female analysts, male analysts exhibit relative but not unduly overconfidence when issuing stock recommendations.
REGULATORY SPILLOVERS IN COMMON MORTGAGE MARKETS
DUY NGUYEN, DUC
LIM, IVAN; NGUYEN, LINH
Category: GV = Accounting and Governance
This paper links a corporate control regulation to spillovers in mortgage markets. Our identification strategy relies on changes within a common mortgage market to detect regulatory spillovers. Banks directly targeted by the Sarbanes-Oxley(SOX)Act to rectify their internal control weaknesses experience an 11% reduction in mortgage lending. This spills over to neighbour banks untargeted by SOX, incentivizing them to increase lending to capture the market share of targeted banks. Consequently, counties with larger spillover effects experience higher house prices and home foreclosures. Our paper cautions against evaluating regulatory effectiveness based solely on the behavior of targeted firms.
REPORTING ON IPR PROTECTION ISSUES BY BIOPHARMACEUTICAL COMPANIES
DYCZKOWSKA, JOANNA
SICHEL, RICARDO LUIZ
Category: FR = Financial Reporting
Due to quick development of proprietary methodologies, systems or technologies biopharmaceutical industry requires a variety of IPR protection mechanisms. Going forward, the complex R&D projects and their long-term character impose a necessity of transparency with regard to IPR protection. Stakeholders should not be provided with a misleading impression about the protection breadth, the likelihood of patent grant or the ability of the company to enforce its patent rights. This paper explores and analyses critical IPR protection concerns revealed by European biopharmaceutical companies in the narrative parts of their annual reports. These critical issues refer to disclosure of IPR protection strategy, IPR risk and mitigation policies, R&D regulatory framework, patent portfolio, IPR infringements, litigations and exclusive rights. The review of the disclosure practices observed in the examined sam-ple proved that IPR risk and exclusive rights were the most frequently reported areas. 2/5 of the analyzed companies disclosed the number of patents‘ granted whereas IPR protection strategy, R&D regulatory framework, IPR risk mitigation as well as patent infringements/litigations were discussed only by 1/3 of the examined entities. The study evidenced that a considerable share of companies maintained poor standards of IPR protection disclosure (37%), a half of the sample represented a moderate level whereas the rest of entities prevailed in terms of disclosure quality.
THE INTERNET DISCLOSURES OF NON-PROFIT ORGANISATIONS – A STRATEGIC OR A HAPPY-GO-LUCKY APPROACH?
DYCZKOWSKI, TOMASZ
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The paper explores Internet disclosures of Polish public benefit organisations (PBOs), applying a comprehensive assessment methodology of information provided by PBOs on their website and in the social media. The study was conducted between October 2015 and February 2017 and included a sample of 250 randomly selected PBOs. Beside determining a share of Polish PBOs which were sustainably active on the web, a combined analytical approach using a scoring system and a cluster analysis enabled to define three strategies related to Internet disclosures, including: ‘a contact page’, ‘a promotion website’ and ‘a stakeholder relationship portal’. Differences between the said approaches, together which factors influencing disclosure intensity and quality, including an Internet platform, financial status of an organisation and their activity domains, were identified, as well. The paper is concluded with an analysis of stakeholders’ opinions on contents of websites, where text-mining software was used. It was evidenced that the three aforementioned strategies correspond well with stakeholders’ expectations on what and how PBOs should communicate via the Internet.
INFUSING DATA ANALYTICS INTO THE ACCOUNTING CURRICULUM: A FRAMEWORK AND INSIGHTS FROM FACULTY
DZURANIN, ANN
JONES, JANET; OLVERA, RENEE
Category: ED = Accounting Education
Understanding how to use data to formulate and solve business problems provides an opportunity for the accounting professional to become a forward thinking strategic partner in the organization. The challenge for accounting academic departments is determining the data analytic topics and skills that are relevant to the accounting profession and how to incorporate those topics into an already full curriculum. This is especially true for accounting programs that have separate AACSB accreditation, given that Accreditation Standard A7 requires universities with separate accounting accreditation to include content and learning objectives associated with data analytics and technology skills. This paper provides the results of a broad exploratory survey of accounting faculty about data analytic instruction. Our survey is based on four research questions developed from a review of practice and academic literature. We find that faculty consider developing students’ mindset as the most important data analytics topic to include in the accounting curriculum. In addition, faculty support the use of Excel to develop data analytic skills in addition to emerging technologies. Faculty indicate that case-studies and hands-on projects are most appropriately used as methods to develop students’ data analytic skills in upper-level or graduate accounting coursework. We conclude the paper by offering two suggested implementation methods: the Integrative Approach or the Focused Approach.
USING MUTUAL AGREEMENT PROCEDURES TO CREATE A PROXY FOR BILATERAL TAX CONTROVERSY
ECKERLE, MATTHIAS
TREDE, MARK; ULLMANN, ROBERT
Category: TX = Taxation
This is a methodical note. We aim to develop a technique to estimate joint frequencies from marginal frequencies in a contingency table of interactions between two parties. We apply this technique to the practical setting of the OECD statistics on mutual agreement procedures between countries where only marginal frequencies, i.e. the total number of mutual agreement procedures per country, are made publicly available. Contrary to this data availability, tax researchers are interested in using joint frequencies, i.e. the number of mutual agreement procedures per country pair. Such an empirical construct would be useful in any archival research that relies specifically on the bilateral relationship between countries rather than on the consolidated measurement. We argue that the empirical construct would capture a variety of theoretical constructs which, given the early status of the project, are yet not fully investigated and which we summarize for now under the term bilateral tax controversy.
MANDATORY IFRS ADOPTION AND COMPLEX INFORMATIVENESS OF ANNUAL REPORTS: FINANCIAL WORDS AND FINANCIAL JARGON
EFRETUEI, EKAETE
Category: FR = Financial Reporting
There is the prevalence of complex narratives in accounting disclosures to the extent that this is being normalised as an inherent characteristic of financial reporting. On the other hand, International Financial Reporting Standards (IFRS) was introduced to enhance reporting efficiencies and improve communication in financial reporting. This study examines if IFRS adoption had an impact on narrative disclosure complexity by investigating whether IFRS adoption in 2005 is associated with the pervasiveness of word complexity in annual report disclosures. The study decomposes word complexity into two components of information (common complexity) and obfuscation (uncommon complexity) by applying theoretical assumptions from the Incomplete Revelation hypothesis and the term weighting concept from the information retrieval literature. The results find evidence of a significant increase in the complexity of narratives reported in annual reports with the mandatory regulatory adoption of IFRS in 2005 and this increase appears to be associated with common complexity. The findings are an indication that the application of IFRS increases disclosure complexity informativeness and that an active engagement with the management of disclosure narrative complexity has benefits for information extraction cost.
CORE EARNINGS MANAGEMENT: HOW DO AUDIT FIRMS INTERACT WITH THE BALANCE BETWEEN CLASSIFICATION SHIFTING AND ACCRUALS MANAGEMENT?
EILIFSEN, AASMUND
EILIFSEN, AASMUND; KNIVSFLAA, KJELL
Category: AU = Auditing
An important research question is whether and how auditor incentives and competencies affect the trade-offs between various earnings management tools. Classification shifting (CS) and core accruals management (CAM) are used to manage core earnings. This study investigates how three common audit quality related variables; audit firm size, industry-specialization, and auditor-provided non-audit services (NAS), associate with CS before large equity issues and acquisitions, taking CAM into consideration. For a sample of Norwegian public companies 2000-2015, we find that Big 4 as well as industry-specialized audit firms tolerate (constrain) CS when CAM is constrained (tolerated), indicating that CS and CAM are substitutes. In contrast, non-Big 4 and non-specialized firms either tolerate both CS and CAM or constrain both, indicating that CS complements CAM. For non-specialized Big 4 firms tolerating CAM, CS is less constrained when NAS are large, consistent with impaired independence. Non-specialized non-Big 4 firms behave diametrically opposite. Overall, the findings show that firms’ interactions with the balance between CS and CAM align with auditor incentives and competencies. Auditor incentives, however, may be distorted towards tolerating CS. Given that financial analysts and investors tend to fixate on core earnings, this raises the question of the suitability of the scope of the current accounting and auditing standards to classify line items in the financial statements.
RESPONSIVENESS AS A CHALLENGE FOR THE LEGITIMACY OF THE IASB – A LUHMANNIAN PERSPECTIVE ON CURRENT INTERNATIONAL ACCOUNTING REGULATION AND ON ALTERNATIVE APPROACHES –
EISENSCHMIDT, KARSTEN
SCHMIDT, MATTHIAS
Category: IC = Interdisciplinary/Critical
The article addresses the legitimacy of global accounting regulation. In line with other approaches, we relate the legitimacy of standard setting by the IASB to the process of standard development. We argue that the provision of procedural elements in the standard setting process that assure responsiveness vis-á-vis constituents is the key to legitimacy. While this perception is still in line with other, particularly economic, approaches we further elaborate a clearer conception of what is meant by responsiveness. We therefore utilize a sociological framework that analyses standard setting processes as social systems and is based on the work of Luhmann (1983). Against this backdrop, we analyse the current due process of the IASB as well as the endorsement process for IFRS within the EU. We further discuss whether market approaches to standard setting as suggested in academic literature offer process alternatives that comply with our theoretical framework. Each of the market approaches offers different procedural elements to assure responsiveness. However, we will show that a distinguishing element of stable regulation processes in this regard is missing in most of the analysed procedures. Since this element requires to tie norm development to the political process, we carefully draw sceptical conclusions for the future of global accounting regulation.
RISK AND UNCERTAINTY IN THE ORDERING OF ACCOUNTING PROFIT
EKLOV ALANDER, GUNILLA
CARRINGTON, THOMAS
Category: IC = Interdisciplinary/Critical
In this paper, we move beyond previous accounting research of profit (earnings management, accrual accounting, and the like) and instead study profit in the setting of risk with the aim to contribute to accounting literature in a novel way. We seek the answer to how profit is produced in what approach to risk the relevant actors draws on and what order[s] of worth (Boltanski & Thévenot, 2006; Stark, 2009) these approaches correspond to. We undertook a case study of a European based large listed construction company, and identify three distinct approaches to risk: a compliance approach, a prudence approach and a control approach. Our analysis of how these approaches constitute the production of profit illustrates the possibility of uncertainty and the ambiguity from which profit can be made (Stark, 2009), not only with regards to “which order or convention is operative in a given situation” (ibid. p. 15) but also as to the nature (ontology) of that order or convention.
INFORMATION ASYMMETRY AND THE IMPACT OF SENTIMENT ON STOCK MARKETS’ RETURNS: NEW EUROPEAN BASED EVIDENCE USING IFRS ADOPTION FRAMEWORK
EL HAJJAR, SAMAH
DUXBURY, DARREN ; GEBKA, BARTOSZ ; SU, CHEN
Category: FR = Financial Reporting
This paper investigates the effect of IFRS mandatory adoption on information asymmetry using a unique approach. Specifically, it investigates the change in the irrational sentiment effect on stock markets’ returns after the mandatory adoption of IFRS in 18 European countries over the period 2000 to 2010. Using predictive regressions and rolling window estimation, we find that sentiment has a negative impact on future stock market returns prior to IFRS adoption in 11 out of 18 countries. Moreover, our results show that the impact of irrational sentiment is reduced after the mandatory adoption of IFRS for a majority of countries in our sample. The results are robust to various sensitivity tests applied, indicating that information asymmetry has decreased in the post-IFRS period. Compared to previous studies, this paper provides clearer evidence that improved accounting quality transfers into direct benefits for investors who are the major user of financial reports. Furthermore, this paper presents direct evidence for policy makers on the favorable consequences of the IFRS adoption.
DO THE BIG 4 PRACTICE WHAT THEY PREACH? BIG 4 AFFILIATION AND THE ART OF AVOIDING TAXES
ELEMES, ANASTASIOS
BLAYLOCK, BRADLEY
Category: TX = Taxation
Using a unique private firm dataset from 13 European countries, we investigate Big 4’s own tax planning relative to that of their closest peers. We provide evidence that Big 4 affiliated firms engage in higher levels of non-conforming tax avoidance and shift more income out of high tax rate affiliates compared to peer firms. The Big 4 shift more income out of high tax rate affiliates only in those high tax rate countries with stricter institutional environments, higher levels of tax enforcement, and higher book-tax conformity levels where the Big 4 have strong incentives to engage in tax avoidance but are more likely to be scrutinized from regulators. The Big 4 avoid more taxes in low tax rate countries, which are more likely to serve as inbound income shifting locations. We further show that the positive relation between Big 4 affiliation and non-conforming tax avoidance (income shifting) is stronger for Big 4 affiliated firms that are audited by another Big 4 auditor. Our study contributes to the literature by documenting how political and reputational costs interact with tax expertise to define Big 4’s own tax planning rather than merely that of their clients.
EARNINGS QUALITY AND ANALYSTS’ INFORMATION ENVIRONMENT: EVIDENCE FROM THE EU MARKET
ELIWA, YASSER
ABRAHAM, SANTHOSH; HASLAM, JIM
Category: FA = Financial Analysis
Purpose – This study aims to examine the relationship between earnings quality and analysts’ information environment measured by analysts following, analysts' forecasts dispersion and analysts' forecasts accuracy using a sample of EU listed firms. Design/methodology/approach – Secondary data was used, that covers all non-financial firms in 15-member states of the EU during the period of 2000 to 2014, to test the relationship between CoD and AQ. Findings – We find evidence that firms with high earnings quality have more analysts following, less analysts' forecasts dispersion and higher analysts' forecast accuracy. Moreover, we find that the innate component of earnings quality dominates the effect on analysts following, analysts’ forecasts dispersion and analysts’ forecasts accuracy, while the discretionary component is likely to have a negligible impact. Moreover, we report a link between the magnitude of this relationship and national characteristics and provide evidence of the significant effects of national characteristics and market forces on analysts’ information environment. These findings shed light on the important role of earnings quality in helping analysts and investors to make better financial investment decisions.
CORPORATE TAX AVOIDANCE, CSR, CORPORATE GOVERNANCE, AND CULTURAL VALUES IN TOURISM FIRMS: INTERNATIONAL EVIDENCE
ELKHASHEN, EMAD
ALLCOCK, DEBORAH; NTIM, COLLINS
Category: GV = Accounting and Governance
This paper contributes to accounting literature through investigating the association between CSR and tax avoidance as well as the moderating effect of corporate governance and cultural values on this link in a unique setting. Based on panel data of 973 observations for the period 2010-2016, the findings of this study generally show a positive association between CSR and tax avoidance, with a latter evidence shows that the result is driven by the sub-sample of less responsible firms. The findings also show a positive moderating effect of corporate governance on this association. Further, there is some evidence that country level characteristics seem to affect CSR-tax avoidance link. Our findings are robust across different statistical techniques and alternative measurements. These findings support the theoretical framework of legitimacy and stakeholder theories. This study has implications for regulators, governments, and key players in tourism sector.
MANAGERS’ STOCK-BASED COMPENSATION AND DISCLOSURES OF HIGH PROPRIETARY COST INFORMATION: AN INVESTIGATION OF US BIOTECH FIRMS
ENACHE, LUMINITA
ENACHE , LUMINITA; KIM, JAE B
Category: FR = Financial Reporting
In this study, we examine whether CEOs’ stock-based compensation has any relationship with disclosure of high proprietary information. While prior studies suggest that stock-based compensation provides managers with an incentive to enhance their voluntary disclosures in general, we argue that it may not be case when the proprietary cost is high. By using novel measures capturing the disclosure cost of high proprietary information and focusing on a bio-tech industry, we find that, on average, managers’ stock-based compensation is not significantly related with their disclosure of high proprietary cost information. More importantly, we find that a larger amount of stock-based compensation motivates managers to reveal less high proprietary cost information when they have a stronger need to protect their proprietary information; specifically:(i) when the stage of product development is earlier, (ii) when the corporate board mainly consists of directors with lack of sufficient knowledge on technology, and (iii) when firms are a leader in an industry. Overall, our study contributes to the literature by documenting that the role of stock-based compensation on managers’ disclosures can differ depending on the level of proprietary cost of information.
WHAT EXPLAINS THE “DORMANT” STAGE OF MANAGEMENT IDEAS? THE CASE OF INTEGRATED REPORTING
ENDENICH, CHRISTOPH
HAHN, RÜDIGER; REIMSBACH, DANIEL; WICKERT, CHRISTOPHER
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Using a theoretical framework that combines elements from the management fashion theory with the so-called “virus metaphor” (Røvik, 2011), we analyze the case of integrated reporting (IR) in Germany, a management idea mainly applied by multinational corporations to combine financial and non-financial reporting practices. Building on qualitative data from the German IR and non-financial disclosure landscape gathered over a two-year timeframe, we examine why IR – despite its strong initial popularity in academia and business practice – remains in a dormant stage: The idea of IR is neither moving towards full adoption nor becoming a fad and being abandoned. Our data sheds light on the field level conditions that might explain this continuous dormant stage where key actors in the field approach IR with a “wait-and-see” perspective. We find that dormancy is facilitated by low demand of reporting organizations due to lack of tangible benefits and low reputational gains, a more supply- than demand-driven market environment for IR, and maintained by subliminal regulatory threat. These findings theoretically expand the “virus” perspective on the organizational handling of management ideas by putting the roles of different field-level actors that can influence the dormancy of management ideas into a common conceptual framework.
FIGHTING CLIMATE CHANGE WITH DISCLOSURE? THE REAL EFFECTS OF MANDATORY GREENHOUSE GAS EMISSION DISCLOSURE
ERNSTBERGER, JUERGEN
RETTENBACHER, HANNES; SCHWENEN, SEBASTIAN; ZAKLAN, ALEKSANDAR
Category: FR = Financial Reporting
We examine how mandatory disclosure of greenhouse gas (GHG) emissions influences companies’ emission levels. We identify the effect of full transparency by exploiting a mandate requiring UK-incorporated listed companies to disclose information on their GHG emissions in their annual reports. Comparing the emissions of installations owned by listed companies and installations owned by firms not subject to the mandate, we document that disclosing GHG emissions in annual reports reduces emission levels by up to 16.5%. Emission reductions occur across all industries, but are largest for installations from the energy supply industry. Our results are robust to various specifications and document the incremental effect of disclosing emission data in annual reports, as firms had to report emission data to a central register already before the disclosure mandate.
ORGANIZATIONAL COMPLEXITY AND IAF INVESTMENT - NEW INSIGHTS FOR THEORY AND PRACTICE -
EULERICH, MARC
Category: AU = Auditing
The Internal Audit Function (IAF) has become a main pillar of good corporate governance in recent years. To better understand drivers that influence the investment into the IAF, this study examines possible factors associated with the organizational investment into internal auditing. Based on proprietary survey data from Chief Audit Executives (CAEs) gathered in Austria, Germany and Switzerland, we were able to identify different measures of corporate complexity as key drivers of the investment level. Based on data from 415 organizations, our results show significant effects of different complexity indicators, such as internationalization, industry type or company size, on IAF investment. We use nine different variables as proxies for corporate complexity and the number of internal auditors as our main dependent variable of interest. This study contributes to the internal audit literature through an unique research approach to identify key drivers of an IAF investment. Furthermore, the results are a potential benchmark for practitioners and the profession to evaluate the necessary investment into the IAF.
BOARD INFORMAL HIERARCHY AND INNOVATION
EVDOKIMOV, EGOR
CHEUNG, SAMUEL; GUL, FERDINAND; LAI, KAREN
Category: GV = Accounting and Governance
Based on recent research on the importance of board informal hierarchy in firm performance, and the significance of innovation for firm survival and growth, this study examines whether board informal hierarchy is associated with innovation, measured as the productivity of R&D (RQ). Board informal hierarchy is measured as the Gini coefficient to capture the level of inequality that exists among the board members based on their board memberships in other firms. For a large sample of US firms for the period 2000-2015, we show that informal hierarchy is positively associated with innovativeness (RQ).
THE ECONOMIC CONSEQUENCES OF CRIMINAL FIRMS
FABRIZI, MICHELE
MALASPINA, PATRIZIA; PARBONETTI, ANTONIO
Category: GV = Accounting and Governance
This paper investigates the economic consequences of firms connected to organized crime (criminal firms) and shows that when a criminal firm is eliminated from an industry, the performance of non-criminal competitors significantly increases. We also show that the positive effect on the performance of the non-criminal competitors includes improved efficiency reached after the elimination of the criminal competitor. Overall we provide evidence that criminal firms play a crucial role in hampering competition and shows that the economic costs imposed by organized crime are not exclusively linked to a deterioration of the institutional environment.
ENVIRONMENTAL REPORTING IN CONNECTION WITH ENVIRONMENTAL DISASTERS
FALLAN, EVEN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This is a study of companies’ and industries’ use of environmental reporting in connection with environmental disasters and crises. Exxon Valdez is an example of such an event. The study is a review of current literature on this issue, and concerns both how such events affect corporate reporting and how reporting, before and after the event, affects the consequences of the events for companies and industries. The study shows how environmental reporting may be used as an accountability and a strategic legitimation tool. Extreme cases are of interest because environmental risks are more likely to be significant, and, hence, relevant for companies. Such events represent a boundary condition for environmental reporting.
THE EU DIRECTIVE ON NON-FINANCIAL AND DIVERSITY INFORMATION: A NEW TOOTHLESS TIGER IS BORN?
FARNETI, FEDERICA
DE VILLIERS, CHARL; DUMAY, JOHN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Considering the public dissatisfaction with corporate scandals and the resultant investor and consumer mistrust with European companies, the European Union Parliament has introduced Directive 2014/95/EU on non-financial reporting and disclosure. We investigate its potential effective based on its scope. Level of guidance and methods, lack of audit and the absence of meaningful sanctions. As a result, we cannot see any evidence that the Directive will have a major impact on European companies and argue that a toothless tiger has been born.
UNDERSTANDING THE BEHAVIORAL GAP: INSIGHTS INTO CSR INTENTIONS OF GERMAN FIRMS AS AN ANTECEDENT OF EFFECTIVE MANAGEMENT CONTROL SYSTEMS
FEDER, MADELEINE
WEIßENBERGER, BARBARA E.
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Within their day-to-day decision-making, managers face various trade-off situations when engaging in CSR-related activities that might result in a gap of executed behavior that is not in line with corporate strategic objectives. This paper examines (top level) managers’ intentions to engage in CSR-related activities as they determine the extent of such potential management control problems that can be addressed through an appropriately designed management control system (MCS). According to the theory of planned behavior, intention is determined by three psychological constructs, namely attitude, subjective norm, and perceived behavioral control. We conduct two vignette studies to examine the effect of the theory’s constructs on corporate CSR-related activities among German firms. (Top level) managers participated in our study by completing an online questionnaire. Our results show that attitude towards CSR-related activities has a strong impact on intentions to engage in certain activities. Furthermore, perceived behavioral control influences (top level) managers’ intentions to engage in CSR-related activities. However, the influence of subjective norm is not supported. Our findings are relevant for the design of effective MCSs that set an important basis for long-term behavior, which is in line with corporate CSR-related goals. Furthermore, our findings are relevant to governmental agencies, which seek to support the CSR integration into corporate (core business) activities.
THE ROLE OF PROCESS ACCOUNTABILITY IN MITIGATING THE IMPACT OF AFFECT ON CAPITAL BUDGETING DECISIONS
FEHRENBACHER, DENNIS D.
KAPLAN, STEVE; MOULANG, CARLY
Category: MA = Management Accounting
While it has been generally established that affect can play a role in capital budgeting decision-making, the impact of positive and negative affect is not the same (Kida et al. 2001, Monero et al. 2002, Farrell et al. 2014). The current study explores the role of process accountability in mitigating the role of affect on capital budgeting decisions. We conducted an experiment with highly experienced and qualified accountants. Our study reveals the effectiveness of process accountably in mitigating the role of positive dispositional affect on choosing the most financially preferred project. In contrast, and as expected, we demonstrate that project reviewers were less likely to select a financially preferred project proposed by a manager with negative dispositional affect and this tendency was not mitigated by process accountability. Therefore, we indicate that the pervasiveness of negative affect is stronger than positive affect and renders process accountability ineffective.
AUDITOR INDUSTRY SPECIALIZATION AND NON-GAAP EARNINGS QUALITY
FENG, ZHUOAN
SHAN, YAOWEN; TAYLOR, STEPHEN
Category: AU = Auditing
We consider how auditor industry specialization impacts the quality of voluntary non-GAAP earnings disclosures. Our results show that non-GAAP exclusions tend to have the less predictive ability for future operating earnings in firms audited by industry-specialist auditors, suggesting a higher degree of non-GAAP earnings quality. These findings reveal that industry-specialist auditors can improve the overall disclosure quality beyond the accounting standards. We also predict that industry-specialist auditors are less important in industries where the non-GAAP disclosures are prevalent, since the non-GAAP quality is already high in prevalent industries. Consistent with our prediction, we document a positive association between industry-specialist auditors and the quality of non-GAAP disclosures in firms from industries where non-GAAP disclosures are less prevalent, but not in prevalent industries. These results extend our understanding of the impacts of industry-specialist auditors on the voluntary disclosure behavior of firms.
ACCOUNTING-BASED DEBT COVENANTS, DEBT MATURITY AND ACCOUNTING CONSERVATISM
FERENTINOU, AIKATERINI
C. ANAGNOSTOPOULOU, SERAINA
Category: FR = Financial Reporting
Both conservatism and the inclusion of covenants in debt contracts have been identified as factors promoting contracting efficiency. We argue that demand for conservatism increases in the presence of relatively more balance sheet-based vs. income statement-based covenants in public debt contracts. We examine, for public debt contracts issued by North American firms during 1980-2016, the association between covenant mix and accounting conservatism, upon considering that demand for conservatism may also depend on debt maturity when debt contracts incorporate covenants. Our findings first indicate that debt maturity positively associates with a covenant mix more intensive in balance sheet-based covenants. Our evidence further shows that demand for conservatism increases with debt maturity, and with a covenant mix more intensive in balance-sheet vs. income statement-based covenants, as debt maturity increases. We interpret this evidence as consistent with conservatism enhancing the ex-ante shareholder/debtholder alignment of interests role performed by balance sheet-based covenants, when conservatism may facilitate or adversely affect the ex-post credit risk deterioration signaling function of income statement-based covenants, particularly in the multi-period context. Our findings suggest that the type of covenants included in public debt contracts significantly associates with demand for accounting conservatism, under the scope of improving debt contracting efficiency.
QUALITY OF CSR REPORTING INSTRUMENTS: EXCELLENCE OR SMOKESCREEN?
FERNANDEZ-FEIJOO, BELEN
ROMERO, SILVIA; RUIZ, SILVIA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The purpose of this paper is twofold. First, we aim to extend the conversation started by Michelon et al. (2015). They conducted a study of sustainability information submitted by companies in the UK for the period 2005-2007, when IR was not yet proposed. They found that, companies that prepare stand-alone reports do not provide a higher quality of information about sustainability than companies reporting within the annual reports. They conclude that CSR reporting practices are symbolic rather than substantive; however, their sample includes only companies in the United Kingdom, a shareholder oriented country. We analyze if the quality of sustainability reports in a stakeholder oriented country, is affected by the type of instrument used for disclosure. Second, we aim to assess the quality of the sustainability information issued following the two most common reporting practices: stand-alone report (addressed to stakeholders) and integrated report (addressed to shareholders). In order to achieve these objectives we perform a content analysis of the sustainability information disclosed by Spanish listed companies during the years 2013 to 2015. Our findings indicate that companies issuing stand-alone or integrated reports provide higher quality information than companies including their sustainability information within the annual report. We also find that stand-alone reports are issued with higher quality than integrated reports.
IMPAIRMENT OR AMORTIZATION OF GOODWILL – THAT IS THE QUESTION. EVIDENCE FROM THE FIELD
FERRAMOSCA, SILVIA
ALLEGRINI, MARCO
Category: FR = Financial Reporting
The ongoing controversy around goodwill accounting prompted this paper, aimed at empirically exploring chief financial officers’ perceptions about goodwill impairment versus its amortization. The study is based on a global survey of CFOs, extrapolating their perceptions about the adoption of IAS 36 and SFAS 142. More than half of the responding CFOs argue that alternative accounting treatments of goodwill might better accomplish the objective of rendering useful information than impairment testing. However, almost two thirds of the respondents still prefer impairment testing to the amortization process. The results are topical, considering the interest in the issue by standard setters, practitioners, and academics. The responses indicate the antecedents of the preference of goodwill impairment testing to the amortization process. From a theoretical viewpoint, the study indicates whether the practice converges (or diverges) from the speculative motivations underlying the preference of impairment to amortization. The study identifies several areas where regulators and standard setters can intervene, contributing to the ongoing debate on possibly reintroducing goodwill amortization. While there is copious literature that debates and explores earnings management through the income effects of goodwill write-offs, it has not studied CFO perspectives about the flexibility of goodwill estimates.
RELIABILITY AND RELEVANCE OF FAIR VALUES: PRIVATE EQUITY INVESTMENTS AND INVESTEE FUNDAMENTALS
FERREIRA, PETRUS
KRÄUSSL, ROMAN; LANDSMAN, WAYNE; NYKYFOROVYCH, MARIA; POPE, PETER
Category: FR = Financial Reporting
This study develops direct tests of the reliability and relevance of fair values reported by listed private equity firms (LPEs), where the unit of account for fair value measurement attribute (FVM) is an investment stake in an individual investee company, FVMs are observable for multiple investment stakes, fair values are economically important, and granular data on the economic fundamentals that should underpin fair values are available in public disclosures. We find that LPE fund managers determine valuations based on accounting-based fundamentals that are in line with those investors derive for listed companies. Additionally, our findings suggest that LPE fund managers apply a lower valuation weight to the investee’s equity book value if direct market inputs are unobservable during investment value estimation. We interpret these findings as evidence that LPE fund managers do not appear to mechanically apply valuation weights the market uses for their publicly traded investees when determining valuations for their non-listed investees. We also document that the judgments that LPE fund managers apply when determining investee valuations appear to be perceived as reliable by their investors.
THE FINANCIAL REPORTING OF CULTURAL, HERITAGE AND SCIENTIFIC COLLECTIONS: EVALUATING THE VALUATION PRACTICE OF AUSTRALIAN MUSEUMS DURING THE PERIOD 1996-2015
FERRI, PAOLO
CARNEGIE, GARRY; SIDAWAY, SHANNON
Category: FR = Financial Reporting
The paper aims at understanding the reliability, comparability and relevance of information reported on the monetary value of cultural, heritage and scientific collections as assets in the general purpose financial statements of Australian Museums. It analyses the financial statements of 16 major Australian museums for each year during the period 1996-2015 focusing on: (a) institution total assets; (b) carrying value of the collection; (c) basis of carrying value per year; (d) depreciation policies. Findings show that the total monetary value of collections across all 16 institutions has increased by 20 times from 1996 to 2015, namely from $806 million to $16 billion. In 1996, collections represented 51.8% of the total assets of all museums. This percentage rose to 85% twenty years later. Overall, this trend reflects changes in the valuation practices rather than variations in the nature of the collections via additions or deaccession. It remains questionable to what extent the financial valuation of collections is useful for improving the accountability of those who manage not-for-profit public arts institutions having non-commercial goals.
DETERMINANTS OF CASH VAT REGIME: THE PERCEPTION OF PORTUGUESE ACCOUNTANTS
FIGUEIREDO, PAULO
LOPES, CIDÁLIA; VISEU, CLARA
Category: TX = Taxation
This paper analyses and identifies the main determinants of cash VAT regime, in particular through the perception of Portuguese Chartered Accountants. This tax regime was introduced in Portugal recently and its study is particularly important for two reasons. Firstly, the cash VAT regime is applied to Small and Medium-sized Enterprises (SMEs) and the Portuguese business structure, like in many other countries, is mainly built of SMEs. Moreover, since this new regime is designed to benefit these enterprises, particularly their cash flow levels, it is important to assess whether SMEs had used it or not. Secondly, this regime is an optional regime, whose decision incur to Chartered Accountants. Thus, we believe it is relevant to analyze their perception related to the regime adoption, in order to identify the main determinants of cash VAT tax regime.
CAREER CHOICE: THE DARK TRIAD REVEALS INTERESTS OF ACCOUNTING STUDENTS.
FIGUEREDO D'SOUZA, MÁRCIA
AUGUSTO SAMPAIO FRANCO DE LIMA, GERLANDO
Category: ED = Accounting Education
This study analyzes the influence of the personality traits of the Dark Triad on the career interests of accounting students. For this purpose we obtained responses from a sample of 1,404 accounting majors at Brazilian universities. The data were analyzed by calculating descriptive statistics and applying structural equation modeling (SEM). The results indicated greatest career preference for auditing, followed by private accounting. Besides this, the Dark Triad traits influenced, to a greater or lesser degree, all the career interests (remuneration, social prestige, hierarchical position, vocation, professional satisfaction, history of success among family members or friends and availability of jobs). However, the strongest influence was on career choices that reflect attitudes of individuals with Dark Triad traits, such as manipulation, superiority, exhibitionism, power and strategies. These results make a theoretical contribution by expanding knowledge of the roles played by personality and career interests in accounting education, presenting a theme often considered undesirable. In practical terms, it provides information to recruiters in the accounting area, audit firms and businesses. The results also call attention of educators to the need to address ethical dilemmas of the accounting profession and professional responsibility to society. Identification of students with undesirable personality traits can be used to guide them toward extracurricular activities that emphasize the need for ethical postures both in the academic and professional settings.
CORPORATE SOCIAL RESPONSIBILITY AND EARNINGS MANAGEMENT: THE ROLE OF INSTITUTIONS
FILIOU, ANASTASIA
BALLAS, APOSTOLOS
Category: GV = Accounting and Governance
This paper examines, theoretically and empirically, the impact of institutions on the associations between corporate social responsibility and earnings management. Using a sample of firms from 30 European countries spanning seven years, we construct a large data set with external and internal corporate governance, political, financial, and cultural factors. We find that the political control of corruption, followed by the financial and the cultural system are the most important categories of institutions that influence the relationship between corporate social responsibility and earnings management. Interestingly, the board of directors efficiency and the existence of board committees appear to have a relatively less significant impact.
EARNINGS MANAGEMENT: MEASUREMENT AND MISMEASUREMENT
FILIP, ANDREI
JEANJEAN, THOMAS; MARMOUSEZ, SOPHIE
Category: FR = Financial Reporting
Measuring earnings management is an empirical challenge for many academic papers in accounting. The objective of this study is to review and critically assess the quality of the most frequently used models for detecting earnings management. Earnings management models are based on a modelling of the accruals process. This paper is based on the simple assumption that an earning management model can be qualified of “good” if estimates are consistent with the underlying economic assumptions. We compare five earnings management models (three derived from the Jones (1991) and two from the Dechow and Dichev (2002) models) with three estimation methods (grouping by country, year and industry: by industry and year; by country, year and size) for short-term and total accruals. We test the models with all observations with sufficient data from Eikon Thomson Financial on the 2005-2014 periods. We find that models explaining total accruals outperform short-term accruals models. Our data also reveals that estimation of the various models by year and industry (ignoring the country of incorporation) is more likely to generate reliable estimates than any other estimation method. We also find that Dechow and Dichev (2002) models outperform Jones (1991) ones in explaining the accruals process.
ON CONTINUED MYOPIC USE OF THE ELASTICITY BASED PRICING RULE
FJELL, KENNETH
PAL, DEBASHIS
Category: MA = Management Accounting
We examine the effects of a continued myopic use of the inverse elasticity rule in pricing. By myopic, we mean ignoring that elasticity and marginal cost both may depend on price. It has been shown that myopic use will typically lead to price changes which are too large relative to the optimal price change (Fjell, 2003). We find that repeated myopic use will lead to price divergence unless demand is sufficiently convex. However, the divergence problem may be mitigated by adopting a simple heuristic of only changing price by half of the increment proposed by myopic use of the inverse elasticity rule.
WHEN DO MANAGERS HIGHLIGHT THEIR EFFECTIVE TAX RATE?
FLAGMEIER, VANESSA
MÜLLER, JENS; SURETH-SLOANE, CAREN
Category: TX = Taxation
We examine the disclosure of GAAP effective tax rate (ETR) information in firms’ financial statements. Applying the theoretical underpinnings of Wagenhofer (1990) to a tax setting, we argue that firms face a tradeoff in their GAAP ETR disclosure decision. On the one hand, firms have incentives to increase GAAP ETR disclosure if the ratio has a condition that is favorable from an investor’s perspective, expecting positive capital market reactions. On the other hand, the disclosure might draw tax auditors’ and public attention to the GAAP ETR and result in proprietary costs in terms of additional tax payments or reputational damages. We empirically test the disclosure behavior by examining the relation between disclosure intensity and five different measures of favorable GAAP ETR conditions. First, we provide evidence that the annual report section in which most of the firms disclose GAAP ETR information is the management report, indicating that firms assign considerable relevance to the ratio. Second, we find a higher disclosure intensity if the GAAP ETR has a favorable condition, i.e. is decreasing or near the average ratio of firms in the same industry or size group. We do not find a significant relation to the disclosure level for smooth GAAP ETRs. Our findings indicate that firms assess the benefits of providing the favorable GAAP ETR information to be higher than the related costs.
NON-GAAP EARNINGS DISCLOSURES ON THE FACE OF THE INCOME STATEMENT BY UK FIRMS: THE EFFECT ON MARKET LIQUIDITY
FLOROPOULOS, NIKOLAOS
CHARITOU, ANDREAS; KARAMANOU, IRENE; LOIZIDES, GEORGE
Category: FR = Financial Reporting
This study exploits a special feature of the UK information environment which allows UK firms to disclose non-GAAP earnings on the face of the income statement to examine two interrelated questions. First, we ask whether the decision to disclose non-GAAP earnings on the face of the income statement is related to the firm’s financial performance and corporate governance characteristics and second, we investigate the effect of this disclosure decision on market liquidity. Using a dataset of 1,241 hand-collected firm-year observations during the period 2006-2013, we show that better governed firms and firms with weaker financial performance are more likely to disclose non-GAAP earnings. Our evidence also suggests that this disclosure is associated with increased levels of market liquidity and the results hold after controlling for self-selection bias. We conclude that firms’ decision to disclose non-GAAP earnings on the face of the income statement is driven by the incentive to provide more information rather than to mislead the market.
SOCIO-ENVIRONMENTAL INFORMATION AND VISUALS WHEN USED BY MANGERS FOR IMPRESSING INVESTORS AND MANAGE THEIR DECISIONS: ARE THEY EFFECTIVE TOOLS?
FORNACIARI, LUCA
MEDIOLI, ALICE; PESCI, CATERINA; SOOBAROYEN, TEEROOVEN; TRIANI, SILVIA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
'Impression management' comes from the sociologist Erving Goffman (1959) who described each individual as an actor in a theatre whose scope is to 'impress' the viewers. In the literature often, the preparers of financial or social and environmental reporting (SER) are depicted as the actors who want to impress the readers. In the same vein accounting scholars have examined how visual images, like graphs, can be distorted in order to obtain information as much favourable as possible for the company. Previous studies found high level of graphs' distortion and linked this distortion with impression management techniques or with legitimacy intents. Nevertheless, there is a lack of studies devoted to analyse the real power of influencing the investors’ decision making process attributed to such types of voluntary disclosure instruments used by managers. This study aims to fill the existing gap on the readers' reaction to the use of impression management tools focusing on value relevance effects. More concretely this study seeks to detect if visual devices and SER have effects on investors' decisions and thereby on market value. This study presents preliminary results on a sample of Italian listed companies. The results open the door for a deeper reflection on the managerial intents and on the investors ability of detecting possible tools merely aimed at impressing them and influencing their decision making process.
OPINION SHOPPING THROUGH SAME-FIRM AUDIT OFFICE SWITCHES
FRANCIS, JERE
CHEN, FENG; HOU, YU
Category: AU = Auditing
We investigate the potential for a client to use a same-firm office switch as a mechanism for audit opinion shopping, relying on the framework developed by Lennox (2000). Opinion shopping in this context could either be informationally motivated (Dye 1991) or driven by managerial opportunism. Using U.S. data from 2000-2015, we find that client companies successfully avoid going concern audit opinions through audit office-switch decisions. The empirical finding is stronger when opinion shopping involves larger audit offices, industry specialist offices, and offices in the same metropolitan statistical areas. More importantly, we find that successful opinion-shopping companies tend to choose audit offices with low Type I errors, and they exhibit higher earnings quality than non-successful counterparts. Overall, the evidence suggests that same-firm audit office switching is not opportunistic, but is informationally motivated and improves audit quality.
SOCIOEMOTIONAL WEALTH AND DEVELOPMENT STAGES AS ANTECEDENTS TO THE ADOPTION OF MANAGEMENT CONTROL ARTIFACTS IN BRAZILIAN FAMILY BUSINESSES
FREZATTI, FABIO
BECK, FRANCIELE; BIDO, DIOGENES; CAPUANO DA CRUZ, ANA PAULA; MUCCI, DANIEL
Category: MA = Management Accounting
The aim of this study is to understand the association between the elements of Socioemotional Wealth (SEW), Greiner (1997) framework about the firm’s stages of development, and the adoption of management control artifacts. The relevance of the research is linked to the fact that the adoption of artifacts and their use in family businesses is preceded by socioemotional aspects and aspects of organizational evolution, which can stimulate, impede, or postpone the demand for them in relation to stages of development. This phenomenon is particularly relevant for family businesses, where the regulatory environment is weaker and pressure to formalize due to the presence of shareholders is less present. From the management control perspective, it is important to understand how the profile of the family business in terms of socioemotional elements affects the demand for management artifacts via the stages of evolution. The data were analyzed using the structural equation modeling technique in SmartPLS. Unlike in most of the studies developed, the sample was composed of organizations that do not have shares on the stock exchange, which improves the focus on family-controlled companies. The results partially prove the thesis involving the association between SEW and the stages of evolution (Greiner, 1997) of the organization, and also the association between these stages and the adoption of management artifacts. Consequently, the findings suggest that socioemotional wealth is positively associated, to a greater or lesser degree, with the stages of organizational development. In turn, the adoption of artifacts in organizations can be understood as a practice that passes through the phases of their evolution; that is, the stage experienced by the family business has a distinctive character in terms of the adoption of management artifacts.
BIG NEWS, MARKET REACTIONS, AND ATTENTION AROUND EARNINGS ANNOUNCEMENTS
FRIEDMAN, HENRY
ANDREI, DANIEL; OZEL, N. BUGRA
Category: FR = Financial Reporting
Big news events can influence market returns, liquidity, trading, and reactions to earnings announcements. Using the Pew Center’s News Coverage Index, we build daily indices capturing the importance of newsworthy events related to business and economics (BE), government, and other events. We find that absolute market returns, price impact, price protection, and trading volume are higher on days with bigger BE news. Market reactions to earnings announced on high BE news days tend to be larger and followed by less post-earnings announcement drift, even though there is less trading around these earnings announcements, consistent with differential attention effects on sophisticated and unsophisticated investors.
HOW PERFORMANCE EVALUATION CAUSES CHRONIC STRESS: FIELD EVIDENCE ON NEUROHORMONAL EFFECTS OF ACCOUNTABILITY DURATION
FRIMANSON, LARS
HARTMANN, FRANK; HORNBACH, JANINA
Category: MA = Management Accounting
Whereas extant accounting studies consider stress an outcome of performance evaluation, suggesting a direct positive association between evaluation frequency and stress, we expect an indirect negative association when focusing on chronic stress. Drawing on the neurobiological literature on chronic stress, we argue that such a negative association is explained by accountability duration, which is the time between evaluations during which one anticipates the threat of justifying periodic performance. We measure chronic stress with resting levels of the neurohormone thyrotropin, which is a classic marker of chronic biological stress and predictor of burnout. In a one-year field experiment, we found that participants assigned to a 12-week accountability duration cycle, compared to those remaining in a 6-week accountability duration cycle, had higher resting thyrotropin levels after 6 and 12 months. We conclude that accountability duration is positively associated to chronic stress, suggesting that performance evaluation has a beneficial role in mitigating chronic stress by disrupting the accountability duration. We find no effects of accountability duration on self-reported mental fatigue scores, attesting to the need of using neurobiological measures in research on accounting behavior.
FAMILY ENTRENCHMENT, BOARD INDEPENDENCE, AND CEO TURNOVER
FRISENNA, CLAUDIA
RIZZOTTI, DAVIDE
Category: GV = Accounting and Governance
In family firms, risks of minority’s wealth expropriation arise. Board of director should mitigate risks of expropriation for minority shareholders. However, family owners may weaken the effectiveness of board monitoring, by entrenching family members or not truly independent directors in the board. This study investigates the effect of board composition on the CEO turnover-performance sensitivity in family firms. Moving from agency theory, we hypothesize and find that the CEO turnover-performance sensitivity is lower as the level of family entrenchment increases, but it is higher in firms with independent boards.
DISAGGREGATED PERFORMANCE MEASURE FROM A COLLECTIVISTIC VIEW
FUJINO, MASAFUMI
LI, YAN; SAWABE, NORIO
Category: MA = Management Accounting
The aim of this paper is to explore what implications disaggregated performance measures have for interdependent relationship among managers who share collectivistic values. Drawing on the cross-cultural psychological literature, this paper adopts independent and interdependent construals of the self as a theoretical framework. Based on the framework, this paper explore how disaggregated performance measures implicate managers' roles and goals in the relationship. To address this question, this paper builds upon a qualitative case study in the Japanese manufacturing site of a Japanese company. We find that managers show empathetic attitudes to other managers. The other managers also have the feeling of indebtedness to the managers. These empathetic relation development can facilitate cross-functional cooperation. Our findings also show that managers recognize the progress toward other managers' goals as one of their own goals and then take on socially expected wider roles for the others. This role orientation involves a self-improving process in which senior managers offer role-driven capability development for young managers.
OPENING THE BLACK BOX OF THE RELATIONSHIP BETWEEN PERFORMANCE MEASUREMENT SYSTEMS AND ORGANIZATIONAL PERFORMANCE: AN EXPLORATORY STUDY OF MANAGEMENT ACCOUNTING CAPABILITIES
FUKUSHIMA, KAZUNORI
METOKI, TAKEHIRO
Category: MA = Management Accounting
This study explores the relationship between organizational (i.e., management accounting) capabilities and organizational performance in terms of effective contemporary performance measurement system (CPMS) use. Data collected from our mail-based questionnaires reveal that absorptive capacity and experiential learning capability in CPMS use, one of the organizational capabilities of management accounting, play important roles in organizational performance improvement. Our results also show that absorptive capacity and experiential learning capability have opposite effects that are conditioned by the specific situation.
TAINTED BY ASSOCIATION? NON-CULPABLE SIGNING PARTNERS AND REPUTATION LOSS FOLLOWING ENFORCEMENT ACTION AGAINST AUDIT CLIENTS
FUNG, SIMON
JIANG, LIKE; RAMAN, K. K.
Category: AU = Auditing
We examine whether signing audit partners in China experience reputational harm following regulatory sanctions against their clients even when regulators hold the signing partners (and the audit firm) to be non-culpable for the client’s misconduct. We find that non-culpable signing partners of sanctioned clients suffer reputation loss over a three-year period following the sanction announcement as measured by a decline in the likelihood of client gain, an increase in the likelihood of client loss, and a decline in audit fees earned from continuing clients. Further, we find the losses for non-culpable signing partners to be more severe for accounting-related vis-à-vis non-accounting-related misconduct by the client. Collectively, our findings indicate that non-culpable signing partners are subject to undeserved reputational harm for being associated with a tainted client, i.e., personal reputations are damaged for reasons unrelated to the signing partner’s audit responsibilities or performance. Our findings suggest a disquieting prospect for engagement partners in the US and are of potential interest to the PCAOB.
WOMEN ON THE BOARD OF DIRECTORS AND GENDER POLICIES IN CORPORATE SOCIAL RESPONSIBILITY REPORTING
FURLOTTI, KATIA
MAZZA, TATIANA; TIBILETTI, VERONICA; TRIANI, SILVIA
Category: GV = Accounting and Governance
Inspired by the promotion of gender balance in governing bodies of listed companies in Europe, this study seeks to understand if the presence of women on the board of directors with different levels of responsibilities is associated with the disclosure of gender policies in corporate social responsibility reports. We investigate the gender balance in governing bodies through the lens of two theories: social identity theory to learn about the women role in a group and gender self-schema to learn about the individual role of women. Using data of Italian companies listed on the Milan Stock Exchange from 2010 to 2015, we find that the percentage of women on the board of directors is positively associated with the implementation and disclosure of gender policies. Consistently with the social identity theory, we show that having more women as members of the same group influences the decision-making process. We also find that the presence of women in the role of Chairperson is positively associated with gender policies. Consistently with gender self-schema, women believe in their values, ethic and attention to conflict management when they are in the position of Chairperson, promoting gender policies. We contribute to social identity theory showing its application also in the group of boards of directors and with the minority of women. We contribute to self-schema showing that the gender self-schema has a significant impact in the position of Chairperson.
WHO BENEFITS FROM STRATEGY DISCLOSURE? EVIDENCE FROM ITALIAN MARKET MICROSTRUCTURE DATA
GABBIONETA, CLAUDIA
GASSEN, JOACHIM; MAZZOLA, PIETRO
Category: FR = Financial Reporting
This study extends and integrates research on complex disclosure, in general, and strategy disclosure, in particular, by looking at the distributional wealth effects of strategy disclosure, an inherently complex type of disclosure, between individual and institutional investors. Using proprietary market microstructure data of the Milan Stock Exchange and strategic plan presentations of Italian firms as disclosure events, we show that strategy disclosure triggers an abnormal trading activity around the disclosure date and that institutional investors trade in the direction of the price change around the disclosure date, whereas individual investors trade in the opposite direction. We also document that institutional investors’ trading around the disclosure date generate on average positive two-month abnormal returns of 5.9%, while individual investors’ trading generate negative two-month abnormal returns of 5.3%. Collectively, these results suggest that strategy disclosure “unlevels the playing field” between individual and institutional investors, causing a wealth distribution from individual to institutional investors around its release.
DOES INSTITUTIONAL OWNERSHIP EXACERBATE DEBT-EQUITY CONFLICTS?
GAD, MAHMOUD
KIM, KIRAK
Category: FR = Financial Reporting
We study how institutional ownership influences the lenders’ monitoring demand. Using the sample of syndicated loan contracts for U.S. firms from 1996–2012, we show that, when institutional ownership of a borrower is higher, the debt contract is more likely to include a covenant-monitoring mechanism called the auditor certificate of covenant compliance (CC). Consistent with the debt-equity conflict hypothesis, this result is driven by transient and index-tracking institutions. We establish the causal relationship using exogenous variations in institutional ownership created by annual reconstitutions of the Russell index memberships. Overall, our evidence suggests that the pressure for firms to cater to institutional investors causes the incentive to engage in creative accounting practice and consequently, a higher demand for the contracting mechanism that restores the workings of financial covenants.
INSTITUTIONAL INVESTORS' STEWARDSHIP AND VOTING POLICY. EVIDENCE FROM EUROPEAN LISTED COMPANIES.
GAIA, SILVIA
CUOMO, FRANCESCA
Category: GV = Accounting and Governance
The trend towards higher ownership by institutional investors led to increasing discussions about the role that they should play as owners of the equity of large European listed companies. Coherently, several national and transnational institutions around the world issued several codes and guidelines on institutional investors’ responsibilities in order to increase the institutional investor activism and their engagement with investee companies. Among them, the first stewardship code was issued in the UK in 2010 (revised 2012). This study investigates the effectiveness of the UK Stewardship code in encouraging an active role of the largest institutional investors, via shareholder dissent, in the corporate governance of European listed companies. Our findings show a greater shareholder dissent in those institutional settings characterized by a greater risk of expropriation. Moreover, we find that the adopters of the UK stewardship code tend to express a greater dissent compared to non-adopter and, in particular, in companies listed in civil law countries, where investors suffer the most the risk of wealth expropriation. These findings support the view that institutional investors adopt the UK stewardship code because of the gains in efficiency that followed its adoption, rather than for legitimacy reasons. First, our study contributes to a better understanding of shareholder dissent in Europe. It also shed some lights on the effectiveness of the use of the UK Stewardship Code.
ASSESSING CORPORATE ENVIRONMENTAL ISSUES IN INTERNATIONAL COMPANIES: A STUDY OF EXPLANATORY FACTORS
GALLEGO ALVAREZ, ISABEL
MARTÍN, EUGENIO; PUCHETA-MARTÍNEZ, MARÍA CONSUELO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Environmental issues have become increasingly important for companies and society in general, and information about them is of concern, to the extent that many companies have been criticized for their negative impact on the environment, rather than for their technological and economic performance. This paper attempts to go a step further by developing an index of environmental issues from the Thomson Reuters Eikon database using statistical techniques to analyze the type of environmental information that companies report internationally. An index of 71 environmental variables was constructed and a dependency model was set up to be able to determine the explanatory variables that may influence this index of environmental disclosure, innovation, economic development and geographical areas being some of the variables used and which have been less tested in previous studies.
TAX ENFORCEMENT EXTERNALITIES AND THE BANKING SECTOR
GALLEMORE, JOHN
JACOB, MARTIN
Category: TX = Taxation
Governments have increasingly pushed for greater tax enforcement as a means to improve revenues and reduce the tax gap. We examine whether tax enforcement efforts have unintended externalities on the banking sector. Using the district structure employed by the IRS between 1992 and 2000, we find that corporate tax audit probabilities are positively associated with bank performance. We find similar evidence when exploiting the IRS reorganization in 2000 as an exogenous change to tax enforcement. Going beyond overall performance measures, we find that greater audit probabilities are associated with lower non-performing loans and more informative loan loss provisions. Further tests suggest that that these findings are primarily driven by its effect on existing and potential borrowers, consistent with prior research that documents that greater tax enforcement leads to improved corporate performance and information environments. Overall, our findings show that the tax authority’s mandate has important externalities on the banking sector via improved bank lending decisions, and suggest that the benefits to tax enforcement go beyond simply improving tax collections.
EQUITY MARKET USE OF LOAN MARKET INFORMATION: EVIDENCE FROM LOAN CONTRACT DISCLOSURES
GALLIMBERTI, CARLO MARIA
LEE, LIAN FEN ; LO, ALVIS
Category: FR = Financial Reporting
We study loan contract disclosures as a setting where equity market participants (e.g., analysts) can learn the information produced in the private loan market. Our findings reveal that analysts use the information in covenants with an earnings-related component to guide their earnings forecasts, which helps them improve forecast accuracy. We also study firm-level stock market outcomes. Results show that borrowers’ stock liquidity improves following disclosures of loan contracts and this effect is stronger when the disclosures are more informative. These results indicate that equity market participants learn useful information about borrowers’ future performance from loan contracts. More generally, our results have implications for understanding how information produced in the loan market affects the information available to equity market participants and potentially the well-functioning of the market.
UNDERSTANDING THE DETERMINANTS OF THE MAGNITUDE AND TYPE OF KEY AUDIT MATTERS: THE CASE OF THE UNITED KINGDOM
GAMBETTA, NICOLÁS
GARCIA-BENAU, MARIA ANTONIA; ORTA-PEREZ, MANUEL; SIERRA GARCIA, LAURA
Category: AU = Auditing
This study analyzes the impact of auditors’ and clients’ characteristics on the number and type of key audit matters disclosed in the audit report. A recently introduced audit-reporting standard requires auditors to reveal the client’s main risks identified and how they address them during the audit. The results show that Deloitte, EY and KPMG tend to report a lower number of entity-level risks. However, KMPG is the only significant one related to accounting-level risks. Companies paying higher fees tend to have more entity-level key audit matters and less account-level key audit matters. Bigger and more profitable companies are significant with the number of entity-level risk. Industry is also related to the number of account-level risk KAM included in the audit report. This study is timely because it introduces new data about the analysis of the type of key audit matters disclosure by auditors and their consequences.
SOCIALLY RESPONSIBLE CULTURE AND DEBTHOLDERS' DEMAND FOR ACCOUNTING CONSERVATISM
GAO, XINGHUA
JIA, YONGHONG ; LEE, SAM
Category: FR = Financial Reporting
We hypothesize that socially responsible culture improves the risk profile of borrowing firms and makes debtholders less concerned about the security of their claims and thus demand less accounting conservatism. Consistent with our hypothesis, we find a negative relation between socially responsible culture and conservatism and several analyses indicate that less debtholder demand contributes to this negative relation. First, the negative relation is more pronounced when shareholder-debtholder conflicts are more severe. Second, more direct evidence in relation to debt contracting indicates that debtholders employ fewer covenants on loans to firms with socially responsible orientation, and that these firms are less likely to violate covenants. Third, lead-lag tests of the direction of causality suggest that the negative relation does not result from corporate greenwash (reverse causality). We also document differential effects of cultural values and norms and demonstrate that cultural values need to be coupled with norms to influence debtholders' decisions.
ACCOUNTING FOR GOODWILL IN FRANCE: A CASE STUDY OF INSTITUTIONAL CROSS-COMPLEMENTARITY
GARCIA, CLEMENCE
Category: HI = History
Starting from the observation that accounting for goodwill changes more rapidly in some countries than in others, the purpose of this research is to highlight the institutional groundings of the resilience to, or tendency for regulatory changes. In this regard, historical paths of the U.S. and France are opposite despite both countries currently prescribe permanent retention of goodwill. In this research, I argue that the French accounting concept of goodwill has remained relatively stable in time due to the strong relationship between accounting standards and legal institutions. In the frame of institutional complementarity (Aoki, 2001), I analyze why the original concepts derived from the Commercial Law remain a major factor that hinders changes regarding goodwill accounting. Far from seeking to explain some kind of “exception francaise”, this paper shows some institutional features that can be found in many code law countries including Germany and Japan; therefore, it may contribute to further debates in accounting standard-setting regarding goodwill.
MISSING NARRATIVES: AN ANALYSIS OF BIASES IN SAMPLE SELECTION AND VARIABLE CHOICE IN TEXTUAL ANALYSES
GARCÍA OSMA, BEATRIZ
BAFUNDI, ANDREA; GUILLAMON-SOARIN, ENCARNA
Category: FR = Financial Reporting
We study plausible biases in textual analysis studies of 10-K documents. The study of financial narratives using automated procedures is a relatively novel development in accounting and finance. Therefore, standardized methods to collect and systematically analyse these data are yet to be developed. We provide detailed step-by-step guidance on how to download and prepare these files for analyses, and study the biases introduced by a number of decisions regarding sample construction, data preparation, and variable choice. In particular, we focus on two widely studied properties of financial narratives: their tone and readability. We document that a number of these choices introduce significant biases into the samples studied, as well as induce differences in average observed tone and readability. Our results also indicate that a non-trivial proportion of the EDGAR population is missing from the textual analyses being conducted.
THE RELATIONSHIP BETWEEN THE FINANCIAL CRISIS AND CSR REPORTING: AN ANALYSIS OF SPANISH LISTED FIRMS
GARCÍA TOREA, NICOLÁS
VAZ OGANDO, NATALIA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper analyses the influence of the 2008 financial crisis on the level of CSR reporting, by considering the degree of the impact at which each firm was particularly affected by the crisis. Firms should assess the costs and benefits of disclosing CSR information when deciding whether or not to publish a CSR report. The financial crisis might have affected the relevance of both factors in this analysis. On the one hand, firms may not be willing to assume the costs of producing a CSR report due to the scarcity of resources during the crisis. On the other hand, CSR reporting might be beneficial in times of economic turmoil because it enhances the reputation and legitimation of the firm. Using a sample of Spanish listed companies in two post-crisis years (2009 and 2011), our results support the second assumption. The companies that felt more intensely the adverse effects of the crisis provided CSR reporting of higher level than the other firms. Particularly, we found that this relationship was significant in 2009, when the crisis was at its peak. This paper allows us to get more insight into how the financial crisis influenced CSR reporting. Additionally, it reinforces the idea that, despite its costs, CSR reporting may be considered an adding-value practice that companies should embrace.
IS ONE-DOLLAR SALARY OF CEOS A SIGNAL OF BENEVOLENCE? AN ANALYSIS BY ASSESSING ACCRUAL-BASED EARNINGS MANAGEMENT AND CORPORATE TAX AVOIDANCE ACTIVITIES
GARG, MUKESH
NG, ANTHONY; SUPARDI, SUPARDI
Category: FR = Financial Reporting
This study investigates whether adoption of one-dollar salary for the CEOs is a credible signal of benevolent act in the interest of the firms’ shareholders, analysed by assessing accrual-based earnings management (EM) and corporate tax avoidance (CTA) activities. We find that one-dollar salary CEO firms are more likely to have higher income-increasing EM and engage relatively more in CTA activities relative to other firms. Since all one-dollar salary CEOs have equity ownerships or stock options in their firms, acceptance of one-dollar salary could be interpreted as exchanging of their smaller amount of current compensation in the form of salary for a larger amount of long-run future equity compensation through the usage of EM and CTA activities. Therefore, adoption of one-dollar salary may not be a true signal of benevolent act. Additionally, we investigate the moderating effects of managerial ability on one-dollar salary CEO firms’ EM and CTA, and find that the positive effect of one-dollar salary CEO on the levels of EM and CTA is weaker in firms with more able managers. We also find that one-dollar salary CEO firms with more analysts coverage engage in less EM and CTA activities, highlighting the importance of good external monitoring in curtailing such behaviour.
PARADOXICAL IDENTITY WORK IN BIG AUDIT FIRMS
GARNIER, CLAIRE
BEAU, PAULINE; JERMAN, LAMBERT
Category: AU = Auditing
In this article, we conceptualize auditors’ identity work in the Big audit firms. While the literature shows that auditors’ identity consists of a form of standardized social identity, the hierarchy of the Big firms also requires individuals to stand out from one another. Auditors’ identity work rests on a still little explored paradox where auditors must be like the others and stand out simultaneously. Through a qualitative study we conceptualize auditors as individuals who endeavour to divide their subjectivity into a set of preferences and qualities in order to stand out through their uniqueness and usefulness. We highlight three sets of practices and discourses through which auditors become unique and useful: they redefine their professionalism with regard to their personal qualities, turn the latter into human capital capable of making them move up the ranks, and fully commit to competing against others and against themselves. By drawing on this notion, we suggest that identity work can be seen today as a post-disciplinary form of power.
MANAGERIAL STYLE IN COST ASYMMETRY AND SHAREHOLDER VALUE
GASTONE, LAURA-MARIA
KASPEREIT, THOMAS; LOPATTA, KERSTIN
Category: MA = Management Accounting
This paper investigates how cost asymmetry resulting from decisions of individual CEOs may be associated with shareholder value. We focus on the asymmetric behavior of costs because although it has captured the attention of researchers in the past years , little to no attention was given to what the economic consequences of asymmetric cost behavior might be or how the decisions of individual CEOs may directly impact the level of asymmetry in selling, general and administrative (SG&A) costs. This study attempts to close these literature gaps by first identifying the contribution of CEOs to the level of SG&A cost asymmetry at the firm level using CEO-fixed effects as proxies, and then analyzing whether and how the CEO-related excess SG&A cost asymmetry is associated with shareholder value. The results confirm the existence of significant CEO influence on the level of SG&A cost asymmetry at the firm level and provide strong evidence that the identified CEO-related SG&A cost asymmetry is associated with lower shareholder value. In addition, our empirical analysis provides the first comprehensive evidence of cost asymmetry also consisting of a part which is harmful to the firm and its shareholders, namely the CEO-related excess SG&A cost asymmetry.
VALUATION ​ ​ SHOCKS ​ ​ AND ​ ​ NON-FINANCIAL ​ ​ REPORTING: ​ ​ EVIDENCE ​ ​ FROM ​ ​ VOLUNTARY CSR ​ ​ RELEASES
GE, JINGWEN
BENLEMLIH, MOHAMMED; GE, JINGWEN; ZHAO, SUJIAO
Category: FA = Financial Analysis
We examine the relationship between firm’s valuation shocks and the disclosure of nonfinancial information using web-scrapped CSR news for publicly traded non-financial US firms between 2000 and 2015. We measure valuation shock by the value-to-price ratio based on the residual income model. To correct for potential endogeneity, we use institutional price pressure, more precisely mutual fund outflow, to instrument for firm’s valuation shock. Our results suggest that firms facing negative valuation shocks are more likely to release CSR information compared with their peer firms who operate in the same industry and have similar characteristics. This relationship is robust to alternative measures of valuation shocks, various benchmarking approach, and different estimation models. Furthermore, we provide evidence that information asymmetry (i.e., low CSR engagement, low stock price informativeness, and low analyst forecast coverage) is likely the underlying channel through which undervalued firms increase their nonfinancial information disclosure. Our findings have important implications for academics and practitioners in understanding firm’s incentive to release CSR information.
INDIVIDUAL RESPONSES TO COMPETING ACCOUNTABILITY PRESSURES IN HYBRID ORGANISATIONS: THE CASE OF AN ENGLISH BUSINESS SCHOOL
GEBREITER, FLORIAN
GEBREITER, FLORIAN; HIDAYAH, NURUL
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper examines the competing accountability pressures individual frontline employees can face in hybrid public sector organisations, and how they respond to them. Drawing on a case study of an English business school, it shows that the co-existence of professional and commercial logics exerted competing accountability pressures on lecturers. It moreover shows that, sometimes deliberately and purposefully, sometimes ad-hoc or even coincidentally, lecturers drew on a wide range of responses to these conflicting pressures, including compliance, defiance, combination and compartmentalisation. The paper sheds light on individual level responses to competing institutional logics and associated accountability pressures. It also highlights the drawbacks of user, customer or citizen accountability mechanisms, showing that a strong emphasis on them in knowledge-intensive public organisations can have severe dysfunctional effects.
PORTFOLIO CONCENTRATION AND TRADING ON INDUSTRY-SPECIFIC INFORMATION: AN ANALYSIS OF CUSTOMER COMPLAINTS IN THE AUTO INDUSTRY
GEIGER, MARSHALL
KESKEK, SAMI; KUMAS, ABDULLAH
Category: FA = Financial Analysis
Prior research generally attributes portfolio concentration to an information advantage that arises from private information acquisition. We investigate whether sophisticated investors’ concentration in the auto industry is associated with their use of industry-specific information in customer complaint data from the National Highway Traffic Safety Administration (NHTSA). We find that the extent to which mutual funds incorporate the complaint information into their trading decisions is positively associated with their industry concentration. While our findings are consistent with the information advantage explanation, we provide direct evidence that information advantage can also arise from superior information processing rather than access to private information. Furthermore, unlike mutual funds, we find that pension funds, regardless of their level of industry concentration, do not use the customer complaint information to inform their trading decisions. Our findings suggest that pension funds appear to hold concentrated portfolios for reasons other than the information advantage explanation for portfolio concentration.
ECONOMIC AND FINANCIAL VIABILITY OF A PARTICULAR CASE OF SOCIAL FIRMS: SHELTERED EMPLOYMENT CENTERS
GELASHVILI, VERA
CAMACHO-MIÑANO, MARÍA-DEL-MAR; SEGOVIA-VARGAS, MARÍA-JESÚS
Category: FA = Financial Analysis
The aim of this paper is twofold: firstly, we want to know the economic and financial situation of all the Sheltered Employment Centres (CEEs) in Spain, showing which variables explain their viability, and, secondly, we want to test the impact of the economic crisis on their profitability. Using the available data of all the Spanish Sheltered Employment Centres for the period 2004-2016, a descriptive analysis and a linear regression have been carried out. Additionally, the obtained results are compared with non-parametric methods (artificial intelligence) in order to check them. This study helps to shed light on the future viability of this kind of firms as well as its social visibility.
FROM EMOTIONALITY TO THE CULTIVATION OF EMPLOYABILITY: AN ETHNOGRAPHY OF CHANGE IN SOCIAL WORK EXPERTISE FOLLOWING THE SPREAD OF QUANTIFICATION IN A SOCIAL ENTERPRISE
GENDRON, YVES
AMSLEM, THIERRY
Category: IC = Interdisciplinary/Critical
This paper examines the processes by which a group of social workers in a social enterprise came to adhere to the claimed benefits of quantitative templates in framing the social problems of individuals and ways of addressing them. We also reflect on consequences ensuing from this important shift in social work expertise. We build our insights from an ethnographic study conducted in a social enterprise, where the management had recently been taken over by social entrepreneurs. The latter were concerned in rendering their organization’s social workers more focused on strengthening the employability of beneficiaries, particularly through the compulsory use of quantified grids of evaluation. Our analysis brings to light the strategic initiatives and main conditions of possibility that collectively played a role in strengthening social worker receptivity towards quantification and in modifying the nature of their expertise. Specifically, we found that the core of social work expertise was altered in three main ways: strengthening of emotional boundaries between expert and beneficiary; downplaying the victimhood (of beneficiaries) as a key referent; and development of a breach in the claim of exclusivity in the relationship between social worker and beneficiary. This shift in expertise has deep consequences on the kind of person social work aims to produce; the emphasis is now on the development of individuals capable of being employed in the labor market.
MANAGEMENT CONTROL PRACTICES, CONTEXTUAL FACTORS AND PERFORMANCE IN SMALL AND MEDIUM-SIZED ENTERPRISES
GEORGIEV, NIKOLAY
ANDERSEN, EMIL P.; FELDHUES, MELANIE LUCIA
Category: MA = Management Accounting
This study takes the work of Bedford & Malmi (2015) regarding configurations of control as starting point. We explore measurement-related and structure-related management control (MC) practices and contextual factors in small and medium-sized enterprises (SMEs). We derive three hypotheses regarding the interdependence of MC practices and four hypotheses regarding the interaction between MC practices and contextual factors and their association with performance. We test our hypotheses based on matched archival and survey data for 406 companies from Denmark, Finland and Norway. We find support for three hypotheses. This study contributes to complementarity theory and extends prior research regarding MC practices, contextual factors and performance for SMEs. Findings further imply country and industry differences.
NON-FINANCIAL DISCLOSURE, ASSURANCE, AND FINANCIAL REPORTING QUALITY: EVIDENCE FROM THE EUROPEAN BANKING SECTOR
GEORGIOU, NADINE
MANIORA, JANINE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper examines the impact of banks’ non-financial disclosure and its quality of assurance on financial reporting quality. We use corporate social responsibility (CSR) disclosure to proxy for non-financial information and earnings quality measured by discretionary loan loss provisions (DLLPs) to proxy for financial reporting quality. Using a hand-collected dataset of European banks’ CSR disclosure and assurance practices, our empirical analyses show that banks’ CSR disclosure is negatively related with DLLPs, indicating that CSR disclosure mitigates bank managers’ incentive to manage earnings. Moreover, we find that the level and scope of assurance on CSR disclosure significantly influences financial reporting quality. We posit these findings to the bank managers’ moral imperative participated by the information collection, processing and presentation of CSR disclosure. As such, low-quality assurance can indicate less socially responsible bank managers that engage only in CSR disclosure assurance for enhancing the bank’s reputation. In this case, CSR disclosure assurance is not likely to constrain earnings management using DLLPs. Overall, our results suggest that the quantity and quality of CSR disclosure impacts the financial reporting quality of banks.
CORPORATE ENVIRONMENTAL DISCLOSURE IN THE ARAB MENA REGION: AN INSTITUTIONAL PERSPECTIVE
GERGED, ALI
BEDDEWELA, ESHANI; COWTON, CHRISTOPHER
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study investigates the level of disclosure of environmental information, and influences upon this, for 180 firms listed on the stock exchanges of nine Arab MENA countries. The sample of this multi-country study denotes two defined groups of sectors for a five-year period from 2010 to 2014. Our findings indicate increased trends of, but substantial variability in, CED practices amongst MENA firms. Although firm-specific characteristics are positively and significantly related to CED, the influence of country-level governance is heterogeneous in that they may have enhanced or reduced CED levels in annual reports across the nine MENA countries. Additionally, CED reflects the different region-specific pressures (i.e., business cultures and business environment). By using institutional theory, the study argues that country-level institutional factors, representative of the social context of a company’s operational environment may either encourage or discourage the adoption of CED in the countries across the MENA region. Given the paucity of research into CED within the region, our study’s findings reiterate the crucial need for a more concerted effort to integrate economic, environmental and political policies to ensure sustainability within the area.
INDUSTRY DIFFERENCES OF ENVIRONMENTAL PERCEPTIONS AND THE IMPORTANCE OF PERFORMANCE MEASURES
GERHARDT, NADINE
STRAUSS, ERIK; WEBER, JUERGEN
Category: MA = Management Accounting
Industry is a topic in the management accounting literature that is widely acknowledged, but hardly discussed in depth. Studies with statistical analyses include a dummy variable for industry effects or use industry classification to describe the sample. We extend this approach by introducing an approach to consider industry effects in statistical analyses based on established measures of perceptions of organizations’ environment. To do so, we find in ANOVAS that perceptions are not completely idiosyncratic to particular organizations and are homogeneous within industries. Building on these results, we used hierarchical regression analysis to test how the industry-specific perceptions are associated with the importance of financial and non-financial measures. Hierarchical regression analysis accounts for the nested structure of data, i.e. organizations’ affiliation to an industry. The results indicate that the importance of financial measures differs across industries. With this study, we contribute to management accounting literature by introducing a measurement instrument to account for industry in statistical analyses.
DOES CO-OPTION AFFECT MERGER AND ACQUISITION OUTCOMES FOR BIDDING FIRMS?
GHANNAM, SAMIR
BUGEJA, MARTIN; GHANNAM, SAMIR; JEGANATHAN, DAVINA
Category: GV = Accounting and Governance
This study investigates whether board co-option is associated with merger and acquisition (M&A) outcomes for bidding firms. Using a sample of 1,381 M&As initiated by U.S. public firms, it is documented that co-opted boards are more likely to engage in acquisitions. Board co-option is also associated with higher takeover premiums, a lower market reaction around the M&A announcement and a higher likelihood of M&A completion. The evidence presented is robust to a variety of variable definition and sample specifications.
EARNINGS MANAGEMENT AND LABOUR DISMISSALS: A BALANCE BETWEEN POLITICAL COSTS AND ETHICS
GHIO, ALESSANDRO
ANDREICOVICI, IONELA IRINA; COHEN, NAVA; FERRAMOSCA, SILVIA
Category: FR = Financial Reporting
We investigate earnings management around large labour dismissals. We look at firms listed in 18 European stock exchanges in the period 1997-2015. We first find that firms manage downwards their earnings in the year before dismissals. We document that firms have stronger incentives to manage their earnings around dismissals in the presence of with high political costs, i.e., strong labour unions, and low labour flexibility. We then use labour reforms as an exogenous shock to the political costs. Using a difference-in-difference design, we document that earnings management before large labour dismissals co-move with the direction of labour protections. Finally, we document that firms’ commitment to ethics plays a moderator role in the relationship between earnings management and large labour dismissals. Firms less committed to ethics are more likely to manage their earnings before large labour dismissals. These results support the conjecture that firms alter their financial performance to justify their decisions in the search to mitigate political costs associated to labour-related decisions. In addition, stronger firms’ commitment to ethics leads to less opportunistic financial reporting, even around stressful business decisions, i.e., large labour dismissals. This study extends the literature relating earnings management to political costs and to ethical decisions.
AN ASSESSMENT OF MANAGEMENT ACCOUNTANTS’ UNDERSTANDING OF PROFESSIONAL ETHICS
GHOSH, ARPITA
BHUYAN, NISIGANDHA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Professional code of ethics for accountants can play a critical role in helping the accounting profession meet its public interest challenge and strengthen public trust on its credibility. However, there is hardly any research attempting to assess professional accountants’ understanding of their professional code of ethics. Moreover, the literature ignores professional management accountants working in business, particularly in emerging economies. This paper seeks to fill these gaps by conducting a survey research in Indian context. The overall holistic score of the respondents turned out to be a dismal 56% on an average. Further analysis of the scores reflected that the professionals were better in ‘case-based application’ and ‘ability to resolve dilemma’ than ‘theoretical understanding’. They understood ‘threats to compliance’ better than the ‘fundamental principles’. The results of multivariate and probit regressions reveal that some of the factors in the professionals’ individual characteristics, job attributes and organizational features, could explain the differences in their scores. These findings can provide useful insights to the accounting profession, the standard setting bodies, and the accounting educators, which can guide them devise the right kind of intervention. This can be expected to make the professionals more effective in their ethical behavior and therefore, would be deemed valuable by those engaged in encouragement of ethical behavior in society.
STRATEGIC CHOICE OF SUBSIDIARY MANAGERS AND TAX AVOIDANCE
GIESE, HENNING
GAMM, MARKUS; KOCH, REINALD
Category: TX = Taxation
This paper investigates to what extent multinational enterprises (MNEs) strategically choose subsidiary managers in order to alleviate application of tax planning strategies. Using a cross-section data set taken from the AMADEUS database, we show that headoffice managers have a significantly higher probability for taking co-positions in foreign high-tax subsidiaries. We find that subsidiaries with very high or very low tax rates also have more frequently managers in charge with co-positions in other subsidiaries. We argue that these subsidiaries are particularly relevant for the application of tax planning strategies and that engaging headoffice managers or managers with co-positions in other group companies may avoid a conflict of interest between the MNE’s and the manager’s priorities. Applying a second research design, we can also show that groups employing these management structures show significantly lower effective tax rates.
SUBJECTIVE EVALUATIONS OF RISK TAKING DECISIONS: EXPERIMENTAL EVIDENCE ON OUTCOME BIASES AND THEIR CONSEQUENCES
GILLENKIRCH, ROBERT
VELTHUIS, LOUIS J.
Category: MA = Management Accounting
This study experimentally investigates how a principal uses outcome information in her subjective evaluation of an agent who chooses between alternatives of differing risks, and how outcome bias in the evaluation is related to the agent’s risk taking decision. We consider both a situation of information symmetry, where the principal can observe the agent’s decision, and a situation of information asymmetry, where the agent’s decision is hidden. Within both situations, we compare a condition where the principal receives peer comparison information with a condition where such information is unavailable. We hypothesize and find that principals’ evaluations are subject to an outcome bias, and that the bias is stronger when peer comparison is present. We further hypothesize and find that with peer comparison being present, agents’ decisions become increasingly misaligned with principals’ preferences. Our findings contribute to understanding outcome biases in subjective evaluations of risk taking decisions, and how these biases may contribute to explaining excessive risk taking by agents.
MANAGERS’ USE OF ORDER BACKLOG TO AVOID REPORTING REVENUE DECLINES
GILLIAM, THOMAS
HEFLIN, FRANK; PATERSON, JEFF
Category: FR = Financial Reporting
We investigate whether firms use order backlog to avoid reporting revenue declines and instead report revenue increases. We find that, in almost 30 percent of firm-years where the firm would have otherwise reported a revenue decline, a reduction in order backlog resulted in reporting a revenue increase. After controlling for non-opportunistic factors influencing order backlog, we find order backlog is abnormally low for firms reporting small revenue increases. Results are robust to alternative models of normal order backlog, propensity score matched samples, and counterfactual analyses. We find similar results using analysts’ revenue forecasts as the benchmark. While prior research suggests managers manage revenue, it provides little evidence about how managers manage revenues, especially without violating GAAP. Our study suggests that, by the strategic use of order backlog, managers relatively frequently manage reported revenues.
THE IMPACT OF IFRS 16 IN THE EU: AN ESTIMATE WITH MONTE CARLO SIMULATIONS
GINER, BEGOÑA
MERELLO, PALOMA; PARDO, FRANCISCA
Category: FR = Financial Reporting
IFRS 16 has been recently adopted by the European Commission, hence in 2019 European firms will have to follow the new standard to record lease transactions. The accounting literature has provided as-if studies where operating lease contracts have been included in the balance sheet in order to estimate the impact of the change. Despite its potential usefulness, simulation methods are not common in accounting research (Labro, 2015), and this is the methodological approach we follow in this research. More precisely, we simulate the impact of IFRS 16 using the Monte Carlo method, which allows considering complex but reasonably assumptions and generate predictions. Thus, by incorporating uncertainty about the future values of some variables, this methodology allows to deal with research questions when there is no data available, as it happens with the question in-hand: which will be the impact of IFRS 16? Based on the Stoxx All Europe 100, we provide new as-if results that allow to estimate the financial position and performance of the European firms affected by the change in a five-year horizon after implementing IFRS 16. In consistency with prior as-if studies, ours confirms that in 2019 leverage, debt quality and liquidity will decrease; as for profitability ratios return on assets will decrease while return on equity will increase, but figures do not change so much after that date. Our results are consistent to several likely scenarios about the future.
ON THE ECONOMICS OF AUDIT PARTNER TENURE AND ROTATION: EVIDENCE FROM PCAOB DATA
GIPPER, BRANDON
HAIL, LUZI; LEUZ, CHRISTIAN
Category: AU = Auditing
This paper provides the first partner tenure and rotation analysis for a large cross-section of U.S. publicly listed firms over an extended period. We analyze the effects on audit quality as well as economic tradeoffs related to partner tenure and rotation with respect to audit hours and fees. On average, we find no evidence for audit quality declines over the tenure cycle and little support for fresh-look benefits after rotations. Nevertheless, partner rotations have significant economic consequences. We find increases in audit fees and decreases in audit hours over the tenure cycle, which differ by partner experience, client size, and competitiveness of the local audit market. More generally, our findings are consistent with efforts by the audit firms to minimize disruptions and audit failures around mandatory rotations. We also analyze special circumstances, such as audit firm switches and early partner rotations, and show that they are more disruptive than mandatory rotations, and also more likely to exhibit audit quality effects.
CONCEPTUAL SHIFTS IN ACCOUNTING: TRANSPLANTING THE NOTION OF BOUNDARY FROM FINANCIAL TO NON-FINANCIAL REPORTING
GIRELLA, LAURA
ABELA, MARIO
Category: IC = Interdisciplinary/Critical
In his seminal paper titled “The margins of accounting”, Miller observed that “by looking at the margins of accounting, we can understand how this influential body of expertise is formed and transformed” (Miller, 1998:618). Drawing on this analogy, the boundaries of reporting and the ways these are defined and re-defined, as a consequence of the relationships organisations form with other entities from time to time, and their substantive nature provide insights about the business and its business model. Accordingly, an examination of reporting boundaries helps to better understand and appreciate the objective of an organisation, the logic that underlies its business model and how that is ‘reflected’ and communicated through the reporting entity’s financial statements – which may or may not align with the boundaries of the ‘organisation’. Despite the relevance of reporting boundaries as a critical aspect of the accounting discipline, it remains a relatively unexplored area in the literature. Accordingly, the aim of this work is to offer an initial overview on how the boundaries of reporting have (not) changed in response to the broadening scope of reporting to address both financial and ‘non-financial’ information (e.g. sustainability, governance and intangibles) and attempts to promote greater integration between both sets of information (IIRC, 2013).
DARK TRADING VOLUME AT EARNINGS ANNOUNCEMENTS
GKOUGKOUSI, XANTHI
LANDSMAN, WAYNE
Category: FA = Financial Analysis
We examine how dark market share changes at earnings announcements and find a statistically significant increase in dark market share during the week of and the week following the earnings announcement. The increase in dark market share is larger for firms with a relatively high quality of information environment, consistent with informed (uninformed) traders facing lower execution (adverse selection) risk in dark venues for high quality firms. The increase in dark market share is also higher for firms without Credit Default Swaps (CDSs), consistent with some informed traders trading in the CDS market instead of dark venues around earnings releases.
PREDICTING ACCOUNTING FRAUD USING FINANCIAL AND TEXTUAL DATA
GLEICHMANN, TOBIAS
GRÜNING, MICHAEL
Category: FA = Financial Analysis
An automated identification of fraudulent financial statements based on publically available data allows allocating audit resources more effectively and improve market efficiency considerably. This paper examines how quantitative data and corporate narratives (MD&A) can be used to identify accounting fraud. Accounting fraud is determined based on SEC’s AAERs. Narratives are analysed using multi-word phrases, including an extensive language standardization that allows reflecting linguistic peculiarities more precisely and partly address context. We use conventional Naïve Bayes and k-nearest neighbour classifiers, support vector machines and artificial neural networks. The last two outperform the less sophisticated approaches in classification validity. Altogether, the (partly optimized) models can classify up to 79 % of the fraudulent cases correctly (AUC approaching 0.8). We compare realistic holdout samples where probabilities for accounting fraud are determined for financial statements of subsequent years, and matched samples, both. Asymmetric costs of misclassification improve detection rates. Our results suggest that textual features are superior predictors compared to financial ratios. We found text based classifiers to vary over time considerably and it is vital for fraud detection systems to update predictors frequently. Altogether, automated fraud detection systems may help regulators and policy makers to allocate resources on in-depth audits of high-risk statements.
MANAGERIAL POWER AND CEO PAY
GOEX, ROBERT
HEMMER, THOMAS
Category: GV = Accounting and Governance
We study the consequences of the CEO's power over the board of directors in the context of a standard agency model. First, we find that the optimal compensation level is not an increasing function of the CEO's power. A friendly board generally raises CEO pay for low performance levels but reduces it for high performance levels. Second, the pay-performance sensitivity (PPS) is not constant but an increasing function of the firm's performance. Third, we identify conditions for which the optimal contract proposed by a friendly board exhibits a higher PPS than the contract that maximizes the utility of shareholders. For the special case of a quadratic contract, we find that a more friendly board always proposes a contract with a higher salary, more stocks and the same number of options. We also examine how a friendly board affects the optimal use and the rules for aggregating multiple performance measures into a single performance index. While both decisions are generally not affected by the friendliness of the board, we identify conditions under which the sensitivity of CEO pay to peer performance is increasing in the CEO's power over the board. Our results suggest that pay levels and the sensitivities of the CEO's pay to firm and peer performance cannot be taken as indicators of the soundness of firms' compensation practices without considering the realized values of the underlying performance measures.
DO INTERNAL FINANCIAL CONSTRAINTS LEAD TO MORE TAX PLANNING? EVIDENCE FROM THE PENSION PROTECTION ACT OF 2006
GOLDMAN, NATHAN
CAMPBELL, JOHN; LI, BIN
Category: TX = Taxation
Prior research argues that firms facing greater internal financing constraints engage in tax planning activities to generate cash. However, these studies face identification challenges, and the empirical evidence on this relation is mixed. We use the Pension Protection Act of 2006 (PPA 2006) as an exogenous shock to firms’ financing constraints. The PPA 2006 requires firms to fund 100 percent of their pension obligation within seven years. Previously, firms were required to fund 90 percent of their pension obligation within 30 years. Thus, firms with pension plans face greater cash constraints after the PPA 2006 while firms without pension plans have no such constraint. Using a difference-in-difference design, we find that pension firms experience larger decreases in cash effective tax rates after the PPA 2006 than firms without such plans. This result suggests that an exogenous shock to a firm’s cash outflows leads that firm to engage in higher levels of tax planning. Additional analyses suggest that our results are stronger when firms need cash the most: when the PPA 2006 has a greater effect on their cash outflows, when they have greater investment opportunities, and when they have lower cash balances. Finally, while prior research documents that exogenous cash outflows increase firms’ cost of capital, we find that this increase is muted for firms that engage in greater tax planning activities to mitigate the effects of the cash outflow.
THE IMPACT OF INTERACTIVE AND DIAGNOSTIC USES OF MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS ON EARNINGS MANAGEMENT
GÓMEZ CONDE, JACOBO
GARCIA OSMA, BEATRIZ; LOPEZ-VALEIRAS, ERNESTO
Category: MA = Management Accounting
We examine the links between management accounting and control systems (MACS) and real and accruals earnings management. MACS are used diagnostically to monitor and detect deviations from earnings targets. We argue that when the diagnostic lever detects deviations, managers resort to accruals earnings management to correct them. However, if the diagnostic use warns that earnings largely deviate from target, managers are expected to use MACS interactively to focus the attention of the whole organization in designing and implementing action plans to bridge the gap between current and target earnings. These actions aim to push earnings towards their pre-established critical values, i.e., they constitute real earnings management practices. The research model is empirically tested with survey and archival data from member managers of the main professional body for practice managers in Spain. The results support the theoretical model.
EARNINGS MANAGEMENT AND MACROECONOMICS – EUROPEAN EVIDENCE FROM THE SOVEREIGN DEBT CRISIS
GONÇALVES, TIAGO
GAIO, CRISTINA; SANTOS, CARLOS
Category: FR = Financial Reporting
This study analyses the association between sovereign debt and Earnings Management in Eurozone countries with a sample of 766 listed firms and, consequently, if troika interventions are associated with firms´ Earnings Management, from 2007 to 2015. The Jones model (1991), adjusted by Kothari et al. (2005), is used to measure Earnings Management. The study finds an association between countries with higher sovereign debt and firms´ Earnings Management. The study also allows us to verify that countries under intervention do not have incentives to Management Earnings. In addition, firms from countries with higher unemployment rates and a low GDP do not manage earnings significantly. Furthermore, countries with higher interest rates (more rigid markets) have fewer firms managing results downward. Contrarily, countries with higher levels of Foreign Direct Investment (FDI) have firms Managing Earnings upward, while countries with higher tax burdens tend to have firms doing Managing Earnings downward. Further analysis allows us to conclude that firms make less Earnings Management during the period of the Sovereign Debt Crisis than in the period before that. It also allows us to verify that the relation between Earnings Management and the macroeconomic cycle is not linear and monotonic.
(WHY) DO CENTRAL BANKS CARE ABOUT THEIR PROFITS?
GONCHAROV, IGOR
IOANNIDOU, VASSO; SCHMALZ, MARTIN
Category: FA = Financial Analysis
We provide prima facie evidence that central banks care about their profits by documenting that they are significantly more likely to report slightly positive profits than slightly negative profits. The discontinuity in the profit distribution is more pronounced amid greater political or public pressure, the public’s receptiveness to more extreme political views, and agency frictions arising from governor career concerns, but absent when no such factors are present. Moreover, the propensity to report small profits over small losses is correlated with more lenient monetary policy inputs and greater inflation. These findings indicate that profitability concerns, while absent from standard theoretical models of central banking, are both present and effective in practice, which informs a theoretical debate about monetary stability and the effectiveness of non-traditional central banking.
WALKING THE TIGHTROPE: THE ROLE OF MANAGEMENT CONTROL SYSTEMS IN BALANCING SOCIAL AND ECONOMIC IMPERATIVES IN THE EARLY STAGES OF A SOCIAL ENTERPRISE’S LIFE CYCLE
GONG, MALEEN Z.
FERREIRA, ALDONIO ; KOBER, RALPH; ZHOU, LIXIAN
Category: MA = Management Accounting
A key function of management control systems (MCS) is to bring the organisation around a set of shared key goals, a function that gains added complexity in the social enterprise (SE) context. This is due to the fact that SEs pursue both social and economic imperatives, which coexist in dynamic tension. Compared with organisations that primarily pursue economic goals or social goals, the MCS of SEs are subject to added pressure due to this tension, and the need to attain some form of ‘balance’ between both imperatives as the SE ‘walks the tightrope’. Such tension is dynamic and changes as the SE grows. This study examines the MCS of a SE based in China over its early stages of development. The analysis of the case organisation, from the inception stage to the growth stage enables us to illustrate how the MCS took shape over a period of six years. The study finds that intensive use of informal controls and the interactive use of formal controls facilitated the ‘dynamic balance’ of social and economic purposes at the birth stage of a SE. Yet, this ‘dynamic balance’ was disturbed as the SE proceeded into the growth stage, the point at which when a significant array of formal controls replaced informal controls to address financial stability concerns and work efficiency requirements. This was a process that brought into question the central mission of the organisation, with the MCS contributing to an increased polarisation of purposes rather than a convergence of goals.
CONTAGION EFFECT OF COMPENSATION REGULATION: EVIDENCE FROM CHINA
GONG, NA
SHAO , JUN; ZHANG, JUNZI; ZHOU, HAIYAN
Category: GV = Accounting and Governance
To shed light on whether and how firms changed compensation practices in response to a shift in the environment in which they operated, we examine whether there is contagion effect of executive compensation regulation on state-owned enterprises (SOEs) in the emerging market of China. Specifically, we investigate whether firms not directly affected by the changing regulatory environment nonetheless changed executive compensation in response to the actions of the directly affected firms, which is called contagion effect. We further discern the specific contagion mechanisms and examine the economic consequences of regulation on compensation. The results show that the regulation has a significant effect on compensation gap in central SOEs and a contagion effect on local SOEs but not for non SOEs. Within SOEs, there is an inter-industryand regional contagion effect of compensation regulation.In addition, compensation regulation positively affects firm performance of central SOEs but negatively affect those of local SOEs.
DIRECTORS’ INTERNATIONAL WORK EXPERIENCE AND TAX AVOIDANCE
GONZALES, AMANDA
HARRIS, M. KATHLEEN; OMER, THOMAS C.
Category: TX = Taxation
We examine the association between directors’ international work experience and the tax avoidance of U.S. firms. Prior studies suggest that cultural factors help explain variation in corporate tax outcomes worldwide. We posit that individuals are shaped by the cultures where they work and thus international work experiences could affect directors’ advising and monitoring activities. For a sample of U.S. firms from 2004-2013, we find evidence consistent with this hypothesis for work experiences in tax havens and countries with higher levels of corruption. In further tests, we confirm that director’s international work experiences, rather than their nationalities, are responsible for our results. The findings contribute to the literatures on the effects of directors on reporting outcomes and the effects of international experiences on firm outcomes.
SPECIALIZED AUDITORS IN STRATEGIC ALLIANCES
GORE, ANGELA
JI, YUAN; XUE, YANFENG
Category: AU = Auditing
We investigate the impact on strategic alliance value when auditors have greater knowledge and experience in auditing contractual strategic alliances. Although common and economically significant, contractual alliances often fail due to uncertainty, lack of trust, and poor culture matches between alliance partners. We hypothesize that auditors with more extensive alliance expertise can help partner firms reduce information uncertainty and hold-up problems endemic to alliance relationships. Our measures of auditor expertise include general alliance, alliance type (e.g. technology alliances), and deal-specific (both alliance partners share the same auditor) expertise. Primary findings document that announcement date abnormal returns are higher among alliance partner firms served by an alliance expert auditor, after controlling for Big N and auditor industry expertise. Effects are more pronounced among alliances where information uncertainty, trust, and hold-up problems are more severe, and when alliance partners have mismatched cultures. Additional analysis suggests that information uncertainty is less severe, accruals quality is generally higher, and alliance contract duration longer, among alliance partner firms served by alliance expert auditors. Overall, our evidence suggests that auditors with alliance expertise help firms increase value in strategic alliance arrangements.
EXPLORING THE CONSTRUCTION OF PERSUASIVENESS OF FORECAST NUMBERS: A TEMPORAL WORK PERSPECTIVE ON FORECAST MEETINGS
GORETZKI, LUKAS
PETRIKOWSKI, LUKAS; WIEGMANN, LEONA
Category: MA = Management Accounting
This paper identifies that actors mobilize different types of temporal work to render forecast numbers persuasive towards their superiors in face-to-face discussions. Our case study reveals a forecast’s persuasiveness as reposing on a superior’s evaluation that it reflects the future as reliable while mirroring a “reasonable” (future) operational performance. While the former rests upon a number’s coherence and plausibility, the latter draws on a number’s acceptability. We show that actors link their interpretations of the past, present, and future to build a number’s coherence, plausibility, and acceptability, and to restore criteria when a number is challenged against the prior-outlined two principles of evaluation. We theorize this interactional alignment as temporal work and exhibit its pivotal role in creating a forecast number’s persuasiveness. In detail, we show that actors deploy three distinct types of temporal work to negotiate and possibly legitimize forecast numbers. While discussions to “only” create a common information level work as temporal convergence, forecasters rather turn to temporal reframing and temporal expansion after doubts were voiced. Overall, we add to the literature on planning by outlining the importance of the social and organizational context and “accounting talk” for perceptions of persuasiveness beyond technical accuracy. Findings of the paper also deepen our understanding of persuasiveness of numbers as a situated accomplishment.
CORPORATE CODE OF ETHICS AND COST OF EQUITY CAPITAL
GOTTI, GIORGIO
DUONG, HONG KIM; FASAN, MARCO
Category: FA = Financial Analysis
Using a novel dataset that records the comprehensiveness and implementation of code of ethics of S&P500 firms between the period of 2004 and 2012, we provide evidence that firms with higher quality code of ethics enjoy lower cost of equity capital. Our empirical findings support Bicchieri’s (2006) model of social norm activation and Davidson and Stevens (2012) assertion that a code of ethics can activate social norms that help control opportunistic behaviors of managers. Our empirical results about possible impact channels suggest that firms with higher quality code of ethics have lower cost of capital because they tend to attract more institutional holders.
THE IMPACT OF UNIONIZATION ON IPO UNDERPRICING
GOUNOPOULOS, DIMITRIOS
CHATZIARAS , ANTONIS; LEVENTIS, STERGIOS
Category: FA = Financial Analysis
This paper investigates the impact of labor unionization on IPO underpricing. Our findings indicate that unionized IPOs are associated with less underpricing, downward offer price revisions and less aftermarket volatility. We demonstrate that information asymmetry and salient agency costs, which characterize unionized firms, discourage investors’ participation and compromise their demand for the issue. We further show that the effect of unions on first day returns is more prominent in areas with incremental union power, using Right to Work laws as an exogenous variation in the strength of labor unions. We conclude that labor unionization is an important factor of IPO pricing and first day return, a finding which could be of importance for managers, labor unionists and market participants.
TAX AVOIDANCE AND SUPERANNUATION FUNDS
GOVENDIR, BRETT
LANIS , ROMAN ; SIVAPALAN, THULAISI ; WELLS, PETER
Category: TX = Taxation
The objective of this paper is to evaluate the nature of tax avoidance in the superannuation industry in the light of changing trends within the industry. The motivation for this study stems from anecdotal evidence of superannuation funds conducting investing activities in offshore financial centres and amendments made to superannuation industry that require trustees of superannuation funds to consider the taxation consequences of their investment strategy. This paper utilizing a sample of 96 fund-year observations between 2014 and 2016, this study is the first to evaluate the tax avoidance of superannuation funds in Australia. The study finds evidence that on average for both measures of Tax Aggressiveness that superannuation funds in the sample on average pay significantly less than the statutory 15% tax on earnings accumulated within the fund. The average percentage of tax paid in the sample is ETR2 2.7% and ETR3 3.5%. Further, there is evidence of a relationship between tax avoidance and the various phases when controlling for the accumulation and transition phase.
SOCIAL MEDIA AND THE RATIONALIZATION AND INCENTIVIZATION OF EQUITY INVESTMENTS
GRAAF, JOHAN
Category: IC = Interdisciplinary/Critical
This paper follows the case of two medical students who were found guilty of market manipulation after recommending shares through social media, i.e. blog posts and chat forum discussions. Using rare and detailed material from the court case, the paper addresses two aims, a) to explore social media in equity markets, and b) to analyze how seemingly illegitimate advisors work to influence investors. By drawing on social studies of finance and Knorr Cetina’s (2010, 2011) theory of equity advice as an ‘affective science’, this paper shows how the students influenced the market through iterative moves of rationalization (calculation and argumentation) and incentivization (emotions and gambling). The paper finds that social media seems to have taken over the role of traditional advisors (i.e. sell-side analysts) in firms with poor accounting quality and low analyst coverage, highlighting the importance of further research and possibly regulation. Furthermore, the paper argues that previous research has dominantly emphasized advisors’ rationalizing activities, but the current case shows that also incentivization is important. Such activity aims to boost investors’ confidence and hopes, increase the gambling aspects of investments and allude to others’ ‘structures of wanting’. Whereas previous research has mainly explored how advisors work to reduce uncertainty, this study shows how advisors also incite others to act despite existing uncertainties involved in equity investments.
MANAGERIAL INFLUENCES ON GOAL SETTING AND PERFORMANCE OUTCOMES
GRAFTON, JENNIFER
ABERNETHY, MARGARET; LILLIS, ANNE; ZHANG, PAMELA
Category: MA = Management Accounting
Increasingly researchers are beginning to unpick the effects of managers on behavior within firms. Our interest is in exploring the manager effect on both the goal setting process and the goal-performance relation. There is an established body of literature demonstrating that specific goals are associated with improved performance outcomes but little is known about how goals are set. We explore whether managers’ own preferences influence how their subordinates set their own goals. We then examine whether managers’ expertise affects the employees’ goal-performance relation. Using archival data from a professional services firm, the results support prior literature that goal specificity leads to increased performance. We also find that managerial preferences, as expressed in managers’ own goals, directly influence the specificity of their subordinates’ goals. Given our setting we expected that the challenge for professional services firms is how managers can support subordinates where goals cannot be easily specified. We thus focus on whether manager with high levels of expertise moderate their subordinates’ goal-performance relation. We find that this is the case. When goals are less specific, managers with high levels of expertise are better able to support the goal-performance relation. This study highlights the influence of managers in the performance evaluation process and extends current research on manager fixed effects and goal setting.
GHG DISCLOSURE AND EMISSION LEVELS: EVIDENCE FROM PRIVATE FIRMS
GRAHN, ALINE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Environmental disclosure studies make typically use of sociopolitical theories. In doing so, they leave out the theory that is applied to describe voluntary (financial) reporting: voluntary disclosure theory. Current empirical studies provide evidence that the underlying mechanisms of disclosure theory can also be applied in environmental disclosure contexts because investors are interested in e.g. Greenhouse Gas information. Therefore, my study aims at transferring the main ideas of disclosure theory to a GHG disclosure setting and contrast the partially contradicting predictions of the sociopolitical theories and disclosure theory. To figure out which of those theories explain GHG disclosure decisions in the absence of capital market incentives, I analyze a sample of German private firms. I find that, in accordance with all three theories, publicly held firms reach significantly higher GHG disclosure levels. The analysis of private firms only suggests that if the decision to disclose GHG information is divided in two sub steps, first the decision whether to disclose or not, and second the decision on the extent of the disclosed information, these two steps could be assigned to two different underlying theories: The initial disclosure decision seems to be driven by legitimacy issues while the decision on the extent of disclosure is driven by attempts to reduce information asymmetries between owners and managers and, thus, follows the idea of voluntary disclosure theory.
FROM REPRESENTATION OF FACTS TO MEDIATION OF CONCERNS: THE DEVELOPMENT OF INTEGRATED REPORTING AS IT EMERGES IN PRACTICE
GRANÀ, FABRIZIO
BUSCO, CRISTIANO; IZZO, MARIA FEDERICA
Category: MA = Management Accounting
The aim of this paper is to explore whether emerging practices of accounting for stakeholders, in our case Integrated Reporting (IR), can be articulated in a way that foster enablement of processes of stakeholder management and value creation, beyond the mere representation of facts. More specifically, we respond to recent calls for in-depth field studies on accounting for stakeholders to explore through which mechanisms IR can be interpreted as a 'successful' management and accounting innovation that offers a pragmatic solution for dealing with the search, measurement, and communication of sustainable value. We build on the emerging literature on performativity of accounting, and in particular on the notion of rhetorical machine, as well as on the insights offered by the case study of a medium-sized fashion firm, to explore the way in which IR emerged and developed in practice well before the establishment of the International Integrated Reporting Council. We suggest that the 'successful' development of IR is not derived from its supposed ability to represent and reconcile the multiple and differing views of an organization's stakeholders. Instead, we add to the existing literature by arguing that IR offers a space for purposefully engaging participants and their different concerns in a continuous process of mediation that relies on heterogeneity and difference, in which accounting and reporting contribute to the ongoing construction of what counts as sustainable value.
THE PRODUCTION OF STRATEGIC AND FINANCIAL RATIONALES IN CAPITAL INVESTMENTS: JUDGMENTS BASED ON INTUITIVE EXPERTISE
GRANT, MICHAEL
NILSSON, FREDRIK
Category: MA = Management Accounting
The aim of this paper is to examine how strategic and financial rationales are produced in capital investments. Informed by literature on capital investments, strategic fit and intuitive expertise the present study examines how firms produce strategic and financial rationales and how they are related. This is done by conducting a detailed case study of how these concepts were described in decision documents and how the documents were produced by practitioners. The setting is an acquisition by a large and successful serial acquirer in the manufacturing industry. The analysis reveals how capital investment processes consist of two parts. The first part is the production of strategic and financial rationales. It is based on judgments of a myriad of factors and data using rough estimates. This process lacks a visible analytical reasoning. We argue that these judgments are made through an intuitive process based on expertise. The second part is how the strategic and financial rationales are presented in approval documents. These rationales are logical, can be explained by analytical reasoning and have an exactness in the description of numbers and values. Whereas capital investment research has brought important insights and knowledge to the latter part, the finding of how judgments based on intuitive expertise affect the production of strategic and financial rationales is an addition to our knowledge in capital investment research as well as acquisition research.
FINANCIAL REGULATION AND ITS IMPACT ON BANK STABILITY AND ASSET QUALITY: AN EMPIRICAL STUDY OF SPANISH BANKS
GRAS, ESTER
MARIN, SALVADOR; ORTIZ, ESTHER
Category: GV = Accounting and Governance
The two main changes in the prudential financial regulation applied by the Spanish banks are: the statistical or dynamic provision implemented in 2000; and the agreement signed by the Basel Committee on Banking Supervision 2004. We investigated the effects of these changes on stability and asset quality for a total of 48 Spanish banks over the simple period of 1995-2015. The key findings are the change in financial regulation and its direct application by the Spanish banking sector and its managers had a negative effect on the financial stability, as well as the quality of their asset-based financial information.
A TEACHING CONCEPT FOR AUDITING – THE ILPA CASE
GRASCHITZ, SABINE
BALDAUF, JULIA; MUELLER, CLAUDIA
Category: ED = Accounting Education
A career in the audit profession seems to get less and less attractive. Especially high staff turnover rates and less experienced staff in audit firms are of concern for the audit profession. Consequently, within the last years, the average time, which young professionals work for audit companies has significantly decreased from five to three years (Accountancy Europe 2017). The prior education of these young professionals is often organised by Universities and other tertiary education institutions. Hence, Higher Education Institutions have the opportunity and duty to provide attractive and job-adequate education and therefore to deliver the relevant technical and soft skills (Boyce et al. 2001). Therefore, within this paper we illustrate and analyse the application of a new teaching concept, developed for an auditing class. Using an embedded single case-study approach enables in-depth analyses. We found that the audit teaching concept (1) focuses on the development of problem-solving, discussion and critical evaluation skills, (2) follows the relevant didactical guidelines for valid teaching concept and (3) is positively assessed by three groups of students. Based on our findings one can state that the audit case developed throughout the ILPA project can be considered as an appropriate, useful and relevant teaching activity.
ASSURANCE QUALITY AND INFORMATION ASYMMETRY – THE UNREGULATED SETTING OF INTEGRATED REPORTING
GRASSMANN, MICHAEL
FUHRMANN, STEPHAN; GUENTHER, THOMAS W.
Category: AU = Auditing
Due to the unstandardized setting of voluntary assurance services by third parties for integrated reporting (IR), it appears crucial to investigate the effectiveness of this credibility-enhancing mechanism. We perform a content analysis of both the 110 voluntary assurance statements included in all 169 integrated reports of Forbes Global 2000 firms disclosed in the years 2013 and 2014 and the integrated reports themselves. The assurance statement reflects the assurance process and, thus, the assurance quality as a measure of the decrease in assurance risk. We explore whether assurance quality is able to increase credibility and, thereby, to decrease information asymmetry for investors as the target audience of integrated reports. Our results provide evidence that voluntary assurance statements for integrated reports are not per se able to decrease information asymmetry. Rather, investors emphasize assurance quality. In particular, addressing an external party, stating a moderate assurance level, describing an assurance of internal documents, and an assurance based on interactive work steps appear able to decrease information asymmetry. Big 4 assurers seem to benefit from their reputation because they do not need to describe their work steps. Additional analyses of the interaction between IR quality and assurance quality show that credibility concerns cannot be counterweighted solely by IR quality but assurance quality is required.
THE MONTY HALL PROBLEM AND AUDITOR’S OVERCONFIDENCE: SOME PRELIMINARY RESULTS
GREEN, BRIAN
KOBELSKY, KEVIN
Category: AU = Auditing
Prior research has examined how auditors’ decision-making is negatively affected by heuristics and biases, including base rate and sample size neglect. The purpose of this paper is to introduce the traditional Monty Hall problem in an audit setting. We further present some preliminary findings. We use the Monty Hall problem (MHP), a well-known decision-making problem, as an accessible illustration. We then survey 200 accounting students who are entering the profession. Students are presented with three alternative audit scenarios of equal to unequal probabilities, and multiple explanations beyond the Monty Hall three alternative problem. When applying the MPH theory to the audit simulations, we find that students entering the profession demonstrate a very high level of auditor over-confidence in accepted management explanations.
THE EFFECTS OF LEVEL 3 FAIR VALUE ASSUMPTIONS ON MANAGERS’ SELLING DECISIONS
GREEN, KAREN
BRINK, ALISA; GREEN, KAREN
Category: MA = Management Accounting
This study examines how the historic choices made in regard to Level 3 fair valuation of assets affect managers’ decisions to sell those assets. In a 2x2 between-participants experiment, accounting managers with fair value accounting experience made selling decisions regarding Level 3 fair value assets. We manipulate the stated conservatism of the fair value estimate (fair value assumptions described as more or less conservative while holding the dollar value constant) and the volatility of the historically recognized fair value (low or high volatility). The results indicate that conservatism in fair value estimation and volatility affect managers’ selling price. Further, managers’ willingness to accept a selling price below the most recently recognized fair value decreases when the fair value estimate is described as more conservative. The results indicate that historic assumptions in fair valuation can have unintended consequences on experienced managers’ current decisions in the disposition of assets.
STAKEHOLDER FOCUS OR STRATEGY FOCUS? AN EYE-TRACKER STUDY ON THE EFFECT OF PRESENTATION FORMAT ON NONPROFESSIONAL INVESTORS’ INFORMATION PROCESSING PATTERNS
GREEN, WENDY
CHENG, MANDY; KO, JOHN
Category: FR = Financial Reporting
Using eye-tracking technology, we examine whether information processing patterns of nonprofessional investors with a directional investment preference are affected by performance information presented based on either stakeholder categories (stakeholder focus) or strategic themes (strategy focus). We find that a stakeholder focus presentation causes investors in a long position to focus more information processing effort to negative financial information and less to positive nonfinancial information compared to those in a short position. However, investment position makes no difference when the same information is presented with a strategy focus. Further, when facing negative financial information, investors exert more effort towards integrating information when they hold a long (versus short) position or when they receive information with a stakeholder (rather than strategy) focus. Despite this, investors’ directional preference has a dominant effect on how they weight different information when making performance forecasts. Our results have implications for external report preparers, standard setters and analysts.
AUDIT ADJUSTMENTS – A NEW LOOK AT AUDIT QUALITY IN THE PUBLIC SECTOR
GREENWOOD, MARGARET
ZHAN, RUIJIA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
In this paper, we adopt an agency based theoretical framework to investigate the role of auditors in mitigating management bias in public sector financial reporting. There is a substantial body of literature which finds that both public and not-for-profit managers manage accruals to report small surpluses close to zero, that is, accruals are income increasing(decreasing) for entities with a pre-managed deficit(surplus). An auditor acting in the interests of the principal would tend to reverse this bias. We exploit privileged access to pre-audit financial statements in the setting of the English National Health Service to investigate the impact of audit adjustments on the pre-audit financial statements of English NHS Foundation Trusts over the period 2009-10 to 2014-15. We find evidence that auditors act to reverse management bias in the case of Trusts with a pre-managed deficit, but find no evidence that this is the case for Trusts with a pre-managed surplus. These findings are consistent with auditors’ interests being aligned with principals’ (the public, Parliament etc) in the case of Trusts in deficit but with those of management in the case of Trusts in surplus. Our findings suggest that measures to better align auditor incentives with the interests of principals would be beneficial to the quality of public sector financial reporting.
THE DETERRENT EFFECT OF ANTI-BRIBERY LAW ENFORCEMENT ON THE QUALITY OF EARNINGS
GREUSARD, OLIVIER
Category: FR = Financial Reporting
The paper investigates the quality of accounting information of bribe-paying firms and their competitors. We analyze a hand-collected sample of 241 enforced bribery cases under the US Foreign Corruption Practices Act (FCPA) during 1978-2015. Exploiting the disclosure of anti-bribery law enforcements, we document a positive effect on the quality of accounting information of bribe-paying firms’ competitors, but not the bribe-paying firms. Additional tests document that this positive effect is stronger for cases revealed in or after 2006 and for cases resolved using vehicles other than NPA/DPAs. Our results suggest a positive impact of anti-bribery law that incentivizes other firms to enhance their accounting information once they acknowledge a bribing behavior of a peer.
USING MACHINE LEARNING AND SURVIVAL ANALYSIS TO ESTIMATE ANALYSTS SPEED TO INCORPORATE TONE FROM MD&A FILINGS
GROSSETTI, FRANCESCO
GIETZMANN, MILES; LEWIS, CRAIG; PÜNDRICH, GABRIEL
Category: FR = Financial Reporting
When firms release annual 10-K filings it is well known that analysts rapidly react to hard financials’ by updating consensus forecasts. However, 10-Ks also include soft non-financial disclosures which are more difficult for analysts to process and interpret. This research uses a novel method to assess textual polar- ity to identify the tone of the soft information disclosed in the MD&A section of 10-K filings. Using a hazard modelling framework, we find supporting evidence for the hypothesis that analysts are more likely to rapidly revise forecasts when the magnitude of the polarity is higher. In addition, we find that these effects arise when polarity is positive.
VALUE RELEVANCE AND REGULATORY CAPITAL: EVIDENCE FROM US BANKS
GU, JUN
O'HANLON, JOHN
Category: FR = Financial Reporting
This paper examines the association between banks' regulatory capital and value relevance of their accounting earning and book equity. The results show that the Tier 1 capital ratio of US banks is positively related to the value relevance of bank accounting that includes both book equity and earnings. Recognizing that the Tier 1 ratio can be decomposed into (i) the difference between book equity and Tier 1 capital; (ii) a leverage element and (iii) a measure of the riskiness of the asset portfolio, the evidence reported in this study indicates that banks with higher spread between their book equity and Tier 1 capital, higher leverage and riskier asset portfolios are more likely to render their earnings being more value-relevant. In addition, after controlling all the components of Tier 1 capital ratio, the result show that the Tier 1 capital ratio itself can still have some explanatory power to the changes of value-relevance on book equity and earnings.
XBRL ADOPTION AND EXPECTED CRASH RISK
GUAN, YUYAN
KIM, JOENG-BON; SU, XIJIA; ZHANG, YANAN
Category: FR = Financial Reporting
This study investigates whether and how adoption of eXtensible Business Reporting Language (XBRL) impacts investor expectations of future crash risk. Using the steepness of the volatility smirk as a proxy for ex ante expectation of crash risk, we find that expected crash risk decreases after adoption of XBRL. Moreover, we document that the impact of XBRL adoption on expected crash risk is more pronounced for firms with higher financial opacity, more volatile earnings, and greater analyst forecast dispersion. Further, our analysis generates evidence that the use of customized extension XBRL elements attenuates the effect of XBRL reporting on reducing expected crash risk. Our empirical results are robust to a variety of sensitivity checks. Overall, our findings indicate that XBRL reduces information processing costs and strengthens information transparency of capital markets, which in turn, reduces investor expectations of future crash risk.
FACTORS EXPLAINING A COST-BASED PRICING ESSENCE
GUERREIRO, REINALDO
VENTURA AMARAL, JULIANA
Category: MA = Management Accounting
Economic theory explains how prices are set at a level that equates marginal cost and marginal revenue. On the other hand, marketing theory explains how prices should be set having value as a basis. The issue at stake is that some scholars argue that none of these two theories actually explains pricing practices, because empirical studies have concluded that most companies set prices having cost as a basis. However, empirical studies also have not examined if cost-plus formulas represent the pricing approach or essence, yet. This paper addresses the factors explaining a cost-based pricing essence in industrial companies located in Brazil. The results show that, in price-makers, cost-based pricing essence is positively associated with 4 factors (2 obstacles to deploy value-based pricing, company size, and differentiation), but it is negatively related to 1 factor (premium pricing strategy). In price-takers, cost-based pricing essence is positively associated with 4 factors (2 obstacles to deploy value-based pricing, coercive isomorphism, and use of full costs), but it is negatively related to 5 factors (1 obstacle to deploy value-based pricing, company size, competitors’ ability to copy, normative isomorphism, and experience).
TAX MIMICKING IN SPANISH MUNICIPALITIES
GUILLAMÓN, MARÍA-DOLORES
BASTIDA, FRANCISCO; BENITO, BERNARDINO ; RÍOS, ANA-MARÍA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper evaluates tax mimicking in Spanish municipalities. To this aim, we consider the largest sample of Spanish municipalities used so far: 2,431 municipalities for 2002-2013. We find significant evidence of tax mimicking, both on property tax and car tax. Further analyses reject both yardstick competition hypothesis and tax competition (Tiebout hypothesis) as sources of this tax interaction. Therefore, our results point to expenditure spillovers as the explanation for this tax mimicking. Municipalities seek to have the same services and infrastructures of their neighbors, which makes the former set similar levels of taxes and expenditures than the latter. Regarding policy implications of our findings, legislation should be aimed to direct municipal governments’ decisions towards the real needs of their constituencies, rather than mimicking neighboring municipalities’ tax and spending policies. In this respect, participative budgets should be used as a way to empower tax payers about spending priorities of their municipality.
DEBT OR EQUITY BASED PAY? THE INCENTIVE ALIGNMENT QUALITIES OF DEBT RELATIVE TO EQUITY FOR MULTIPLE STAKEHOLDERS
GUILLAMON SAORIN, ENCARNA
BLANCO, BELEN; GOMEZ-MEJIA, LUIS; GUILLAMON-SAORIN, ENCARNA; GUIRAL, ANDRES; MARTIN, GEOFFREY
Category: GV = Accounting and Governance
We bridge the debt based compensation discourse with stakeholder agency literature to explore the consequences of debt relative to equity based pay for multiple stakeholders, including employees, community, customer, debtholders and shareholders. We argue contractual mechanisms that create long-term debt obligations to the CEO result in better outcomes for multiple stakeholders. Our empirically supported theory suggests that the long-term debt obligations are more likely than equity to incentivize broad based stakeholder management through engaging in socially responsible activities, while also tending to the needs of both shareholders and creditors. This suggests that inside debt deserves more attention from governance scholars and boards who are attempting to incentivize a longer-term multi-stakeholder orientation. We also offer insight into why previous research that has not included inside debt has often provided mixed findings.
CEO MASCULINITY, CEO DISCRETION AND AUDIT FEES
GUL, FERDINAND AKTHAR
SHARPE, WEN HUA; YANG, ZHIFENG
Category: AU = Auditing
Drawing on the theory that facial width to height ratios (facial masculinity) are measures of testosterone levels, this study examines whether the facial masculinity of male CEOs is associated with audit fees. Prior research suggests that facial masculinity is associated with masculine behaviors such as aggression, risk seeking, and financial misreporting. We use a sample of U.S. firms for the period 2000 to 2014 and show that CEOs with higher facial width-to-height ratio on average are associated with higher audit fees. We also find that the relationship is stronger for firms with longer tenured CEOs and more powerful CEOs. Collectively, our findings are consistent with the notion that firms with CEOs who have masculine faces are likely to make more aggressive accounting choices, which results in higher audit risks, especially if they have longer tenure and are more powerful.
MARKET VALUATION OF GREENHOUSE GAS (GHG) EMISSIONS – EVIDENCE FROM THE USA
GULLKVIST, BENITA M.
G., WAYNE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study contributes to the literature by providing fresh empirical evidence on the association between the level of greenhouse gas (GHG) emissions and market valuation. Using financial and CSR data for a sample of U.S. public companies (S&P 500) from 2009 to 2015, we find, consistently with prior studies, that corporate level of GHG emissions, measured in million metric tons, is negatively associated with firm value. Further, our results suggest that type of GHG emissions matter, as direct emissions (scope 1) show a significant negative association with the firm value, whereas indirect emissions (scope 2) are positively associated with firm value, although the result is not significant (p-value 0.13). In addition, our results indicate that CSR assurance is positively associated with firm value.
THE ROLE OF MANAGEMENT CONTROL SYSTEMS IN THE HIGHER EDUCATION SECTOR: AN INVESTIGATION OF DIFFERENT PERCEPTIONS
GÜNTHER, THOMAS
HEINICKE, XAVER
Category: MA = Management Accounting
A variety of empirical studies have investigated the relationship between management control systems (MCS) and the financial and non-financial performance of for-profit firms, but there is a dearth of research on MCS in the higher education (HE) sector. Our study contributes to MCS research by investigating the mediating role of MCS in the relationship between structural autonomy and both research and teaching performance in HE institutions and by comparing the perceptions of employees at two different hierarchical levels: heads of administration and professional academics. Based on professionalism theory, we use survey data of two paired sub-groups with 104 heads of administration and 104 academics and perform a multi-group analysis with structural equation modeling. We find significant differences between heads of administration and academics concerning the relationship between autonomy and MCS and that between MCS and teaching and research performance for the diagnostic and interactive use of controls. For heads of administration, we find that only strategic boundaries and strategic beliefs are significantly associated with teaching performance, whereas for academics, more autonomy is associated with more emphasis on most management controls. Furthermore, for academics, more emphasis on diagnostic use, but less on interactive use, is associated with higher research performance.
FIGHTING COLLUSION THROUGH DISPARITY: AN EXPERIMENTAL INVESTIGATION OF THE EFFECT OF PAY DISPERSION ON COLLUSION IN TOURNAMENTS
GUO, LAN
HUO, KUN; LIBBY, THERESA
Category: MA = Management Accounting
Pay dispersion in organizations is rising and has received increasing attention in recent years. Although prior research has documented several negative consequences of high pay dispersion, we document one of its potential benefits, that is, to reduce collusion between employees. We conduct an experiment to examine the effect of pay dispersion on employee collusion. In our experimental setting, two subordinates compete in a tournament and a superior and the firm benefit from their effort contributions. The two subordinates can collude by both providing a low level of effort, which increases their own payoffs at the cost of the superior and the firm. We manipulate horizontal pay dispersion (i.e., the ex-ante fixed wage gap between the subordinates) and vertical pay dispersion (i.e., the ex-ante fixed wage gap between the subordinates and their superior). Economic theory predicts that ex-ante fixed wage differences should not affect rational subordinates’ interest in collusion. However, based on behavioral theory, we predict and find that both horizontal and vertical pay dispersion each individually reduce collusion by increasing defection among subordinates. Additional data suggest that reduced cohesion and trust between subordinates as well as their elevated desire to reduce pay disparity underlie these results. We also find that when one type of dispersion is present, the effect of the other type of dispersion weakens, possibly due to the switch of pay referent from superior to subordinate or vice versa.
THE INCREMENTAL EFFECTS OF GOVERNMENT AUDITS ON EARNINGS QUALITY: EVIDENCE FROM CHINA CENTRAL SOES
GUO, YINGWEN
MO, PHYLLIS LAI LAN; WANG, BING; ZHU, XIAOWEN
Category: AU = Auditing
Chinese authorities privatized SOEs by having certain subsidiaries or groups listed on stock exchanges. While the financial reports of listed SOEs controlled by the central governments are mandated to be audited by independent auditors, they are also subject to periodic government audits conducted by China National Audit Office (NAO). This creates a unique setting to investigate the incremental effects of government audits on earnings quality of listed central SOEs. Based on government audit reports issued by the NAO from 2010 to 2017, we find that the SOEs tend to have lower ex ante earnings quality if more severe problems are discovered by the NAO. After government audits, the central SOEs have significantly lower discretionary accruals and higher accounting conservatism, indicating that government audits improve the quality of financial reports that have been audited by independent audit firms. We also find that the effects of government audits on earnings quality are more significant in central SOEs audited by non-Big 10 audit firms, indicating higher demand for government audits when the independent audit quality is low. Further analysis supports the “knowledge spillover effects” of government audits, i.e., the independent auditors with at least one client audited by the NAO also improve the quality of audits provided to other central SOEs not audited by the NAO. Our study proves the effectiveness of government audits in improving earnings quality of SOE firms.
COSO 2013 INTERNAL CONTROL FRAMEWORK FOR SOX 404 COMPLIANCE AND INFORMATION ASYMMETRY IN U.S. CAPITAL MARKETS
GUPTA, PARVEEN
SAMI, HEIBATOLLAH; ZHOU, HAIYAN
Category: AU = Auditing
In this study, we examine what impact, if any, the COSO 2013 Control Framework implementation (COSO 2013) has on the information environment of the firms in U.S. capital markets. Prior to the passage of the Sarbanes-Oxley Act of 2002, disclosures of whether a public company’s system of internal controls over financial reporting is effective were virtually non-existent. Section 404 of the Sarbanes-Oxley Act of 2002 mandated such disclosures from both the management and external auditors of the public companies in the U.S. No research study, to-date, examines the impact of the underlying control framework or internal control standard on the quality and reliability of such assessments and resultant disclosures. Lack of this empirical validation of the underlying control framework that is so ubiquitously used by all public companies leaves a gaping hole in the internal control literature. We use information asymmetry proxies (i.e., bid-ask spread, trading volume, and price volatility) to evaluate the impact of the COSO 2013 on the information environment of a sample of public companies. As expected, we find that bid-ask spreads decrease and trading volume increase for our sample firms after the adoption of the COSO 2013. This clearly suggests that the information environment does improve because market perceives the COSO 2013 to result in higher quality internal control assessments and opinions. However, the results are contrary to our expectations with regard to the volatility.
THE FORMATION AND USE OF A PROFIT RESERVE IN THE MIDDLE AGES
GURSKAYA, MARINA
ANDREENKOVA, ANGELINA ; BAGDASARIAN, RIPSIME; KUTER, MIKHAIL; SANGSTER, ALAN
Category: HI = History
This paper considers the early practice of reserve formation from pre-distribution profits at the end of the 14th century. It reveals the two-fold purpose of this reserve, the entries made, including those when the reserve was utilized and the unexpired element written-back to be distributed to the owners in the following period. The research method used in this study was logical-analytical modeling of archival accounting material belonging to Francesco Datini's company in Pisa during 1392–1399. It finds that the reserve was equivalent to a modern-day allowance for doubtful debts in that it was an estimate, but of costs that had been incurred but not billed, rather than of account receivables; and that the same account was used as a suspense account to balance the ledger when errors in the double entries could not be identified.
CDP DISCLOSURES OF GHG EMISSIONS FOR MEGACITIES: AN EXPECTATION GAP?
GUTHRIE, JAMES
HAZELTON, JAMES; MIA, PARVEZ
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Purpose – This paper explores one aspect of sustainable development disclosures – the greenhouse gas emission (GHG) disclosures made to CDP by megacities – and compares those disclosures with the expectations of their users and the public. Design/Methodology/approach – The initial examination of each megacity’s disclosures relied on content analysis. The comparisons between the information disclosed by megacities and the user expectations of those disclosures were drawn through the ‘expectation gap’ framework. Findings – GHG information at the megacity level is outdated, incomplete, inconsistent, inaccurate and uncomparable and, therefore, may not be useful to decision makers or meet user expectations; there is room for improvement. Research Implications – The findings have implications for policymakers in designing guidelines to facilitate the flow of GHG information relating to cities; for stakeholders in understanding GHG emissions performance at city level; and for managers in measuring, disclosing and mitigating GHG emissions. Originality/Value – Prior studies focus on GHG disclosures made to CDP by corporations, whereas this paper examines CDP disclosure relating to GHGs at the megacity level – a novel regional approach.
FINANCIAL REPORTING QUALITY AND BANK RISK TAKING – THE CASE OF BANK ASSET QUALITY
HA, JOOHYUNG
Category: FR = Financial Reporting
Building on the recent literature that timely recognition of expected loan losses, otherwise known as conservatism, reduces managerial risk taking through enhanced market discipline, this study examines the effect of conservatism on bank’s own monitoring effort reflected in their loan portfolio quality. The study documents that in a sample of publicly traded bank holding companies in the United States over the period 1994–2014, bank's conservatism strengthens the banks’ monitoring effort in loan portfolios after controlling for a large set of bank-level and macro-level variables. Consistent with conservatism enhancing monitoring over lending practices by reducing information asymmetry, these results are stronger for low and high lending growth cycles when information asymmetry over loan quality is greater.
THE ROLE OF COUNTRY-SPECIFIC FACTORS AND ADOPTION OF GLOBAL BUSINESS LANGUAGE
HAAPAMÄKI, ELINA
Category: FR = Financial Reporting
Research question/Issue: Efficient corporate governance requires precise and reliable financial information. It is argued that International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA) are considered to be an important tool developing global business language. Historically, each jurisdiction has developed and pursued its own accounting and auditing standards; however, as financial markets grow into a global market, there is a need for a common set of accounting and auditing standards. As a result, there is a movement towards harmonization of IFRS and ISA all over the world. This study seeks to explain why some countries have adopted IFRS and ISA standards while others just partially adopted them. Moreover, previous studies have not examined adoption of IFRS and ISA and country-specific factors at the same time. Research Findings/Results: This study suggests that Voice and Accountability, Import Penetration, Regulatory Quality, Control of Corruption achieved within a national economy are all predictive of the degree to which IFRS and ISA are adopted across 105 jurisdictions. Theoretical/Academic Implications: This study suggests that country-specific factors are positively and significantly associated with global business language adoption. Practitioner/Policy Implications: For policy makers, findings of this study suggest that the institutional pressure and good governance within an economy are the key drivers of IFRS and ISA adoption For investors and global market players, results provide insights that can help to explain and forecast future universal business language adoption within economies. When adopting IFRS and ISA standards, economies are making the financial information more transparent and reliable for global investors.
THE INFORMATIONAL ROLE OF CRA; IS IPO UNDERPERFORMACE DUE TO EARNINGS MANAGEMENT OR MARKET TIMING?
HADJIGAVRIEL, STAVRIANA
Category: FR = Financial Reporting
While many studies have focused on the role of credit rating agents in the debt market, I focus on the potential benefits that credit ratings may confer to firms raising equity through an Initial Public Offering (IPO). Credit ratings could play an important role in this market because asymmetric information is at the root of the two main problems investors face in the IPO market: underpricing at the IPO stage and subsequent stock market underperformance. Interestingly, there is no consensus on whether underperformance is mainly caused by earnings management or by the market timing ability of firms and underwriters. I find that IPOs that are credit rated when they go public exhibit a 70.4\% less underpricing compared to non-rated ones. I also find evidence of IPO underperformance two years after the IPO. However, credit rated IPOs have no influence in the subsequent stock-return performance suggesting that firms or underwriters base their decision on going public on market timing. Analysis on earnings management show no evidence of earnings manipulation for my sample period. Robustness checks further reinforce the argument as IPOs that belong to the hot period market underperform statistically significant more IPOs that belong to the cold period market. What is more, hot period IPOs exhibit higher underpricing.
INDIVIDUAL AUDITOR’S CHARACTERISTICS, LIABILITY REGIME AND TASK COMPLEXITY ASSESSMENT – EXPERIMENTAL EVIDENCE
HAID, MARCO
GRASCHITZ, SABINE; MÜLLER, CLAUDIA
Category: AU = Auditing
This study investigates the auditors’ perception of task complexity in the light of their individual risk preference and capabilities under different liability regimes. A within-subject case-based experiment with 134 auditing students was conducted. The results show that individuals with a higher risk aversion assess the task complexity higher than participants with a lower risk aversion or risk neutrality. Regarding the liability regime, the analyses show that in a high liability scenario the complexity is assessed higher than in a low liability scenario. Further the results show that the participants’ knowledge and experience dampen the effect of risk preference onto the task complexity assessment. This study offers an insight to the impact of individuals’ characteristics as well as regulatory conditions on the assessed audit complexity.
PERFORMANCE INFORMATION USAGE IN LOCAL GOVERNMENTS WITHIN THE ADMINISTRATIVE REFORMS
HALDMA, TOOMAS
HALDMA, TOOMAS; KENK, KARINA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Amalgamations have been pointed out as one solution to increase efficiency, technical capability and regulatory capacity of local governments (LG) (Steen et al 2017). Theoretical and empirical literature so far has mainly concentrated on the impact of municipal amalgamations on municipal performance and financial sustainability. The aim of this paper is to study more deeply the use of performance information (PI) for management decisions in the context of the administrative-territorial reform e.g. amalgamation in the LG-s on an example of Estonian LG-s. The study is contributing to the debate on the importance and usefulness of different types of PI for different user types in the light of LG reform in Estonia as in a CEE country. The results show that although the main aim of the amalgamation as stated by the Administrative Reform Act is to improve the quality of public services and the outcomes of LG policy, the focus of actual formal analysis in the amalgamation process has been on financial information (investment capacity).
DOES AUDIT COMMITTEE ACCOUNTING EXPERTISE CURTAIL AUDITOR RENT EXTRACTION? EVIDENCE FROM TWO NATURAL EXPERIMENTS
HANSEN, JAMES
LISIC, LING; SEIDEL, TIMOTHY; WILKINS, MICHAEL
Category: AU = Auditing
We investigate whether audit committee accounting expertise limits external auditors’ ability to extract rents from their clients. We posit that greater accounting expertise among audit committee members should reduce information asymmetries between the auditor and the client that arise from accounting and auditing complexities. Our tests use two natural experiments in which audit effort necessary to obtain reasonable assurance likely was reduced as a result of changes in professional standards. First, ASU 2011-08 significantly simplified how companies test goodwill for impairment purposes. We find that companies with goodwill that was not likely to be impaired paid significantly lower fees after ASU 2011-08 when they had accounting experts on their audit committees. Second, Auditing Standard No. 5 (AS5) eliminated the requirement that auditors issue an opinion on management’s assessment of internal controls and permitted the scaling of audits for smaller clients. We find that smaller companies and clients of non-Big 4 auditors paid significantly lower fees in the transition to AS5 when they had accounting experts on their audit committees. Our results in both of these settings highlight an important and previously undocumented benefit of audit committee accounting expertise – a reduction in auditors’ ability to extract rents.
INDIVIDUALISM AND ANALYST BEHAVIOR
HAO, RUBIN
CAO, YING; YANG, YONG GEORGE
Category: FA = Financial Analysis
This paper examines whether and how culture affects the forecasting behavior of sell-side financial analysts. Based on a large sample of financial analysts with diverse cultural backgrounds in the U.S., we find that analysts from individualistic cultures issue bolder and timelier earnings forecasts and stock recommendations compared with analysts from collectivistic cultures. In addition, individualistic (collectivistic) analysts are more likely to overweigh (underweigh) their private information in producing forecasts, consistent with the greater emphasis on individual (collective) contribution in individualistic (collectivistic) cultures. In addition, we find that the market’s reaction is stronger to bold forecasts by collectivistic analysts than to bold forecasts by individualistic analysts, suggesting that the market views bold forecasts by collectivistic analysts as more credible. Finally, using the closures and mergers of brokerages as exogenous shocks to firms’ information environment, we find that individualistic analysts induce greater incorporation of firm-specific information into stock price than collectivistic analysts do, although the two types of analysts do not differ in their impacts on firms’ overall information environment.
BOARD GENDER DIVERSITY AND BIODIVERSITY: DO THE GRI FRAMEWORK AND THE BIODIVERSITY STRATEGIC PLAN (2011-2020) MATTER?
HAQUE, FAIZUL
JONES, MICHAEL
Category: GV = Accounting and Governance
This study examines how board gender diversity is associated with corporate biodiversity initiatives, and whether gender diversity reinforces the effects of the Global Reporting Initiatives (GRI) and the EU biodiversity strategic plan on corporate biodiversity. Using an integrated theoretical framework of institutional theory and resource dependence theory, our study is based on 4,013 firm-year observations form European listed firms covering a period from 2002 to 2016. We use panel regressions with country, time and industry fixed effects to analyse biodiversity management performance (BMP) and logit regressions to explain biodiversity impact assessment (KPI). We find that board gender diversity has a positive relationship with BMP and KPI of a firm. Moreover, the GRI framework and the EU Strategic plan show positive relationship with BMP, rather than KPI, even though gender diversity positively moderates their relationships with both biodiversity indicators. Overall, our evidence suggests that a board with increased female representation is more responsive to the concerns of institutions and societal stakeholders, and respond to those concerns by influencing biodiversity initiatives of a firm. In addition, the GRI framework and the EU 2020 strategy appear to enhance management performance on biodiversity without influencing firms to assess their impacts on biodiversity.
ORGANIZATIONAL HYPOCRISY IN THE EMPLOYEE-RELATED DISCLOSURES RENDERED BY THE ELECTRONIC MANUFACTURING SERVICES PROVIDERS DOMICILED IN TAIWAN
HAQUE, SHAMIMA
CHAPPLE, ELLIE; LI, ZHONGTIAN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Purpose – The research objective is threefold: (1) it investigated the possible discrepancies between the employee-related disclosures (a type of corporate accounts) from the electronic manufacturing services (EMS) providers domiciled in Taiwan and inspection results (a type of shadow/counter accounts) from the labour-practice-oriented non-governmental organizations (NGOs); (2) it examined the effectiveness of CSR assurance services in addressing the possible discrepancies; (3) it looked into the effectiveness of mandatory reporting rules in addressing them. Design/methodology/approach – Corporate accounts (the employee-related disclosures) and shadow/counter accounts (inspection reports from NGOs, news, sociological work and supplier reports from the client of EMS providers) are investigated. The study deeply examined two cases, two dominant Taiwanese providers in the global market, by documentary analysis. The sample period is 2010, 2012, 2014 and 2015. Findings – The study found that the discrepancies in the employee-related disclosures existed in years surveyed. Moreover, the use of CSR assurance services and introduction of mandatory CSR reporting rules did not correct the discrepancies. According to organizational hypocrisy, the study interpreted that the discrepancies found are due to a dual role of the Taiwanese EMS providers as both action and political organizations. Originality/value – The study introduced organizational hypocrisy into the CSR literature It contributed to the research on employee-related disclosure in Asia (especially Taiwan), to that on CSR assurance services and to that on mandatory reporting. It generated practical impacts on policy making in relation to mandatory CSR reporting.It contributed to the research on employee-related disclosure in Asia (especially Taiwan), to that on CSR assurance services and to that on mandatory reporting. It generated practical impacts on policy making in relation to mandatory CSR reporting. It contributed to the research on employee-related disclosure in Asia (especially Taiwan), to that on CSR assurance services and to that on mandatory reporting. It generated practical impacts on policy making in relation to mandatory CSR reporting. It contributed to the research on employee-related disclosure in Asia (especially Taiwan), to that on CSR assurance services and to that on mandatory reporting. It generated practical impacts on policy making in relation to mandatory CSR reporting.
UNDERSTANDING HOW THE EFFECTS OF CONDITIONAL CONSERVATISM MEASUREMENT BIAS VARY WITH THE RESEARCH CONTEXT.
HARAKEH, MOSTAFA
LEE, EDWARD; WALKER, MARTIN
Category: FR = Financial Reporting
While the asymmetric timeliness (AT) measure of Basu (1997) underpins a large body of empirical research on conditional conservatism (CC), prior studies have demonstrated that the AT construct is biased and that such bias is likely to lead to Type 1 error. To assess how this could affect inferences from prior literature, we replicate previous CC studies that apply the AT measure, and compare the outcomes against those based on the asymmetric conditional variance (ACV) measure of Dutta & Patatoukas (2017) confirmed to be less influenced by similar bias. We draw two main conclusions. First, the AT and ACV measures yield similar inferences in interrupted time-series settings that examine the impact of exogenous accounting policy changes on CC. Second, the inferences drawn from applying the AT measure are not supported by the ACV measure in seminal studies that model the determinants of CC in cross-sectional settings. Our findings have implications for both past and future empirical studies of CC.
E-COMMERCE AND INCOME SHIFTING TO DOT-SIZED TAX HAVENS
HARRIS, DAVID
CHEN, CHAO; SHI, LINNA
Category: TX = Taxation
We investigate the extent to which E-commerce facilitates tax avoidance by multinational corporations’ shifting income into dot-sized foreign tax havens. E-commerce exacerbating such tax avoidance has long been a widespread concern. Recent OECD position papers extensively discuss this problem and provide a series of recommendations for addressing it. However, there are few empirical research papers on E-commerce and tax avoidance, and the specific effect of E-commerce on income shifting is unexamined. We find evidence firms utilize dot-sized-tax-haven foreign operations to shift income out of U.S. and that the digital economy strongly increases this effect, consistent with OECD concerns. Similarly, the effect of E-commerce on such income shifting is exacerbated by greater profitability intangible asset investment. Though we document our results with U.S. firms’ data, there is every reason to believe that what we find is not unique to the U.S., but general to all jurisdictions. Consistent with income shifting being a zero-sum transaction, we find similar U.S (negative) and foreign (positive) effects. Our paper contributes to the literature by identifying this effect and measuring the magnitude of it on U.S. multinational firms’ U.S. and foreign reported incomes. We also contribute to the literature by utilizing a new, less ambiguous measure of firms’ abilities and tax incentives to shift income based on the numbers of tax haven subsidiaries they incorporate.
IFRS ADOPTION AND LITIGATION RISK: EVIDENCE FROM DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE
HART, DAPHNE
BURNETT, BRIAN; PAIGE, PATRICK
Category: GV = Accounting and Governance
This paper examines the effects of IFRS adoption on litigation risk using Directors' and Officers' (D&O) liability insurance in Canada. IFRS is typically viewed as a more principles-based accounting standard than Canadian GAAP which, while considered a principles-based standard, is relatively more rules-based than IFRS. A common perception is that principles-based accounting standards allow for more managerial discretion over financial reporting, which suggests that IFRS adoption may alter the litigation risk exposure of companies and their directors and officers. We find that D&O liability insurance coverage increased while premiums and the cost per unit of coverage decreased following the adoption of IFRS in Canada. We separately study a sample of Canadian firms cross-listed in the US, which is considered more litigious than Canada. We find that for Canadian firms cross-listed in the US, D&O liability insurance coverage was unchanged following the adoption of IFRS; nonetheless, premiums and the cost per unit of coverage decreased. We also conduct a difference-in-difference analysis using a sample of US firms. We find that relative to US firms, the D&O liability insurance premiums paid by Canadian firms cross-listed in the US, decreased following IFRS adoption. These results are consistent with the expectation that more principles-based accounting standards reduce litigation risk, and provide evidence for a real benefit of adopting more principles-based accounting standards.
THE EFFECT OF GENERALIZED TRUST AND CIVIC MORALITY ON COST STICKINESS: CROSS-COUNTRY EVIDENCE
HARTLIEB, SVEN
EIERLE, BRIGITTE; LOY, THOMAS R.
Category: MA = Management Accounting
We investigate the impact of informal social attributes on cost behavior. More specifically, we examine the effect of generalized trust (trust in others) and civic morality (self-reported trustworthiness) on cost stickiness. Using a large international sample of firm-year observations across 56 countries, we find that generalized trust significantly increases cost stickiness, while civic morality is not statistically associated with cost behavior. This study makes a significant contribution in understanding cost asymmetry differences across the globe. Our results further complement prior research which has found to the contrary that trust and cost stickiness are negatively associated at the local level. Hence, our study corroborates the importance of distinguishing between local social capital and global generalized trust concerning their effect on economic outcomes.
SUSTAINABILITY IN ACCOUNTING EDUCATION: PUSH- AND PULL-STRATEGY AS IDEOLOGICAL BACKGROUND FOR CURRICULUM INNOVATION
HARTMANN, BERIT
Category: ED = Accounting Education
This study investigates and reflects upon how our understanding of sustainability shapes and is shaped by the ways in which we teach accounting, focussing on the following questions: how do we understand sustainability, and how can we describe, assess, and improve the ways in which we embed the sustainability agenda into the curriculum? To shed light on these questions I interviewed teachers and program leaders at the accounting section of the School of Business Economics and Law at the University of Gothenburg as well as the environmental coordinator responsible for sustainability work at the school. The analysis utilizes a semiotic square to deconstruct the predominant boundaries we draw between integrating sustainability in accounting education as a natural part of what we teach and a separation of sustainability as an “add-on” to established tools and techniques in accounting education. The study finds that there are several teaching approaches and strategies prevalent in the accounting section, grounded in different academic and ideological backgrounds. The study further shows a tension between the aim to please current job markets (pull-strategy) and to change the world for the better (push-strategy). Business schools need to balance this tension and I propose a way of combining these different approaches to move towards a more holistic approach while at the same time taking individual specialisations into account.
THE LITERATURE ON ACCOUNTING IN THE ARAB WORLD
HASLAM, JIM
AL-SHAER, HABIBA ; GALLHOFER, SONJA; KAMLA, RANIA
Category: IC = Interdisciplinary/Critical
We overview and assess the English language literature on accounting in the Arab world. We begin by highlighting the increased global significance of the region and the need to understand accounting in this specific context. We then offer a critical appreciation of the relevant literature in terms of its contributions as well as its limitations. We argue that despite the important and interesting insights this literature has offered many studies evidence a neglect of context and a narrow view of accounting. We thus make suggestions for further research to redress this imbalance.
THE ASSOCIATION BETWEEN CORRUPTION AND ANALYST COVERAGE
HASSAN, OMAIMA
GIORGIONI, GIANLUIGI
Category: FA = Financial Analysis
Corruption is a social evil and a widely spread unethical practice in many countries, to a different extent, around the world. Although the literature on corruption at the country level is rich, relatively fewer studies have focused on the impact of corruption at firm level due to data limitations. This study contributes to the literature by providing empirical evidence on the impact of country-level corruption and firms’ self-reported policies for combating bribery on the number of analysts following a firm. It employs a panel data analysis on a sample of S&P Global 1200 companies for the years 2010 to 2015. The results show that companies that operate in clean countries, i.e. countries with low level of corruption, attract high analyst coverage. The results also show that companies that adopt policies to tackle corruption at firm level stimulate high analyst coverage. However, firms’ efforts to tackle corruption cannot mitigate the negative impact of high corruption at country level on analyst coverage. These results send a warning message to decision makers that country-level corruption is damaging the economic performance of firms in terms of low analyst coverage.
DO DIFFERENCES IN CFO BACKGROUND MATTER TO FINANCIAL STATEMENT QUALITY? AN APPLICATION OF MACHINE LEARNING AND TEXTUAL ANALYTICS
HAYES, LOUISE
BORITZ, J.EFRIM
Category: FR = Financial Reporting
Using machine learning, we develop and use Naïve Bayes algorithms to classify the audit experience, finance experience and accounting education of 3,816 chief financial officers (CFOs) of S&P 1500 companies for the period 2006 – 2014. A logistic regression tests the associations between the likelihood of restating annual financial statements and CFO experience/education categories. We find that companies with CFOs with audit experience have a lower likelihood of restatement relative to companies with CFOs without audit experience. For entities with higher analyst following, finance experience is associated with a higher likelihood of restatement, whereas audit experience is associated with a lower likelihood of restatement. This difference is exacerbated by weaker corporate governance and the presence of restructuring. This study both indicates that further research into CFO characteristics is warranted and provides an automated, labor-saving, transparent, replicable, and scalable text analytics approach based on machine learning that can be used in such future research.
DOES PROVIDING NON-AUDIT SERVICE IMPACT AUDIT QUALITY? EVIDENCE OF CORPORATE SOCIAL RESPONSIBILITY (CSR) REPORT ASSURANCE AND AUDIT QUALITY
HE, LI-JEN
CHIANG, HSIANG-TSAI
Category: AU = Auditing
For increasing the accountability in CSR reports, listed companies meet certain criteria were required to compose and publish company CSR reports starting in 2015. With respect to the mandate for CSR reports prepared by the food-related industry to have an auditor’s assurance opinion, the assurance of CSR reports has become an important non-audit service for audit firms. Accordingly, this study aims to explore the effects of engaging auditors to provide assurance services for their audit clients on audit quality. The empirical results reveals that companies whose CSR reports are assured by the auditor that provide audit service for its financial statement possess significantly lower absolute discretionary accruals. In addition, the results suggest that while the effects of audit firms are not significant, the impact of engaging audit partner to provide CSR report assurance service is significant for improving audit quality in most situations. For the consideration of auditors’ industrial specialization, the results reveal that the association between providing CSR report assurance service and audit quality is significant only for companies that are audited by non-industrial specialist auditors. For the reason that non-specialist auditors process fewer client or industrial specific knowledge, the advantages of knowledge spill-over from CSR assurance work are more significant as a result. For the additional test for companies issued CSR reports, we find that when the CSR report
CORPORATE CARBON ACCOUNTING: A REVIEW IN ACCOUNTING LITERATURE
HE, RONG
LUO, LE; SHAMSUDDIN, ABUL ; TANG, QINGLIANG
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We review 110 carbon accounting papers published in 34 high quality accounting journals in the period from 2005 to 2017. We find that carbon accounting research is evolving quickly, indicating that climate-change issues are attracting more and more attention of accounting scholars. In particular, we develop a framework for systematically evaluating corporate carbon accounting research in terms of four major subject matters, namely carbon disclosure, carbon assurance, carbon management and carbon performance. While predominate studies focus and explore carbon disclosure, carbon assurance, carbon management and carbon performance have also been witnessed their momentum. The paper summarises the main findings of each of these four subject matters and identifies their respective gaps. Finally, we urge more research on carbon investment, the dynamic decisions of other capital market participants such as banks and analysts, developing countries and sector-specific carbon issues.
EXAMINING THE RELATIONSHIPS BETWEEN INTERNAL AND EXTERNAL AUDITORS AND AUDIT COMMITTEES IN THE PUBLIC SECTOR
HEGAZY, KARIM
HEGAZY, MOHAMED
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Purpose This paper assesses the job of scrutiny and oversight in public services by examining the role of the Internal Auditor (IA) and External Auditor (EA) and their relationship with the Audit committee (AC) in two distinct English public sector settings during a time of change. The diversity and wider and more complex accountability relationships and intricacies found in public sector organisations increases the significance of such research. Design/methodology/approach The research uses an exploratory qualitative case study approach based on semi-structured interviews, AC meeting observations and documentation reviews. Findings The research provides evidence of good triangulation between the work of the IA, EA and AC. Nevertheless, some of the findings in terms of having a close interaction between EAs and ACs and a crossing over in terms of responsibilities may lead to a conflict of interest and raises serious doubts about the independence and objectivity of the EA. Research implications The study highlights that the additional complexities of public sector organisations means that agency theory in itself is insufficient to offer good explanations of scrutiny and oversight arrangements. The research provides evidence on the existence of elements of loosely coupled Corporate Governance structures in the roles of the EA and IA and their relationship with the AC, indicating that some analysis from an Institutional Theory perspective can be helpful. Originality/Value: This paper gives an exploration of the IA, EA roles and their relationship with the AC in a public sector context. It adds to the very limited literature on such topic in a different organizational and institutional setting other than the private sector.
AUDITING FIRMS NETWORKS AND THEIR MEMBERS: GLOBAL INTERACTIONS AND COOPERATION OR LONE WOLFS FOR AUTONOMY?
HEGAZY, MOHAMED
HEGAZY, KARIM; MOHAMED, BASUONY
Category: AU = Auditing
The international audit firms’ networks play an important role in managing the auditing and other type of services worldwide. The current research assesses the relationship between the members of an international audit network and its management in the provision of an international referral providing insights into the complex interactions among members given their differences, in policies, management and environments. A case study approach is undertaken to respond to a few research questions related to the extent of how members firms within the network cooperate in providing their services without sacrificing their autonomy and independent status. Also, the extent to which senior management of the network may influence members firms’ decisions associated with the provision of their services. The study analyzed and assessed an actual referral engagement of one of the top 10 international auditing networks showing the interactions and decisions of the members and management of the network. The results show that members firms disagree and miscommunicate when they cooperate for their international referrals and some members can lose the engagement if they insisted on maintaining their autonomous decisions. Threats and pressure to terminate the engagement and not collect the agreed upon fees are used from both the lead partner and senior management of the network to force other member to perform the services according to the wishes and management style of the leading member firm.
DOES THE DISCLOSURE OF KEY AUDIT MATTERS REDUCE THE AUDIT EXPECTATION GAP?
HEILMANN, MELINA
POTT, CHRISTIANE
Category: AU = Auditing
This study investigates the effectiveness of Key Audit Matters (KAMs) as mandated by the revised ISA 700 and the new ISA 701 auditor’s report in reducing the audit expectation gap. German auditors and students participated in an experiment where they received a summary of a company’s financial statements and an auditor’s report which was manipulated as being the ‘complete auditor’s report’ with KAMs and a ‘responsibilities-only’ version without KAMs. We examined the perceptions of financial statement users compared to auditors regarding ascribed auditor’s responsibilities, management’s responsibilities, and financial statement reliability. We find strong evidence for a persistent expectation gap regarding the auditor’s and management’s responsibilities. In contrast, the expectations regarding the financial statement reliability just differ marginally between auditors and financial statement users. Most remarkably, we observe that the disclosure of KAMs does not result in significant different expectations of financial statement users indicating that KAMs may not serve as an instrument to reduce the audit expectation gap. Overall, our results suggest that the disclosure of KAMs is ineffective in closing the audit expectation gap.
NICHE CONSTRUCTION AND LINKED ECOLOGIES: GLOBAL VERSUS LOCAL
HELLIAR, CHRISTINE
CRAWFORD, LOUISE; ROCCA, LAURA; TEODORI, CLAUDIO; VENEZIANI, MONICA
Category: IC = Interdisciplinary/Critical
Abstract The environment of accountants in different jurisdictions and in a diverse range of settings may mean that local practices vary across the globe in their own particular niches. However, the convergence of accounting through the adoption of International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board (IASB), the adoption of the International Audit and Assurance Board’s International Standards on Auditing and the publication of International Education Standards (IES) by the International Accounting Education Standards Board (IAESB) may mean that global influences now dominate. This tension between the global and the local is examined in this paper using Italy as a vehicle to establish whether the global or local institutional setting prevails and why. We find that the global ideological approach to professional accounting education impacts on Italian niches, and that although local professionals arbitrage between global, national and local conceptions of the profession in a linked ecologies framework, in Italy accountants are located in their own professional niches that are unhinged from any sense of a linked ecology.
INTERNAL CONTROL THROUGH THE LENS OF INSTITUTIONAL WORK: A SYSTEMATIC LITERATURE REVIEW
HENK, OLIVER
Category: GV = Accounting and Governance
Despite the internal control (IC) explosion in recent years, the research on the concept remains limited and there is confusion about effective ICs in practice. One reason for such confusion is that the literature on IC remains currently highly fragmented with an unclear definition of the concept. To address this lack of research, the paper aims at systematically structuring the literature in the field of IC by investigating what we know from previous studies about the practice of IC and how it is institutionalized on the individual level. Therefore, the paper uses the theoretical lens of institutional work, which represents a recent development of institutional theory and is useful to investigate how the practice of IC is institutionalized through the work of individuals who have different roles and responsibilities related to IC. The paper presents one of the first attempts to synthesize the knowledge from different research streams in the field of IC through the analytical lens of institutional work. It contributes, therefore, substantially to the growing body of literature that analyzes aspects of corporate governance through more diversified theoretical frameworks than agency theory. In addition to that, the paper presents an aggregated understanding of the term IC and can therefore significantly supplement the efforts of regulators to implement IC procedures that add value for the corporate governance of organizations.
HOW DIFFERENT ARE BANKS? - ETRS OF BANKS AND NON-BANKS
HENNEMANN, VANESSA
MÜLLER, JENS
Category: TX = Taxation
While the public has noticed the need for the detection of potential tax loopholes and demand further improvement in the taxation of banks, there is scarce empirical evidence of whether banks are pursuing tax aggressive strategies. We try to close this gap by investigating U.S. banks’ tax avoidance behavior for a sample period from 2004 to 2015. To anchor banks’ tax avoidance, we use annual and long-run Cash ETRs and compare them against the tax avoidance behavior of non-banks. As banks’ and non-banks’ are probably heterogeneous, we control for differences in size, profitability, multinationality and leverage. Banks, however, have a different business model than non-banks. In additional analyses, we therefore try to shed more light on what are bank-specific drivers (like non-interest income or loan loss provisions) of tax avoidance. Descriptive evidence shows that banks, over the whole sample period, engage in less tax avoidance than non-banks.
THE CAPITAL MARKET’S MISINTERPRETATION OF MANAGER-SPECIFIC ABNORMAL TONE – AN ANALYSIS OF MANAGER-SPECIFIC CONTEXT FACTORS
HENNIG, JAN CHRISTOPH
Category: FA = Financial Analysis
This study investigates the investor perception of abnormal tone on the manager-level under consideration of manager-specific context factors. We estimate a manager-specific abnormal tone that is unrelated to firm fundamentals and manager fixed effects. We find that positive manager-specific abnormal tone in earnings conference calls has an increasing effect on the market reaction, but not on future firm performance. This indicates that investors expect abnormal tone to convey incremental information about future performance, yet managers use it to mislead investors. We also find that manager-specific linguistic context factors such as past use of language (tone level and tone deviation) and current use of language (complexity and assertiveness) reduce the effect of abnormal tone on the market reaction, so the investor perception varies with the manager. We also find some evidence that managers with a generally optimistic tone level and managers being very assertive use abnormal tone particularly when they try to mask poor future firm performance. Overall, the evidence is consistent with investors perceiving abnormal tone positively, yet the inclusion of manager-specific linguistic context factors aids investors in adjusting their reaction.
THE IMPACT OF VALUE REPORTING ON FIRM VALUE: INVESTIGATING SWITZERLAND’S SPI-LISTED COMPANIES
HENRIZI, PHILIPP
CANDRIAN, MEN
Category: FR = Financial Reporting
The concept of value reporting (VR) is an existing corporate reporting way to provide investors and other stakeholders with a holistic picture of the value generation activities of a company. Thus, it addresses information asymmetry and limitations to extant corporate reporting approaches, which is certainly criticized for being unclear in its benefits. This paper examines the impact of VR on firm value (FV). Using a sample of listed firms in Switzerland, we examine the relationship between cross-sectional variation in VR disclosures and FV in the period after the financial crisis. We find that FV is positively associated with the quality of VR disclosures. This result suggests that on average, the benefits of VR exceed its costs. Moreover, we find that the positive relation between FV and VR is stronger in the firms with higher organizational complexity, suggesting that VR improves the information environment in complex firms such as firms with high intangible assets, firms with multiple business segments and large firms. Furthermore, we find that in firms with higher external financing needs, the sub-sample of firms with higher VR quality have higher FV, suggesting that VR mitigates the information asymmetry between corporate insiders and external suppliers of capital.
SECTION SENTIMENT: FORM 10-K TEXTUAL ANALYSIS AND FUTURE STOCK RETURNS
HERING, JÖRG
HENSELMANN, KLAUS
Category: FA = Financial Analysis
In this study, we perform textual analysis on more than 180,000 annual reports on Form 10 K filed with the SEC between 1993 and 2016. We find that negative textual sentiment in annual reports is associated with lower subsequent stock returns. Furthermore, we pro-vide evidence that textual sentiment in certain report sections (“MD&A,” “Business ,” “Shareholder Matters”) is more important to investors than textual sentiment in the entire report. In particular, we show that investors’ reaction to textual sentiment in several Form 10-K subsections is much stronger and timelier than their reaction to textual characteristics in the overall filing. We also find suggestive evidence that capital market participants react to textual sentiment in the additional non-core documents (“Exhibits”) as part of the an-nual report submission. Finally, besides connecting textual sentiment to other important fu-ture firm fundamentals (return on assets, dividend yield, payout ratio), we show that man-agement obfuscation in financial statements (“Footnotes”), as argued in the literature, is either not present or has failed.
THREE GOVERNANCE-RELATED LEARNING STORIES
HEROUX, SYLVIE
ROUSSY, MELANIE
Category: GV = Accounting and Governance
The aim of this paper is to understand how organizations comply with governance regulation. More specifically, it seeks to interpret the processes by which organizations implement and coordinate mechanisms to ensure they achieve such compliance. Based on semi-structured interviews with governance actors at three large organizations, data are interpreted from an organizational learning perspective. Results suggest that compliance with governance regulation can help organizations enhance business strategy with better risk management, control, and accountability, thereby benefitting board members, top managers, and internal auditors. Results are particularly relevant for newly listed firms dealing with governance regulation for the first time, and for cross-listed firms, which are required to conform to a considerable number of regulations. This study contributes to the governance literature by providing insights into the benefits that can result from compliance with governance regulations. It also extends the organizational learning literature as it relates to regulatory compliance.
OPERATING LEVERAGE AND LEARNING FROM PEER INVESTMENT
HILLERT, GEREON MARKUS
WOLTSCHLÄGER, ANDREAS
Category: FA = Financial Analysis
We examine the effect of peer investment on a firm’s operating leverage. Our results suggest that peer firms play an important role in determining operating leverage. Firms cost structure decisions are positively associated with firm’s peer investment as corporate investments reveal expectations about growth opportunities. We propose peer learning as potential explanation for this finding. Important determinants of learning are macroeconomic uncertainty, restricted financial resources and peer size. We exploit a setting with granular costs disclosures and detailed information on product market overlap. In sum, the results are consistent with our theoretical considerations that peer investment informs the decision-making firm about its own growth perspectives which leads to an adjustment in the cost structure.
ONLINE CLOUD EXPERIMENTAL TECHNOLOGY FOR ACCOUNTING ETHICS
HIROSE, YOSHITAKA
Category: ED = Accounting Education
The purpose of this research is to construct a method for conducting accounting ethics education using an online cloud experimental system which has not been done conventionally. A prisoner's dilemma game and a public goods game were conducted, which is an important theme in accounting ethics. There are two core findings of this experiment. First, there are no differences in decision-making of high school, college, and university students in the prisoner’s dilemma game, which indicates that the online cloud experimental system is applicable to various subjects. Second, those who contribute significantly toward public goods receive relatively low benefits as compared to those who contribute less. This result indicates the presence of free riders. It further suggests that individuals do not focus on maximizing self-benefit only, but also contributes toward public goods to derive at overall gain. This research makes three contributions. First, it applies a completely new educational technology in the form of an online cloud experimental system to accounting education for the first time. Second, it contributes toward accounting ethics education by providing a new method of teaching using experiments. Third, it contributes toward important themes of accounting education research such as cooperativeness, team work, and active learning. It is a future research opportunity to conduct simultaneous on-line experiments connecting multiple countries and universities.
INFORMATION CONTENT OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE IN EUROPE
HOERMANSEDER, STÉPHANIE A.
HUMMEL, KATRIN; RAMMERSTORFER, MARGARETHE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Based on a hand-collection of annual reports of the constituents of the STOXX Europe 600 covering a period of 8 years, we investigate the value relevance of corporate social responsibility (CSR) information. Using textual analysis, we construct topic-specific disclosure measures that examine the prevalence of the six CSR topics identified by the EU directive on non-financial disclosure, namely environment, social and employee matters, respect for human rights, anti-corruption and bribery matters, in firms’ annual reports. Through a traditional value relevance study, we first, identify which CSR topics provide information content for prices. In a next step, we examine whether the institutional environment impacts the incremental value relevance of the topic-specific disclosure measures. Except for ecology, our results reveal, that for social and employees matters, human rights and corruption the strength of the institutional environment drives the incremental value relevance of the CSR topic.
MANDATORY AUDITOR UPGRADE AND EARNINGS QUALITY
HÖGLUND, HENRIK
SUNDVIK, DENNIS
Category: AU = Auditing
Prior to the Finnish auditing act of 2007, smaller firms could use non-certified auditors to audit their annual financial statements. For firms that had used a non-certified auditor prior to the auditing act of 2007, a transition period until the end of 2011 was specified. After 2011, the firms that had used a non-certified auditor up to that point had to switch to a certified auditor. The purpose of this study is to examine the effects of the mandatory auditor upgrade on earnings quality. The results indicate that the mandatory auditor upgrade has a positive effect on earnings quality. Furthermore, the results show that the level of the auditor or the auditor being a Big 4 auditor has no significant impact on the post upgrade earnings quality. Finally, the results also show that firms that upgrade their auditors although they are eligible for an audit exemption improve their earnings quality one year prior to upgrading their auditors.
HOW THE EFFECT OF ASYMMETRIC COST BEHAVIOR INFLUENCES OPTION RETURNS
HOPPE, ANDRÉ
HOMBURG, CARSTEN; UHRIG-HOMBURG, MARLIESE
Category: FA = Financial Analysis
We study the effect of asymmetric cost behavior on the cross-section of stock option returns. Our results imply that investors overestimate future volatility if costs are symmetric and underestimate it if costs are asymmetric. Based on this, we identify a zero cost trading strategy requiring a long position in a portfolio with high sticky cost behavior and a short position in a portfolio with low sticky cost behavior. This strategy yields an abnormal significant monthly average return of 3.89%. Further, we find a significantly positive cross-sectional relation between sticky cost behavior and straddle options. For anti-sticky cost behavior, we obtain similar results but an even higher abnormal monthly average return of 5.64%. The findings are robust to changes in the estimations methods and the returns cannot be explained by common risk factors. However, as expected the monthly average portfolio return turns negative and insignificant if we include transaction costs.
A TWO-STAGE MODEL OF DECISION-MAKING OVER FINANCIAL REPORTING REGIMES AND TECHNIQUES IN THE UK: THEORETICAL ANALYSIS SUPPORTED BY ILLUSTRATIVE CASE STUDIES
HSU, YU-LIN
REID, GAVIN
Category: FR = Financial Reporting
This paper develops a new two-stage decision model to explain the choices of financial reporting regimes (e.g. IFRS or UK GAAP) and techniques (e.g. valuing intangibles, by cost, income or market methods) for UK companies. The theoretical framework is based on the choice theory of orderings (Lex and CoLex), and is expressed in decision trees which capture firms’ actions, based on calibrated benefits and costs. The decision-making processes are examined through three UK empirical case studies (one private and two public firms), that expound their decision trees, and explain their decisions. We probe the rationale of their decisions using field-work investigation methods, through which we develop a ‘stated preference’ metric of choice, which allows us to interpret how decisions are made, and how they differ: over time (notably when regime changes are being implemented e.g. the emergence of New UK GAAP post-2015); and across firms (where factors like ease of execution and the quality and quantity of information needed for decisions, are shown to play a large part).
DISPEL THE CLOUDS AND SEE SUNSHINE: THE EFFECT OF ANTI-CORRUPTION ON CORPORATE TAX AVOIDANCE
HU, MINGSHENG
MO, PHYLLIS; YUAN, JIANGUO; YUAN, YUAN
Category: TX = Taxation
We investigate the association between anti-corruption and corporate tax avoidance via Difference-in-Difference approach, by exploiting an exogenous event: Xi Jinping’s anti-corruption campaign since the end of year 2012. By exploiting China listed firm data during the period from 2008 to 2015, we find that anti-corruption could restrict corporate tax avoiding behavior after controlling various factors at firm level and region level. The restrictive effect is more significant for listed firms located in high-corrupted regions with state owned property, political identity managers and directors, or more governmental subsidy. The result indicates that anti-corruption could restrict corporate tax avoiding behavior, by weakening the positive relation between government-enterprise relationship and tax avoidance. This paper provides an empirical evidence by showing a causal effect of institutional anti-corruption on corporate tax avoidance, and expanding a flow of research on official corruption and corporate tax decision making.
LEARNING WHILE WORKING: HOW DO EARLY LITIGATION EXPERIENCES AFFECT MANAGERS' DISCLOSURE?
HU, YAQIN
CREADY, WILLIAM
Category: FR = Financial Reporting
We track the employment histories of over 3,000 chief executive officers (CEOs) and study how their past litigation experiences affect corporate disclosure decisions. We define the litigation experience to be any securities class action experienced in a CEO's early career in other firms and in non-CEO positions. We find that firms managed by these litigation experienced CEOs provide more guidance than firms not managed by such CEOs. However, we also find that they provide less precise non-earnings guidance and that market response to their EPS related disclosure is lower. Collectively, this evidence is consistent with the perspective that past litigation experience leads CEOs to increase the frequency with which they provide voluntary disclosure, but the surprise content (as measured by market reaction) of such disclosure falls. Such behavior is consistent with these managers seeking to avoid large price change events, as such events are argued to attract litigation.
DOES THE CREDIT RATING OF IMMEDIATE CONTROLLING SHAREHOLDER MATTER TO THE FIRM’S BONDHOLDERS? EVIDENCE FROM CHINA’S BOND MARKET
HU, YIMING
HAN, PENGFEI
Category: FA = Financial Analysis
This paper examines the effect of credit rating of immediate controlling shareholder on the cost of debt. Using a sample of corporate bonds publicly traded on China’s stock exchange over 2008-2014, we find that the bond spread is reduced when the credit rating of immediate controlling shareholder is higher than the firm’s. We also find that the effect of credit rating of immediate controlling shareholder on bondholders is stronger for the firm with a poorer credit rating and worse profitability, higher sales ratio and larger ownership concentration. Our results suggest that the impact of controlling shareholders on investors depends on the credit rating of immediate controlling shareholder.
LOAN FINANCING COST IN MERGERS AND ACQUISITIONS
HUA, CHEN
GAO, NING; KHURSHED, ARIF
Category: FA = Financial Analysis
In this paper, we examine the determinants of loan financing cost in the M&As, using a sample of 330 manually collected US M&As that were funded by loans. After controlling for characteristics of the acquiring firms and loan packages and potential simultaneity and self-selection issues, we document robust evidence in terms of positive association between relative size of the target to the acquiring firm and all-in-drawn spread (AIDS), which suggests that presence of the higher information asymmetry between the bidder and the target increases the loan financing cost. Furthermore, consistent with the risk-sharing effect of paying by stock, higher proportion of stock in the consideration is negatively associated with AIDS. Our findings complement the M&A literature by offering empirical evidence for the financing cost in the M&As. This paper also suggests that the specific purposes of loans could affect the loan financing cost.
BASEL II AND BANK OPERATIONAL LOSSES
HUAN, XING
CONLON, THOMAS
Category: FR = Financial Reporting
Banks are required to hold capital as a buffer against future losses and as a market impediment to discourage excessive risk taking. We examine whether the introduction of capital specific to operational risk under the Basel II framework resulted in a reduction in operational losses. To isolate this effect, we take advantage of the staggered implementation of Basel II in the US compared with other countries. Employing an entropy-balanced sample of 1,140 bank-year observations across 25 countries, we show that the introduction of operational risk capital under Basel II leads to a significant reduction in operational losses in treated banks. Findings indicate that Basel II implementation has been effective in reducing bank operational losses, especially in the presence of strong regulatory and supervisory practices.
POLITICAL CORRUPTION AND FIRM ACCESS TO IPO MARKET
HUANG, CHEN
GOUNOPOULOS, DIMITRIOS
Category: FA = Financial Analysis
The study provides new evidence on how political corruption affects firm performance. We uncover strong evidence that the corrupt environment imposes costs for firms to access public capital market by increasing underpricing, which is consistent with the notion that political corruption causes business uncertainty and high information asymmetry on the market. This translates into a $12.2 million potential loss for an average issuer. Our evidence indicates that the effect applies only for small-sized issuers, and also increases along with the higher percentage of operations concentrated in headquarter locations. We demonstrate that underwriters play an vital role to promote IPOs in the corrupt environment by increasing offer price revisions and reducing underpricing. The study reveals that political corruption does not diminish the likelihood of pre-IPO shareholder’s managing positive wealth gains. Results continue to hold after addressing endogeneity concern and conducting a variety of robustness tests.
MARKET UNCERTAINTY OF FUTURE FIRM VALUE: THE IMPACT OF CONTINGENCY DISCLOSURES ON IMPLIED VOLATILITY
HUANG, HSIN-YI
LIU, CHIAWEN ; WANG, TAYCHANG
Category: FR = Financial Reporting
The SEC intensified its review of firms’ contingency disclosures in October 2010, looking to address investor concerns regarding the lack of information available to value the firms’ risk with respect to contingent issues. This paper investigates the effect of litigation loss contingency disclosure on market uncertainty in the post-SEC increased monitoring period. Using implied volatilities from different option maturities, we find that the initial disclosure of a lawsuit in the footnotes to the financial statements is positively related to stock market volatility, implying that stock market investors revise their views on the future value of the stock when responding to this unexpected information. We further test and, after controlling for the attributable effects of earnings surprise, find that market uncertainty regarding firm value decreases as managers initially disclose the recognition of a loss or the estimation of a loss in the legal loss contingency disclosure. These results imply that information provided in the litigation loss contingency disclosure helps to resolve market uncertainty because market participants are highly uncertain of the firm’s value before it is disclosed. Overall, our study provides evidence that while the initial disclosure of a lawsuit increases market uncertainty, the disclosure of recognition of legal loss contingency helps to resolve investor uncertainty about the underlying firm value.
DISCRETIONARY DISCLOSURE ON TWITTER
HUANG, WENLI
CROWLEY, RICHARD; LU, HAI
Category: FR = Financial Reporting
Using a sample of 12.8 million tweets from S&P 1500 firms with active Twitter accounts from 2012 to 2016, we show that firms selectively disclose corporate events on Twitter and choose to post financial disclosures on Twitter more frequently around earnings announcements, accounting filings, and firm-specific news events. Financial disclosures on Twitter are more likely to contain media (image or video) and links around these events. Consistent with predictions from disclosure theory, both effects are strong when the sign of the news is clearly negative or positive. The above patterns of timing and usage of media and links are robust in intraday analysis. We also find that firms with lower institutional ownership are more likely to exercise discretion and the feedback of Twitter users affects firm disclosure in the future. These findings suggest that firms make discretionary disclosure on Twitter and the feedback mechanism on Twitter affects the disclosure patterns in a dynamic manner.
INFORMATION SHOCKS AND CORPORATE CASH POLICIES
HUANG, YUAN
CHENG, CS AGNES; LI, XIAO
Category: GV = Accounting and Governance
We examine how firms’ cash holdings change as a result of shocks to the firms’ information environment. The information shocks we examine are changes in two country-level regulations: the initial enforcement of insider trading laws (ITLs) around the world and the mandatory adoption of International Financial Reporting Standards (IFRS) in European Union (EU) countries. Using a difference-in-differences approach, we document that, after the initial enforcement of ITLs and mandatory IFRS adoption, firms decrease their cash holdings significantly. Furthermore, we find that country-level enforcement quality affects firms’ cash holdings. We provide evidence that the decrease in cash holdings is more significant in firms with higher precautionary savings demand and with more agency problems. Additional tests show that after these two informational events, firms save less cash from their operating cash flow, increase external financing, and mitigate the underinvestment problem. Our findings provide evidence that information environment improvements have real decision effects.
THE INFORMATIVENESS AND MONITORING EFFECT OF ANALYSTS’ COMMENTS ON EARNINGS QUALITY
HUANG, ZHONGWEI
Category: FR = Financial Reporting
This paper investigates analysts’ comments on earnings quality as a potential channel through which financial analysts monitor firms and deter earnings management. I find that these earnings quality comments convey information to investors beyond that in the earnings forecasts, stock ratings, price targets, and other qualitative text in analyst reports. Further analyses suggest that the market’s reaction to these comments is primarily driven by comments written with certainty. In addition, controlling for accruals reversals, I find that firms significantly reduce the level of discretionary accruals after receiving negative comments. Finally, I find that the increase in discretionary accruals following an exogenous decrease in analyst coverage is more pronounced when the analysts dropping the coverage have a record of making comments on earnings quality.
MODES OF CONSTITUTION: AN ESSAY ON ACCOUNTING PERFORMATIVITY
HUBER, CHRISTIAN
YU, LICHEN
Category: IC = Interdisciplinary/Critical
The notion of performativity has enjoyed significant attention in the social sciences in the past decades because it has helped dispelling the myth of language being a mirror of reality. Rather, different utterances, economic models or accounting tools among them, change the world they seek to represent. In economic sociology, the performativity of economic models has so far been the focus of study. This paper teases out the specificities of the performativity of accounting. It does so in two steps. First, the differences between the performativity of accounting and economics is discussed. Second, based on a literature review, five types of accounting performativity are proposed. The basic contention is that accounting performativity differs from the performativity of economics because accounting draws on a less homogeneous body of knowledge and creates more flowing and instable worlds to accommodate multiple forms of decision-making. The study offers avenues for a more fine-grained understanding of accounting performativity in conceptual and empirical research.
PROFIT SHIFTING WITHIN MULTINATIONAL ENTERPRISES - EVIDENCE FROM THE ROE OF GERMAN DAX 30 SUBSIDIARIES
HUBMANN, MAXIMILIAN
Category: TX = Taxation
This paper examines profit shifting activities of German multinational enterprises, namely the DAX 30 firms. Multinational enterprises are expected to take advantage of tax-rate differentials and shift income into low-tax jurisdictions. Past research focuses on the US albeit German firms, in contrast to American firms, can repatriate dividends virtually tax-free. Therefore the incentive for German firms is actually higher than for US firms. This paper tries to fill this research gap. Using pooled OLS regression and a fixed effects model, the analysis shows that there is a negative but weak relationship between the return on equity and the tax rate of a country on the subsidiary level of DAX 30 companies. In addition to that, a recently developed measure of the tax environment of a country, the Tax Attractiveness Index, is employed as an alternative tax variable. The examination shows that the extent of profit shifting of DAX 30 firms is, on average, smaller than for prior research relating to US- and European firms. The reason might not only be strict tax laws but recent research suggests that the corporate governance culture is different from the US. Moreover, the focus of the firms’ tax departments lies rather on compliance and risk minimization than on elaborate tax avoidance strategies.
PREDICTING BANKRUPTCY VIA CROSS-SECTIONAL EARNINGS FORECASTS
HUETTEMANN, MARTIN
HESS, DIETER
Category: FA = Financial Analysis
We develop a model to predict bankruptcies, exploiting that a firm’s over-indebtedness (negative book equity) is a state of immediate financial distress. Accordingly, our key predictor of bankruptcy is the probability that future losses deplete the book equity. To calculate this probability, we use earnings forecasts and their standard deviations that we obtain from cross-sectional models. However, not all over-indebted firms finally turn bankrupt. Thus, in an expanded model, we add accounting variables that we find to discriminate between bankrupt and non-bankrupt firms. As these models solely require accounting data, we can provide bankruptcy predictions for a wide range of firms, including firms that have no access to capital markets. In strictly out-of-sample tests we show that our accounting model performs substantially better than alternatives of corporate failure risk that solely use accounting information. If we allow for stock market information, we significantly outperform all leading alternatives, including those that require market data.
SELL-SIDE ANALYSTS’ VALUATION MODEL CHOICE
HUIKKU, JARI
PÖYHIÄ, AINO-MARIA
Category: FA = Financial Analysis
This study investigates the valuation method choices of sell-side analysts, an area largely overlooked by the prior literature. Specifically, we focus on the choice of valuation models that analysts use to derive a target price. The research was conducted as a case study by drawing on interviews of sell-side analysts and their valuation reports on a major energy sector firm. In addition to corroborating the existence of various drivers of valuation method choice identified in prior empirical and theoretical research, we found previously unrecognised drivers. Based on these findings, we suggest a tentative framework that categorises valuation methods in four groups: 1) firm-specific drivers, 2) market related drivers, 3) method characteristics and personal preferences, and 4) employer related drivers. We show that firm-specific aspects, such as newness of the major business and lack of peer comparability, can play a dominant role in method choice. Our research contributes to the valuation literature by providing a more nuanced picture of the drivers’ influencing the method choices of sell-side analysts. Additionally, we add to the literature by suggesting a framework that has the potential to let us better understand analysts’ behaviour and thus serve future research on the exploration of this phenomenon. Our study provides further insights for executives on the aspects that are influencing a firm’s valuation and internal decision-making.
MANDATING THE DISCLOSURE OF SUSTAINABILITY INFORMATION IN ANNUAL REPORTS – EVIDENCE FROM THE COMPANIES ACT 2006 REGULATIONS 2013
HUMMEL, KATRIN
RÖTZEL, PETER
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study investigates the introduction of the Companies Act 2006 Regulations 2013 in the United Kingdom. The regulation mandates the disclosure of specific sustainability information in a firm’s annual report, particularly information on GHG emissions and gender distribution, and the disclosure of general information on environmental, employee and human rights issues. We investigate the consequences of this regulation on firms’ disclosure in their annual reports. Drawing on traditional economic theory and socio-political theories, we argue that firms increase only the disclosure of specific information on the mandated topics in response to the regulatory intervention, but not the disclosure of general information. Our sample consists of the FTSE-100 firms and a matched control group of U.S. firms. We use textual analysis to assess the disclosure of specific and general sustainability information in firms’ annual reports. Our results reveal a significant increase in the disclosure of specific information on the mandated topics relative to the control group. When we capture the content of the mandated topics more broadly, only the disclosure of gender distribution is significantly higher – relative to the control group – after the SR Regulations became effective. Our results remain robust to a number of additional tests, including hand-collected data.
DOES GEOGRAPHIC PROXIMITY INFLUENCE CORPORATE INVESTMENT?
HUNG, CHUNG-YU
LEE, LING-CHU
Category: MA = Management Accounting
We investigate the role of geographic proximity in corporate investment using a setting of Taiwanese firms’ investment in mainland China. Geographic proximity with different provinces in mainland China affects the amount of information Taiwanese firms have when managing their oversea investment. The deregulation of direct flight routes between Taiwan and mainland China took place in 2008 and serves as a change to the travel distance and time. This feature enables a difference-in-difference empirical design. Guangdong province (control group) does not experience the reduction in travel distance and time, but nonGuangdong provinces (treatment group) do because of direct flight routes. We find that geographic proximity increases the propensity of Taiwanese firms’ investment and the associated investment performance as well. We also find that the direct flight policy improves investment efficiency (through the reduction of under-investment) and enlarges investment spread. The evidence suggests that geographical proximity reduces the coordination costs and moral hazard problems in the invested divisions.
INSTITUTIONAL HERDING AND AUDIT FEE
HUNG, SHENGMIN
DENG, XIN; QIAO, ZHENG
Category: AU = Auditing
This study investigates how institutional investor trading behavior affects audit fee by examining mutual fund herding in specific. We find that herding weakens mutual funds’ information advantage and monitoring effectiveness, resulting in higher audit fee. Our findings are robust using propensity score matching method and remain significant under the natural experiment of the 2004 SEC regulation change on mutual fund disclosure frequency. A potential explanation to our main finding is that herding fund managers, who become less effective monitors, are associated with deteriorated corporate disclosure. Empirically, we document that mutual fund herding is associated with worsened earnings quality, higher idiosyncratic volatility, and higher crash risk.
ANTI-FRAUD CONTROLS AND FRAUD RISK FACTORS IN THE NON-PROFIT WORLD: EVIDENCE FROM THE UNITED STATES IRS FORM 990
HURTT, KATHY
EINING, MARTHA; HURTT, DAVID; RICHARDS, CLAIRE
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
We study the relationship between anti-fraud controls and fraud risk factors and the incidence of fraud in non-profit organizations (NPOs) using data from the US IRS Form 990. This is a US requirement, but many international organizations register with the IRS to facilitate tax-deductible contributions and many large US NPOs have operations in other countries. Our study uses the largest and most current data set to date, including all NPOs that reported an asset diversion during the years 2008-2014 and over 200,000 non-fraud NPOs.. We systematically examine an extensive set of variables related to anti-fraud controls divided into policy controls, governance controls and external controls and fraud risk factors, divided into operational and management risks. We found strong support for our contention that anti-fraud controls relate to less fraud, especially for large NPOs. Policy controls were significant for all size groups. We also found strong support for the notion that fraud risk factors are related to more incidence of fraud. Health and Education NPOs were the largest and had differences in controls for only the largest NPOs. These findings provide insight into organizational characteristics related to the incidence in fraud in NPOs, and should benefit auditors, audit committees, and donors.
THE COMPONENTS OF OTHER COMPREHENSIVE INCOME AND ANALYST BEHAVIOUR
HUYNH, TINA
ARTHUR, NEAL; MAI, MEISHAN
Category: FR = Financial Reporting
The study examines the relationship between components of OCI and analysts’ forecasting behaviour, being forecast accuracy, analyst following and herding. The findings show that CFH and FCX (AFS) elements are negatively (positively) associated with forecast accuracy and herding. We also find that analyst following increases with AFS but decreases with FCX items. Importantly, we document that disaggregated AFS, CFH and FCX components have differential associations with some properties of analysts’ behaviour relating to earnings forecasts. Findings for REV and DBP are less consistent. This study bears directly on the OCI reporting practices under IFRS. The IASB (2011) requires that entities shall report OCI items based on whether they may (or must) be reclassified subsequently to net income. Also, the evidence bears indirectly on the conundrum surrounding the effects of OCI line items on the analysts’ information environment and their behaviour. Together with prior evidence, our findings provide empirical evidence that some OCI items (CFH and FCX) may increase uncertainty and make it more difficult for analysts to predict net income, and other OCI items (AFS) may be used by management to smooth net income, making net income less volatile and easier to predict. This study contributes to a growing literature relating to financial analysts and the usefulness of OCI information, and suggests that market participants might benefit from more transparent OCI disclosures.
DETERMINANTS AND PERFORMANCE CONSEQUENCES OF NARRATIVE FEEDBACK IN SUBJECTIVE PERFORMANCE EVALUATION
HYUN, JEONG-HOON
AHN, TAE-SIK
Category: MA = Management Accounting
This paper examines the determinants and performance consequences of narrative feedback amounts in subjective performance evaluation. The data of narrative feedbacks in Korean State Owned Enterprises (SOEs) provides a unique setting to investigate the evaluators’ motivation for giving narrative feedback and the evaluatees’ response to narrative feedback in subjective performance evaluation. First, we find that evaluators present large amount of narrative feedbacks about the highly weighted, long–tenured, and both high scored and low scored performance measures, and SOEs with large number of evaluators and large number of employees. This empirical evidence is consistent with evaluators giving substantial narrative feedback when evaluators face low information acquisition cost, high confrontation cost and high intrinsic motivation for providing comments. Second, we find that evaluatees are more likely to improve the performance measures with large amount of feedback, especially those with large amount of suggestion for development. This paper suggests that evaluators have their own incentives to provide narrative feedback and evaluatees improve their performance by utilizing information of narrative feedback.
THE RELATIONSHIP BETWEEN PRODUCT AND PROCESS INNOVATION AND OPERATING PERFORMANCE: THE MODERATING ROLE OF STRATEGIC POSITIONING
HYUN, SOONCHUL
ANDERSON, MARK; BANKER, RAJIV
Category: MA = Management Accounting
Product and process innovations are key activities for achieving strategic goals and obtaining superior performance against competitors. Previous empirical studies have not examined the moderating role of strategic positioning in relating both product and process innovations to performance for a large sample of operating units. We investigate how strategic positioning determines the impact of product and process innovations on operating performance for manufacturing plants in Canada. Our results indicate that differentiation plays a positive moderating role for product innovation and cost leadership plays a positive moderating role for process innovation. These results support claims that strategy matters in determining what innovation is successful. We also find that new product and new process innovation have lagged effects on performance whereas improved product and process innovation have more immediate effects on performance.
BLENDED LOGICS AND HYBRIDISATION OF ACCOUNTING PRACTICES IN UNIVERSITY SETTING
HYVONEN, TIMO
MÄKELÄ, HANNELE; PELLINEN, JUKKA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This article examines how accounting and accountability are performed by the university managers employing multiple and competing institutional logics in the midst of a societal and organisational change. The study relies mainly on interview data with altogether 20 university managers at all levels in the selected two universities. Relying on the theory of institutional logics we analyse how the university managers combine and manage the accounting-related activities, structures, processes and meanings within hybrid, knowledge-intensive organisation, and drawing on these competing logics. We found that the multiple logics manifest themselves differently in the understandings and processes of accounting and that the competing institutional logics and the tensions between enable a certain extent of agency by the individual managers. Indeed, the challenges by the turbulent organisations require a hybrid manager capable of dealing with the pluralism inherent in the context. The study makes three main contributions to the existing literature on accounting in higher education. First, it contributes to the literature on the role of accounting(s) in hybrid organisations (universities); second, it contributes to the literature on the development and institutionalisation of the new, managerialised and marketised academia and on the role of accounting within this development; and third, it contributes to the literature on on the financial management of higher education institutions.
MAPPING THE MAPS: STUDIES OF MANAGEMENT ACCOUNTING PRACTICES IN THE POST-SOCIALIST COUNTRIES
IERMOLENKO, OLGA
Category: MA = Management Accounting
The purpose of this paper is to provide a comprehensive review of empirical research on management accounting practices (MAPs) in the context of post-socialist countries (PSCs) with an intention to identify, how has transformation to a market economy influenced MAPs development across PSCs in the past few decades, and what role has agency (Battilana & D’Aunno, 2009) played in MAPs development. In total 42 articles in international research journals in English language, published in period 1991-2016, were selected and analyzed. Traditionally, the institutional (structural) perspective is adopted to explain the development of MAPs in the PSCs (Paladi & Fenies, 2016). This literature review advances our understanding of the nature of transformation in the PSCs; it offers an insightful explanation of the processes of MAPs development and changes from a novel perspective that fits in the notion of agency into the development of MAPs across different PSCs. The two groups of external and internal agents are identified and examined in terms of their “agentic” and “negotiating capacities” (Emirbayer & Mische, 1998) that define their abilities to be engaged in MAPs changes. The paper contains critical assessments of the quality of the selected publications in terms of theories used and theoretical contributions, and provides directions for future research.
THE CONSEQUENCES OF BASEL III ON BOARD ROLE AND STRUCTURE: THE CASE OF SCANDINAVIAN BANK
IKAHEIMO, SEPPO
SCHIEHLL, EDUARDO
Category: GV = Accounting and Governance
Our study attempts to contribute to this ongoing debate by examining the interplay between industry (banking) regulation and the role of board of directors (firm-level), using a field study based on a major financial institution Scandinavian Bank (SB). SB, which is a major co-operative bank, supervisory board has several roles varying from monitoring and service to strategy and commitment building. The new regulation, Basel III, and distant supervisor, European Central Bank (ECB), introduce monolithic perspective on board, controlling, where trust is built solely based on independence and competence. The dilemma is challenging to SB, as the power of nominating candidates for the supervisory board is in the hands of local co-operative banks, i.e. owners of SB. For these banks, representation on the supervisory board is essential, but this will result in the eyes of ECB to lack of independence and in several cases also lack competence. The SB is in a very sound condition financially and far ahead of all regulatory requirements. Therefore, from the perspective of SB Group representatives and most of other local players, these requirements are interpreted as micromanagement without any proper meaning. Although, the regulation has lead to improved practices of audit and risk management committees resulting to better transparency and understanding of these issues in the supervisory board, it is still an open question whether this regulation serves SB Group’s business purposes.
QUANTIFYING THE ‘IN-BETWEEN’ OF PRISONS USING INDICATORS: THE TENSION BETWEEN SECURITY AND RESOCIALIZATION THROUGH THE LENS OF LIMINALITY
ILOGA BALEP, NATHALIE
HUBER, CHRISTIAN; SCHEYTT, TOBIAS
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Modern prisons find themselves in a constant pursuit of multiple, potentially conflicting aims, linked to having to account for both resocialization and security. Quantitative performance measurement is a common means to pursue organizational goals. However, research on performance measurement concerned with multiple organizational aims has focussed primarily on the relation between financial and non-financial aims. We add to this debate by drawing on the concept of organizational liminality, which allows focussing on the in-between-state of prisons in their pursuit of multiple non-financial aims. Drawing on a case study in the German prison sector we show how performance indicators issued by the ministry of justice organize interconnecting and in parts conflicting organizational dynamics. We thereby contribute to the literature on performance measurement by empirically and theoretically examining how numeric representations organize the relation between multiple non-financial organizational aims, here security and resocialization in prisons.
ACCOUNTING CONSERVATISM AND THE TIMING OF M&A
IMPERATORE, CLAUDIA
PEREIRA PUNDRICH, GABRIEL
Category: FR = Financial Reporting
In this study, we examine whether conservatism influences the timing of M&A decisions. Prior studies document that acquisition performance is lower if M&A are undertaken during booming markets. Hence, the timing of the M&A decision is an important channel through which conservatism can improve investment efficiency. We contend that, as conservatism triggers managers to promptly report loss, they will be more reluctant to undertake M&A during booming markets in an attempt to prevent the reporting of negative earnings in the future. Empirical evidence confirms our expectations. We find that more conservative firms are less likely to make M&As during booming markets and the negative effect is more pronounced if firm faces greater agency costs. Moreover, the avoidance of M&A during high-valuation markets leads more conservative firm to exhibit a better acquisition performance than less conservative ones.
NON-AUDIT SERVICES AND AUDITOR INDEPENDENCE: EVIDENCE FROM SWEDISH FIRMS
INWINKL, PETRA
CARLVIK , MARIELLA ; GLINIECKA , PAULINA ; UYAR, ALI
Category: AU = Auditing
Purpose -The purpose of this study is to examine if the provision of non-audit services poses a threat to the auditor’s independence, with a focus on Swedish public firms. Design/methodology/approach -Data about audit fees, non-audit fees, auditor tenure, and modified/going concern opinions has been collected from the companies’ annual reports. The sample consists of small-, mid- and large cap companies listed on the Stockholm Stock Exchange in the period from 2012 to 2015. Subsequently, regression analyses were conducted to test the formulated hypotheses. Findings -The results show a positive relationship between audit fees and non-audit fees, but do not suggest a loss of independence. There is no relationship between the amount of non-audit fees and the auditor’s propensity to issue a modified/going concern opinion. Furthermore, no association between the amount of non-audit services and the length of the auditor tenure was found. Originality/value -When it comes to Swedish literature on the topic, there are a few studies that investigate the relationship between non-audit services and auditor independence. The focus of these studies is on small and medium-sized enterprises, bankrupt firms or both. Studying this topic in the context of public Swedish firms contributes to the academic discussion by offering an additional perspective that has not been explored in previous research.
SOCIAL IMPACT DISCLOSURE AS A MOTION OF LEGITIMATION IN THE FAIR TRADE
ISLAM, MUHAMMAD AZIZUL
ISLAM, MUHAMMAD AZIZUL ; SEMEEN, HOMAIRA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The paper illustrates how the member organisations of a fair trade alliance use social impact accounts and disclosures in a well-synchronised fashion to (re)formulate the legitimate vision of fair trade amid the tensions, contradictions and challenges prevailing in the field. Moving beyond the legitimacy theory, we mobilise Bourdieu’s theory of the symbolic violence as explained by Everett (2002) to examine how fair trade organisations position themselves within the alliance and how they interact with the stakeholders. The finding is informed by a comparative narrative analysis of the social impact accounts and disclosures of the UK fair trade organisations as well as the narratives that document stakeholders’ opinion in the public domain. The paper unravels some important insights into the uses of social impact accounts and disclosures, by the dominant organisations of a business alliance, to mutually (re)formulate a common understanding of the legitimate vision of their business operations.
DISCLOSURE TONE AND FIRM CHARACTERISTICS
ITO, TAKEAKI
Category: FA = Financial Analysis
This study attempts to measure the tone of the MD&A section in Japanese firms and analyze its fundamental characteristics. Much research in accounting and finance examines the role of linguistic tone in firm disclosures, but, there is no research on Japanese firms and few studies on non-English text-based disclosure. To measure the tone, the word list is important. This study uses a word emotion correspondence table by Takamura et al. [2006] as criteria for tone classification. Some of the results show the opposite result to past studies. It may be due to differences in audit regulations. in Japan, there is no audit of the MD&A section in the annual report. Therefore, there is less risk of litigation risk for Japanese firms in comparison to that of U.S. firms, resulting in differences in the role of MD&A between Japan and the United States. And additional results show that market factor is the determinant of firms with positive tone disclosure and fundamentals are the determinant of firms with negative tone disclosure. So, the determinants of disclosure tone in MD&A may differ by the polarity.
CORPORATE BANKRUPTCY AND DIRECTORS’ REPUTATION: AN EMPIRICAL ANALYSIS OF THE EFFECTS ON PUBLIC DEBT CONTRACTS
IVANOVA, MARIYA NIKOLOVA
PUNDRICH, GABRIEL
Category: FA = Financial Analysis
We examine the effects of directors´ prior bankruptcy involvement on the reputation and financing policies of firms. Specifically, we investigate whether past bankruptcy exposure of directors is relevant to bondholders and affects public debt contracts. Using a large sample of bond issues, we document higher credit spread and lower bond size for firms with a bankruptcy exposure director suggesting that bondholders are concerned about the prior experience of the director. Further, we test whether bankruptcy exposure influences firm’s financing and investing policies. We document higher levels of leverage and cash holdings providing partial support for the “hot stove” effect.
IMPACT OF JAPAN’S STEWARDSHIP CODE REVISION ON INSTITUTIONAL INVESTORS’ VOTING BEHAVIOR FOR TAKEOVER DEFENSE PROPOSALS: ANOTHER “AGENCY” VIEW
IWATA, KIYONORI
Category: GV = Accounting and Governance
This paper discusses an issue related to the disclosure of the outcome of institutional investors’ proxy voting. First, the actual condition of the disclosure by institutional investors about their voting criteria and outcomes is reviewed. This paper finds evidence that investment trusts increased the rate of opposition to the takeover defense measures proposal after the revision of Japan’s Stewardship Code. This result bears testimony to the existence of some situations where the institutional investor does not maximize the investee company’s value when exercising voting rights. Moreover, by testing the change of the investors before and after the revision of Japan’s Stewardship Code, it turns out that there is a possibility that the monitoring by asset owners is effective to reduce the “agency problems” mentioned above. In addition, the firm-side analysis implies that firms with an extremely high ownership ratio of the investors that actively vote against their proposals put forth a “good” proposal appreciated by institutional investors.
SOCIAL TECHNOLOGY: AN INTEGRATED STRATEGY AND RISK MANAGEMENT FRAMEWORK
JANVRIN, DIANE
CONSIDINE, BRETT; KRAHEL, JOHN PAUL; LENK, MARGARITA
Category: IS = Accounting and Information Systems
Accounting firms, corporations, and non-profits use social technology to disseminate information to engage clients and regulators, attract and develop employees, manage business intelligence, and innovate business processes. Despite its benefits, social technology’s unique reach and speed create new risks for managers, accountants and auditors. This study develops a new Integrated Social Technology Strategy and Risk Management Framework based upon prior research and modifications to Kaplan and Norton’s (2004) Balanced Scorecard and the new COSO Enterprise Risk Management – Integrated Framework (2016). A field investigation involving three leading accounting organizations support this framework’s representativeness for the accounting profession and its potential usefulness to managers, consultants, and researchers. This framework identifies social technology strategies, significant risks, and effective risk management controls from governance to monitoring activities. Further, this framework may assist professionals exploring how social technology use provides value to their organizations and stakeholders.
MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS IN PRIVATE EQUITY BACKED FIRMS
JÄRVENPÄÄ, MARKO
PELLINEN, JUKKA; SCAPENS, ROBERT W.; TEITTINEN, HENRI
Category: MA = Management Accounting
This case study research explores management accounting and control systems (MACS) in private equity (PE) backed growth firms. We study the role of PE investors in professionalising management of buyout companies, and in shaping MACS. The study is based on observations of two divisional spin-offs, both companies that had moved from public to private ownership, and have PE investors. Within-case and cross-case analyses are used to explore the relationships between PE type, growth type and MACS. One of the cases was outsider led buyout and the other insider led buyout. In addition, the strategies of growth were different between the cases. The organic growth in the outsider led buyout required investments in product development and new production capacity while the growth in the insider led buyout was based on acquisitions and change in the industry logic. The results of our study contribute to the current understanding of the management control practices in the industry where risks and uncertainties are exceptionally high. We find that PE investors complement financial information with different evaluative practices. Despite the importance of strategy implementation for the value based management of the growth businesses we did not find that performance measurement or cost accounting would be exploited for that purpose.
MANDATORY JOINT AUDITS AND AUDIT FEES: MODERATING ROLE OF AUDITOR GENDER
JAVED, FAHIM
CHTIOUI , TAWHID; NEKHILI, MEHDI
Category: AU = Auditing
French mandatory joint audit requirement provides a unique environment to investigate the impact of auditor’s gender on audit fees by considering number of Big 4 auditors in auditor pair composition. We investigate whether the presence of a female auditor as joint engagement partner, exacerbates or attenuates the coordination and cooperation between competing audit firms. We use propensity score to control client characteristics of Big/Big and Big/non-Big auditor pairs and employ system GMM approach on a sample of French listed firms. We find that auditor pair with a female engagement partner earns an audit fee premium. Further, we show that regardless of the auditor pair combination female audit fee premium earned by Big/non-Big auditor pair is approximately the same as the audit fee premium earned by Big/Big auditor pair.
THE CONSTRUCTION OF THE EFFICIENT OFFICE: SCIENTIFIC MANAGEMENT, ACCOUNTABILITY AND THE NEO-LIBERAL STATE
JEACLE, INGRID
PARKER, LEE
Category: HI = History
Little attention has been paid in accounting research to accountability and control processes in the office. Yet this has been a central site of organisational planning and control since the 19th century. Through the dual theoretical lenses of Foucaultian and Labour Process theories, this study employs historical photo-elicitation methodology to investigate and critique the implementation of management control and accountability in the scientifically managed office which emerged in the US during the late 19th and early 20th centuries. It reveals the pervasiveness of organisational surveillance through disciplinary records maintenance and knowledge based governance. Office staff emerge as adjuncts to the accounting record, working at deskilled accounting tasks in a gradually feminising and mechanising office environment. Our visually derived historical account of these transformations in office administration allows us to reflect on some contemporary issues. The production line design and efficiency so promoted by scientific management served as a forerunner to the today’s open plan office, as well as influencing contemporary office management philosophies such as Activity-Based Working (ABW). Furthermore, we seek to inform current debates on the role of accounting in contemporary neo-liberal society. In the technologies of micro-measurement inherent in scientific management, we receive an early glimpse of the subsequent role that accounting can play within a neo-liberal agend
NON-IFRS EARNINGS: TO BE OR NOT TO BE A DISCLOSING FIRM?
JEANJEAN, THOMAS
DAVRINCHE, GREGOIRE; MARTINEZ, ISABELLE
Category: FR = Financial Reporting
Non -IFRS (or “adjusted”) earnings tend to be more and more popular (Bentley et al. 2016; Black et al. 2016). Adjustments are made by managers to standards-compliant earnings mainly exclude non-recurring or non-operating items (such as restructuring and acquisition charges and gains/losses on sales of assets) in order to give a better picture of permanent earnings and to portray “core earnings”. Standard setters and securities regulators have recently expressed concerns about adjusted earnings, criticizing their lack of rigor, transparency, consistency in comparability across firms. While there is an abundant literature on the consequences of adjusted earnings (in terms of usefulness and value relevance or earnings management), little is known about the determinants of the voluntary disclosure of non-IFRS earnings (Ebitda, operating income or net income) in press releases. On a sample of French listed companies over the 2007-2015 period, our findings are consistent with the idea that the rationales differ for disclosing Ebitda on the one hand and adjusted operating income or net income on the other hand. While Ebitda seems to be disclosed in response to investors and creditors demands beyond the information that can be found in financial statements; adjusted operating income and adjusted net income seems to be primarily driven by the desire to influence investors’ perception about the firm performance.
CORPORATE LOBBYING, IASB RESPONSIVENESS AND LEGITIMACY: A CASE STUDY ON THE LOBBYING FAILURE OF THE TELECOMMUNICATIONS INDIUSTRY IN THE IFRS 15 REVENUE RECOGNITION PROJECT
JENDRECK, ANNEKATRIN
WÜSTEMANN, SONJA
Category: FR = Financial Reporting
One of the major aims of the IASB and FASB’s recently completed project on revenue recognition was to develop a joint principles-based revenue standard that is consistently applicable across different entities and industries. However, due to strong lobbying efforts coming from various interest groups the Boards had to compromise the theoretical soundness and principles-based nature of the standard in order find consensus with its constituents and thus to ensure participatory legitimacy. Strikingly, one powerful industry group, the telecommunications companies as well as their users, did not manage to push through their interests, despite strong and continuous lobbying efforts unitedly coming from the entire industry. We use this setting to explore the lobbying behaviour of a specific industry group as well as the response behaviour of the IASB and the FASB in respect of their legitimacy by conducting a comprehensive content analysis of comment letters as well as of the Boards’ responses to them. In contrast to previous lobbying literature, we find that the Boards completely turned down the industry’s conceptual arguments, partly with convincing arguments, partly by “silencing” the criticism, and only responded to economic consequence arguments. We furthermore challenge the achievement of procedural legitimacy because the Boards obviously ignored the views of the industry’s users, and, since they weakened the conceptual soundness of the revenue recognition model in favour of other industry groups, but they refused to do so with regard the telecommunications industry.
PRIVATE LENDERS’ USE OF ANALYST EARNINGS FORECASTS WHEN ESTABLISHING DEBT COVENANT THRESHOLDS
JENNINGS, JARED
CALL, ANDREW; DONOVAN, JOHN
Category: FR = Financial Reporting
We examine whether lenders use analyst forecasts of the borrowing firm’s earnings when establishing covenant thresholds in private debt contracts. We find greater proximity between the analysts’ consensus earnings forecast and the future earnings performance required by the contract among borrowers whose analysts have historically issued accurate earnings forecasts, consistent with our hypothesis that lenders use analyst earnings forecasts when establishing debt covenant thresholds. These results are robust to firm and year fixed effects as well as an instrumental variable approach that addresses potential correlated omitted variables. We also find that the likelihood that the borrower violates a debt covenant following a decline in creditworthiness is increasing in the extent to which the debt covenant threshold is set closer to analyst expectations, suggesting that lenders’ use of analyst research increases the effectiveness of debt covenants in transferring contingent control rights following declines in creditworthiness. Our results provide new evidence on the role of sell-side analysts in debt contracting and inform the literature on the information used by lenders when establishing debt covenant thresholds.
CORPORATE SOCIAL RESPONSIBILITY, TRANSLATION AND LANGUAGE: THE CASE OF GENDER IN THE BIG FOUR
JENY-CAZAVAN, ANNE
SANTACREU-VASUT, ESTEFANIA
Category: IC = Interdisciplinary/Critical
This paper studies the corporate social responsibility reports (CSR) of the Big Four through the lens of language. We aim to highlight the set of linguistic strategies that these firms use, and certain translation issues that arise as they struggle to reconcile widening gender equality values, in line with their adherence to the UN Global Compact, with their internal gender inequality. We study the CSR reports of 19 audit firms, all part of the same Big Four network. We use theories of signaling and impression management, and insights from the most recent research on linguistic relativity and economics. The use of images of female in the CSR report is positively correlated with the percentage of female employees, while negatively correlated with language gender marking. This suggests that CSR reports are used as a signaling device and that language influences the firm’s ability to challenge local meanings of gender. The qualitative and descriptive nature of our study does not allow us to perform quantitative robustness checks due to the small sample size. In the future, harmonization of accounting practices may go beyond the purely financial statements into the CSR realm, including gender equality issues. Being aware that such performance is conveyed through language (words and images) and, therefore, the gendered structure of the language in which the report is originally written may matter for a successful standardization. Combining different theories and through the lens of language, we provide a novel approach to the study of issues arising from translation when it involves gender-related social accounting.
SUSTAINABILITY REPORTING IN THE AUTO INDUSTRY: THE CASE OF FORD MOTOR COMPANY
JERMAKOWICZ, EVA
BREMSER, WAYNE G; REINSTEIN, ALAN
Category: FR = Financial Reporting
This case introduces students to the concepts of sustainability reporting and integrated reporting. Through the reporting of Ford Motor Company, the case addresses the importance of grasping such concepts as materiality of sustainability issues, integrating sustainable development initiatives with business strategy, and connecting financial and sustainability information in integrated reports. Students research sustainable business reporting frameworks and explore how the company assesses the materiality of sustainability-related issues. The case encourages students to reflect critically on the motivations for sustainability reporting, its stakeholders, and challenges with sustainability reports to preparers, auditors and investors. The case can be used to discuss sustainability topics in many undergraduate and graduate level accounting courses, including accounting electives such as Accounting Theory, Advanced Auditing, Ethics, and International Accounting or, as well as in standard financial, international accounting, and managerial accounting courses.
INVESTIGATING THE VISUAL POWER OF ACCOUNTING NUMBERS: THE CONTRIBUTION OF HUSSERLIAN PHENOMENOLOGY
JERMAN, LAMBERT
LABARDIN, PIERRE
Category: IC = Interdisciplinary/Critical
Abstract In this article, we analyse the visual and classificatory power of accounting numbers (Quattrone, 2009; Busco & Quattrone, 2015) by using Husserlian phenomenology to study the restructuring of a firm. We thus explain how accounting images and inscriptions impact individuals at a distance by drawing on the dynamics of perception. By revisiting the Husserlian concept of image-consciousness, we characterize the perception of accounting inscriptions as the product of the interaction between a physical thing (image-thing), a representation (image-object), and a more or less observable reality (image-subject). We reveal the benefits of using this level of analysis by studying how accounting images progressively transformed a painful corporate liquidation into an industrial and financial success. We conducted a longitudinal analysis of the restructuring of a large French firm, which took place in the early 1980s. Through phenomenological analysis, we build on works studying accounting inscriptions and the visual power of accounting, by specifying how they act by drawing on the levers of perception in a flexible, fragile, and sometimes even involuntary way, going as far as to subjugate individuals’ representations.
PERFORMANCE IMPLICATIONS OF MISALIGNMENT AMONG BUSINESS STRATEGY, LEADERSHIP STYLE, ORGANIZATIONAL CULTURE AND MANAGEMENT ACCOUNTING SYSTEMS
JERMIAS, JOHNNY
GANI, LINDAWATI; JULIANA, CHRISTINA
Category: MA = Management Accounting
The purpose of this study is to examine the performance consequences of misalignment among business strategy, organizational configurations and management accounting systems. Based on a questionnaire surveys conducting in publicly held manufacturing companies listed in Indonesia Stock Exchange, we hypothesize and find that misalignments among business strategy, leadership style, organizational culture and management accounting systems are negatively associated with both financial and non-financial performance. The findings of our study suggest that product differentiation companies should employ transformational leaders, promote flexible organizational culture, and use broad-focused management accounting systems. By contrast, cost leadership companies should employ transactional leaders, promote controlled organizational culture and use narrow-focused management accounting systems.
DOES TAX ENFORCEMENT INFLUENCE THE FINANCIAL REPORTING QUALITY OF PRIVATE FIRMS? EVIDENCE FROM A NATURAL EXPERIMENT IN CHINA
JIA, FANSHENG
KIM, JEONG-BON; LI, GUANGZHONG
Category: FR = Financial Reporting
This study investigates whether and how the financial reporting quality (FRQ) of privately held firms is influenced by local government tax enforcement. To establish a causal relation between the two, we exploit China’s province-managing-county (PMC) reform in 2003. Under this reform, prefectural local governments experience either a fiscal squeeze or revenue shortfall. Consequently, they are incentivized to implement stricter tax enforcement to redress lost tax revenue. Using the PMC reform as an exogenous shock to governments’ fiscal revenue and tax enforcement, we find that the heightened post-reform tax enforcement leads to improved FRQ for private firms incorporated in a PMC-reformed city. The positive effect of PMC reform on FRQ becomes insignificant: (1) when the local prefectural government is less fiscally squeezed in the post-reform period; (2) for private firms outside the prefectural local government’s tax jurisdiction; or (3) for firms for which the prefectural city government has less incentives to collect tax. Complementing Hopes et al. (2012), we find that the stricter tax enforcement induced by PMC reform reduces tax avoidance by privately held firms. As the fiscal hierarchical system is a global phenomenon, and the dual roles of local governments as tax payers and tax collectors are prevalent in many countries, our study provides valuable insights into the role of local government tax enforcement in shaping private firms’ FRQ.
IS MANAGERIAL RENT EXTRACTION ASSOCIATED WITH TAX AGGRESSIVENESS? EVIDENCE FROM INFORMED INSIDER TRADING
JIA, YONGHONG
GAO, XINGHUA
Category: TX = Taxation
Despite the agency perspective of corporate tax avoidance, there is little empirical evidence confirming that managers do extract rents derived from aggressive tax practices. This study investigates the association between tax aggressiveness and managerial rent extraction by focusing on informed insider trading, a self-serving action with an unambiguous impact on insiders’ personal wealth and representing the most direct channel through which managers expropriate outside shareholders. We find that insiders from firms with greater tax aggressiveness gain significantly higher returns from insider purchases than those from firms with less tax aggressiveness and this outperformance results from trading on future earnings news. We also find that insiders under the cover of aggressive tax practices more likely trade on bad news via insider sales and gain more from these trades. The overall evidence is consistent with aggressive tax avoidance serving managerial interest through gainfully exploiting private information and extracting rents from uninformed shareholders.
SHORT-SELLING THREATS AND REAL EARNINGS MANAGEMENT – INTERNATIONAL EVIDENCE
JIANG, HAIYAN
BAI, MIN; QIN, YAFENG
Category: GV = Accounting and Governance
This paper investigates the effect of short selling threats on managers’ earnings management choices in an international setting. Using data from 22 countries between 2003 and 2015, we find that short-selling threats constrain real earnings management, and this effect is mainly driven by firms operating in countries with weak shareholder protection. Furthermore, firms with great short selling potentials substitute accrual earnings management with real earnings management. We also reveal a stronger constraining effect of short sale on real earnings management among firms in the countries where short sale is feasible. Overall, we find that short sale modifies managers’ choices of earnings management.
INSIDER TRADING AND MODIFIED AUDIT OPINIONS: INSIGHTS FROM ASIAN MARKETS
JIANG, JIN
FILIP, ANDREI; JENY, ANNE
Category: AU = Auditing
In this paper, we investigate how insiders trade prior to the issuance of modified audit opinions, and how it affects the market reaction in Asian markets. We test the link between insider trading activities and issuance of MAO in the light of agency theory and signaling theory. Our evidence is consistent with both of these theories. We find that insiders are less likely to buy stocks before the issuance of going concern opinion, and that they are more likely to buy stocks before the issuance of material uncertainty, scope limitation and GAAP violation opinions. We also find that insider buying activity sends positive signals to the market and lead to less negative market reaction to modified audit opinions. This study contributes to the literature by showing that insider trading behavior depends on the level of severity and uncertainty of third-party news, and the price reaction to modified audit opinions is a function of observable insider trading signals.
EARNINGS PREDICTION AND THE VALUATION OF LOSS-MAKING FIRMS
JIANG, WEI
STARK, ANDREW ; ZAIMOOR, NAJEEBA
Category: FA = Financial Analysis
Valuing loss firms is difficult as negative earnings lose information content. In this study, we demonstrate that forecasted one-year-ahead earnings for loss firms are value relevant. We develop an earnings forecast model for loss-making firms in order to separate between persistent and transitory losses. We show that the forecasted earnings are associated with firm value. Using cross-sectional valuation models, we find that, the coefficients of current earnings for transitory loss-making firms are significantly higher than that for persistent loss-making firms, suggesting that earnings is an important value determinant for transitory losses. We also find that, the coefficients of book value for transitory loss-making firms are significantly lower than that for persistent loss-making firms, supporting that persistent loss-making firms are more likely to adopt an abandonment option instead of bearing infinite losses. Our results are also generally supported by the use of analyst forecast information.
DO ACCOUNTING SCANDALS AFFECT CAPITAL MARKETS RETURNS?
JIMENEZ ANDRADE, JESUS RODOLFO
JIMENEZ-ANDRADE, JESUS RODOLFO
Category: FA = Financial Analysis
Do accounting scandals affect capital markets returns? To investigate this, I theorized that investors’ responses are determined by the type of event, the economic penalties, and the opinion of experts involved in the process. Using three- and eight-day stock prices window from 486 tax, fraud, quality and corruption scandals between 2007 and 2016, I found that the consequences of scandals in capital markets are scarcely related with firms’ financial performance but highly explained by how controversial events are perceived by forecasters. Highly controversial events (tax and quality scandals) have smaller abnormal returns than low controversial events (corruption and fraud) that have more aggressive results. Also, if present, regulatory sanctions on firms positively influence abnormal returns. In average tax and corruption scandals have positive abnormal returns; meanwhile quality and financial fraud have negative abnormal values. In other words, analyzed evidence suggests that when the capital market’s social verdict about a scandal is negative (quality and financial statements fraud scandals) the abnormal returns are also negative and the opposite results with positive verdicts (tax and corruption scandals) and the harder the judgment, the lower the abnormal returns.
FINANCIAL STATEMENT COMPARABILITY AND HEDGE FUND ACTIVISM
JO, KOREN
CHENG, C.S. AGNES ; NG, JEFFREY; WU, HONG
Category: FR = Financial Reporting
Recent studies show that hedge fund activists are effective in monitoring. They create firm value by being able to identify undervalued firms and promote positive changes. We propose that accounting information comparability can facilitate hedge fund activists’ monitoring effectiveness. We find that higher accounting information comparability is associated with higher abnormal returns around hedge fund campaign announcements and that this association is stronger for firms with more agency problems and for more experienced hedge fund activists. In addition, we find that greater comparability is associated with a higher likelihood of activists using hostile tactics and firms experiencing superior post-activism performance. Taken together, our findings suggest that hedge fund activists utilize comparable information to identify undervalued firms and push for value-enhancing changes to improve firm performance. Our paper contributes to the literature by providing new evidence on the monitoring role of accounting information comparability.
LOOKING UNDER THE HOOD: QUANTITATIVE VS QUALITATIVE INPUTS TO ANALYST FORECASTS OF FUNDAMENTAL RISK
JOOS, PETER
BOCHKAY, KHRYSTYNA
Category: FR = Financial Reporting
We study how sell-side analysts map both quantitative and qualitative information from earnings conference calls into their forecasts of fundamental fi rm risk. We fi nd that analysts perceive fi rm risk to be lower when absolute earnings surprises are small and tone of earnings conference calls is more positive. Further, we find that the relative importance of earnings call tone increases during periods of high macro-uncertainty and this increase improves the calibration of the risk forecasts. Our results are robust to alternative empirical specifi cations and increase our understanding of the "black box" that is the analyst forecasting process.
WHEN ARE COMPLEX COSTING SYSTEMS USEFUL? THE INFLUENCE OF A FIRM'S CONTEXT
JORISSEN, ANN
DAOWADUENG, PIYADA; DU, YAN
Category: MA = Management Accounting
Costing systems can vary from very simple cost allocation techniques to more complex systems with multiple cost pools and cost drivers, whereby firms use different costs for different purposes. Whether or not more complex costing systems are also more usefulness for decision-making is still an issue of debate. Prior studies, analysing this relationship resulted in mixed findings To unravel these mixed findings, this study sets out to investigate when firms adopt more complex costing systems as well as which underlying mechanisms influence the relationship between costing systems complexity and cost usefulness. Based on the theory of Galbraith (1973), hypotheses which relate firm-level characteristics to costing systems complexity are formulated and using cognitive psychology theory, hypotheses on the relationship between costing systems complexity and usefulness are developped. Using survey data our results show that the adoption of more complex costing systems is significantly associated with high operational turbulence, a high level of IT-integration, and a high level of product customization. Moreover the relationship between costing systems complexity and cost usefulness is moderated by the presence of organizational processes that stimulate knowledge creation.
ACCOUNTING NUMBERS AND TEMPORARY ORGANISING: EVIDENCE FROM ARTIST-FUNDED RECORD PRODUCTION PROJECTS
JUBB, DARREN
JACKSON, WILLIAM
Category: IC = Interdisciplinary/Critical
The aim of this paper is to investigate how accounting numbers are used in the organisation and management of temporary organisational record production projects. The findings of the paper are based on interview data gathered from record producers involved in the management of short-term record production projects. The data were analysed through the lens of strong structuration theory to highlight the use of accounting numbers in the continual processes of temporary organising that record producers face in such environments. The paper finds that accounting numbers are used by record producers to continually reproduce the structures of temporary record production projects while at the same time providing projects with enough fluidity to allow musical tasks to take place. In doing so, the findings of the paper highlight how this is possible through drawing upon the calculative, symptomatic and existential qualities of accounting numbers, offering a novel conception of the operation of accounting numbers beyond permanent organisational settings. The paper responds to calls for the flexible adoption of strong structuration theory by extending the notion of active agency and outcomes to focus on the situated use of accounting numbers within domains that exist outside of permanent organisational forms. The paper also furthers our understanding of how non-accounting actors use accounting within the music industries.
DOES ABNORMAL AUDIT HOUR MEAN AUDIT EFFORT OR INFORMATION RISK? EVIDENCE FROM KOREA
JUNG, NAMCHUL
JEONG, SEOK WOO ; LEE, SANG HO
Category: AU = Auditing
This study investigates the relationship between abnormal audit hour and cost of equity capital in Korean audit market. Although prior research suggests abnormal audit hour reflects auditors’ effort and shows positive relation with financial reporting quality, we find that abnormal audit hour is positively related to ex-ante risk premium in equity market. This implies investors regard abnormal audit hour as information risk and there might exist un-observed errors in normal audit fee model with regard to accounting issues such as auditor-client disagreements. We also find that this relationship is more prominent in firms with positive abnormal audit hour, less profitable auditor and with large portion of quality review hour. These results imply that auditors’ over input, especially, excessive audit hour commitment under low profitability and high portion of quality review management would be the major source of investors’ concern about financial statement credibility. Results of this study contribute to the extant literature by showing expanded evidence on whether investors’ response to abnormal audit effort as new source of information risk.
SHAREHOLDER LITIGATION AND INSIDER TRADING: EVIDENCE FROM DERIVATIVE LAWSUITS
JUNG, SUMI
NAM, JONATHAN; SHU, SUSAN
Category: GV = Accounting and Governance
We examine whether ex ante litigation risk deters corporate insiders from exploiting private information. We use the staggered adoption of Universal Demand (UD) laws, which presents a quasi-exogenous variation in shareholder litigation risk. The reduced litigation risk following the passage of UD laws leads to greater tendency for corporate insiders to utilize their information advantage. Insider trading, especially opportunistic insider sales, are more informative about firms’ future performance post UD laws. Further analysis shows that the effect of UD laws on the return predictability of insider trading varies with firms’ information environment, alternative governance mechanisms and managerial incentives in a predictable manner. The disciplinary effect of litigation is greater for more opaque firms, firms less constrained by alternative governance mechanisms such as institutional ownership and media coverage, and firms with greater managerial career concerns. Overall, we provide evidence highlighting the disciplinary role of shareholder lawsuits in restraining managerial opportunism in insider trading.
MANAGEMENT EARNINGS FORECASTS DURING PRICE PRESSURE: EVIDENCE FROM MUTUAL FUND TRADES
KADACH, IGOR
Category: FR = Financial Reporting
Does a company’s stock mispricing influence its decision to issue an earnings forecast? Does executive compensation affect the nature of the forecast? How does the market react to these forecasts? I address these questions using cross-sectional and time-series variation in stock mispricing related to the liquidity-driven trades of mutual funds. I find that managers issue earnings forecasts more frequently when their company’s stock appears mispriced. In answering the second question, I uncover unintended consequences of executive compensation schemes, in that managers of mispriced firms strategically withhold information from investors to benefit from stock option exercises. I also show that in responding to forecasts of mispriced firms, investors act as if they are able to distinguish informative management earnings forecasts from uninformative ones. Finally, the difference-in-differences estimations lend credibility to the results by exploiting the exogenous fund outflows due to the 2003 mutual fund trading scandal. Collectively, my findings highlight the interplay between stock mispricing, managerial earnings forecast incentives, the company’s resulting disclosure policy, and the market reaction to it.
THE ROLE OF ACCOUNTING IN SOLVING AGENCY CONFLICTS WITHIN CORPORATE GROUPS: EVIDENCE FROM VOLUNTARY IFRS ADOPTION IN THE UK
KALOGIROU, FANI
ANDRÉ, PAUL
Category: FR = Financial Reporting
One of the most critical decisions top management in corporate groups has to make is the allocation of resources among competing investment opportunities. Information asymmetry between the parent and the subsidiary, however, creates agency conflicts that complicate such allocation. We examine whether accounting information can mitigate those agency costs in a UK setting where a choice existed for subsidiaries to voluntarily adopt IFRS. We find that adopting subsidiaries have greater cash holdings, receive more group borrowings and pay less dividends. These findings are consistent with IFRS adoption reducing agency costs of excess cash. Further, we find that IFRS subsidiaries have greater (lower) capital expenditures when in growing (declining) industries and invest more in innovation and intangible assets.
ISOMORPHIC PRESSURES IN SHORT-TERM MANAGERIAL DECISIONS: EVIDENCE FROM WORKING CAPITAL MANAGEMENT
KAMATH, SAIPRIYA
SINGHVI, BHAVYA
Category: MA = Management Accounting
We investigate whether isomorphic pressures play a role in determining a firm’s working capital policy. Using instrumental variable estimation and excess-variance tests to overcome reflection problem in identifying isomorphic pressures due to peer interactions, we find that average change in working capital of peers positively impacts a firm’s working capital policy choice. Further, we hypothesize and find that the impact of peers’ working capital decisions on a firm is moderated by industry competitiveness. We also find that firms do not follow their peers if they are cash constrained i.e. they cannot afford to follow. In addition, we document that a firm’s long term investment strategy is negatively related to a firm’s propensity to follow peers in deciding its working capital policy.
INFOGRAPHICS IN CORPORATE SUSTAINABILITY REPORTS: PROVIDING USEFUL INFORMATION OR USED FOR IMPRESSION MANAGEMENT?
KANBATY, MAJID
HE, COLLY; HELLMANN, ANDREAS
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Infographics combine visual and textual information and thus may be used to attract attention, with the ultimate purpose of influencing the thoughts and feelings of readers of accounting information. However, little is known about the role of infographics in sustainability reports. This study examines the practice and features of infographics in sustainability reports, particularly focusing on whether infographics are used for impression management (IM) purposes by utilising selectivity, visual manipulation and performance comparisons. As infographics become more widely used, it is important to understand their use in corporate sustainability reporting (CSR), particularly because their use is not regulated. Additionally, the association between IM and sustainability disclosure is scrutinised. The findings reveal that infographics are becoming increasingly utilised in CSR and that they are commonly used by environmentally sensitive industries. The key social and environmental aspects depicted by infographics are air emissions, energy usage, water consumption, labour practices and decent work. We find clear evidence of infographics being harnessed for IM purposes and that there is a bias in selecting, comparing and emphasising sustainability performance trends towards favourable disclosures that enhance company reputation. Further, we find evidence of an association between IM and social disclosure in relation to selectivity and visual emphasis strategies but the association with environmental disclosure is only found for selectivity and performance comparison strategies.
IS MORE ALWAYS BETTER? DISCLOSURES IN THE EXPANDED AUDIT REPORT AND THEIR IMPACT ON LOAN CONTRACTING
KARAIBRAHIMOGLU, YASEMIN
DE WAARD, DIRK ADRIANUS; HOOGHIEMSTRA, REGGY; PORUMB, VLAD-ANDREI
Category: AU = Auditing
Starting October 2013 auditors of premium listed firms in the UK are mandated to prepare an expanded audit report. In this report auditors provide details on audit procedures, main risks of material misstatement (RMMs), and materiality thresholds. We analyze if the increased audit disclosure reduces private lenders’ monitoring costs and shapes loan contracting. Our evidence suggests that the introduction of the expanded audit report is associated with improved lending terms for adopting firms relative to matched samples of non-adopting US and UK firms. The analyses of expanded audit reports in the post-adoption period show that borrowers with more RMMs are perceived to be riskier, which translates into less favorable loan contracting terms. Additional tests indicate that uncertainty in the tone of the disclosures reduces the negative impact of the number of RMMs on lending terms. Taken together, our results indicate that the expanded audit report disclosures contain relevant information, which shapes loan contracting.
OPERATING WITHIN THE BOUNDARIES OF LEGISLATION, ACCOUNTABILITY AND PERSONAL AGENDAS: A STUDY ON FINANCIAL SUSTAINABILITY IN CATALAN MUNICIPALITIES
KARATZIMAS, SOTIRIOS
GRIFUL MIQUELA, CARLES
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The present study examines and compares the perceptions of Catalan mayors and municipality comptrollers on aspects related to the Spanish legislative framework on financial sustainability. These aspects touch upon the usefulness and necessity of maintaining the existing legislative framework in light of the results so far, its impact on decision-making, flexibility and on citizens’ welfare as well as on alternative plans that could safeguard municipalities’ financial health. The 178 responses on a structured questionnaire indicate that when strict rules are imposed on the management of expenses, surpluses and debt, the interests of the two groups are aligned. Nevertheless, the views of mayors appear to be more pessimistic. Municipality size and financial condition does not influence the respondents’ perceptions. Finally, it appears that while the application of strict rules has bear fruit, this trend is not sustainable in the long-run and the introduction of more flexible measures is required.
THE CORPORATE GOVERNANCE OF PROFIT SHIFTING
KARAVITIS, PANAGIOTIS
DELIS, MANTHOS; KLASSEN, KENNETH
Category: TX = Taxation
Reducing tax-motivated profit shifting is an increasingly important element in the agenda of academics and policy-makers in the effort to understand tax-planning behavior and to promote tax fairness. In this research, we view profit shifting as the outcome of corporate governance characteristics of multinational enterprises (MNEs), ceteris paribus. Using a sample of 860 parent firms from 24 countries, 6,698 subsidiaries in 49 countries, we first measure profit shifting from the responses of subsidiary profits to parent earnings shocks. Subsequently, we draw on several agency theories of the firm and we show that elements of board structure, directors’ experience and networks, and CEO duality determine the aggressiveness of profit shifting. According to our baseline specification, a one-standard deviation change in these board characteristics implies an 11.06% total response in our measure of profit shifting. We contend that closely observing these corporate governance characteristics can yield improved identification of profit shifting flows and ways to contain them.
THE EFFECT OF FINANCIAL AND NON-FINANCIAL INFORMATION ON SURVIVAL TIME OF FINNISH REORGANIZING FIRMS
KÄRKINEN, EIJA
SORMUNEN, NINA
Category: FA = Financial Analysis
The objective of our study is to assess small entrepreneurial firms (n=167) filing a petition for reorganization under the Finnish Company Reorganization Act, which is comparable to Chapter 11 of the Bankruptcy Act in the United States. Approximately 77 percent of the final sample firms interrupted the reorganization process after filing a petition for reorganization. In particular, the study examines whether the financial paths are different within the firms filing for reorganization and whether the financial and non-financial information is connected to survival time in reorganization. In this study it is assumed that longer the survival time the better the chance at success. The findings of this study indicate that different financial paths can be found within firms filing a petition for reorganization. The results also provide evidence on the connection between pre-filing financial information and survival time. Especially one variable, which is strongly connected to pre-filing liquidity, may affect survival time in reorganization. Furthermore, the results show evidence on the connection between non-financial information and survival time. However, the combined model, including both financial and non-financial information does not outperform models based on financial or non-financial variables.
UNEQUAL PUNISHMENT FOR PROFESSIONALS: HOW AUDIT FIRMS RESPOND TO THEIR ACCOUNTANTS' MISCONDUCT IN FINANCIAL STATEMENTS
KARUBE, MASARU
FUKUKAWA, HIRONORI; UCHIDA, DAISUKE
Category: GV = Accounting and Governance
We explore how professional organizations respond when their professionals engage in misconduct. Using data on professional misconduct by accountants in the Japanese audit industry, we empirically examine the relationship between professional misconduct and punishment with organizational-level and individual-level factors that respectively moderate the relationship. We found that audit firms tend to assign fewer clients to those accountants who initially audited financial statements that are restated later, suggesting that audit firms punish accountants who engage in misconduct by not entrusting professional tasks to them. Further, we also found that such relationships differ between Big Four and non-Big Four audit firms, and also differ between accountants who have high relative organizational standing and those who have low relative organizational standing within their organization. Our findings indicate there are unequal punishments: punishment for accountants who engage in misconduct differs across organizations and individuals.
DETECTING CARBON EMISSION DISCLOSURE MANAGEMENT
KASPEREIT, THOMAS
LOPATTA, KERSTIN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper measures empirically the extent to which firms manipulate their carbon emission disclosure. Whereas many studies provide empirical evidence for earnings management, the quantitative literature is silent with respect to firms’ intention to manage non-financial disclosures. We fill this gap and develop an empirical model to evaluate whether firms manipulate carbon disclosure in their favor after having incurred environmental controversy costs. Our analyses are based on all firms that have carbon emission data in the Asset4 database. We find support for our hypothesis that firms engage more frequently in decreasing emission disclosure management around years in which they incurred environmental controversy costs. We find no evidence that audits of sustainability reports prevent environmental disclosure management. Thus, external assurance is not able to mitigate the problem of biased environmental disclosures. We attribute this finding to the limited assurance of sustainability report audits.Our findings have implications for the audit profession, which should revise their practice of providing only limited assurance levels on CSR reports and should start the transition from a mere labelling to a thorough auditing process. Our results imply that investors and other stakeholders should consume carbon emission disclosures with caution.
BUDGETARY AND FISCAL GOVERNANCE IN SPAIN AFTER THE CRISIS: REFORM OR RESIST?
KASPERSKAYA, YULIA
XIFRÉ, RAMON
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper examines the two main fiscal reforms that Spain adopted after the crisis: the law on budget stability and the creation of the country’s first independent fiscal institution, the AIReF. Our main question is whether these two reforms reflect a reformist or a conservative approach to public crisis management. Our analysis suggests that the government adopted an ambivalent strategy displaying tendencies both to reform but also to resist, trying to keep or regain decision power for itself.
ORIGIN OF DEPRECIATION ACCOUNTING PRACTICE IN THE UK GAS COMPANIES OF THE EARLY 19TH CENTURY: WITH A FOCUS ON ACCOUNTING PRACTICES OF THE INDEPENDENT GAS AND LIGHT COMPANY
KASUKABE, MITSUNORI
SAWANOBORI, CHIE
Category: HI = History
The purpose of this paper is to examine the accounting practices at UK gas companies during the first half of the 19th century with regard to the origin of depreciation accounting. We are especially concerned with the historical development of the accounting practices at the Independent Gas Light and Coke Company (IGLC). It is a historical/empirical study based on the minutes of the directors’ and general meetings. Although a large number of studies have been made on the development of depreciation accounting, little is known about the actual circumstances at the accounting practices of the individual company. IGLC also began in 1830 to treat expenditure for taking down, rebuilding, and so forth as being different in nature from operating expenses. In 1834, along with a total equivalent to 1% of capital charged against revenue,the cumulative amount of such expenditures began to be recorded as a capital category in the capital account. This meant that revenue receipts were allocated to capital expenditure. This practice was not temporary, it continued and became customary. It is interesting that IGLC calculated depreciation based on capital and not assets. Gas companies focused on capital because they considered their entire gas supply operation as a whole. To maintain their overall operation, they calculated an amount equivalent to a certain rate of capital and charged to revenue. This was a unique accounting method at the IGLC.
A MORE APPROPRIATE STATEMENT OF FINANCIAL PERFORMANCE FOR THE LOCAL GOVERNMENTS
KATO, TATSUHIKO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The Japanese local governments are expected to issue the same financial statements and the comparability will be guaranteed, after the release of guidelines for the intergraded public accounting standards through the Ministry of internal affairs and communications in 2015, which standards are among others strongly influenced and inspired by the IPSAS model. Nonetheless three different models are still going on now. These financial statements, however, seem to have a fundamental defect, because the important fact is ignored that the subsidies or grants are playing much more crucial role in the public sector than in the private sector as an incentive tool. The public sector should have another budget constraint other than private sector and Kornai (1979・1980) first called it a “soft budget constraint”. An incomplete contracts approach is applied to deal with problems that the soft budget constraint can cause between the central government and local governments. Our proposition is simple: give them a sub-optimally lower budget by the means of decreasing grants or subsidies, if they submit a distorted report. This measure could reveal the true performers and give us a judgment basis on how far their reforms are going. To be more specific, another statement of financial performance should be included in the financial statements as a tool for investigating how many grants or subsidies are appropriate for each local government. This statement was proposed in Japan but completely forgotten for a number of years.
CSR REPORTING PRACTICES IN INDONESIA: A CASE STUDY OF COMPANIES LISTED ON THE SRI-KEHATI INDEX
KATSIKAS, EPAMEINONDAS
PRATIWI, SITI CZAFRANI
Category: GV = Accounting and Governance
CSRR has become a widespread practice amongst companies to discharge their public accountability about CSR practices. In order to perfectly perform public accountability, a high-quality CSRR practices involving comprehensive disclosure of ‘vision and goals’, ‘management approach’, and ‘performance indicators’ on each of the CSR items is required. CSRR regulations, both voluntary and mandatory, have therefore emerged in order to assist companies in discharging their public accountability. CSRR is expected to be of higher quality for companies listed on SRI indices as these companies are believed to have a high ethical commitment in doing business. However, few studies have examined the quality of CSRR disclosure by SRI index participants. Moreover, these studies have been largely conducted within the context of developed countries and fail to consider the impact of CSRR regulations on CSRR quality. This research thus attempts to address these gaps by examining the influence of regulations on CSRR quality for companies listed on the Indonesian SRI-Kehati index. This study adopts a case study design involving two mining companies on the SRI-Kehati index. Employing a documentary analysis and content analysis methodology, it is demonstrated that the CSRR quality of these companies increased following the development of mandatory and voluntary CSRR regulations in Indonesia. The findings also indicate that similar companies have an identical quality and practice of CSRR.
THE USEFULNESS OF NEGATIVE AGGREGATE EARNINGS CHANGES IN PREDICTING FUTURE GROSS DOMESTIC PRODUCT GROWTH
KAUSAR, ASAD
GAERTNER, FABIO; STEELE, LOGAN
Category: FR = Financial Reporting
Konchitchki and Patatoukas (2014) (hereafter KP 2014) show that aggregate accounting earnings growth predicts future nominal Gross Domestic Product (GDP) growth and that professional macro forecasters do not fully incorporate the information contained in aggregate accounting earnings. Based on results from prior literature, which find that accounting earnings reflect bad economic news in a timelier manner than good news, we condition KP’s GDP growth forecast model on the sign of earnings changes. We show that negative changes in aggregate earnings predict future GDP growth, while positive changes in earnings do not. Furthermore, we show that professional macro forecasters underreact to the information contained in negative changes in aggregate earnings about future GDP growth. In additional analyses, we find evidence suggesting the incremental usefulness of negative earnings changes is driven by accounting conservatism rather than other drivers of asymmetric timeliness in earnings.
ALL ROADS LEAD TO ROME?: ON THE OVERLAP AND DIFFERENCES BETWEEN RISK MANAGEMENT AND MANAGEMENT CONTROL
KAWAI, TAKAHARU
DEKKER, HENRI; SAKAGUCHI , JUNYA; WIERSMA , EELKE
Category: MA = Management Accounting
Risk management and management control are considered to include distinct though potentially interrelated practices to manage firm risks and uncertainties. Little is known, however, how they interrelate in the context of risk and uncertainty which risk management is meant to address. We collect archival and survey data to examine this question. Findings support the expectation that risks arising from environmental uncertainties that are recognized and understood by the firm are managed through risk management practices as well as through performance-based rewarding and performance measurement. However, environmental uncertainties that are less easily translated into managerial risk assessments are primarily managed through risk management practices, and result in less use of performance-based rewarding that would be based on more noisy measures of performance. Finally, results show that risk management, performance-based rewarding and performance measurement are complementary practices in the management of firm risks.
FINANCIAL PERFORMANCE AND GRAPH USE IN JAPANESE CORPORATE ANNUAL REPORTS
KAWASHIMA, KENJI
Category: FA = Financial Analysis
The purpose of this study is to investigate usage of financial graphs in Japanese corporate annual reports and evaluate the quality of those graphs, in order to compare and contrast the results with those of studies in other countries, including European countries, the United States, and other Asian countries. This study observes and describes the nature of graph use in corporate annual reports in Japan and analyzes whether the representational neutrality of the graphs are violated. The observation suggests that graphs are used widely in Japanese annual reports. However, results did not find that Japanese firms were selective in using graphs or that graphs were distorted or used to misrepresent the facts. In addition, the survey found no statistical evidence to support the hypothesis that graphs were included in annual reports when they could present a favorable view of performance rather than an unfavorable view. These findings are different from any results of other prior research, show that the graphs in Japanese corporate annual reports are accurate, and suggest that Japanese firms are not attempting to manage impressions by means of graphs used in their annual reports. The results might be influenced by several factors, including Japanese culture and/or aesthetics in financial reporting practices.
MANDATORY EARNINGS FORECAST REGULATION AND STOCK PRICE INFORMATIVENESS
KE, BIN
ZHANG, XIAOJUN
Category: FR = Financial Reporting
We examine the economic consequences of disclosure regulation using a regulation implemented in a staggered manner that requires publicly listed Chinese firms to issue earnings forecasts under certain conditions. We find the regulation substantially increases the directly affected firms’ frequency of management earnings forecasts, but approximately one third of the firms that are required to issue mandatory earnings forecasts fail to issue the required forecasts (noncompliant firms). The stock market reacts positively to the announcements of mandatory earnings forecasts. More importantly, the mandatory earnings forecast regulation helps increase the directly affected firms’ future earnings response coefficient (FERC), suggesting that the regulation helps increase the total information available to stock market investors. We also find that the regulation creates a spillover effect on some firms that do not issue earnings forecasts in the post-regulation period. Specifically, we find that the noncompliant firms experience a significant increase in the FERC in the post-regulation period when their peer firms in the same industry issue at least one mandatory forecast. However, we find no evidence of a spillover effect for the firms whose expected earnings do not fall into the scope of the regulation and thus are not obligated to issue any earnings forecasts.
AUDITORS’ RESPONSE TO LOW READABILITY IN ANNUAL REPORTS
KENT, PAMELA
BLANCO, BELEN; CORAM, PAUL; DHOLE, SANDIP
Category: AU = Auditing
We study whether auditors adjust risk assessments in response to low financial statement readability and communicate this in the audit opinion in response to heightened risk of financial misstatement. We build on prior research that suggests that financial statement readability is negatively associated with firm performance. We first show that financial statement readability is negatively associated with auditors’ risk assessment. Specifically, low readability is associated with higher audit fees and a greater lag in the issuance of the audit report. We also find that low readability increases the likelihood of the auditor using more explanatory language in unqualified audit reports, consistent with the idea that auditors convey their higher risk assessment to shareholders.
PREDICTING OPERATING CASH FLOWS AND EARNINGS USING THE DIRECT METHOD COMPARED TO THE INDIRECT METHOD STATEMENT OF CASH FLOWS
KENT, RICHARD
KENT, RICHARD
Category: FR = Financial Reporting
This study assesses whether the direct method incrementally predicts future operating cash flow and earnings beyond the indirect method. Using a sample of Australian listed companies reporting under International Accounting Standards, results indicate that the direct method predicts future operating cash flows with greater accuracy than the indirect method. Direct method disclosure is incrementally useful for predicting earnings when companies experience low earnings permanence. Findings show that users cannot re-create or estimate direct method line items accurately with mean absolute percentage errors above 3 percent outside the upper 25th percentile for cash receipts from customer and cash payments to suppliers. In fact, estimated direct method line items provide less predictive accuracy for earnings and operating cash flow than an aggregate operating cash flow measure, after controlling for accruals. This result also holds after I truncate estimation errors for direct method disclosures to the upper 90th and 75th percentiles.
REVENUE RECOGNITION ON THE SALE OF VIRTUAL GOODS AND THE NEW CHALLENGES OF THE GAME INDUSTRY
KETTUNEN, JAANA
HOVI, JAAKKO; KALLIO, KIRSI-MARI
Category: FR = Financial Reporting
This paper studies the calculative practice of recognizing revenue from the sale of virtual goods. By virtual goods we mean non-physical objects, such as avatar feature or skill boosts, which are usable only in the environment where they are sold in. Accordingly, the transactions concerning the virtual goods can only be observed in the same virtual environment. The study contributes to the growing literature on the work of financial reporting, translation of accounting regulations into practice, and on the infrastructures that support financial reporting.
CO-OPETITION AND THE FIRM’S INFORMATION ENVIRONMENT
KEUSCH, THOMAS
BUSHEE, BRIAN; KIM-GINA, JESSICA
Category: FR = Financial Reporting
Some firms in the technology sector choose to cooperate with competitors (“co-opetition”) in Standards Setting Organizations (SSOs). These SSOs create technology standards that facilitate rapid market penetration of new technologies such as Wi-Fi, Bluetooth, and Blue-Ray. Active participation in the standard setting process requires the exchange of proprietary information with competitors. While the goal of such information sharing is to further a technology or a market, firms potentially receive an unintended benefit from access to competitor and industry information. We examine whether active SSO participation enhances a firm’s information set and allows managers to better predict future sales and earnings. Comparing firms that actively contribute information in SSOs with firms that passively participate (i.e., do not share information), we find that SSO-contributing firms are more likely to issue annual sales forecasts after initiating their collaboration. We also find the SSO-contributing firms experience an improvement in the accuracy of their annual sales and earnings forecasts and a reduction in the dispersion of analysts’ earnings forecasts. Our findings contribute to the literature by showing that collaborating with competitors in the product market provides an important unintended benefit of improving the manager’s information set.
GENDER IS NOT ‘A DUMMY VARIABLE’: A DISCUSSION OF CURRENT GENDER RESEARCH IN ACCOUNTING
KHALIFA, RIHAB
HARDIES, KRIS
Category: IC = Interdisciplinary/Critical
Purpose: The purpose of this article is to reflect on the corpus of gender research in accounting journals, with the overall aim of evaluating the extent to which it has contributed to our understanding of the organization of accounting, and its social and organizational functions. Design/methodology/approach: A critical analysis was undertaken of a selection of gender articles. The selection included all gender papers published between the years 2004–2014, in 58 journals ranked A*, A, and B from the Australian Business Deans Council (ABDC) journal ranking list. Patterns within the publishing norms of those journals were identified and critically reflected upon. Findings: We grouped gender research into three categories, namely: gender as a dummy (or control) variable, gender as giving voice, and gender as a process and organizing principle. Of these three categories, we contend that using gender as a dummy variable is very common, and proved to be least fruitful in explicating the roles of gender in accounting. Moreover, many published papers confuse sex with gender. Research limitations/implications: This paper discussed future avenues and approaches for research gender in accounting without, however, expanding on recent changes in gender research.
TECHNOLOGICAL SIMILARITY AND STOCK RETURN CROSS-PREDICTABILITY - EVIDENCE FROM PATENT BIG DATA
KHIMICH, NATALYA
BEKKERMAN, RON
Category: IC = Interdisciplinary/Critical
In this paper we identify technologically similar patents and firms by performing textual analysis on 7.7 million patent descriptions. We find that information about technological similarity is impounded into stock prices by demonstrating that stock returns of technologically similar firms comove contemporaneously. However, we find that stocks of technologically similar firms cross-predict each other’s returns, suggesting that this information is not impounded into prices fully and immediately. Moreover, the magnitude of return cross-predictability is lower when the number of investors informed about the links, as proxied by the number of common analysts covering technologically related firms. This suggests that investor inattention may explain observed predictability.
THE IMPACT OF CORPORATE REPUTATION ON THE TIMELINESS OF EXTERNAL AUDIT AND EARNINGS ANNOUNCEMENT
KHOO, EUNICE
LIM, YOUNGDEOK; MONROE, GARY
Category: AU = Auditing
Our study examines the role of corporate reputation in enhancing the timeliness of external audit and earnings announcement. Changes in regulation and the financial reporting environment have resulted in longer audit report lags, which have resulted in an increase in the proportion of firms that release earnings before completion of the audit. We find that corporate reputation is negatively associated with the likelihood of time constraint in the audit process and the likelihood of firms releasing earnings after audit completion. Our findings have implications for various stakeholders interested in improving external audit and financial reporting timeliness, given the challenges faced by auditors in terms of more onerous audit requirements and shorter filing deadlines, as well as demands for timelier information faced by firms.
HAS THE PCAOB INSPECTION REGIME NARROWED THE BIG 4/NON-BIG 4 AUDIT QUALITY DIFFERENTIAL?
KHURANA, INDER
LUNDSTROM, NATHAN; RAMAN, K.K
Category: AU = Auditing
We examine the time trend in the Big 4/non-Big 4 audit quality differential since the start of PCAOB inspections in 2004. One view predicts the inspection regime to narrow the differential by raising the audit quality of non-Big 4 auditors relative to that of Big 4 auditors. A second view predicts the differential to remain unchanged, i.e., the Big 4 increase their audit quality in step with the non-Big 4 to protect their premium brand identity. Yet another view suggests a widening of the differential because the Big 4 are subject to annual inspections and thus have more opportunities for continuous improvement to protect their brand. Consistent with the first view, we find an attenuation in the Big 4/non-Big 4 audit quality differential over the 2005-2014 time period when we use discretionary accruals and the likelihood of restatements as proxies for audit quality. We also find that much of the attenuation in the audit quality differential can be explained by improvements in the audit quality of small (i.e. triennially inspected) audit firms. However, when we use the likelihood of a going concern opinion as an indicator of auditor independence to measure audit quality, we find no attenuation. Thus, although our findings are consistent with inspections narrowing the Big 4/non-Big 4 differential with respect to auditor competence, they also suggest that the differential is likely to persist with respect to auditor independence because of Big 4 size-related incentives arising from litigation risk and reputation loss concerns. Our study contributes to the literature on the consequences of PCAOB inspections, particularly for product differentiation, which remains a fundamental question in auditing.
HOW CLIENT FACTORS MAY INFLUENCE AGGRESSION OR INNOVATION AMONG TAX PROFESSIONALS
KILLIAN, SHEILA
LAHEEN, MARTIN; LYNCH, RUTH; O'REGAN, PHILIP; SOROLA, MATTHEW
Category: TX = Taxation
We explore the day-to-day decision making processes of tax professionals to understand how client related factors might influence them to take an innovative or aggressive tax decision. Previous academic work has explored how client relationships may affect professionals’ judgement in the context of auditor independence. We extend this work beyond audit, to focus on tax professionals across a diverse range of professional settings. This is timely and topical work, given the recent release of the “Paradise” and “Panama” papers which has reinvigorated the public and political debate on client / professional relationships, and their influence on tax avoidance. We find that the age and stage of professionals, their geographic location and factors relating to the size and international focus of their employing firm amplify the degree to which client factors may lead them to make a more innovative or aggressive tax decision. The degree to which their employing firm is understood as having a client-focused ethos also impacts on the importance of the client expectations on their decisions, although this does not translate necessarily to tax minimisation. Given the prevalence of commercialisation logics within both professional service and law firms, our findings have implications to the future training of tax professionals, and for firms’ self-awareness of the influence of their tax employees.
COST STICKINESS AND INFORMATION OF TAX ACCOUNTS FOR LOSS REPORTING FIRMS
KIM, JI HYE
KIM, JINBAE; LEE, GUN
Category: MA = Management Accounting
We investigate the effect of information contained in valuation allowance for deferred tax assets on cost stickiness. Dhaliwal et al. (2013) find that managers use their private information properly in estimating valuation allowance for deferred tax assets and the information in valuation allowance for deferred tax assets gives incremental information about the persistence of loss for loss reporting firms. By using tax categories following Dhaliwal et al. (2013), we find that the magnitude of cost stickiness of firms with material increase in valuation allowance for deferred tax assets is significantly smaller than that of other firms. The results suggest that firms with managers’ positive prospect about future performance shows stickier cost behaviors because material increase in valuation allowance for deferred tax assets reflects managers’ negative perspective about future performance. This study contributes to the literature for the following two reasons. First, by examining the effect of managers’ perspective about future performance on cost stickiness, this study helps analyze the mechanism of the cost stickiness more specifically. Second, by providing the link between cost stickiness and tax information, this paper enhances understanding of the relation between cost behavior and tax information. Third, this paper extends the understaning of cost behavior for loss reporting fims by investigating loss reporting firms.
CHANGES IN ACCOUNTING ESTIMATES: ARE THE CURRENT DISCLOSURE REQUIREMENTS SUFFICIENT TO DETER MANAGERIAL OPPORTUNISM?
KIM, KYONGHEE
ALBRECHT, ANNE; LEE, KWANG
Category: FR = Financial Reporting
In light of the concerns about inherent measurement uncertainty and subjectivity embedded in accounting estimates and the demand for new auditing standards on accounting estimates, this study examines firms’ practice in making material changes in accounting estimates (CAEs) – CAEs that are subject to mandatory disclosure in accordance with Accounting Standard Codification 250 (ASC 250). The result suggests that anticipated impacts of CAEs on earnings in the context of meeting or beating analyst forecasts significantly influence managers’ decision to make CAEs. Regarding CAEs impact on earnings, we find that earnings for the CAE quarter is less persistent, suggesting that CAEs are a one-off adjustment to revenue or expenses. We also find that financial reports are more likely misstated, subject to SEC inquiries (i.e., SEC comment letters), and are more difficult to read. Reflecting auditors’ view on CAEs as a source of audit risk, audit fees increase significantly when the firm makes a material CAE. Finally, abnormal returns around earnings announcements suggest that investors do not fully understand the impact of CAEs on future cash flows despite the disclosure requirements – investors only partially discount the meet/beat premiums when the meet/beat is aided by a positive CAE, leaving a significant net benefit to firms. These findings, together, provide strong evidence of managers’ self-serving biases in their CAE decisions and support the need for enhanced CAE disclosure.
DOES SELL-SIDE DEBT RESEARCH HAVE INVESTMENT VALUE?
KIM, ROBERT
CHOI, SUNHWA
Category: FA = Financial Analysis
We examine whether debt research has investment value for debt investors. Specifically, we examine the event-time and post-event bond price reactions around the issuance of debt analysts’ recommendations and find that both the levels of and changes in recommendations are associated with the event time abnormal bond return, while the price reaction is stronger for changes in recommendations. We also find that changes in recommendations are associated with a significant post-event bond price drift, suggesting that the initial bond market reaction is incomplete. The calendar time portfolio approach shows that buying (selling) bonds following upgrades (downgrades) generates significant abnormal bond returns. We also document that debt analysts’ coverage of debt securities is non-random and that the information in their bond-specific recommendations is incremental to that in the firm-level recommendations. Overall, our results suggest that debt analysts’ reports have investment value.
CEO PENSION AND LABOR INVESTMENT EFFICIENCY
KIM, YOUNGJIN
MO, KYOUNGWON
Category: MA = Management Accounting
Using U.S. sample, we show how inside debt affects labor investment efficiency. Inside debt has recently been shown to increase manager’s conservatism and long-term horizon due to deferred payments. As labor investment has been recognized as an integral factor for firm’s long-term survival and growth, the inside debt is expected to lead the manager to approach labor investment efficiency. We empirically find positive association between manager’s inside debt holdings and labor investment efficiency. Our results imply that the inside debt mitigates the agency problem between equity holders and debtholders.
EXTERNAL VERIFIABILITY OF ACCOUNTING INFORMATION AND INTANGIBLE ASSET TRANSACTIONS
KIM-GINA, JESSICA
Category: FA = Financial Analysis
Firms commonly use disaggregated accounting information to facilitate efficient contracting over intangible assets. However, reliance on accounting measures creates information asymmetries and thus a role for contract audits. Using a hand-collected sample of technology licensing agreements with royalties based on product-line revenues, I investigate how perceived weaknesses in the licensee’s accounting system and reporting flexibility affect the design of two key audit terms—(1) the scope of audit rights, and (2) penalties for adverse audit outcomes. I find that perceived weaknesses in the licensee’s reporting system lead to the granting of broader audit rights to the licensor, consistent with licensors demanding broader auditor rights when the licensee’s accounting system is believed to be less reliable. However, when the licensee has greater reporting flexibility, the contracting parties are more likely to include penalties in their agreements, consistent with the deterrence theory that penalties are a more cost-effective means to discourage intentional misreporting. Licenses covering more territory and having longer duration are associated with narrower audit scope terms, consistent with the self-enforcement theory that the greater the opportunity cost of early termination, the greater the licensee’s incentives to self-enforce. Overall, my results suggest that audit scope and penalties can improve contracting efficiency in two different ways.
THE EFFECT OF BANK MONITORING ON THE DEMAND FOR EARNINGS QUALITY IN BOND CONTRACTS
KITAGAWA, NORIO
FUTAESAKU, NAOKI; SHUTO, AKINOBU
Category: FR = Financial Reporting
We investigate whether bank monitoring that relies on private information in private debt decreases the demand for earnings quality in public debt. In doing so, we focus on Japanese main banks that have high abilities to access the private information of borrowing firms. We find that under stable financial conditions in the bond-issuing firms, accruals quality is negatively associated with bond yield spreads, regardless of the existence of a main bank, suggesting that reporting higher quality earnings affects the reduction of the cost of debt in public debt. In contrast, we find that when the bond-issuing firms with a main bank have high default risk, there is no relationship between accruals quality and bond yield spread. The results suggest that when a main bank has a stronger incentive to monitor their borrowing firms due to the firm’s poor financial performance, the increased bank monitoring using private information decreases the demand for earnings quality in bond contracts.
R&D EXPENDITURE MANIPULATION TO REACH EARNINGS AND GROWTH EXPECTATIONS. EVIDENCE FROM R&D-INTENSIVE FIRMS
KIVIMAKI, NIKO
Category: FR = Financial Reporting
This paper examines research and development expenditure manipulation in an industry where R&D expenditures are exceptionally large, and when R&D manipulation is expected to bear significant costs to the firm. I study whether research-reliant firms manipulate quarterly R&D spending for earnings reporting purposes when at the same time firms must meet markets’ R&D growth expectations. These conflicting expectations set by investors, and the resulting complex reporting decisions have not been discussed in the previous literature. I use cross-sectional model developed by Gunny (2010) in quarterly setting to detect firm’s abnormal R&D spending, and find that firms meeting or exceeding markets’ annual earnings expectations postpone fourth quarter’s R&D spending in to the first quarter of the following year. I also find that R&D manipulation for earnings management purposes is conditional to firm reaching markets’ R&D growth expectation. In addition, I find that the R&D manipulation by postponing quarterly spending has no effect on firm’s real operations measured by the level of R&D investments. This study is the first to use cross-sectional residual model on quarterly R&D expenditures, and it presents detailed evidence on quarterly expenditure manipulation in highly R&D-intensive industry.
THE IMPACT OF BANKING REGULATION ON FINANCIAL REPORTING: EVIDENCE FROM THE DODD-FRANK ACT
KLEYMENOVA, ANYA
ZHANG, LI
Category: FR = Financial Reporting
We investigate how increased mandatory disclosure requirements of the Dodd-Frank Act (DFA) affect disclosures of bank-holding companies (BHCs). The DFA regulations and disclosure requirements impact large BHCs differently than smaller BHCs. We find that, following the introduction of the DFA, mandatory disclosures of large banks directly affected by the DFA and those banks unaffected by such regulation become more similar. Compared to small banks and other financial firms, however, large banks are incrementally less likely to issue management forecasts and less likely to increase the frequency of forward-looking statements in the MD&A sections of their financial reports. Finally, we also find weak evidence that large banks increase the quality of voluntary disclosures by issuing annual management forecasts with a narrower width. Overall, our findings suggest that following the introduction of the DFA, large banks substitute away from voluntary disclosures relative to small banks and other non-regulated firms in the financial sector.
DO KEY AUDIT MATTERS IMPACT FINANCIAL REPORTING BEHAVIOR?
KLUEBER, JOHANNA
GOLD, ANNA; POTT, CHRISTIANE
Category: AU = Auditing
Our paper examines whether the implementation of key audit matters in auditors’ reports affects managers’ reporting behavior. In line with prior research in psychology, we argue that greater transparency through KAM sections lead to higher accountability pressure as managers may expect their judgments to be scrutinized more strongly in the presence of KAM sections. This may evoke a more critical and thorough evaluation of their accounting choices, which could ultimately result in better financial reporting quality. Further, we examine whether varying levels of informational precision in KAM sections adversely affect our predictions. 54 financial statement preparers participated in an experiment where they were asked to make an accounting decision on a complex area of financial reporting judgment: goodwill impairment testing. Our findings show that participants who received a KAM section with firm-specific content are less likely to engage in earnings management activities compared to participants who receive a traditional auditor report without a KAM section. However, we find no significant effect for KAM sections containing non-firm specific information. Thus, our results suggest that KAM sections may serve as a beneficial mechanism for enhancing managerial financial reporting quality in the highlighted area, but only when information precision in KAM disclosure is high.
THE ASSOCIATION BETWEEN NON-EXECUTIVE COMPENSATION AND FIRM PERFORMANCE
KO, CHUNYOU
KO, YEN-CHUN; KUO, LI-CHUN; PAN, HUNGHUA
Category: FA = Financial Analysis
The non-executive compensation in Taiwan is commonly considered underpaid and is a highly concerned issue for the public. Companies must trade-off between the cost and benefit when rewarding higher compensation to non-executives. Using data in Taiwan from 2008 to 2015, we find partial evidence that the average compensation for non-executives is positively correlated with firm performance. We further partition the compensation into fixed and variable parts, and find that fixed (variable) pay is negatively (positively) associated with firm performance. After considering the percentage of compensation classified into operating expense, we find significant positive (negative) incremental effects of fixed (variable) pay on firm performance. Overall, our results show that non-executive compensation is important to firm performance, and firms must consider compensation structure with the functional categories of cost carefully when designing compensation schemes for non-executives.
MARKET DISCIPLINE AND SUPERVISORY PREFERENCE FOR PRIVATE INFORMATION: EVIDENCE FROM REGULATORY RISK REPORTING IN EUROPE
KOENRAADT, JEROEN
Category: FR = Financial Reporting
Investor’s incentives to monitor banks’ public risk information are attenuated when the prudential supervisor is known to operate on private information in order to facilitate preemptive supervisory interventions. In this paper we use variation in the confidential reporting requirements under the COREP framework across European countries between 2007 and 2013 as an indicator for such a supervisory preference for private information. We find that a stronger reliance on confidential reporting requirements is associated with a significant decrease in trading volume around the publication of banks’ annual reports. This relationship is stronger where the supervisor has more regulatory resources, indicating a better ability to act on its private information. Our study adds to the literature on the influence of institutional characteristics on market discipline by highlighting the role of supervisory information.
IS STOCK OPTIONS BACKDATING AN UNINTENDED CONSEQUENCE OF NON-STOCK OPTIONS EXPENSING?: HISTORICAL EVIDENCE
KOH, WEI CHERN
Category: FR = Financial Reporting
Stock options expensing has been a controversial issue since it was first raised in the 1980s. Due to major opposition, it wasn’t till 2005 before stock options expensing was mandated. In 2006, the financial press highlighted yet another phenomenon related to stock options, i.e. stock options backdating, which refers to cherry picking a date on which the stock price is lower than that of the actual grant date and reporting this cherry-picked date to the regulators. Financial press suggests that had employee stock options been expensed, the incidences of options backdating would have reduced. I compare a sample of firms which voluntarily expensed stock options over 2002-2004 and a sample of firms which did not. The proportion of grants that are suspected of being backdated is lower for the sample of voluntary adopters during their post-adoption period relative to non-adopters. This study provides empirical evidence to the suggestion made by the financial press that both the stock options expensing and stock options backdating phenomena are potentially related and contributes to the stock options expensing debate by highlighting yet another benefit to stock options expensing.
GENERAL KNOWLEDGE OF AUDIT PARTNERS IN THE CONTEXT OF AUDIT PARTNER SWITCHING: EVIDENCE FROM AUDIT QUALITY AND AUDIT FEES
KOLOMIIETS, ALONA
DEKEYSER, SIMON
Category: AU = Auditing
We investigate whether audit partners’ general knowledge is associated with audit quality, measured by discretionary accruals, and audit fees. We investigate this research question for client firms that change the lead audit engagement partner but do not change the audit firm, as this setting allows us to control for cross-sectional heterogeneity between audit firms and clients. We examine three different characteristics of audit partners’ general knowledge: professional experience, industry specialization and the number of clients of the audit partner. We use a sample consisting of 2,088 Belgian firms who changed audit partners but not audit firms over the period 2010-2015. Overall, we find no association between general knowledge of audit partners and audit quality in the first year after the partner switch. However, we document a consistent positive association between professional experience and audit fees implying that audit partners with extensive professional experience use their experience as a competitive advantage allowing them to charge higher audit fees. In contrast, industry specialization and number of clients are negatively associated with audit fees in some but not all of our tests.
INSTITUTIONALISING SUSTAINABILITY: A STUDY OF THE UAE’S NATIONAL SUSTAINABLE DEVELOPMENT STRATEGY
KOMAREV, ILIYA
FAROUK ABDEL ALL, SHERINE; NYAMORI, ROBERT
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Developing and implementing a national sustainable development strategy (NSDS) has proven a challenge for many governments. This paper examines how the UAE has attempted to institutionalise sustainability through the development and implementation of a NSDS. Employing the interpretivist lens of institutional theory and the Sociology of Worth, we examine speeches by significant actors and official documents - especially relating to key moments in the international and national sustainability arena - to understand the norms and values that inform these efforts in the UAE context. We conclude that the malleability of the sustainability concept has provided an opportunity where ecological norms have become subordinated to economic ones. We ask how ecological sustainability can be rescued in a contested environment where political and economic imperatives hold sway. The study hopes to contribute to recent concerns about the paucity of research into sustainable development and accounting.
RISK AVERSE AGENTS AND INPUT MARKET CONSIDERATIONS
KOPEL, MICHAEL
HINTERECKER, HARALD
Category: MA = Management Accounting
This paper examines the interdependence between a firm's internal agency problem and a firm's external relationship with its suppliers. Elaborating on a linear principalagent model inside a firm that engages in external procurement, we demonstrate that moral hazard problems are not necessarily detrimental to a firm.Introducing asymmetric information in our model leads to higher expected marginal production costs because the principal demands less cost-reducing effort from the agent if effort is unobservable. This reduces the expected compensation that is paid to the agent. Moreover, anticipating higher marginal production costs of the firm, the suppliers set a lower input price to stimulate demand for the input. The cost effect and the additional effect on the firm's revenue have a negative whereas the compensation and the input price effect have a positive influence on expected firm profit. We derive conditions for the level of competition on the input market under which the two beneficial effects outweigh the detrimental effects. In addition to that we find a positive relationship between the number of firms on the input market and incentives provided to agents employed in downstream firms. When elaborating on a multi-product firm, we show that the effect of moral hazard problems on firm profit depends on procurement decisions and on segment profitability. Additionally, we show that optimal incentive provision in a multi-product firm depend on procurement decisions.
THE INFORMATION CONTENT OF CAPITAL MARKET DAYS
KOPF, KARLA
Category: FA = Financial Analysis
This study analyzes Capital Market Days, a relatively new and unique disclosure medium which is organized by a company's Investor Relations department. It allows for face-to-face interactions between company representatives and influential market participants. The study discusses the characteristics and prevalence of Capital Market Days. It also investigates their information content by applying an event study methodology. The sample includes all German DAX 30-listed corporations in the period from 2000 to 2016. Consistent with the hypothesis, this study finds that Capital Market Days do not lead to significant abnormal returns on average. While the findings of this study have implications for hosting companies, participating analysts and regulators, they should be viewed as a piece of a larger puzzle that increases our understanding of face-to-face interactions.
CODES OF CONDUCT OF GERMAN PUBLIC-LISTED COMPANIES. CONTENT, ENFORCEMENT, AND IMPLEMENTATION
KOTZIAN, PETER
STÖBER, THOMAS
Category: GV = Accounting and Governance
Apart from few comparative surveys focusing on the largest companies, there are no content analyses of the codes’ full content among German companies. Due to country-specific differences results of content analyses can hardly be transferred from one country to another. Refining existing coding schemes to include new topics, enforcement and implementation, we analyze the content, its patterns and anteceding factors. While codes are common, our findings indicate substantial differences in the degree to which codes address topics and functions. We find a single underlying dimension: the intensity of regulation. Codes are most elaborate in terms of what actors are supposed to do, while issues like guidance and enforcement are dealt with in less detail. Endorsement of the code by the top management is also quite low. We find that regulatory intensity differs by stock market segment, which is not a proxy for company size but rather for the presence of the companies in the public and regarding the code’s role, e.g., the preservation of a company’s image. Our study contributes to the literature by examining the codes’ full content of the largest German listed companies. In addition, we modified and disclosed a frequently used coding scheme that can be considered for future research. Finally, we contribute to the business practice by generating a basis for benchmarking their code and giving recommendations for reconsidering their content and design.
TAXATION AND MARKET-BASED TRANSFER PRICES
KOUROUXOUS, THOMAS
Category: TX = Taxation
Multinational corporations are frequently alleged to use transfer prices to strategically minimize the firm's exposure to taxation when transferring goods, services and intangibles between related entities in different countries. This paper analyzes the implications of a frequently discussed remedy to this issue: the use of market-based transfer prices. While market-based transfer prices prevent conventional profit shifting, we find that they do not remove tax considerations from economic decision making in transfer pricing. In particular even when the market place is most transparent, cross-border tax rate differences influence the behavior of all actors in the market-places on both sides of the border.
COST-BENEFIT CONSIDERATIONS OF REPORTING FINANCIAL INFORMATION – A CONTENT ANALYSIS OF COMMENT LETTERS FOR FASB’S AND IASB’S JOINT REVENUE RECOGNITION PROJECT
KRAM, PETER
FROSCHHAMMER, MATTHIAS; KOHL, BENEDIKT
Category: FR = Financial Reporting
Conceptual frameworks of private standard setters frequently state that costs of reporting financial information shall be justified by associated benefits. Frequent criticism targets the expected costs of reporting financial information due to new reporting standards to be inadequate compared to the expected benefits. Research has remained largely silent on insights here. Stepping into this research gap, our study analyzes the relevance of cost-benefit considerations for interested persons, as it seems fruitful to update research in this field and offer practice (e.g., standard setters and interested persons) valuable insights. The study uses a content analysis of 1,647 comment letters submitted to FASB’s and IASB’s joint Revenue Recognition Project. The results show that costs and benefits are frequently indicated and emerge mainly in the middle stages of the standard-setting process. Preparers are the most active interest group regarding these indications, followed by auditors, regulators, and users. Essentially, this study illustrates the high relevance of an efficient cost-benefit consideration for interested persons. It reveals a more structured inclusion of cost-benefit considerations and points to the need for support by research and interested persons. Interested persons benefit from the findings through explicit advice for their own commenting behavior, for example, directly opposing costs to benefits, instead of the current practice of separately indicating them.
QUALITY OF ACADEMIC ACCOUNTING EDUCATION: DOES ACCREDITATION MATTER?
KRASODOMSKA, JOANNA
BIERNACKI, MICHAŁ ; ZARZYCKA, EWELINA
Category: ED = Accounting Education
The paper aims to investigate the quality of academic education in the context of ACCA accreditation from the perspective of a critical stakeholder group – students. The identification of their views contributes to the ongoing discussion surrounding the accounting education quality, and how it relates to practice. The study is based on an online survey questionnaire. There was a total of 384 responses used in the study, provided by students of three leading Polish universities. We took into consideration such characteristics of our respondents as gender, age, type of studies, work experience. The multiple regression analysis allows us to conclude that accreditation is a factor moderately influencing the quality of accounting education. Students indicate the subject coverage and difficulties in preparation for accredited exams as significantly important factors influencing the education quality. Accreditation and its impact on the quality of education are important and current issues, at the same time not undertaken in the academic research. The presented study is an attempt to fill in the gap in the literature of this field, while also being relevant for practice. The results contribute to a better understanding of accreditation processes and students’ expectations. They may also be useful to more successfully design and develop accounting curricula at higher education institutions which have already been accredited or are considering such a possibility.
THE INFLUENCE OF CORPORATE DIVERSIFICATION ON COST OF DEBT
KREILKAMP, NIKLAS
Category: FA = Financial Analysis
This study examines whether a company’s organizational structure has an impact on its cost of debt. On the one hand, it can be argued that corporate diversification lowers a company’s default probability by reducing its overall earnings and cash flow volatility. On the other hand, corporate diversification, contrary to existing opinions that it has no effect on systematic risk, might in fact be able to lower the systematic risk of a company by reducing its exposure to countercyclical deadweight costs of financial distress. In line with this theoretical prediction, I find that diversified companies on average have a lower cost of debt than a comparable portfolio of stand-alone companies. In addition, I predict and find that the cost-of-debt-reducing effect of diversification is stronger during periods of economic or financial crises. Corporate diversification lowers the risk position of debtholders and hence secures the debtholders’ wealth during times of high uncertainty.
DEVELOPMENT COSTS CAPITALISATION AND DEBT FINANCING
KREß, ANDREAS
EIERLE, BRIGITTE; TSALAVOUTAS, IOANNIS
Category: FA = Financial Analysis
Existing studies analysing the value relevance of capitalised development costs focus exclusively on equity markets and thus provide a partial view towards the market implications of research and development (R&D) capitalisation. This study sheds light on the debt market effects of capitalised R&D, using a global sample of public bonds and private syndicated loans. First, we provide evidence that R&D capitalisation is associated with a firm’s debt market choice. Higher amounts of development costs capitalised are associated with firms’ decision to raise funds in the public instead of the private debt market. Second, we show that capitalised R&D investments reduce cost of debt (bonds’ and syndicated loans’ prices). Lastly, we document that debt market participants are able to look through a firm’s motives of R&D capitalisation, as we only find a reduction in the cost of debt when R&D capitalisation is not attributed to earnings management incentives.
INFLUENCE OF TRANSNATIONAL ECONOMIC ALLIANCES ON THE IFRS CONVERGENCE DECISION IN INDIA – INSTITUTIONAL PERSPECTIVES
KRISHNAN, SARADA RAJESWARI
Category: GV = Accounting and Governance
This study contributes to the literature on global governance by highlighting the importance of not losing sight of the nation state as an important player in the transnational governance arena. Specifically, literature on global (accounting) regulation devotes a great deal of attention to the roles of organisations and agencies with transnational remit (such as global standard setters, donor agencies) while often downplaying the significant impacts of the more traditional cross-country links forged through economic relationships and resource dependencies between national and transnational institutional fields. This was specially noted in the case of the indirect influences of the US’s decision to delay IFRS convergence. While being interpreted as an indirect source of influence, such a decision played a very significant role on the convergence negotiations in India. The study shows how the US influence was channelled through Japan with which India has significant trade and economic relations and, most importantly, holds a joint forum specifically to discuss convergence issues. The consequences of India’s links with countries such as US and Japan in the decision-making process provide a vivid indication of the important roles of cross-governmental relationships in the global governance arena, and also question the position of transnational organisations as pervasive powers in such governance. The study’s findings clearly demonstrate that the pursuit of full IFRS convergence strongly favoured by the transnational forces was invariably challenged in the Indian context by the influences of powerful nation states advocating a more cautious approach.
ACCOUNTING COMPARABILITY IN MUTUAL FUNDS' PORTFOLIOS
KROECHERT, SARAH
Category: FA = Financial Analysis
The study examines whether accounting comparability matters for mutual funds’ portfolio decisions. I measure accounting comparability at the holding level by assessing similarities with portfolio peers, explicitly adopting an investor perspective. Methodologically, I follow De Franco, Kothari and Verdi [2011], extended with a cash flow-based model. I first show that comparability is high and varies predictably with the type of mutual funds. For the same firm, comparability is higher in mutual fund than in analyst portfolios, which I derive from analysts’ coverage decisions. Likewise, it is higher in portfolios of active funds. I then provide evidence consistent with comparability arising from the selection of already comparable firms. For the same portfolio, a firm is more likely to be included if it is more comparable to portfolio peers. For the firm that is included, comparability increases until and around inclusion, but not subsequently. The findings are in line with accounting comparability reducing portfolio management costs.
THE IMPACT OF JOB SIMILARITY ALONG THE CAREER PATH ON THE FIRM'S PROMOTION CHOICE
KRONENBERGER, SEBASTIAN
INFUEHR, JAKOB
Category: MA = Management Accounting
Job promotions are one of the most important ways to incentivize hard work from low-level employees. At the same time, they are also used to sort employees according to their skills. These two functions are often in conflict. An external job candidate might be the best qualified, but hiring him reduces motivation for the existing workforce. We extend prior research by taking the effect of job similarity between current and future job into account. We show that if the job after promotion requires a vastly different skill set than the one currently performed, then this makes it easier and thus more likely for a firm to promote only internal candidates. Furthermore, we analyze competition on the demand-side of the labor market and its effect on promotion decisions, depending on firm productivity.
PRICE-EARNINGS RELATIONS IN THE PRESENCE OF MARKET INEFFICIENCY
KUBATA, ADRIAN
Category: FA = Financial Analysis
This paper evaluates specifications of price-earnings relations when capital markets are not a priori assumed to be fully efficient. Using a ‘hybrid’ model, I test whether the extent to which price reflects fundamental value creates an omitted correlated variable biasing estimated price to earnings ratios (P/E ratios) and earnings response coefficients (ERC). Since fundamental analysis cannot be disentangled from a test of market efficiency, I empirically estimate the degree of market efficiency. My results show that investors’ immediate responses to earnings news amount to 112-130% of the full effect that would have occurred under market efficiency, i.e., 100%, indicating stock market’s overreaction. Thus the bias in estimated P/E ratios and ERCs caused by an omission of the price adjustment process amounts to 12-30%. Further, prior literature traditionally assumes P/E ratios and ERCs to be positively associated with market efficiency. Recent literature, however, provides evidence on a negative cross-sectional association between P/E ratios and ERCs. In the light of this result, I test whether market efficiency is positively or negatively associated with P/E ratio and ERC magnitudes, respectively. My results reveal a positive (negative) association between ERCs (P/E ratios) and the degree of market efficiency arising from that fact that high persistence in investors’ expectations is associated with higher cost of arbitrage.
HOW MANAGEMENT ACCOUNTANTS SHAPE PARTICIPATIVE FORMS OF BUDGETING: A COMPARATIVE ANALYSIS
KUNZL, FERDINAND
Category: MA = Management Accounting
This paper breaks up the rather uniform notion of participative budgeting by providing insights into how the practice can vary between organizations. Drawing on qualitative empirical evidence collected in three companies, it is outlined how different dominant logics (Friedland & Alford, 1991) play a decisive role in particularly shaping participative forms of budgeting in each company. Moreover, it is argued that specifically management accountants take in a central role in designing, shaping, and structuring organizations’ budgeting practices, which also affects how other organizational members (can) participative at the practice. The paper outlines how management accountants are engaged in and work on the practice in a way that is consonant with their own interests and aims at aligning different, sometimes competing, expectations that are set by other organizational actors.
ACCRUAL ACCOUNTING FOR BUDGETARY DECISION MAKING: A SURVEY EXPERIMENT OF LOCAL GOVERNMENTS
KUROKI, MAKOTO
HIROSE, YOSHITAKA; MOTOKAWA, KATSUHIRO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
While accrual accounting and general-purpose financial statements (GPFSs) have spread to local government (LGs), existing studies do not clarify the effect of adopting accruals with cash-based budgeting. This study aims to clarify the impact of accrual accounting for internal decision making, especially budget priority decisions, with a focus on depreciation expenses and durable life information included in fixed assets. We conduct a survey experiment of all 1 788 Japanese LGs budgeteers (response rate: 40.9%). In 2017, Japanese LGs began reporting general public financial statements (GPFSs) based on unified LG accounting standards that require them to create a fixed asset register according to acquisition cost. We test the hypothesis that budgeteers change their decision priorities related to a building investment when they have depreciation expenses and durable life information based on accrual accounting. The results provide evidence that budgeteers change their decisions about budgeting priorities using accrual accounting, in particular fixed asset information. This study contributes to accounting research and practice to reveal the initial impact of adopting accrual accounting on budgetary decision making using the unique methodology of a survey experiment.
THE TREATMENT OF ADJUSTING ENTRIES AT THE END OF THE 14TH CENTURY
KUTER, MIKHAIL
ANDREENKOVA, ANGELINA ; BAGDASARIAN, RIPSIME; GURSKAYA, MARINA
Category: HI = History
A century before Pacioli’s treatise of 1494 that described how to correct errors and make adjusting entries in the ledger, the accountant in Francesco Datini's company in Pisa made adjustments in the account for Profits and losses to rectify errors identified in the ledger. While the accountant knew where the mistakes had occurred, he did not consistently make adjusting entries in the appropriate ledger accounts. As a result, these individual accounts were closed without alteration. In other cases, an entry in the form of a note was added to the ledger account where the error had occurred, while the ‘real’ entry was made in the account for Profits and losses. This paper presents a series of errors, most of which were detected by the accountant in the company’s ledger for 1395-6. It shows that, contrary to the perception in the literature, accountants of that period not only detected errors, they devised methods to address them that ensured the overall financial result reflected a fair presentation of what had occurred; and that they did not simply use the account for Profits and losses as an easy outlet in which to record an amount that balanced the books. It also finds that the accuracy of individual ledger accounts was not deemed important once they had been balanced, even after errors were detected.
CHANGES IN REPORTING FINANCIAL AUDIT RESULTS – THE CASE OF POLAND
KUTERA, MALGORZATA
Category: AU = Auditing
Significant changes are being made to the way independent auditors report audit results. The opinions issued previously, short and rather rigid in wording, no longer meet the expectations of the business community. Report readers want to learn about the broader context in which the auditors worked to analyse their conclusions more effectively. What is particularly interesting in this context is the auditor's duty to present Key Audit Matters (KAMs) concerning areas of the highest risk. In light of the above, the purpose of this article is to present the extent to which changes have been implemented in independent auditors' reports from audits of financial statements of the largest companies in the Polish market and to identify key audit matters as well as the verification procedures applied by auditors. Auditors' opinions from audits of consolidated financial statements of the 30 largest companies listed on the main market of the Warsaw Stock Exchange for the years 2014 – 2016 were analysed in detail. The total sample comprised 90 opinions. The research methodology consisted mainly of case studies, with deductive and inductive reasoning used to formulate conclusions based on the analysis and synthesis method. The results of this research indicate that some independent auditors have been implementing new elements of reporting on a current basis. Auditors also give rather detailed reasons for selecting the specific KAM and the verification techniques used.
A STUDY OF GOODWILL DISPOSALS
KVAAL, ERLEND
Category: FR = Financial Reporting
To dispose of goodwill through a sale or a closure of business is a “backdoor exit” that can be used opportunistically to avoid a goodwill write-down. Attaching goodwill to a sale of business is a discretionary managerial decision that has no real or accounting effects other than the accounting effects for the selling firm. This paper analyzes whether goodwill disposals are managed for accounting purposes. A quantitative analysis of a sample of 200 UK firms over the period 2010 – 2014 provides evidence that goodwill disposals obey certain patterns: they are more substantial in firms that have goodwill impairment losses and poor accounting performance, and less substantial in firms that have good corporate governance measured by the activity of the audit committee, than in other firms. These findings are followed up by a multiple case analysis of firms that have large or frequent goodwill disposals.
CEO-EXECUTIVE CONNECTIONS AND FORCED TURNOVER OF NON-CEO EXECUTIVES
KWACK, SO YEAN
BALSAM, STEVEN
Category: GV = Accounting and Governance
In this paper, we examine the impact of connections, i.e., relationships established outside the focal firm, between the CEO and the other named executive officers, finding they reduce the likelihood of involuntary turnover of those non-CEO executives. While this is not surprising as the CEO generally has the authority to hire/fire subordinates, we find that this is associated with higher firm value and lower investment inefficiency which is consistent with the benefit of keeping executives with connections with the CEO on the top management team. We further examine and find a differential impact based on the genesis of the connection, i.e., connections that arise from other activities such as mutual membership in a charitable organization or club are the ones associated with lower likelihood of turnover and higher firm value. In additional analyses, we find the results consistent with our findings being driven by powerful CEOs.
EXECUTIVE PENSIONS AND DEBT RESTRUCTURING CHOICE: IMPLICATIONS OF THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005
KWAK, BYUNGJIN
KWAK, BYUNGJIN; LOBO, GERALD; MO, KYOUNGWON
Category: GV = Accounting and Governance
We examine the relation between executive pensions and the choice between Chapter 11 and workouts before and after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Using a sample of 252 financially distressed firms that either filed for Chapter 11 reorganization or conducted an out-of-court debt restructuring workout, we find that the firms with executive pension plans were more likely to choose Chapter 11 than workouts before BAPCPA but less likely to do so after BAPCPA. Our study documents that the incentives of insiders, in addition to those of outside creditors, are important in a firm’s choice between Chapter 11 and a workout. Additionally, our finding that the preference for Chapter 11 over workouts is reversed after BAPCPA implies that BAPCPA effectively restricts the payments of executive pensions under Chapter 11 and protects creditors, consistent with its intended purpose.
LOOKING INWARD: ANALYZING THE VISUAL DIMENSION OF MANAGEMENT ACCOUTING TOOLS USING THE THEOLOGY OF ICONS
LAGUECIR, AZIZA
LAGUECIR, AZIZA; LECA, BERNARD
Category: IC = Interdisciplinary/Critical
The nature and impact of the visual representations on which management accounting is build has attracted increasing attention. To contribute to this research we draw from analytical and critical aspects from one of the oldest and deepest tradition in the analysis of images, the Christian orthodox theology of icons. Building from controversies and studies in this tradition, we generate three insights. First, we point to the need, so far neglected, to question and theorize the relation between the representation and what is represented. Second, we highlight the prominence of symbolism over aesthetic aspects. Third, we underline that images are both embedded within meaningful relationships with other images, and used in social and power relationships. Building on these insights, we elaborate the notion of epistemic power to account for the capacity of visual representations as those used in management accounting to provide knowledge of an object of inquiry, which cannot be immediately conscripted nor clearly perceived in its entirety. Eventually, we discuss the potential integration of insights from theological analysis into accounting research and contributes to it by showing how reasoning on visual representations initially elaborated in theology can further extend our understanding of accounting in secular organizational settings.
INTEGRATED REPORTING AND SOCIALIZING ACCOUNTABILITY
LAI, ALESSANDRO
MELLONI, GAIA; STACCHEZZINI, RICCARDO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The International Integrated Reporting Council (IIRC) claims that integrated reporting (IR) can enhance corporate accountability, yet critical and interpretative studies have contested this outcome. Insufficientempirical research details how preparers experience accountability while constructing IR; to fill this gap, this study analyses how the preparers’ mode of cognition influences the patterns of accountability associated with IR. Drawing on research into forms of accountability, this study adopts a functionalist approach to narrative analysis to elucidate the function that a narrative mode of cognition adopted in preparing the IR serves in extending accountability toward stakeholders. The empirical analysis particularly benefits from in-depth interviews with the IR preparers of a global insurer that has used IR since 2013. The preparers’ narrative mode of cognition facilitates dialogue with IR users. It addresses accountability tensions by revealing the company’s value creation process. Preparers’ efforts to establish a meaningful dialogue with a growing variety of stakeholders through broader and plainer messages reveals the potential of IR as a narrative source of a socializing form of accountability. However, financial stakeholders remain the primary addressees of the reports. This article offers new insights for dealing with corporate reporting and accountability in a novel IR setting. Further research should integrate users’ accountability expectations.
TIMING OF FEMALE DIRECTOR APPOINTMENTS, BAD-NEWS-HOARDING AND STOCK PRICE CRASHES
LAI, KAREN
GARG, MUKESH; GUL, FERDINAND; KHEDMATI, MEHDI
Category: GV = Accounting and Governance
Motivated by recent concerns about the lack of females on corporate boards and the prevalence of financial opacity in many firms, this study examines the timing of female director appointments on corporate boards and stock price crash risk. The findings show that firms with females appointed to an all-male board for the first time are more likely to disclose withheld negative information, especially for high opacity firms (proxied by discretionary accruals), thus accelerating a stock price crash. On the other hand, firms with female board directors for an extended period are less likely to experience stock price crashes since their presence helps to curb bad-news hoarding-activities by managers. Overall, these results are consistent with the notion that firms with females on the boards are more diligent in disclosing financial information.
CONTESTED VALUATIONS OF LIFE ITSELF. ACCOUNTING FOR DEATH, RESUSCITATION, AND THE END-OF-LIFE
LAMBERT, CAROLINE
LE THEULE, MARIE-ASTRID ; MORALES, JÉRÉMY
Category: IC = Interdisciplinary/Critical
This paper examines contested valuations of life itself. It is based on an ethnographic study of a hospital’s geriatrics and palliative care department, that is a setting where life ends. There, contests of valuation arise around the fundamental questions of how life should end, who should live and who can be let to die, and based on which criteria. We analyze these valuations drawing on Agamben’s conceptualization of thanatopolitics, or the extension of the sovereign power over life (or biopolitics) to a power over death itself. In hospitals, resources allocations, calculative practices and organizational technologies tend to devalue aged patients and to reduce them to ‘bare’ lives that cannot be ‘treated’ anymore. Geriatricians then have to introduce alternative conceptions of the value of life to demonstrate that their patients’ life is still worth living. We thus analyse the intersections between accounting and death to highlight the role of contested valuations of life in the definition of what makes a life no longer worth living.
INFORMATIONAL OPACITY AS AN ADDITIONAL DRIVER IN EXPLAINING NONPROFIT ORGANIZATIONS’ CAPITAL STRUCTURE
LANCKSWEERDT, LODE
REHEUL, ANNE-MIE; VAN CANEGHEM, TOM
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This study explores the impact of a decrease in informational opacity on Belgian nonprofit organizations’ capital structure. Using data from 7,936 Belgian nonprofit organizations (NPOs) over the period 2006 – 2015, we assess the impact of the introduction of financial statement disclosure requirements on NPOs’ capital structure using alternative leverage proxies. Adopting a difference-in-differences approach, and using a representative sample of for-profits as a control group (to filter out the potential effects of the financial crisis), we find that the public disclosure of financial statements positively affects NPOs’ access to (especially financial) debt.
DISCLOSURES ON ANTI-CORRUPTION AS PART OF CSR REPORTING: INITIAL INSIGHTS OF THE EFFECTS OF THE EU DIRECTIVE ON NON FINANCIAL REPORTING
LANDIS, CRISTINA
PAGLIETTI, PAOLA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study investigates the change in the corporate practice of disclosing information on anti-corruption in corporate social responsibility reports (CSR) consequent to the EU directive on non-financial reporting issued in 2014. Information on anti-corruption has been dealt with in the internationally accepted CSR frameworks and part of CSR reports. With the transposition of the directive, anti-corruption matters are to be covered in the mandatory non financial report. Against this development, this study empirically examines, for a sample of 55 European listed companies, whether there is a change in such voluntary disclosures from period previous to the directive (2012) in comparison to period after the issuing of the directive and before its transposition (2015). Following legitimacy theory, we expect companies to improve the amount and quality of disclosures. Further, we expect disclosures to be associated with legitimacy variables i.e.: negative disclosures, exposure to corruption and firm size. We assess and compare the quantity, breadth and informational quality of the disclosure. We conduct the tests on the whole sample and on two sub-samples of firms exposed and not exposed to corruption. Results show a change in the disclosure and a positive association of quantity, scope and informational quality of anti-corruption disclosure with time effect, propensity of a firm towards voluntary negative disclosure on corruption, corruption-risk exposure and firm size.
DOES THE INFORMATION CONTENT OF INTERIM EARNINGS ANNOUNCEMENTS INCREASE FROM INTRODUCING IFRS?
LANDSTRÖM, JOACHIM
YANG, QISHEN
Category: FR = Financial Reporting
This study tests if the information content of interim earnings announcements increases with the introduction of International Reporting Standards (IFRS) in Sweden. The study uses approximately 11,500 firm-quarters for the period of 2001–2016. Univariate analyses finds that both abnormal trading volume, AVOL, and abnormal return variance, AVAR, significantly increases post introduction of IFRS. However, using a difference-in-difference test between mandatory and voluntary adopters, shows that the information content of mandatory adopters did not increase more than for the voluntary adopters. Multivariate analyses shows that AVOL significantly increases post introduction of IFRS but that it is non-significant for calendar quarter 1–3, which indicates that results are driven by Q4. There is, however, a significantly negative change that affects AVAR. AVAR decreases post introducing of IFRS for the whole sample and for Q2. AVAR also shows a time trend with increasing information content.
TIMING OF NON-AUDIT SERVICE CONTRACTS, STRATEGIC AUDITING, AND INFORMATION KNOWLEDGE SPILLOVERS
LANGBAUER, CLAUDIA
NIGGEMANN, FELIX
Category: AU = Auditing
We study the optimal timing for shareholders to contract with the auditor for the performance of non-audit services, namely management consulting services, by distinguishing between ex ante (before the auditing process) and ex post (after the auditing process) contracting. Depending on the information gathered throughout the auditing process, the auditor exerts the complementary consulting effort subsequent to the manager's effort. We find that ex ante contracting creates additional audit incentives due to information knowledge spillovers, which allow the auditor to make appropriate effort decisions during the consulting stage. Due to strategic effects, the increased audit incentives decrease misreporting by the manager and subsequently increase reporting accuracy such that the shareholders' efficiency loss due to the moral hazard problem with the manager is alleviated. The shareholders, however, must reimburse the auditor for the possible reputational losses that may arise in the case of ex ante contracting and an inappropriate consulting effort decision such that there is a trade off regarding the advantageousness of ex ante contracting. In addition, we show that if collusion between the manager and the auditor is viable, then ex ante contracting can have further positive effects.
MANAGERIAL RISK AVERSION AND ACCOUNTING CONSERVATISM
LARMANDE, FRANCOIS
STOLOWY, HERVÉ
Category: FR = Financial Reporting
This paper investigates the link between one managerial characteristic, the degree of risk aversion, and accounting conservatism. Two models are analyzed, one where the degree of conservatism is chosen by the principal (Board) and accounting information is used for stewardship, and a second where the principal delegates the choice of the degree of conservatism to the manager and accounting information is primarily used for investment efficiency. We show in the first model that higher risk aversion reduces the demand for conservatism from a stewardship point of view. In the second model, we show that delegation is an optimal way for the principal of committing to conservative reporting. Hiring a more risk-averse manager lowers the cost of implementing this conservative reporting. The two models provide opposite predictions for the association between managerial risk aversion and the degree of conservatism. Empirical evidence favors the second model’s prediction. The paper suggests that managers with specific characteristics and incentive contracts might be endogenously chosen by the firm to implement an ex-ante optimal degree of conservatism.
U.S. COMMENT LETTER WRITING TO THE IASB DURING ITS FIRST DECADE: DID IT FORETELL THE FUTURE?
LARSON, ROBERT K.
MYRING, MARK
Category: FR = Financial Reporting
The US Securities and Exchange Commission (SEC) has considered allowing or requiring the use of International Financial Reporting Standards (IFRS) by its US registrants for many years. During its first decade, the International Accounting Standards Board (IASB) endeavored to improve its due process, its governance structure, and IFRS. In part, this was done to meet SEC concerns regarding the breadth and depth of IFRS and the IASB’s independence in its standard-setting process. One aspect of the IASB’s legitimacy relates to the participation of US stakeholders in its standard-setting process. This study investigates US comment letter writers and their responses to 111 IFRS issues released for comment during the IASB’s first decade (2001 through 2010). Increased SEC attention to and consideration of using IFRS did relatively little to increase US responses. The average 14 responses from the US per issue is far lower than experiences at the Financial Accounting Standards Board (FASB). When share-based payment issues are excluded, contrary to Sutton (1984) US responses are lower for the earlier Discussion Papers than for later IASB releases for comment. Overall, the results suggest that except for the large public accounting firms, most US stakeholders acted either as if the FASB would continue to set US GAAP or that the FASB, the SEC, and the large public accounting firms would protect their interests before the IASB.
THE EFFECT OF OWNERSHIP CONTROL CHANGE ON ORGANIZATIONAL FACTORS, RULES AND ROUTINES OF MANAGEMENT ACCOUNTING
LAVARDA, CARLOS EDUARDO
RITTA, CLEYTON
Category: MA = Management Accounting
The purpose of the research is to evaluate the effect of ownership control change on organizational factors (organizational structure, management information system and psychological empowerment), rules and routines of management accounting in a company acquired to meet new organizational principles established by the acquiring company. The results showed that the new organizational principles brought the philosophy of individual performance optimization to the acquired company (Alpha). The new rules and routines of management accounting were materialized in a Performance Evaluation System (PES) with comprehensive management indicators of financial, operational and behavioral nature. After the acquisition, the acquired company reinforced the mechanistic structure, improved utility of the operation and management of the management information system and increased the psychological empowerment of managers. At Alpha, the institutional change was classified as formal, revolutionary and progressive. We concluded that the institutionalization of the new PES in the Alpha company was dependent on organizational factors. The results also indicated that the interaction between the mechanistic structure, management information system, whose nature is operational and managerial, and a moderate feeling of psychological empowerment propelled the institutionalization of rules and routines of management accounting at Alpha.
WHAT WE DO AND HOW WE DO IT. TOWARDS CRITICAL QUANTITATIVE ACCOUNTING RESEARCH
LECA, BERNARD
LINDER, STEFAN
Category: IC = Interdisciplinary/Critical
We draw from recent developments regarding the articulation between critical accounting research and quantitative methods to develop a framework in order to examine how quantitative methods can contribute to advance critical research in accounting. We first distinguish four epistemic perspectives that we argue to be specific to critical research in accounting and distinct from mainstream research. We then discuss how different quantitative methods can contribute to those different perspectives. Eventually, we discuss the implications for critical accounting research, for begin critical from a methodological point of view and regarding the opportunities for dialogue between mainstream and critical approaches in accounting.
THE IMPACT OF FIRM’S CSR ACTIVITIES ON AUDITOR’S FEES
LEE, CHANGHEE
CHEONG, FOONG SOON
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study examines whether the fees paid to auditors are contingent on firm’s involvement in CSR activity. We find that firms with CSR activity (CSR firms) spend more money on audit service than firms without CSR activity (no-CSR firms). However, no-CSR firms spend more money on non-audit service than CSR firms. Change in auditor’s fees shows that unlike non-audit fees, no-CSR firms’ increase in audit fees is significantly more than that of CSR firms. This relationship is more pronounced around no-CSR firms’ initiation of CSR activity. It suggests that before and after the initiation of CSR activity, no-CSR firms appear to reinforce the quality of financial information.
THE RELATIONSHIP BETWEEN CEO INCENTIVES AND CORPORATE SOCIAL RESPONSIBILITY—BALANCE VIEW
LEE, EILEEN CHIA-LING
LIAO, CHIH-HSIEN
Category: MA = Management Accounting
This study aims to examine how CEO equity incentives affect corporate social responsibility (CSR) engagement. We consider different type of CSR actions, including positive CSR, negative CSR, internal CSR and external CSR. Using an equity incentive measure that reflects CEO wealth sensitivity to stock price performance, we find that CEO equity incentives are positively associated with CSR engagement, manifested in both more positive CSR and less negative CSR activities. Overall, our results suggest that CEO equity incentive motivates CEO to conduct CSR. Equity incentives align interests between managers and shareholders to more induce superior CSR engagement in more long term and more balance between the engagement of internal CSR and external CSR.
IFRS HARMONIZATION AND CROSS-COUNTRY M&A PERFORMANCE
LEE, EUNYOUNG
HAN, SAM; YOO, SEUNG-WEON
Category: FR = Financial Reporting
This study investigates the effect of International Financial Reporting Standards (IFRS) harmonization on bidder’s M&A profitability. We assume that the usage of a similar business language amongst countries will reduce the costs and errors on identifying profitable investments in foreign countries and thus lead positive market reaction to M&A announcements. We further predict that the positive association between accounting standard convergence and M&A profitability extends to post acquisition performance. Using a sample of cross-country mergers and acquisitions from the period of 2001-2016, we find that the three-day cumulative abnormal return (3-day CAR) and change in return on assets (∆ROA) are greater for M&A deals made after the period when both the bidder’s country and target’s country adopt mandatory IFRS. Further, we document that this positive association between IFRS harmonization and M&A profitability is pronounced when the bidder’s market is developed. In other words, even if IFRS conciliation facilitates the bidder on identifying a profitable project, if the bidder domiciles in less-developed market, then investors do not react positively to the M&A news. This implies that the positive effect of IFRS harmonization is not realized by unification itself, but should be combined with market supporting institutions.
ARE DISCLOSED AUDITOR MATERIALITY THRESHOLDS INFORMATIVE OF FIRMS’ EARNINGS QUALITY? – EVIDENCE FROM THE REVISED ISA 700 AUDIT REPORT
LEE, JIMMY
GOH, BENG WEE; LI, DAN; LI, NA
Category: AU = Auditing
Under the Financial Reporting Council’s presumption that mandating new disclosure requirement in the audit report would provide information useful to investors, we examine whether the auditor disclosed materiality threshold is associated with the firm’s earnings quality. We document that a lower threshold of materiality level is associated with a higher earnings quality, as measured by lower discretionary accruals, higher accruals quality, and less earnings smoothing. We also find some evidence that the negative association between auditor disclosed materiality threshold and earnings quality is more pronounced when the auditor is more independent, when management’s incentive to manage earnings is higher, and when there is lower information uncertainty. Overall, our results are useful to investors who rely on the new audit report disclosures to gain insights into the audit process and more importantly to infer the quality of the firm’s reported earnings. Our results could also be relevant to regulators, such as the PCAOB and IAASB, who are contemplating whether to impose similar materiality threshold disclosure requirements in audit reports.
COST BEHAVIOR TERMINOLOGY IN FINANCIAL REPORTING
LEE, JOO HYUNG
BEAULIEU, PHILIP
Category: MA = Management Accounting
Usage of cost behavior terminology in financial reporting has not been studied. There are two reasons to believe that usage is important and that it will vary among reporting firms and the analysts covering them. First, these would be voluntary disclosures that may reveal competitively sensitive information, and managers could weigh resulting proprietary costs against other considerations, chiefly poor financial performance. Second, especially when financial performance is poor, this terminology could be used constructively to inform stakeholders about planned changes in cost structure. This is a different orientation than the obfuscation perspective of most textual analysis. We report two studies. The first samples 496 English language annual reports published in 38 countries in 2012, one-third of which used either or both of the terms fixed and variable cost. This usage was associated with a measure of the overall communication effectiveness of annual reports and with declining financial performance. The second study employed a large global sample and business media documents between 2000 and 2016. In the combined subjects of earnings and press releases, documents containing fixed or variable cost are more likely to contain references to losses than not. Executives used these terms in conference calls before analysts did, and usage across all corporate and media documents was associated with adverse macroeconomic conditions.
THE EFFECT OF SEC REVIEWERS ON COMMENT LETTERS AND FINANCIAL REPORTING QUALITY
LEE, KWANG
BAUGH, MATTHEW; KIM, KYONGHEE
Category: FR = Financial Reporting
We examine whether the idiosyncrasy of individual employees of U.S. financial regulators contributes to inconsistent regulatory outcomes. Using a sample of SEC comment letters, we show that SEC reviewers’ idiosyncratic style plays an economically and statistically significant role in explaining the cross-sectional variation in filing review outcomes, even after holding firm and disclosure attributes constant. We also show that the reviewer style is persistent across firms and time. Finally, we find that reviewers with a stricter style are associated with improved financial reporting quality. These findings suggest that individual SEC reviewers have significant influence on the SEC filing review process.
PRODUCT DURABILITY AND CORPORATE POLICIES
LEE, KYEONG HUN
MAUER, DAVID ; XU, EMMA QIANYING
Category: FR = Financial Reporting
The demand for durable goods is highly cyclical, with a business cycle amplitude several times that of nondurable goods. Accordingly, the cash flows and stock returns of firms producing durable goods are riskier. We construct a measure of the durability of a firm’s output and document that durability increases a firm’s total risk, idiosyncratic risk, and systematic risk. We then document that durability is a key determinant of corporate policies. As durability increases, financial leverage, payouts, and investment in research and development decrease, while cash balances and the value of cash increase. Further, durable goods producers tend to be more focused and less sensitive to product market threats. The latter is consistent with theories predicting that product durability helps to insulate firms from competition, because the higher risk exposure makes entry less attractive to potential new entrants.
MANAGERIAL LEARNING AND CAPEX/SGA INVESTMENT SENSITIVITY TO STOCK PRICES
LEE, MEI YEE
GUL, FERDINAND A; LAI, KAREN MY
Category: FA = Financial Analysis
Drawing on the theory that managers learn about the fundamental values of their firms from their own stock prices, we show that stock price informativeness (SPI) of US firms, proxied by idiosyncratic volatility have a significant positive effect on the sensitivity of capital expenditure (CAPX) and selling, general and administrative (SG&A) investments to stock prices. However, we further find that the positive effect of SPI on SG&A investment-to-price sensitivity is weaker for firms with industry specialist auditors and auditors with longer tenure. This suggests that managers rely less on SPI when they can also rely on high-quality auditors who provide informational advantages/resources to the client. This finding highlights the significance of information role played by high-quality auditors in guiding managerial decisions in CAPX/SG&A investment for firms.
DOES D&O INSURANCE MATTER FOR STOCK PRICE CRASH RISK? EVIDENCE FROM AN ASIAN EMERGING MARKET
LEE, MING-TE
LEE, MING-TE; NIEN, KAI-TING
Category: GV = Accounting and Governance
Does D&O Insurance Matter for Stock Price Crash Risk? Evidence from an Asian emerging market Abstract The purpose of this paper is to address the opposing views of the relationship between Directors' and officers' liability insurance (D&O insurance) and stock price crash risk in a major Asian emerging stock market of Taiwan. The two-stage least squares regression analysis is used to address the endogeneity issues in this paper. The research results show that D&O insurance is significantly associated with stock price crash risk in the Asian emerging stock market of Taiwanese firms. Moreover, considering the improvement of corporate governance quality, the effect of D&O insurance coverage is significantly negative related to the firm-specific stock price crash risk. More importantly, the result shows that the effect of improvement of corporate governance quality on negative relationship of D&O insurance coverage and the firm-specific stock price crash risk is more pronounced for higher levels of D&O insurance coverage firms. Our research results have valuable implications for policymakers, company managers, and investors in terms of promoting D&O insurance policies, reducing crash risk, and making effective investment portfolios. Keywords: Directors' and officers' (D&O) insurance, Corporate governance, Taiwan, Emerging market, Crash risk
TEMPORAL DISAGGREGATION AND POST-EARNINGS ANNOUNCEMENT DRIFT: EVIDENCE FROM MONTHLY COMPARABLE STORE SALES DISCLOSURES
LEE, SAM
HONG, KEEJAE; PANDIT, SHAILENDRA; PARK, CHUL
Category: FR = Financial Reporting
We investigate whether a firm’s information temporal disaggregation enhances its information environments, facilitating investors’ more efficient processing of information on the earnings announcement date. We find that the post-earnings announcement drift (PEAD), which likely appears in a weak information environment according to the prior literature, is less pronounced for firms that disclose monthly comparable store sales (CSS) than for firms that disclose only quarterly CSS. We also find evidence that analysts’ underreaction to reported earnings when they revise earnings forecasts is lower for monthly CSS firms than for quarterly only CSS firms, providing corroborating evidence that monthly CSS disclosures mitigate PEAD by improving information environments. Monthly CSS firms also have lower analyst forecast errors and lower analyst forecast dispersion, indicating higher overall accuracy and greater agreement among security analysts, thus substantiating better information environments. Overall, our evidence supports the argument that the release of monthly CSS data leads to more efficient functioning of stock markets by enhancing information environments.
TYPES OF DEBT AND ADDITIONAL AUDIT INPUT
LEE, SANG HO
RYU, JI YEON ; YOO, SEUNG-WEON
Category: AU = Auditing
This study examines the association among different types of liability leverage and abnormal audit effort. Existing studies have found mixed results regarding the relation between total liability leverage and audit effort, audit effort measured using audit fee. Our paper documents a statistically positive relation between liability leverage and audit effort by separating the total liability leverage into types and using abnormal audit hour as proxy for audit effort. We distinguish total liability leverage into operating and financial liability leverage by usage and characteristics. We find that auditors interpret both operating and financial liability leverage as audit risk and contribute additional audit effort, which is reflected as abnormal audit effort. More importantly, we find operating liability leverage has a greater magnitude of correlation with abnormal audit effort compared to financial liability leverage. The result suggests auditors interpret operating liability leverage to have greater influence on audit effort. As prior study states that operating liability leverage has higher uncertainty due to estimations and accruals, we expect auditors contribute greater abnormal audit hour to lessen uncertainty risk. The correlation between operating liability leverage and abnormal audit effort is stronger for firms with income-increasing accruals. Overall, our findings are important addition to two streams of studies: liability leverage and audit effort.
EFFECTS OF TAX REGULATION EXPECTATIONS, OWNERSHIP STRUCTURE ON CORPORATE EARNINGS MANAGEMENT IN EMERGING MARKETS: EVIDENCE FROM TAIWAN
LEE, TE-KUAN
SANG, TENG-SHENG
Category: TX = Taxation
In this paper, we investigate how the tax-induced earnings management is affected by prior tax regulation expectations, and the ownership structure. We avail Taiwan’s specific corporate tax policy reform, that is, raise corporate income tax by reducing corporate tax exemption items and decrease the corporate income tax rate from 25% to 17% at the same time, to examine firms’ tax-induced earnings management from ownership perspective. Through the late completion of the new law “The Act for Industrial Innovation” on April 16, 2010, we show that firms with effective tax rate lower than 17% do more upward earnings management in 2009 based on their expectations. Also, firms with effective tax rate higher than 20% do more downward earnings management in 2009. These results hold both for accrual and real earnings management. As for family firms, we find out family firms in the lower effective tax rate group(less than 17%) will appear to do less upward accrual and real earnings management. Family firms in the higher tax rate group (higher than 20%) tend to do less downward accrual earnings management. Further, we find firms with greater foreign institutional ownership tend to do more upward real earnings management when they have effective tax rate less than 17%. Meanwhile, we find firms with greater foreign institutional ownership tend to do less downward real earnings management when they have effective tax rate more than 20%.
ABNORMAL AUDIT FEES: FEE PREMIUM OR AUDIT EFFORT?
LEE, WOO JAE
Category: AU = Auditing
Our study directly tests Francis (2011)’s suggestion that abnormal audit fees might capture audit effort and/or auditor’s pricing on client risks. Following audit fee decomposition by Simunic (1980), we decompose audit fees into hourly fee and audit hours which represent fee premium and audit effort, respectively. Using listed firms in South Korea, we find positive relation between abnormal audit fees and hourly fee as well as abnormal audit fees and audit hours. We further perform several cross-sectional tests and find that high quality auditors such as Big N auditors and industry specialist auditors enhance those positive relations. Also, providing non-audit services increase the positive association between abnormal audit fees and hourly fee and audit effort. Those positive relations incrementally decrease in lower accounting quality and auditor tenure has insignificant effect on the relations. Lastly, the association between abnormal audit fees and fee premium as well as audit effort do not systematically differ in positive and negative abnormal fees classification.
THE INFORMATION QUALITY OF NON-GAAP DISCLOSURES
LEE, YEN-JUNG
CHEN, HAN-CHUNG; LO, SHENG-YI
Category: FR = Financial Reporting
We examine whether qualitative non-GAAP disclosures provide information about future performance beyond non-GAAP financial figures and whether these disclosures help investors better understand future firm performance. We find that items excluded from non-GAAP earnings are more persistent (i.e., of poorer quality) when they are accompanied by poorer quality non-GAAP disclosures (as proxied by a self-constructed index of coded items found in earnings releases issued by S&P 500 and S&P MidCap 400 firms) during the period 2009-2013. This finding suggests that the quality of non-GAAP disclosures contains information about the persistence of non-GAAP exclusions, which enables investors to better evaluation future firm performance. Moreover, the distance between investors’ belief about the persistence and the actual persistence of non-GAAP exclusions is smaller in the presence of better quality non-GAAP disclosures, consistent with higher quality disclosures facilitating investors’ understanding about future performance implications of non-GAAP earnings information. In addition, we show that our self-constructed index of non-GAAP disclosure quality is inversely related to the probability of a firm receiving an SEC comment letter concerning non-GAAP disclosure issues. We further show that firms experience an improvement in non-GAAP disclosure quality index after receiving SEC comment letters on non-GAAP disclosure issues.
ANALYST COVERAGE AND STOCK PRICE CRASH RISK
LEE, YVONNE
SRINIDHI, BIN; VENKATARAMAN, RAMGOPAL
Category: FA = Financial Analysis
Using a sample of 24,228 firm-year observations from 2000 to 2013, we find that increases in analyst coverage lead to decreases in one-year-ahead crash risk. Prior literature attributes crash risk to managers hoarding bad news. Analysts could reduce such behavior by reducing information asymmetry or exacerbate it by increasing the pressure on managers for short-term results. Our results support the former argument and are inconsistent with the latter. Moreover, we find this result to be more pronounced when the coverage change is attributable to All-Star analysts, supporting our hypothesis that star analysts reduce future crashes by disseminating information more promptly to the market than their non-star counterparts. Our findings remain after controlling for endogeneity and are robust to alternative measures of crash risk. Finally, we find that analysts, particularly star analysts, choose to cover firms with greater prior firm-specific crash risk, consistent with the argument that they provide greater value to their clients in the context of crash-prone firms.
REAL EFFECTS IN ANTICIPATION OF MANDATORY DISCLOSURES: EVIDENCE FROM THE EUROPEAN UNION’S CSR DIRECTIVE
LEHMANN, NICO
FIECHTER, PETER ; HITZ, JOERG-MARKUS
Category: FR = Financial Reporting
In 2014, the European Union (EU) passed a corporate social responsibility (CSR) directive that mandates large firms listed on EU stock exchanges to prepare non financial reports on CSR starting in fiscal year 2017. We predict and find that treated firms (i.e., large firms that previously did not voluntarily prepare CSR reports) significantly increase their CSR expenditures after the passage of the CSR directive in 2014. This finding from a difference in-differences test is consistent with firms increasing CSR expenditures to anticipate adverse stakeholder reactions upon mandatory disclosure of CSR performance. Consistent with this interpretation, our cross-sectional analyses reveal that the increase in CSR expenditures is larger for treated firms with (a) previously low levels of CSR expenditures and (b) higher exposure to potential adverse stakeholder reactions from customers, investors, and regulators. Taken together, our findings shed light on one particular channel through which disclosure regulation creates real effects: anticipation of adverse stakeholder reactions.
THE USE OF MANAGEMENT CONTROL SYSTEM IMPLEMENTATION AS A DIVERSIONARY TACTIC IN AN INTER-ORGANIZATIONAL CONTEXT
LEMAIRE, CÉLIA
Category: MA = Management Accounting
It has already been proved that the management control system (MCS) helps to align the interests of different organizations within an inter- organizational relationship (IOR) context, but how and why this method succeeds deserves specific attention. The present qualitative and longitudinal study addresses this question in organizations that had to deal with a state-controlled MCS implementation within the socio- medical sector. This study specifies the different elements of the implemented MCS, and its findings underline a twofold dynamic in the case investigated. The implementation of the technical element of the MCS is argued to fail in terms of its technical qualities but to succeed as a motor for cultural change. The culture of the sector, based on cost control managed by the State prior to MCS implementation, evolved into a result-oriented paradigm. This phenomenon is explained by the fact that the technical element was used as a diversionary tactic in order to implement a more fundamental change within the IOR. The article pinpoints the crucial role of cultural control in the alignment of IOR interests. It shows that the failure of an MCS element may be necessary in order to trigger a cultural change and consequently have a greater impact on the control of the IOR.
AGGRESSIVE TAX AVOIDANCE BY MANAGERS OF MULTINATIONAL COMPANIES AS VIOLATION OF THEIR MORAL DUTY TO OBEY THE LAW: A KANTIAN RATIONALE
LENZ, HANSRUDI
Category: IC = Interdisciplinary/Critical
The management of multinationals companies often decides in favour of an aggressive tax avoidance strategy pushing the legal limits on behalf of the shareholders and to the disad-vantage of the spirit of democratically legitimised tax laws. The public and the media debate if such an aggressive behaviour is immoral. Aggressive tax avoidance is a subset of aggressive legal interpretations in all fields directed against the (objective) will of a legitimised legislation. A thorough ethical analysis based on the deontological approach of Kant demonstrates that tax avoidance per se is not immoral only aggressive tax avoidance as a special case of operating on the edge of legal boundaries. Applying the Kantian “contradiction of willing test” shows that this maxim cannot be willed as a general law of nature. If all natural or legal persons would aggressively interpret laws in all subjects and in every imaginable situation, the system of law per se would break down. Therefore, aggressive tax avoidance by managers of multinational companies violates their moral duty to obey not only the letter, but also the spirit of the law. Supporting this line of reasoning, several professional bodies for tax consultants in Great Britain have recently introduced a prohibition of aggressive tax planning as a binding ethical principle for tax consultants.
INFLUENCING COOPERATION: EFFECTS OF NON-MONETARY CONTROLS
LETMATHE, PETER
BALAKRISHNAN, RAMJI; ZIELINKSI, MARC
Category: MA = Management Accounting
Using a laboratory experiment, we investigate the effects of two non-monetary controls – beliefs systems and accountability – on agents’ incentive to cooperate in a setting where economic incentives promote both cooperation and competition. When cooperation is individually rational, we find that either non-monetary control, by itself, is beneficial. However, consistent with motivational crowding-out, they are substitutes. In contrast, we predict and show that the controls are complements when economic incentives are misaligned and non-economic considerations drive the choice to cooperate. We discuss implications for theory and practice.
WHO FALLS PREY TO THE WOLF OF WALL STREET? INVESTOR PARTICIPATION IN MARKET MANIPULATION
LEUZ, CHRISTIAN
HACKETHAL, ANDREAS; MEYER, STEFFEN ; MUHN, MAXIMILIAN; SOLTES, EUGENE
Category: FA = Financial Analysis
Well-functioning equity markets are predicated on investors’ access to reliable and accurate information. Yet, manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as simply falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted stocks than demographics. Our analysis offers insights into the challenges associated with designing effective investor protection against market manipulation.
EVOLUTION AND DEBATES IN COSTING IN FRANCE BEFORE 1880
LEVANT, YVES
LEMARCHAND, YANNICK; ZIMNOVITCH, HENRI
Category: HI = History
Abstract: On the basis of company archives collected by various public and private institutions or made available by the firms themselves, it is possible to show that there could be quite a large gap between theoretical discourse and accounting practices before 1885. The study of academic works studying these practices on the basis of company archives has provided us with a better understanding of how these methods evolved, and the logic behind them. The evolution of the methods used to allocate overheads before 1885 are not considered to be linear, cumulative and irreversible. Rather than a process of continual improvement, gradually perfecting the method to meet the needs of users, what we have seen is that that successes and failures alternate in a process that nevertheless leads to improvements.
UNDER WHAT CIRCUMSTANCES CAN COST CROSS-SUBSIDIZATION OUTWEIGH ECONOMIES OF SCALE?
LEVERKUS, CELIA DOROTHEE
Category: MA = Management Accounting
This paper examines the effect of cost cross-subsidization on the structure of reported costs in electricity supply. Especially, we examine whether cross-subsidization can outweigh economies of scale in reported costs. We identify two opportunities to cross-subsidize costs: (i) between regulated and unregulated customers as well as (ii) between regulated and unregulated business segments. Based on the analysis of 76 Swiss electricity suppliers from 2013-15, our results show that cost cross-subsidization outweighs economies of scale in both situations. Costs are cross-subsidized between different customer groups demanding the same product as well as between different business segments focusing on different products. However, this effect is mitigated when electricity suppliers operate in other monopolies outside electricity supply such as gas supply. We show how organizational structures can both encourage and mitigate cross-subsidization. Furthermore, we show how cross-subsidization affects cost structures of reported costs.
STRATEGIC TRADING AT THE PREOPENING AFTER EARNINGS ANNOUNCEMENTS
LEVI, SHAI
ZHANG, XIAO-JUN
Category: FR = Financial Reporting
Prior literature finds the price adjustment after earnings announcements is not immediate. This paper shows that informed investors act strategically to prevent their information from immediately affecting prices after announcements. Specifically, we examine the price discovery at the preopening auction after earning announcements. We show that traders place more orders at the end of the preopening after earnings announcements, a behavior that reduces the market’s ability to learn their information, and we find they make profits on these late orders.
IMPLYING A LONG-TERM FOCUS THROUGH TEXTUAL EMPHASIS OF INNOVATION
LI, HEATHER
ENACHE, LUMINITA; FOGEL-YAARI, HILA
Category: FR = Financial Reporting
Firms may avoid appearing myopic and imply that they have a long-term focus by textually emphasizing innovation in their 10-K. Since this textual emphasis is unverifiable, it may be untruthful. This study examines the relation between this form of voluntary disclosure and firms’ actual long-term focus. We find that this disclosure is truthful on average. Consistent with the long-term focus implication of this textual emphasis, the emphasis has a positive association with firms’ actual investment in the long-term: both with CAPEX and patent measures of innovative effort. To deepen our understanding of why unverifiable information is truthful, we examine situations with different levels of credibility. We distinguish between capital market pressure to retain current investors by explaining poor earnings performance and market pressure to attract new investors during a seasoned equity offering (SEO). Current investors are more likely to be aware of the firm’s reputation for innovation effort, and therefore the emphasis of innovation needs to be more consistent with reputation to be credible. However, new investors are less likely to be aware of the past, and therefore the emphasis of innovation may be less consistent with reputation. We find that long-term signaling is less (more) truthful when it addresses future (current) investors.
PARTICULATE MATTER POLLUTION AND ANALYST INFORMATION PRODUCTION
LI, KEVIN
LUO, JIN-HUI; SIEGEL SODERSTROM, NAOMI
Category: FA = Financial Analysis
We provide evidence that particulate matter (PM) pollution negatively affects analyst information production. Compared to analysts experiencing clean air, analysts exposed to PM pollution are less likely to issue forecasts within a short-term window of earnings announcements. Forecasts issued immediately after earnings announcements by analysts exposed to PM pollution are less likely to be bold (particularly less likely to be negatively bold) and are less likely to result in improvements in forecast accuracy. Both information supply and demand side factors explain the variation in negative effects of PM pollution. The above results are robust to controlling for firm/analyst and time fixed effects. Our difference-in-difference designs and placebo tests corroborate these results. Findings from the study provide evidence of an additional cost of PM pollution on the efficient operation of capital markets.
HOW DO INVESTOR RELATIONS FIRMS CREATE VALUE FOR THEIR CLIENTS? EVIDENCE FROM FINANCIAL RESTATEMENTS
LI, LINGWEI
KANG, JUN-KOO; ZHANG, HUAI
Category: FA = Financial Analysis
We examine whether investor relations (IR) firms create value by improving their clients’ communications. We find that IR clients experience higher restatement announcement returns than propensity-score matched control firms. Inconsistent with IR firms hyping for their clients, we do not observe return reversals in the post-restatement periods. The positive impact of IR is greater for clients with higher information asymmetry. Further investigations show that the valuation impact goes through both the expected cash flows and the discount rate. Overall, our findings suggest that IR professionals increase value for their clients by helping them communicate effectively during periods of crises, when communication is vital.
THE DISCLOSURE OF GOOD VERSUS BAD NEWS: EVIDENCE FROM THE BIOTECH INDUSTRY
LI, LYNN
ENACHE, LUMINITA; RIEDL, EDWARD
Category: FR = Financial Reporting
This paper examines how the type of news affects firms’ voluntary disclosures. We exploit hand-collected product-level disclosures made by publicly-traded biotech firms, which provide evidence of drugs’ progression through key regulatory milestones towards marketability. Of note, the disclosures allow us to distinguish firms’ treatment of good news (i.e., when drugs progress towards marketability) versus bad news (i.e., when drugs are abandoned). We first document that firms increase disclosures following good news (e.g., consistent with incentives to maximize shareholder value), as well as following bad news (e.g., consistent with minimizing shareholder litigation costs). Critically, we then document that the increase in disclosure for good news is higher relative to that for bad news, suggesting that firms view the net benefits associated with disclosure of good news as stronger relative to those for bad news. These results are consistent across product-level regressions, firm-level specifications, and other robustness tests.
ARTICULATION BASED ACCRUALS AND AUDIT PRICING
LI, SIYI
CASEY, RYAN; GAO, FENG; KIRSCHENHEITER, MICHAEL; PANDIT, SHAILENDRA
Category: AU = Auditing
This paper studies the relation between accruals and audit pricing. We start from a balance sheet auditing perspective. We assume auditors attempt to minimize the probability of recording unrealizable assets or failing to record liabilities. Under these assumptions, we argue that underlying economic characteristics of various transactions, as reflected in our articulation-based accruals, will be predictably associated with audit fees, either because more effort is required or because greater risk is present. Further, the economic characteristics will be associated with different accruals depending on their source and type. More specifically, we believe that audit fees relate to the asset type and source of the accrual via the underlying economic characteristics of the firm. Consistent with our expectations, we find that total accruals have a non-linear relation with audit prices, with both large positive and large negative total accruals driving audit fees higher. Also, accruals originating from the balance sheet and the income statement have a positive relation with audit fees, while accruals generated from the statement of owner’s equity are negatively related to audit fees. Finally, decomposing total accruals into five articulation based accrual components reveals varying relations with audit fees.
EXPROPRIATOR OR MONITOR? THE ROLE OF FOREIGN INSTITUTIONAL INVESTORS IN DEBT CONTRACTING
LI, XI
LOU, YUN
Category: GV = Accounting and Governance
This paper examines how lenders perceive the role of foreign institutional investors. Using a sample of international syndicated loan contracts, we find that the U.S. institutional ownership is positively associated with the use of restrictions in loan contracts, especially the covenants addressing shareholder-debtholder conflicts. This finding suggests that lenders view U.S. institutional investors as expropriators of lenders’ wealth. We identify the JGTRRA Act of 2003 as an exogenous shock to U.S. institutional ownership and our difference-in-difference analysis suggests an increase in covenants usage among borrowers affected by this event. In the cross-sectional analysis, we find that the positive association is more pronounced when U.S. institutional investors have a short investment horizon, consistent with short-term focused institutional investors exacerbate shareholder-debtholder conflicts. We also find the association to be more pronounced when borrowers are domiciled in countries with strong creditor protection and contract enforcement, suggesting that lenders use restrictive contract terms as protective mechanisms.
RELATIONSHIP LENDING IN SYNDICATED LOANS: A PARTICIPANT’S PERSPECTIVE
LI, XINLEI
Category: FA = Financial Analysis
I explore the role of participants’ relationships with borrowers and lead arrangers in syndicated lending. I predict and find that these relationships mitigate the information asymmetry problems faced by participants with both borrowers and lead arrangers, and allow participants to take a larger share in the loan. In particular, participants with a borrower relationship take, on average, a 10% larger share of the loan, with the effect being more pronounced when the borrower is informationally opaque or less conservative in its accounting. Similarly, participants with a lead arranger relationship take, on average, a 9% larger share of the loan, with the effect being more pronounced: (i) when the borrower has engaged in accounting irregularities or covenant violations in the past, (ii) when the lead arranger is a repeat lender or a large lender, and (iii) when participants have limited information acquisition capacity. Furthermore, loans with a larger total share taken by participants with a borrower or lead arranger relationship are associated with a smaller lead arranger share, less concentrated loan syndicate structure, a lower loan spread, and a lower upfront fee, consistent with these relationships mitigating information asymmetry. Overall, my study sheds light on how participant-level relationship lending shapes debt contracting.
PROTECTING THE GIANT PANDAS: NEWSPAPER CENSORSHIP OF NEGATIVE NEWS
LI, YI
HOPE, OLE-KRISTIAN; LIU, QILIANG; WU, HAN
Category: GV = Accounting and Governance
We investigate newspaper censorship of firm-level negative news using a rare setting in which many companies were involved in similar tunneling scandals. We find that the Chinese censorship authorities restrict the dissemination of tunneling news on state-owned enterprises, firms with greater numbers of employees, and large taxpayers. An examination of different levels of censors reveals a surprising magnitude of local protectionism: almost all tunneling news involving in-province firms is blocked by provincial governments. We also find that cross-provincial competition and the political power structures are factors driving the provincial-level censorship. Finally, we show that the tunneling news that is reported leads to negative market reactions and greater trading volumes, indicating that the news that survives the censorship has information content.
THE IMPACT OF TOP EXECUTIVE GENDER ON ASSET PRICES: EVIDENCE FROM STOCK PRICE CRASH RISK
LI, YIWEI
ZENG, YEQING
Category: FR = Financial Reporting
We examine the implication of executive gender on asset prices. Using a large sample of US public firms during 2006–2015, we find a negative association between female CFOs and future stock price crash risk. However, the impact of female CEOs on crash risk is not statistically significant. The results support the notion that because CFOs’ primary duties include financial reporting and planning, they should play a stronger role than CEOs in curbing bad news hoarding activities. Our findings are robust to several econometric specifications controlling for potential endogeneity and to alternative measures of crash risk. At last, we show that the negative relation between female CFOs and future crash risk is more pronounced among firms with weaker governance, less market competition, lower analyst coverage, and higher leverage. Collectively, our evidence highlights the importance of CFO gender for firm financial decision making and stock return tail risk.
DO FIRMS WITH STRONG COMMITMENT TO CORPORATE SOCIAL RESPONSIBILITY PREFER LESS FREQUENT FINANCIAL REPORTING? EVIDENCE FROM ELIMINATING MANDATORY QUARTERLY FINANCIAL REPORTING IN EUROPE
LI, YUE
GOH, LISA ; TANG, FENG
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study examines whether corporate commitment to CSR and sustainability affects firms’ choice of financial reporting frequency. Specifically, we examine whether firms with superior CSR performance and commitment to sustainability choose to abandon quarterly financial reporting voluntarily following the reporting regime change in Europe in 2013. We argue that corporate commitment to CSR and sustainability symbolizes firms’ long-term investments and disapproval of management short-termism. As such, firms with strong commitment to CSR would reduce financial reporting frequency to avoid undesired pressure from short-term oriented investors. Using a sample of the London Stock Exchange (LSE) listed companies, we find that firms with superior CSR performance are more likely to abandon the quarterly Interim Management Statement (IMS) voluntarily following the change in the U. K’s Disclosure and Transparency Rules in 2014. In addition, firms with superior CSR performance are more likely to use Trading Updates to communicate with investors instead of IMS at fixed quarterly intervals. Our results are robust to different specifications and controls for firm characteristics known to affect firms’ financial reporting decision. Overall, the evidence in this study is consistent with corporate commitment to CSR symbolizes a firm’s long-term investments and management orientation towards sustainability affects firms’ financial reporting frequency decision.
PEER EFFECTS IN BANK LOAN ACCOUNTING
LI, YUEHUA
SHI, YONGFENG CHARLES
Category: FR = Financial Reporting
We show that peer banks play a significant role in determining a bank’s accounting for loan loss provisions. The peer influence is more pronounced for banks with less capable managers and when banks are under greater regulatory scrutiny. Channel tests indicate that peer effects work through observational. Finally, we provide evidence suggesting that peer effects improve the timeliness of bank loan accounting.
THE MONITORING ROLE OF SOCIAL MEDIA: EVIDENCE FROM TWITTER ADOPTION AND CORPORATE POLITICAL DISCLOSURE TRANSPARENCY
LI, YUTAO
LEI, LIJUN; LUO, YAN
Category: FR = Financial Reporting
This study uses a sample of 1,316 firm-year observations of S&P 500 companies (2012–2016) to investigate whether and how the pressure of social media (i.e., Twitter) affects firms’ disclosure practices (i.e., voluntary political disclosure). Our results show that Twitter-adopting companies, especially those followed by more Twitter users or targeted by Twitter users are more transparent in their disclosure of corporate political contributions, policies governing over, and board oversight of corporate political contributions. Our cross-sectional analyses suggest that the association between Twitter adoption and CPD transparency is stronger for firms that operate in industries with more active Twitter users, are less visible, and have better reputations. Our results remain robust when we control for self-selection bias, alternative social media platforms (i.e., Facebook), and non-interactive social media platforms. Taken together, our findings suggest that social media (i.e., Twitter) exerts pressure on firms’ voluntary disclosure practices.
PENSION BUY-INS AND BUY-OUTS AND PENSION ACCOUNTING ASSUMPTIONS
LI, ZEZENG
Category: FR = Financial Reporting
This paper explores the determinants of pension buy-in and buy-out decisions in the UK. Pension buy-in and buy-out transactions have experienced a rapid expansion in the UK market as one of the pension de-risking strategies to reduce pension risk since 2007. Sponsor firm's financial characteristics and pension fund characteristics are the key determinants for firm to engage in pension buy-ins and buy-outs with insurance companies. In addition, this research finds that firm manages expected return rate on pension assets to improve the condition of pension fund before the event of pension buy-in and buy-out. This incentive is explained by the anecdotal evidence that the better condition of pension fund, the lower the premium to be paid by sponsor firm. Further analyses compare two pension de-risking strategies, pension buy-ins and buy-outs and closing defined benefit (DB) pension plans in terms of management in pension assumptions. It provides evidence that firm manages its pension assumptions differently for these two pension de-risking strategies.
THE EFFECT OF AUDIT MARKET STRUCTURE CHANGE ON AUDIT PRICING: EVIDENCE FROM CHINA
LI, ZIXUAN (LINA)
CAHAN, STEVEN
Category: AU = Auditing
In 2013, audit firm mergers created two “Chinese” audit firms – Ruihua and BDO Lixin – that outranked EY and KPMG to become two of the four largest audit firms in China in terms of total audit revenue. In this study, we examine the impact of this change in audit market structure on the audit pricing behavior of these two large local audit firms – or Big L – relative to the Big 4 and other local audit firms. Using a difference-in-differences design, we find that the pre-post change in audit fees for the Big L auditors is significantly higher than that for the Big 4 and the other local audit firms around the mergers. Specifically, there was a significant decline in audit fees for clients of the Big 4 auditors around the mergers, while audit fees for both Big L auditors increased after the mergers. We also find a significantly higher pre-post change in audit fees charged by the Big L auditors relative to that of other local auditors around the mergers. We interpret the results as consistent with a shift in the relative market power among the large audit suppliers in China and the development of brand name reputations by the Big L firms in the post-merger period. This study answers calls by Francis (2011) and DeFond and Zhang (2014) for further research on the effects of changes in market structure in the audit industry. Implications for various regulators of the accounting profession are discussed.
THE EFFECT OF MANDATORY CORPORATE SOCIAL RESPONSIBILITY (CSR) REPORTING ON FINANCIAL CONSTRAINTS
LIANG, XIAO
CHEN, XIAOMENG; SHI, XIANWANG
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study examines the effect of mandatory Corporate Social Responsibility (CSR) disclosure on firms’ financial constraints using a quasi-natural experiment in China that mandates a subset of listed firms to disclose their CSR activities. Using a difference-in-differences research design, we find that mandatory CSR reporting firms experience an increase in financial constraints after the mandate. Additional analyses reveal that the increase in financial constraint is more pronounced for firms without political connections and firms with low CSR reporting quality. The results suggest that CSR activities that can be valuable for seeking political connections in emerging economies come at the cost of shareholder wealth, with increasing agency problem and financial constraints. High CSR reporting quality can help to mitigate the negative effects of mandatory CSR reporting on financial constraints.
THE PAY-FOR-PERFORMANCE SENSITIVITY AND CD&A READABILITY BEFORE AND AFTER SAY-ON-PAY REGULATIONS
LIAO, CHIH-HSIEN
WU, SHU-LING
Category: GV = Accounting and Governance
In this study, we investigate how Say-on-Pay regulations affect firms' pay-for-performance sensitivity and Compensation Discussion & Analysis (CD&A) readability. We find that firms' pay-for-performance sensitivity has increased on average since Say-on-Pay was implemented. In addition, the increase in pay-for-performance sensitivity is more significant in companies with higher quasi-index institutional ownerships. Because prior literature has shown that quasi-index institutional investors had only limited influence on companies' pay-for-performance sensitivity before Say-on-Pay was implemented, our results suggest that Say-on-Pay is useful in strengthening shareholders' monitoring effect on executive compensation. Moreover, we find that CD&A has become harder to read after Say-on-Pay, and this decrease in CD&A readability is more significant in firms with higher institutional ownership concentration and more dedicated institutional ownership. In recent years, Dodd-Frank Act requires companies to disclose more compensation-related information. In addition, after Say-on-Pay, shareholders, especially sophisticated investors, demand more information to facilitate their assessment of companies' executive compensation policy for voting purposes. These factors might contribute to our findings.
THE EFFECTS OF ACCOUNTING CONSERVATISM AND FINANCIAL FLEXIBILITY ON FINANCIAL POLICY
LIAO, LI-KAI
CHEN, LI-YU
Category: GV = Accounting and Governance
This paper examines how financial constraints affect firm’s choice of stock repurchase or cash dividend payment and analyze the effects of the interaction between financial constraints and accounting conservatism on the choice of stock repurchase or cash dividend payment. We also examine the effect of the interaction between financial constraint and accounting conservatism on the firm’s choices of debt or equity financings. The findings show that because of accounting conservatism considerations, companies with higher financial flexibility are more likely to repurchase stock than to pay cash dividends. From the interaction term between financial flexibility and accounting conservatism, we find that when a company’s financial flexibility is low, they prefer not to repurchase stocks by cash, even if they have high degrees of accounting conservatism. When firms have low financial flexibility and high accounting conservatism, they prefer not to adopt debt financing. However, we do not support that a company with high financial flexibility and low accounting conservatism prefer either debt or equity financing. Overall, the importance of financial flexibility overrides the importance of accounting conservatism in the financial decision-making process.
CAN MANAGERS USE REWARD SYSTEMS TO BUILD RELATIONAL CONTRACTS?
LILLIS, ANNE
ABERNETHY, MARGARET; NAIR, SUJAY
Category: MA = Management Accounting
There are many settings in which formal incentive contracts do not work or are not available to managers to influence employee behavior. Organizational settings are commonly characterized by difficult to measure tasks, where actions that are required to be taken by different parties cannot be fully specified ex-ante. Anecdotal evidence suggests that managers address this control challenge by adopting informal management practices. More specifically, there is growing awareness of the role of relational contracts to motivate desired behaviour, but little empirical evidence documenting their use. There are two important determinants for using relational contracts within the firm; clarity (i.e. clarity on what are desirable and undesirable behaviors and the rewards and punishments that flow from these behaviors) and credibility (i.e. convincing employees that managers will keep their promises and vice versa). We explore how the lenient, informal use of both financial and nonfinancial rewards can be used to establish relational contracts. We categorize managers based on their experience as leaders to distinguish those with most to gain by quickly building clarity and credibility with subordinates. We predict and find that managers who are new to the organization but experienced in the leadership role, use rewards more leniently compared to other managers, and that some leniency in rewards improves clarity and credibility.
HOME BIASED CREDIT ALLOCATIONS
LIM, IVAN
DUY NGUYEN, DUC
Category: GV = Accounting and Governance
Banks make more lending and open more branches near their CEO’s birthplace. This reflects hometown favoritism rather than information advantages: the effect is stronger during economic downturns, among altruistic CEOs, in struggling counties, and among marginal mortgage applicants. Furthermore, while hometown favoritism does not affect the bank’s profitability, it leads to positive economic outcomes in counties exposed to greater favoritism. Together, our results suggest home favoritism as one channel that deepens credit inequality.
DOES XBRL AFFECT FIRMS’ STOCK LIQUIDITY?
LIM, JEE-HAE
RICHARDSON, VERNON ; SMITH, ROD
Category: IS = Accounting and Information Systems
We examine the effect of XBRL disclosure on both short and long-term stock liquidity. An extensive body of research has found links between firms’ information environments, stock liquidity, and cost of equity capital. The SEC, as well as various proponents of XBRL technology, claim that mandated XBRL disclosures, by reducing investors’ information processing costs, should reduce information asymmetry and thus improve liquidity. We examine this contention over three periods. First, we find results consistent with Blankespoor et al. (2014) that liquidity generally decreases around 349 initial XBRL filings compared to a matched sample. Second, we find mixed results when considering all first time XBRL filers. Third, we find a stronger association between XBRL and liquidity for second time XBRL filers. Importantly, consistent with theory, we find that firms with low analyst following and low tag counts (high inverted tag counts) are more likely to improve liquidity following their XBRL filings.
EXPLANATORY FACTORS FOR THE APPROVAL RATE IN THE ACCOUNTING SUFFICIENCY EXAM IN BRAZIL
LIMA, JESSICA
DALMÁCIO, FLÁVIA ZÓBOLI; KAVESKI, ITZHAK DAVID SIMÃO; LIMA, EMANOEL MARCOS; LIMA, JÉSSICA DE MORAIS
Category: ED = Accounting Education
In the last decade the accounting profession in Brazil underwent profound changes, such as the new mandatory accounting sufficiency exam, which impacted not only the accounting information, but also the accountants’ formation and exertion of the profession. Based on the changes and the human capital theory, this paper’s purpose is to verify which variables can explain the accounting students’ passing rate in the sufficiency exam in Brazil. The descriptive research was carried out from documents, which had as its population Accounting courses in Brazil. The research population comprises 1.687 active Accounting courses based on INEP’s database, on that the sample is composed of 568 Brazilian Accounting courses. To achieve the objective, it was performed a descriptive statistic of the variables, a Kruskal-Wallis and Mann-Whitney mean test were also performed to verify if the Approval Rate in the Sufficiency Exam, the concepts of CPC and ENADE, and the Rate of Master’s and PhD’s are the same or different between the regions, the institutions that have a Stricto Sensu program in Accounting and between public and private institutions, moreover the assumptions of multiple linear regression were later applied. The results show that institutions that have a Stricto Sensu program have a passing rate in the sufficiency exam significant higher, additionally the CPC and ENADE scores had also a greater rate than those that do not have the program at the significance level of 1%.
STAR ANALYST VOTING AND RECOMMENDATION BIAS
LIN, AN-PING
CHEN, XIA; CHENG, QIANG; WANG, KUN
Category: FR = Financial Reporting
Being voted as a star analyst increases an analyst’s compensation, reputation, and mobility. In this paper, we examine financial analysts’ economic incentives arising from currying favor with mutual funds in star analyst voting. Using the proprietary, detailed voting data from China, we find that analysts issue more optimistically biased recommendations on the firms held by the voting funds. The extent of the recommendation bias increases with the relative weight of the firm in the voting funds’ portfolios and the weight of the funds’ vote in the calculation of final voting outcome, and decreases with the reputation of the brokerage houses that employ the analysts. In addition, we find that the capital markets do not seem to recognize and discount analysts’ recommendation bias arising from such voting connections. Collectively these findings suggest that analysts issue biased recommendations to secure favorable votes from, or return favor to, the mutual funds that vote for them.
THE RELATIONSHIP AMONG CEO RELATIVE POWER, EXECUTIVE COMPENSATIONS, FIRM PRODUCTIVITY AND FIRM PERFORMANCE
LIN, I-CHENG
WU, MING-CHENG
Category: GV = Accounting and Governance
The main purpose of this paper is to examine the impact of the CEO relative power and that of other executive compensation components on firm performance. Furthermore, this paper takes into account the firm productivity and characteristics. We calculate the ratio of CEO’s compensation to the top-five executives’ as the proxy of the CEO relative power which is an effective measure to capture the CEOs’ power in the top executive team and reflect agency problems. The empirical results show that firms with high CEO relative power have insignificant agency problems. Moreover, firms with high Tobin’s Q, zero R&D, high market-to-book ratio, low leverage have significant negative association between the magnitude of CEO relative power and firm performance. Based on the our findings, we deduce that the negative impact of CEO relative power mainly comes from cash and stock, while simultaneously stock option still plays an effective role in enhancing firm value. Additionally, this paper also reveals hump-shaped relation between managerial compensation and Tobin’s Q, which could result from the trade-off between entrenchment effect and incentive effect.
THE EFFECT OF THE PCAOB’S RESTRICTIONS ON AUDITOR-PROVIDED TAX SERVICES ON AUDIT QUALITY, EARNINGS QUALITY, AND TAX AVOIDANCE
LIN, STEVE
LING, RAN
Category: AU = Auditing
This study examines whether the PCAOB’s restrictions on auditor-provided tax services (APTS) improve a firm’s audit quality, earnings quality and reduce tax avoidance activities. Using a difference-in-differences research design and refined treatment and matched control samples, I find that the likelihood of general restatements and meeting or beating prior year earnings significantly decreases following the PCAOB rules. I also find evidence of reduction in tax avoidance activities after the PCAOB rules as both total effective tax and cash effective tax rates increase. Overall, my results show that compared to the Sarbanes Oxley Act that only required clients’ audit committees to pre-approve APTS purchases, the PCAOB’s restrictions on auditor initiated aggressive tax transactions and tax services to company executives further improve both audit quality and earnings quality and prevent firms from engaging in aggressive tax avoidance activities.
DO DEBT VALUATION ADJUSTMENTS REFLECT CHANGES IN CREDIT RISK?
LIN, WEN
PANARETOU, ARGYRO; PAWLINA, GRZEGORZ
Category: FR = Financial Reporting
Motivated by the debate about the introduction of the Fair Value Option for financial liabilities (FVOL) and the requirement to recognize and separately disclose in financial statements Debt Valuation Adjustments (DVAs), this study investigates whether DVA disclosures reflect changes in credit spreads. Using a sample of U.S. bank holding companies that adopt the FVOL, we show that DVAs generally cannot be explained by the same factors that explain contemporaneous changes in the credit quality of these institutions. This can be a result of the opportunistic use of the FVOL or the superior ability of managers to estimate own credit risk. To investigate these alternative hypotheses, we split the sample based on different fair value levels. Our results indicate that DVAs can explain future changes in credit risk, providing support for the latter explanation.
THE RELATIONSHIP BETWEEN SHARED AUDIT REPORT IN A ENTERPRISE GROUP AND CORPORATE CREDIT RISK
LIN, Y.C. GEORGE
CHEN, HSIN-CHI; LIU, FUYUN
Category: AU = Auditing
Taiwan SAS No. 54 “Special Considerations—Audits of Group Financial Statements” was implemented on July 1, 2015. This standard greatly increases the responsibility of the group’s engaging auditor in the shared audit report when the group’s subsidiaries are audited by different auditors. The rationale behind this new SAS standard is that the standard setter believes that a group enterprise’s financial report issued under a shared audit report may compromise the audit quality. However, such belief hasn’t been tested empirically for Taiwan firms. This study uses the corporate credit risk index of group enterprises as the proxy for audit quality, and examines whether the adoption of a shared audit report will affect corporate credit risk index. The results show that the corporate credit risk index of a group enterprise is significantly higher when it is subject to a shared audit report. This empirical result provide empirical support for the standard setters’ belief that increasing the responsibility of engaging auditors in the shared audit reports contributes to the improvement of audit quality.
THE EFFECTS OF FINANCIAL FLEXIBILITY AND ACCOUNTING CONSERVATISM ON FINANCING AND INVESTMENT DECISIONS
LIN, YI-MIEN
CHEN, LI-YU ; WANG, TENG-SHIH
Category: FA = Financial Analysis
This study first tests whether and how the interactive effects of financial flexibility and accounting conservatism affect corporate investment and financing decisions. Subsequently, it explores the valuation of a firm on top of the correlation between financial flexibility and conservatism. In robustness checks, we examine the effects of hedge factor and agency cost on the aforementioned relationships. The findings show that firms with high financial flexibility and low conservatism in the prior period are more unlikely overinvestment in the current period. In addition, we find that equity mispricing have impact on firm’s financing and investment decision. Especially, our empirical results show that overpricing firms with higher reporting quality leading to higher probability in equity financing; thus, result in overinvestment problem. Moreover, once firms have underpricing with lower financial opaque, leading to lower probability in equity financing and tend to underinvest. Our results are robust when controlling for firm’s hedge factor or agency cost.
AUDITOR SUPPLY CHAIN SPECIALIZATION AND FINANCIAL REPORTING TIMELINESS
LIN, YU-CHUN
Category: FR = Financial Reporting
This study attempts to investigate whether auditor supply chain specialization affects the timeliness of financial reporting. The supply chain specialization is measured as an auditor who audits a client and that client’s suppliers, major buyers, or both. Using a sample of 16,658 firm-year observations of U.S. publicly listed companies from 2007 through 2015, we document that financial reporting timeliness is positively associated with auditors’ specialization on supply chain. Further, we find that, when clients have internal control weaknesses, financial reporting timeliness increases with audit supply chain specialization. Since recent regulatory actions suggest that improving timeliness of financial reporting is a priority for regulators, the evidence about auditor supply chain specialization and financial reporting timeliness might provide political implications for regulators.
NAVIGATING STORMY SEAS: ANOTHER LOOK AT THE INTERPLAY OF MIDDLE MANAGER INVOLVEMENT AND FORMAL PLANNING
LINDER, STEFAN
SAX, JOHANNA
Category: MA = Management Accounting
Long-term success today requires firms to sense changes in their environments early and react efficiently to them. Increasing middle managers’ participation in decision-making about market-related and product-related questions has been suggested as one way of enhancing this strategic responsiveness; abandoning formal planning, such as annual budgets, has been another. Yet, empirical evidence on the matter is scarce and conflicting. Drawing on data from Denmark’s 500 largest firms, we show that participation of middle managers in decision-making about new products and markets to serve, in-deed, increases firms’ strategic responsiveness as assessed by a reduction in firms’ downside risk. However, this effect is not a direct one. Nor does it interact positively or negatively with the emphasis put on formal planning as submitted in literature. Our evidence suggests that emphasis on planning mediates the relation between stronger participation of middle managers in decision-making and the increase in firms’ strategic responsiveness. This has implications for ongoing theory building and practice.
PERFORMANCE INFORMATION USE IN EVALUATING STATE-OWNED ENTERPRISES – A PROCESS TRACING EXPERIMENT
LINDERMÜLLER, DAVID
HIRSCH, BERNHARD; SOHN, MATTHIAS
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
State-owned enterprises (SOEs) provide public services, and government decision makers receive performance reports on SOEs for supervision. We conduct an experiment to analyze how decision makers evaluate SOEs’ performance based on these performance reports. We recruited German graduate students and asked them to assume the role of municipal council members and allocate budgets to SOEs based on their performance. We manipulated the SOEs’ performance across various performance dimensions (financial, customer, process, and employee) in the reports. Furthermore, we manipulated the financial status of the municipality. Our data show that, in the information acquisition phase, participants’ attention is skewed toward the financial and customer performance of the SOEs. However, participants allocate budgets rather evenly across SOEs that outperform in the financial, customer and process dimensions. By manipulating the financial status of the municipality, we show that participants put more effort into the information evaluation process when resources are scarce.
MANAGEMENT FORECASTING BEHAVIOR OF NEWLY PUBLIC FIRMS
LING, ZHEJIA
FENG, MEI; FLOROS, IOANNIS; JOHNSON, SHANE
Category: FR = Financial Reporting
This paper investigates how IPO firms adjust their management forecasting strategies to accommodate the changes in their economic condition and the resulting changes in the costs and benefits of management forecast issuance after IPOs. We differentiate firms that redact proprietary information from their IPO registration statements (redacting firms) from the other firms (non-redacting firms). Compared with non-redacting firms, redacting firms face more intense tradeoff of protecting proprietary information and reducing investor information asymmetry post IPOs. We find that in the first two quarters post IPOs, redacting firms are less likely than non-redacting firms to issue forecasts. Conditional on issuing forecasts, redacting firms issue quarterly forecasts less frequently, and forecast fewer items. We also find some evidence that firms are more reluctant to forecast items that are more closely related to the redacted information than other items. Redacting firms exhibit a positive time trend in their likelihood of issuing forecasts over eight quarters after the IPOs, consistent with the proposition that proprietary cost concerns become relatively less important than investor information asymmetry over time. Moreover, the increase for redacting firms appears to be driven by their subsequent seasonal equity offerings.
IFRS ENFORCEMENT, FIRM REPUTATION AND TAX AVOIDANCE
LINNEMANN, NILS
THOMSEN, MARTIN; WATRIN, CHRISTOPH
Category: TX = Taxation
This study examines company tax avoidance behavior prior to mandatory error-announcements requested by the Financial Reporting Enforcement Panel (FREP) and in the following periods. We find that companies, that have been requested to publish an error-announcement due to IFRS accounting issues, subsequently reduce their tax avoidance behavior estimated by GAAP and Cash ETRs. Since there is no formal conjunction between IFRS accounting and German tax accounting, we figure that companies decrease their tax avoidance behavior to recapture reputational damage. Our analysis contributes to the growing literature of the interactions between tax avoidance and reputation by using the unique enforcement system and tax characteristics in Germany.
THE VALUE RELEVANCE OF GOODWILL-RELATED ACCOUNTING MEASURES IN THE EUROPEAN BANKS
LIONZO, ANDREA
COPPE PIMENTEL, RENÊ ; FLORIO, CRISTINA
Category: FR = Financial Reporting
Goodwill-related accounting measures are important items in European banks' financial statements. From a quantitative viewpoint, goodwill equaled 30% of net book value in 2007 (on average), while goodwill impairment determined huge charges during the global financial crisis. From a qualitative viewpoint, goodwill and its impairments are opposite expressions of the synergies expected in M&As. The estimate of both values in the banking industry is affected by high discretion and raises peculiar issues. Despite such matters of attention, value relevance of goodwill-related measures in banks has since been neglected by academic literature. This study verifies whether goodwill recognition and goodwill impairment losses are useful to investors in valuing the equity of a sample of 110 EU banks from 2005 to 2015 (767 bank-year observations). The analysis is conducted by using well-accepted models of value relevance that are extended to account for banks industry-specific variables. The results suggest that goodwill recognition is positively and significantly associated with market prices, while impairment losses may be interpreted differently according to the bank's performance. Specifically, such losses are positively and significantly associated with market prices in banks with negative earnings, likely because investors are concerned that current impairments may hide further write-downs and operating losses in the future.
DO NON-GAAP EARNINGS ADJUSTMENTS DELIVER COMPARABILITY BENEFITS?
LIU, JIANCHENG
GAO, ZHAN
Category: FA = Financial Analysis
This paper examines the comparability of non-GAAP earnings. Recent work on earnings comparability focuses on GAAP earnings despite non-GAAP earnings being widely used by both firms and financial statement users. Using the De Franco et al. (2011) method, we quantify the comparability of a suite of GAAP and non-GAAP earnings metrics. The findings indicate that street earnings are significantly more comparable than GAAP earnings, supporting the benefit of non-GAAP adjustments by analysts. Moreover, the superior comparability of street earnings is likely attributed to the removal of material nonrecurring items and recurring items with considerable measurement errors. In the supplementary analysis, we find that street earnings bring greater comparability improvement for firms that are larger, followed by more analysts, and have more volatile returns.
THE IMPACT OF ACCOUNTABILITY-ORIENTED CONTROL CHARACTERISTICS OF VARIANCE INVESTIGATION ON BUDGETARY SLACK AND MODERATING EFFECT OF MORAL DEVELOPMENT
LIU, LANA Y J
DENG, DEQIANG; WEN, SUBIN
Category: MA = Management Accounting
Variance investigation has been identified as an effective accountability-oriented control mechanism for reducing budgetary slack in existing literature (e.g. Webb, 2002). This paper focuses on two further research questions: (1) the extent to which different accountability-oriented control characteristics (i.e. external investigation and self-reporting) of variance investigation impact on budgetary slack; and (2) the moderating effect of moral development on this relationship between accountability-oriented control characteristics of variance investigation and budgetary slack. Our experimental results show that both external investigation and self-report can generate accountability pressure to reduce the budgetary slack. More specifically the effect of external investigation on reducing budgetary slack is greater than that of self-reporting. This study also reveals that moral development moderates the effect of external investigation on budgetary slack. When comparing subordinates with low moral development with those with high moral development, our results show that the effect of external investigation on budgetary slack is stronger amongst the former group than that in the latter. This study does not find any moderating effect of moral development on the relationship between self-reporting and budgetary slack. Our study sheds some new light on varying effects of two accountability-oriented control characteristics of variance investigation on budgetary slack, as well as different levels of subordinates’ moral development which may be considered in management control system design and implementation.
GOVERNMENT-ENFORCED PERFORMANCE MEASURES AND FRAUD: EVIDENCE FROM EVA ADOPTION BY CHINESE CENTRAL STATE-OWNED ENTERPRISES
LIU, MENGNING
LIU, YUNGUO; XIAO, JASON; XIE, SUJUAN
Category: MA = Management Accounting
Performance measures play a significant role in corporate governance. Prior accounting research has examined the use of performance measures mainly in the context of management incentive contract, or the design of performance measurement system in a firm. However, little has been studied about how external regulatory body can affect firms’ performance measures, and furthermore, its implication for corporate governance. Using data about China’s central government-owned firms (CSOE), we investigate how government-enforced EVA adoption affects its propensity to conducting fraud. We find that EVA adoption can significantly reduce CSOEs’ propensity to engaging in fraud, in comparison with LSOEs. Furthermore, the negative effect of EVA adoption on CSOEs’ fraud propensity is stronger in regions with better legal environment; but this effective effect is weaker for industries with high government protection, such as defense industry. In addition, we find that the role of EVA adoption in reducing fraud propensity is more pronounced for violations related to information disclosure. One possible channel for EVA adoption to reduce fraud propensity is that EVA adoption changes managers’ incentive to engage in over-investment in order to achieve short-term profit, thus reducing the probability of accrual-based earnings management. Overall, findings of this study suggest that government as ultimate firm owner can play a positive role in reducing fraud through adjusting performance measures.
ARE INDUSTRY AND ACCOUNTING EXPERTISE ON THE AUDIT COMMITTEE RELATED TO BANK LOAN?
LIU, PEIYI
CHEN, CHIAHUI ; CHEN, PINJU; CHIEN, FEILIANG
Category: AU = Auditing
The extant literature reveals that audit committee (AC) members with industry expertise can enhance the AC’s effectiveness in monitoring the financial reporting process. In this study, we focus on AC banking and accounting expertise and examine their effects on bank loan contracting. We find that banks charge a lower interest rate, are less likely to require collateral, use more financial covenants, and offer longer maturity loans to borrowers whose AC members have banking and/or accounting expertise. Additional analyses indicate that the association between AC expertise and loan terms is primarily driven by banking expertise, either alone or in conjunction with accounting expertise, than by accounting expertise alone. We also find that borrowers with banking expertise on the AC obtain larger loans and have more lenders in the loan syndicate. The results are robust to a battery of robustness tests to address the issue of joint determination of loan terms and endogeneity. Overall, our results suggest that banks value borrowers’ AC banking expertise in mitigating information risk and agency cost.
THE EFFECT OF ‘STICK-DRESSED CARROT’ ON DIFFERENT STAGES OF CREATIVITY PROCESSES
LIU, SHANMING
Category: MA = Management Accounting
In this study, I experimentally examine the effects of incentive framing on two stages of creativity process: idea generation and idea selection. For idea generation performance, I find that participants under penalty contract outperform those under bonus contract. Specifically, I predict and find that penalty contract leads to higher level of cognitive flexibility and more highly novel ideas. I further find that the positive effects of penalty contract only lead to better performance in the initial phase but not the later phase of idea generation process. For idea selection performance, I predict and find that participants under penalty contract tend to select extreme novel ideas rather than balanced ideas that are both novel and useful. This study extends the literature on creativity by bring to the forefront neglected role of framing of incentives and the effects of incentives on creative idea selection performances.
FAIR VALUE OF BIOLOGICAL ASSETS AND STOCK PRICE INFORMATIVENESS: EVIDENCE FROM IAS 41
LIU, SOPHIA H.T.
HSU, AUDREY; LIU, SOPHIA ; SAMI, HEIBATOLLAH; WAN, TINGHONG
Category: FR = Financial Reporting
We examine the effect of adoption of International Accounting Standard 41(IAS 41) for biological assets on stock price informativeness. International Accounting Standard 41: Agriculture requires fair value measurement and enhances disclosure for biological assets. We investigate whether the adoption of IAS 41 can facilitate firm-specific information for agricultural activities capitalized into stock prices, as measured by idiosyncratic volatility. Using a sample of IAS 41 adopters from countries that mandates IFRS in 2005 and the control samples of non-IAS 41 adopters, we find that stock price informativeness for IAS 41 adopters increases from the pre-adoption period to the post- adoption period. The finding supports the view that a single International Accounting Standard on accounting for all agricultural activities can help reduce stock price synchronicity. Further analysis shows that the effect is not different between firms that transforms bearer plants, which derive value in use of assets and other biological assets. Overall, our results are consistent with the notion that the increased transparency from IAS 41 adoption broadly facilitates firm-specific information flows entering into stock market and thereby reduces synchronicity, making stock price more informative.
TO DISCLOSE OR NOT TO DISCLOSE: THE JOINT EFFECTS OF SUPERVISOR PAY TRANSPARENCY AND VERTICAL PAY DISPERSION ON BUDGETING DECISIONS
LIU, XIAOTAO
TIAN, YU; ZHANG, YUE
Category: MA = Management Accounting
This study examines the interactive effect of supervisor pay transparency and vertical pay dispersion on decisions in a participative budgeting setting. We investigate supervisor and subordinate budgetary decisions when vertical pay dispersion is high (versus low) and when supervisor pay is transparent (versus not transparent) to subordinates. As predicted, we find a significant interaction between supervisor pay and vertical pay dispersion on misreporting. Specifically, when vertical pay dispersion is high (low), pay transparency significantly increases (decreases) subordinates’ cost overstatements. Further investigation suggests that this result is NOT driven by fairness concerns, but by social comparison and benchmarking (i.e., subordinates using supervisor pay as a pay standard). We also find that supervisors set higher cost thresholds when vertical pay dispersion is high when and only when such pay dispersion is transparent to subordinates. Our results further suggest that pay transparency and vertical pay dispersion jointly affect firm profit in our setting. Implications for theory and practice are discussed.
CORPORATE SOCIAL RESPONSIBILITY IN ACCOUNTING FIRMS AND AUDIT QUALITY: EVIDENCE FROM CHINA
LIU, XUEJIAO
DAI, NARISA TIANJING; DU, XINGQIANGY; FIRTH, MICHAEL; LIU, XUEJIAO
Category: AU = Auditing
This paper explores the empirical association between corporate social responsibility (CSR) in accounting firms and audit quality by drawing upon a three-year (2010–2012) proprietary database on the CSR activities of accounting firms in China. We find that accounting firms with higher levels of CSR achieve greater audit quality. We also find that the relationship between CSR and audit quality is more pronounced in accounting firms that spend more on training and have lower employee turnover. To the extent that we control for confounding factors and potential endogeneity concerns, our results suggest that that socially responsible accounting firms are driven by their ethical concerns to achieve higher audit quality.
ECONOMIC POLICY AND MONETARY POLICY UNCERTAINTY AND BANK EARNINGS OPACITY
LOBO, GERALD
JIN , JUSTIN ; KANAGARETNAM, KIRIDARAN ; LIU, YI
Category: FR = Financial Reporting
Using a sample of U.S. banks and indices for economic policy uncertainty and monetary policy uncertainty developed by Baker et al. (2016), we investigate whether these two sources of policy uncertainty affect bank earnings opacity. When economic and monetary policies are relatively uncertain, it is easier for bank managers to distort financial information, as unpredictable policy changes make assessing the existence and impact of hidden “adverse news” more difficult for external stakeholders such as investors and creditors. Policy uncertainty also increases the fluctuation in banks’ earnings and cash flows, thus providing additional incentives for bank managers to engage in earnings management. Our results show that uncertainty in economic policy and in monetary policy are positively related to earnings opacity, proxied by the magnitude of discretionary loan loss provisions and the likelihood of just meeting or beating the prior year’s earnings, and negatively related to the level of accounting conservatism (i.e., the timeliness of recognition of bad news relative to good news). Collectively, our results suggest that economic policy uncertainty and monetary policy uncertainty lead to greater earnings opacity. We also find that the impact of policy uncertainty on financial reporting distortion is less pronounced for stronger banks (i.e., banks with high capital ratios).
ACCOUNTING AND THE (UN)MAKING OF THE ORGANIZATION: UNDERSTANDING SHIFTING MODES OF FORMALIZATION WITH GERMANY’S ‘REFUGEE WELCOME MOVEMENT’
LOEHLEIN, LUKAS
TWARDOWSKI, DAVID
Category: IC = Interdisciplinary/Critical
This paper explores the role of accounting in structuring civil society intervention in the context of the recent ‘refugee crisis’ in Germany. In particular, it is examined how initially loose volunteer movements turned into formalized and legally independent organizational forms throughout the height of the migration movement. We particularly focus on the constitutive capacity of lists as a basis for enabling more sophisticated forms of accounting which then constitute the inside and the outside of the organization. While our study highlights the importance of accounting in shaping organizational boundaries, i.e. defining what counts as inside and outside, we also acknowledge that accounting only unfolds its full potential within an interplay of other elements such as specific forms of expertise, legal requirements and categorizations. We also show that the formalization of civil society movements is never a linear evolvement but might become disengaged and reactivated.
DOMESTIC TRANSFER PRICING FOR TAX CONSIDERATIONS IN THE MULTINATIONAL ENTERPRISE
LÖFFLER, CLEMENS
Category: TX = Taxation
International transfer pricing within multinational enterprises (MNEs) is considerably complex as transfer prices have to satisfy taxation and managerial accounting objectives. We consider an MNE consisting of an upstream affiliate in one country and a divisionalized downstream affiliate in another country. We find that the inherent trade-off of international transfer pricing between the upstream and the downstream affiliate can be resolved at the domestic level by adjusting the internal transfer price between the divisions of the downstream affiliate. The optimal domestic transfer price not only accounts for the costs of the internally traded good but also for tax differentials. We further show that our finding is robust in that it can be applied to a variety of circumstances, including multilateral investment choices, or when the good is internally traded to multiple subsidiaries in multiple countries.
A TWO-STAGE EXAMINATION OF RGHM DISCLOSURE PRACTICES OF GAMBLING COMPANIES OPERATING WITHIN AUSTRALIA
LOH, CHIN MOI
DEEGAN, CRAIG; INGLIS, ROBERT
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Abstract This study addresses this lack of research in two related ways (stages): the first stage investigates the RGHM disclosure practices of four major gambling companies operating within Australia. We draw upon the ethical branch of stakeholder theory, to examine the detail of annual report disclosure practices in terms of RGHM to assess the extent to which gambling companies publicly discharge (or do not discharge) their accountability to stakeholders regarding problem gambling. In so doing, we develop a disclosure index of what gambling companies ‘should’ report in relation to RGHM issues in order to discharge their accountability to stakeholders. The findings in stage one suggest that there is no substantial attempt by gambling companies to ‘account’ for the actual or potential social ‘costs’ associated with their corporations’ activities. Stage two, therefore, extends the first stage of the study by further investigating evidence that might (or might not) indicate whether there is a de-coupling of gambling companies projected and actual practises related to RGHM. We examine the content of public documents (public submissions made by gambling companies to the New Productivity Commission Inquiry into Gambling in 2008) to ascertain the views expressed by gambling corporations regarding RGHM and the social issues related to problem gambling.
HOW THE STRUCTURAL CHARACTERISTICS OF ANNUAL REPORTS AND THE QUALITATIVE INFORMATION THEY CONTAIN AFFECT THE PREDICTION OF BANKRUPTCY
LOHMANN, CHRISTIAN
LOHMANN, CHRISTIAN; OHLIGER, THORSTEN
Category: FA = Financial Analysis
The structural characteristics of companies’ annual reports (such as their length, complexity and intelligibility) and the qualitative information they contain (e.g., on any risks they may be facing) can provide useful insights that can help increase the accuracy of bankruptcy prediction. In this study we use a sample of German companies that we compiled through propensity score matching to analyze the impact of this information on the validity of models used to predict a company’s likelihood to go bankrupt. The findings provide empirical evidence that both the structural characteristics of an annual report and the qualitative information it contains increase the accuracy of predicting bankruptcy. On this basis, we argue that both types of elements should be introduced into models for predicting bankruptcy, especially in models used to distinguish between companies that are likely to go bankrupt and companies that, although financially distressed, are likely to remain solvent.
WHO ARE THE WINNERS IN IPOS.EMPIRICAL EVIDENCE FOR THE U.S
LOIZIDES, GEORGE
CHARITOU, ANDREAS; KARAMANOU, IRENE
Category: FA = Financial Analysis
In this paper we attempt to shed light on whether the role of lead underwriters in the aftermarket IPO through their trading activity leads to information asymmetry prior and after the lock-up period. This is the first study that classifies the lead underwriters into three distinct categories. We use a novel approach to classify the lead underwriters into Winners (those who benefit both themselves and the company based on the level of underpricing and maximization of their fees), Non-winners and Stabilizers. Using a dataset of 1,051 IPO US firms over the period 2000-2015, results demonstrate that Winners have an information advantage over the rest market participants which is inconsistent with the efficient market hypothesis (EMH). Specifically, results show that there is strong positive association between changes in holdings of Winners and subsequent market adjusted Buy-and-Hold Abnormal returns. These results indicate that Winners do have information advantage over the rest market participants and they seem to exploit this private information for their own benefit. Thus, for safeguarding the interest of public investors more screening is needed to monitor the post IPO activity in order to reduce market inefficiencies.
EVIDENCE OF A POSITIVE TREND IN POSITIVE QUARTERLY EARNINGS SURPRISES OVER THE PAST TWO DECADE
LONT, DAVID
GRIFFIN, PAUL
Category: FA = Financial Analysis
This paper shows a sustained positive trend in positive quarterly earnings surprises over the past two decades for a significant proportion of firms in the S&P 500. The distribution of quarterly earnings surprises over time has not shifted symmetrically to the right, however. Rather, the shift is the result of fewer small earnings surprises in the bins at or just below zero and more and larger positive earnings surprises in the bins further away from zero. We also show a sustained increase in the proportion of firms in the S&P 500 with earnings surprise strings consistently greater than zero and consistently greater than higher thresholds. Of two possible explanations of these trends – of increasingly upwardly biased earnings or increasingly downwardly biased earnings forecasts, our evidence is more consistent with the former. This is because with the latter it is unlikely that financial analysts would bias their forecasts downward to produce the distribution shift that we find unless somehow they had foreknowledge of firms’ earnings management practices contemporaneous with the release of their forecasts. These results are robust to scaled or unscaled earnings surprises and to the earnings surprise shocks from the Sarbanes Oxley legislation and the 2007–2008 global financial crisis. An equivalent temporal analysis of sales surprises also shows a right shift in the bins of the distribution, but the movement is weaker.
SUSTAINABILITY REPORTING, SUSTAINABILITY PERFORMANCE, AND CEOS’ SUSTAINABILITY REPORTING STYLES: THE JOINT EFFECT ON COST OF EQUITY CAPITAL
LOPATTA, KERSTIN
KASPEREIT, THOMAS; TIDEMAN, SEBASTIAN A.
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Sustainability reporting can be considered a simultaneous strategic signaling choice that might lead to a situation similar to a prisoner´s dilemma: the majority of firms chooses to report on sustainability although the signal has no value to investors and hence causes negative net benefits for the reporting firms. Consequently, we predict and find empirical evidence that increases in the levels of sustainability reporting are positively associated with cost of equity capital increases for specific ranges of simultaneous increases in sustainability performance. This association is even more pronounced for firms employing CEOs with a tendency towards sustainability reporting. Our findings are in line with the argument that CEOs opportunistically engage into sustainability reporting at the expense of the firms’ owners.
HOW RELEVANT IS INTEGRATED REPORTING?
LOPES, ANA ISABEL
COELHO, ANA; OLIVEIRA, JONAS
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The present study is focused on the potential market benefits of presenting a high quality Integrated Report. Specifically, this preliminary research assess whether such characteristic is value relevant to investors. We investigate whether the market valuation of traditional accounting measures (book value of equity and net income) is higher for companies presenting an integrated report considered as "leading practice” when compared to companies publishing a regular integrated report. Our sample includes all the unique companies from the IIRC Examples Database. Financial and non-financial data were collected for a period of 10 years starting in 2006. Main findings confirm that either the book value of equity or operating income have a positive and statistically significant impact on the market value and, as expected, those relationships are intensified when they come from companies recognized as “best practice” in the integrated reporting process.
105 - WHAT PLACE HAS OCCUPIED THE RESEARCH OF CSR ISSUES ON STATE-OWNED ENTERPRISES? A REVIEW OF THE LITERATURE
LÓPEZ PÉREZ, MARIA VICTORIA
GARDE SANCHEZ, RAQUEL; LÓPEZ HERNÁNDEZ, ANTONIO M.
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Significant changes have taken place in the organisational culture of the public sector. These changes have brought accountability and sustainability into the spotlight and have led to the concept of corporate social responsibility (CSR) in public administrations. Within the public sector, State-owned enterprises (SOEs) could provide an important example on these issues to other companies and society and could be of crucial importance in the promotion and development of socially responsible policies. This fact leads us to analyze the research done in the field of SOEs related to CSR practices. This study analyses the current state of the research in this field and identifies the main theoretical and empirical contributions made into CSR in published research in internationally-reputed journals, in the context of SOEs, in order to provide a foundation for future studies. Our results show that the issue has been addressed recently comparing it with the research carried out in this field in the private enterprises, despite the commitment that these companies have on CSR. Most of the studies are descriptive, although explanatory ones are increasing in recent years. Studies of the effect of CSR practices on users are scarce and are an interesting area of research. The review shows that SOEs research is significant in those countries which state has a strong presence in companies.
INFORMAL PEER MONITORING AS A DETERMINANT OF THE MOTIVATIONAL DIMENSION OF BUDGETS
LOPEZ-VALEIRAS, ERNESTO
GOMEZ-CONDE, JACOBO; MALAGUENO, RICARDO; TIOMATSU OYADOMARI, JOSE CARLOS
Category: MA = Management Accounting
Budgets and peer monitoring are control mechanisms (formal and informal, respectively) widely recognized in control and management literatures due to their capacity to motivate employees to align their behavior with firm expectations. Several studies have suggested that peer monitoring can be a determinant variable in explaining the motivational effects of budgets. However, those studies are ambiguous in not specifying how these variables relate. This paper examines the different roles that peer monitoring can potentially play on the relationship between budgets and goal commitment. We used a combination of proprietary and survey data gathered from 80 store managers from a division of one of the largest world retail chain companies to test hypotheses. We found that budget motivational properties intensify the level of direct peer monitoring, which in turn contributes to increase managers’ goal commitment. In contrast, the results have also provided evidence of the dysfunctional interaction between indirect peer monitoring and budgets, negatively influencing managers’ goal commitment. This may be the case only for managers performing below expectations.
THE PREFERENTIAL TREATMENT OF BUSINESS ASSETS IN GERMAN INHERITANCE TAX LAW – AN ECONOMIC ANALYSIS
LORENZ, JOHANNES
DILLER, MARKUS; SCHWARZ, HANS-GEORG; SPÄTH, THOMAS
Category: TX = Taxation
Under the German Inheritance Tax and Gift Tax Act the transfer of business assets can be exempted from taxation up to 100%. However, this exemption depends on the evolution of the company's payroll, which is highly uncertain. We model the uncertain nature of payroll evolution using a Geometric Brownian motion. We obtain closed-form solutions for the expected effective exemption and for the expected effective tax rate. We find that the uncertainty effect is most pronounced for moderate negative and positive growth rates. Furthermore, higher uncertainty reduces the value of the effective tax exemption. Given progressive taxation, we are able to isolate an uncertainty-related progression effect; this effect is strongest for moderate uncertainty. We show that – due to the special form of the tariff according to Section 19 ErbStG – the progression effect can even be positive.
EXECUTIVE COMPENSATION AND TOURNAMENT INCENTIVES AROUND US IPOS
LOUKOPOULOS, GEORGIOS
GOUNOPOULOS, DIMITRIOS; LOUKOPOULOS, GEORGIOS
Category: GV = Accounting and Governance
Our study finds that, while both compensation and internal pay gap exhibit lower underpricing, it is on average higher when there are high levels of industry and local pay gap. Economically, having a high compensated CEO on board is associated with a decrease of 2.99% in the value of initial returns to investors. The negative effect of total CEO remuneration on the value of underpricing concentrates among firms with high managerial discretion. Additionally, our findings suggest that the positive association between industry tournament incentives and IPO first-day returns is stronger in less competitive industries as well as among firms with specialist and overconfident CEOs. In contrast, the positive impact of tournament incentives on underpricing is less pronounced in competitive Metropolitan Statistical Areas (MSA) and on firms with new CEOs. The results are robust to various tests and alternative explanations.
CEO EDUCATION ATTAINMENTS AND IPO UNDERPRICING
LOUKOPOULOS, PANAGIOTIS
GOUNOPOULOS, DIMITRIOS; LOUKOPOULOS, PANAGIOTIS
Category: ED = Accounting Education
Using a unique hand-collected data set of educational attainments as a proxy for general cognitive ability and educational quality, we examine whether heterogeneity of CEO academic qualifications in terms of nature, level and quality is important in explaining the variations in the level of IPO underpricing. With respect to undergraduate degrees, we find that science- and practice-oriented degrees (BSc) relate to lower underpricing compared to liberal arts degrees (BA). Similarly, master degrees that emphasize on a narrow discipline (MA and MSc) are generally unrelated to initial IPO returns, whereas MBAs contribute to lower underpricing. Finally, CEOs with titles characterized by considerable degree of conservatism, such as Juris Doctors (JD) holders of professional qualifications are perceived deliver valuable human capital compared to CEOs with a PhD or a medical degree (MD). Collectively, our results that while CEO education generally relates significantly to underpricing, the direction and magnitude of this relationship depends on the nature, level and quality of academic qualifications.
A CONTINGENCY FRAMEWORK FOR THE USE OF NON-FINANCIAL PERFORMANCE MEASURES IN MANAGERIAL INCENTIVES: EVIDENCE FROM SMES
LOURENÇO, SOFIA
ALVES, IRYNA
Category: MA = Management Accounting
This study explores the relationship between contextual variables (strategy, external environment, organizational culture, decentralization and technology) and the use of non-financial performance measures (NFPM) for managerial compensation in SMEs. Using data collected from a questionnaire answered by 1 088 SMEs’ managers, I find that external environment and decentralization are associated with the adoption and use of NFPM for managerial compensations in SMEs. Specifically, I find that the lower the dynamism element of perceived environmental uncertainty (PEU), and the greater the PEU hostility and decentralization, the higher the adoption and use of NFPM. Finally, my study highlights important differences in the adoption and use of NFPM between small and medium firms, and between CEOs and non-CEOs.
CORPORATE LOBBYING, CORPORATE GOVERNANCE AND AUDIT FEES
LOW, YIK PUI
FOO, YEE-BOON; GUL, FERDINAND AKTHAR
Category: AU = Auditing
This paper examines the association between clients’ involvement in political lobbying and audit fees. Using a U.S. sample of 4,824 firm-year observations, we find that auditors charge higher audit fees for clients with active lobbying activities. We also find that the positive association between lobbying and audit fees is weaker for firms with more independent directors and firms with more female directors on board. Overall, our findings suggest that lobbying firms are associated with higher audit risks, but this relationship is weaker for firms with stronger corporate governance.
DOES SOCIAL CAPITAL AFFECT ASYMMETRIC COST BEHAVIOUR? EVIDENCE FROM U.S. COUNTIES
LOY, THOMAS
EIERLE, BRIGITTE; HARTLIEB, SVEN
Category: MA = Management Accounting
We examine the impact of social capital on asymmetric cost behaviour. Social capital captures the strength of civic norms and the density of social networks in a region. As such, it is a socio-economic factor that might affect managerial resource adjustment decisions via different channels. We find that firms headquartered in U.S. counties with high social capital exhibit less asymmetric cost behaviour. Apparently, social capital restrains managers from taking opportunistic resource adjustment decisions that would induce cost stickiness. This is in line with our additional finding, that altruistic norms to act in an ethical manner are the dominant channel for our setting, by which social capital affects cost behaviour. Our results corroborate the important role of managerial discretion in cost behaviour and make a significant contribution in understanding how environmental, local factors explain differences in sticky cost behaviour across firms.
GAINING AND DEFENDING LEGITIMACY: AN INSTITUTIONAL PERSPECTIVE OF THE RISE AND FALL OF BIG N IN CHINA
LU, WEI
JI, DAVID XU-DONG; QU, WEN; YAPA, PREM
Category: HI = History
This paper analyses factors contributing to the rise and fall of large international audit firms (Big N) in China over the last four decades. It develops a general framework by considering broad institutional theory relating to both creation and weakening of an institution. It also applies institutional theory to Multinational Corporations (MNCs), using the construct of institutional distance, which comprises of regulatory, normative and cognitive dimensions. This study finds that Big N’s success in their initial entrance to China, their rapid growth and dominance and their current declining market share is a process of first gaining legitimacy, then maintaining, expanding and defending it. This process is a response to the changes in the institutional distances on regulatory, normative and cognitive dimensions. This paper contributes to the accounting literature by broadening the application of institutional theory. Understanding the development of Big N in China over the last four decades will assist policy makers, in particular in emerging economies, to facilitate and encourage big international audit firms to play an appropriate role within their economies. The result of this study can also assist such audit firms to position their future development around the world.
THE VALUE RELEVANCE OF REGULATORY CAPITAL COMPONENTS
LUBBERINK, MARTIEN
WILLETT, ROGER
Category: FA = Financial Analysis
We measure the value relevance of Tier 1 capital, regulatory adjustments, and Tier 2 capital of U.S. banks. Our research design relies on a parsimonious multiplicative regression model that mitigates shortcomings of conventional research designs. Results for the years 2001–2016 show that Tier 1 capital is less value relevant than book equity. The value relevance of Tier 1 and book equity temporarily increase after the global financial crisis, then gravitate to a predicted value of one in times of economic stability. Some of the regulatory adjustments contradict policy objectives of the definition of Tier 1 bank capital: positive adjustments to bank capital, e.g. hybrid capital instruments, are mostly negatively associated with market returns. Important negative adjustments, i.e. goodwill, are positively associated with market returns. The value relevance of Tier 2 capital becomes strongly negative after the fall of Lehman brothers, thus reflecting the gone concern property of this component of capital.
ASSESSING THE MATERIALITY OF G4-SUSTAINABILITY REPORTS OF UNIVERSITIES
LUBINGER, MELANIE
FREI, JUDITH; GREILING, DOROTHEA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Purpose – Materiality, as a content selection principle, is an emerging trend in sustainability reporting for making sustainability reports (SRs) more relevant for stakeholders. This paper investigates whether materiality matters in the reporting practice of universities who have adopted the Global Reporting Initiative (GRI) G4 Guidelines. Design/methodology/approach – Strategic stakeholder theory and sociological institutionalism serve for deriving conflicting expectations about the compliance of universities with the materiality principle. In the empirical section of this paper, content analyses are conducted on the documented material aspects, followed by a correlation analysis for analysing to which extent the material aspects are reported in the SRs. Findings – Although universities engage themselves in documenting in G4-19 stakeholder-material aspects according to different relevance levels and for two stakeholder groups (internal and external stakeholders), the material aspects are not appropriately reported in the SRs. The adoption of the materiality principle is a superficial one. Originality/value – This is the first study looking at the compliance between the documented material aspects and the content of the SRs in a particular challenging organisational field, the university sector. Keywords: Global Reporting Initiative, materiality, sociological institutionalism, strategic stakeholder theory, sustainability reporting, universities
SOFT INFORMATION PRODUCTION AND INVESTMENT IN SPECIFIC ASSETS
LUNAWAT, RADHIKA
GANGOPADHYAY, SHUBHASHIS; WIHLBORG, CLAS
Category: FA = Financial Analysis
We analyse how soft information about specific assets invested in a project contributes to the expanded financing of socially valuable projects that require investment in both general and specific assets. Our model captures important aspects of the lender-borrower relationship in project financing and allows for an interpretation of degree of softness of information with the lender. The manager-entrepreneur benefits from the lender’s recall rights under some conditions. If the manager-entrepreneur has the choice of financing the general asset in a competitive arm’s length loan market, she will choose a relationship loan with recall rights only if the endogenous quality of information is high enough. We show how the quality of information, the incentive to invest in the specific asset and the choice of loan arrangement depend on project characteristics, costs of information production and the manager-entrepreneur’s private benefits.
THE INSTITUTIONALIZATION OF SUSTAINABILITY ASSURANCE SERVICES: A COMPARISON BETWEEN ITALY AND UNITED STATES
LUQUE VÍLCHEZ, MERCEDES
LARRINAGA, CARLOS ; NÚÑEZ-NICKEL, MANUEL ; ROSSI, ADRIANA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper tries to provide some insights about whether and how specific assurance practices became norms in specific constituencies. To that end, this research presents a descriptive-exploratory analysis of assurance practices disclosed in two countries with different levels of assurance activity (Italy and the U.S.) in a period of eleven years (2003/2013). Italy is among the countries with the highest assurance activity and the U.S., among the countries with the lowest assurance activity. The analysis, drawn on theoretical insights of institutional sociology and normativity production, found a framed situation in Italy, where assurance statements consistently included a narrow set of formal and procedural communications. And an unsettled situation in the U.S., with a more incipient assurance activity but more room for experimentation in substantial assurance practices. Finally, the results also reveal new findings about the association of particular professionals in the earlier and later stages of SR assurance practice norms. On the other hand, results suggest a significant influence of non-Big4 firms (such as engineering and consultant firms) in the emergence of SR assurance disclosure norms. On the other hand, results indicate that Big4 accounting firms are positively associated with the narrowing of the assurance focus to a selected subset of this activity in later stages of the development of the assurance norm. In this regard, this study provides insight into the circumstantial -but relevant- carrier role of Big4 firms determining what “assurance” means.
ACCOUNTING GOODWILL: NEW THEORY AND EMPIRICAL EVIDENCE
LUSTOSA, PAULO ROBERTO B.
Category: FR = Financial Reporting
I elaborate upon the foundations of Gecon – Economic Management System – model to propose a new theory on goodwill and other identified intangibles with indefinite useful lives. I reason that firm value is made up of its physical and intangible wealth, both continuously affected by passage of time and change of conjuncture. The first, more stable, is the opportunity cost of the implemented managerial decisions to buy, sell and manufacture assets. The second, more instable, is the economic value of the new ideas and plans still to be implemented, which seems to be the true nature of goodwill. The non-recognized intangibles act like the firm’s virtuous. They are not separated assets, for their value is already reflected into the economic value of the physical and intangible wealth, the same way that virtuous in a person are embodied in her mind and body. According to this view, accounting goodwill is a portion of the intangible wealth of the acquirer, which quickly dissipates being converted (or not) into physical equity. Statistical tests on a 29,192 firm-year observation panel database show evidence that this new approach to goodwill (and other intangibles with indefinite useful lives) seems to be true.
MENTORING FOR BUSINESS: ACCOUNTING LEGISLATION OF THE RUSSIAN EMPIRE
LVOVA, DINA
LVOVA, IRINA
Category: HI = History
This paper looks at the history of legal accounting regulation governing the Russian business practice in the eighteenth – early twentieth century. The purpose was to establish the role and degree of government intervention in setting the accounting guidelines. The study covers the government’s successive steps in this field: from making bookkeeping obligatory and defining the list of compulsory books to the distribution of their templates. It is stressed that the Russian legislator assumed the role of an accounting mentor, aiming to impose not only the concept, but also specific techniques of accounting, including double-entry bookkeeping. Although this role of the government can be interpreted in many ways, the paper highlights its efforts targeted at promoting a progressive accounting culture.
CEO NARCISSISM AND VOLUNTARY DISCLOSURE
MA, GUANG
Category: IC = Interdisciplinary/Critical
This study investigates the association between CEO narcissism and management forecasting practice. We measure CEO narcissism as the usage of first-person singular pronouns in conference calls and presentations, and find that CEO narcissism is negatively associated with the likelihood and frequency of issuing forecasts, negatively associated with forecast precision, and positively associated with forecast optimism and accuracy. This evidence is consistent with the view that narcissistic CEOs’ are lack of empathy for investors’ information demand and lack of commitment for establishing routine forecasting policies, and their self-admiration and sense of superiority drives them to avoid possible unfavorable outcome, specifically missing the forecast, at all costs. We also find that a narcissistic CEO is more likely to issue forecasts and to issue more frequent forecasts when the underlying earnings news is more extreme, due to narcissistic CEOs’ hunger for grandiosity and public attention.
MARKET IMPLIED EARNINGS: A NEW APPROACH TO EXAMINE THE INFORMATION CONTENT OF GAAP AND NON-GAAP EARNINGS
MA, LE
KHRENOVA, EVGENIYA ; MATOLCSY, ZOLTAN; SPIROPOULOS, HELEN
Category: FA = Financial Analysis
This paper develops a new empirical measure of market expectations of future earnings, referred to as ‘market implied earnings’ by reverse engineering the Residual Income Valuation Model based on actual share prices. Since share prices reflect all information available to investors, market implied earnings are not based on single sourced information such as analysts’ forecasts. Market implied earnings are used to calculate earnings surprises and to test the information content of GAAP and non-GAAP earnings. Findings suggest that the estimated market implied earnings are on average closer in magnitude to non-GAAP earnings than GAAP earnings. Consistent with prior literature, non-GAAP earnings are found to have higher relative information content than GAAP earnings in terms of explaining cumulative abnormal returns around earnings announcements. Furthermore, there is no significant association between cumulative abnormal returns and non-GAAP earnings exclusions, indicating no incremental information content of GAAP over non-GAAP earnings. These results are robust with alternative model assumptions and specifications used in estimating market implied earnings.
THE ROLE OF POWERFUL CEOS IN THE APPOINTMENT OF ACCOUNTING FINANCIAL EXPERTS TO THE AUDIT COMMITTEE
MA, NELSON
GHANNAM, SAMIR ; GROSSE, MATTHEW ; LOYEUNG, ANNA; PHAM, HANNAH
Category: GV = Accounting and Governance
Accounting financial experts on audit committees are associated with a lower probability of financial restatements, higher reporting quality, positive market reactions and other desirable outcomes. Yet, many firms have been reluctant to appoint such directors. As CEOs have incentives to minimise the effectiveness of the audit committee, we examine whether CEO power plays a role in explaining firms’ aversion to appointing accounting financial experts. Using data from 2004 to 2015 we find firms have a lower likelihood of appointing new accounting financial experts in the presence of powerful CEOs. We also find that firms with powerful CEOs are less likely to designate accounting financial experts as the chair of the audit committee. Our results have implications for regulators as we identify one of the impediments to the appointment of accounting financial experts to audit committees and their effectiveness.
BALANCE SHEET STRENGTH AND INVESTMENT STRATEGIES IN THE OIL AND GAS INDUSTRY
MA, YAN
ANDERSON, MARK ; BANKER, RAJIV ; PARK, HAN-UP
Category: GV = Accounting and Governance
We investigate how companies in cyclical industries manage their investment strategies to deal with threats and opportunities that come from uncertainty about the timing and amplitude of industry cycles. We conduct our analysis in the context of the Canadian Oil and Gas (O&G) Industry. Based on our discussions with industry leaders, analysis of company disclosures, and reviews of industry reports, business and academic articles, we identify two investment strategies that are prevalent in the O&G industry – a pro-cyclical strategy that invests heavily in growth periods and a counter-cyclical strategy that invests more conservatively in growth periods to build and sequester resources for decline periods. We use a long-term measure of balance sheet strength based on debt to cash flows to discriminate across these two strategies. We find that companies that are more conservative (lower debt to cash flows over time) achieve higher operating efficiency in general and that their efficiency advantage is greater in post-crisis periods following sharp price declines. We also document that conservative firms invest more in post-crisis periods and that their acquisitions yield significantly more reserve quantities per dollar of investment than other companies, especially in the post-crisis periods.
LBO PRICE AND TARGET INFORMATION ASYMMETRY
MA, YUJING
GAO, HUASHENG
Category: FA = Financial Analysis
This paper investigates the role of target information asymmetry in explaining the premium gap between LBO deals and matching non LBO deals. Using a sample of 236 LBOs and 787 matching deals of U.S. public targets for the period of 1984 to 2013, we find that LBO target shareholders receive significantly less in takeovers than shareholders of non LBO targets and that the premium gap between LBOs and non LBOs is enlarged when targets’ information asymmetry is high. As target information asymmetry measure increases by a standard deviation, the premium gap between LBOs and non LBOs widens by 5% to 10%. We also find the influence of information asymmetry on premium gap mainly happens before merger announcement, but not after merger announcement. We explain our results as PE investors collude with target management and expropriate target shareholders when target is in asymmetric information environment.
YOU PROMOTED WHO? MANAGERS’ STRATEGIC PROMOTION DECISIONS AND THE EFFECTS OF TRANSPARENCY AND COMPENSATION INTERDEPENDENCE
MAAS, VICTOR
HECHT, GARY; VAN RINSUM, MARCEL
Category: MA = Management Accounting
Using a laboratory experiment, we investigate managers’ tendency to strategically influence performance evaluations that affect promotion decisions. One important distinction between performance evaluations that inform promotion decisions and evaluations that are only used to allocate tangible rewards is that employees who earn a promotion will leave the manager’s unit, such that their effort and skill will no longer benefit the manager. We propose that managers may therefore sometimes act strategically in promotion decisions, and provide biased recommendations, increasing the probability that low performing employees are promoted up and out of their unit, and decreasing the probability that excellent employees are promoted. We develop theory about how two crucial design variables of the organization’s control system, transparency about individual performance levels and interdependence of employees’ compensation, affect managers tendency to strategically influence promotion decisions. Data from a laboratory experiment confirm that managers strategically influence promotion decisions, and that the extent to which they engage in such behavior depends on transparency about individual performance levels and compensation interdependence.
FINANCIAL SECTOR SHOCKS AND CORPORATE INVESTMENT ACTIVITY: THE ROLE OF FINANCIAL COVENANTS
MACCIOCCHI, DANIELE
CHRISTENSEN, HANS; NIKOLAEV, VALERI
Category: FA = Financial Analysis
We examine whether shocks to financial institutions affect the choice and composition of accounting-based covenants in private debt contracts and whether this effect represents a channel through which financial shocks affect corporate investment. We exploit plausibly exogenous variation in the payment defaults experienced by lenders that are not in the borrower’s region and industry. We find that financial institutions respond to payment default shocks by shifting the composition of financial covenants towards performance-based covenants (away from capital-based covenants) in newly signed credit agreements. In turn, the increased reliance on performance covenants constrains borrowers’ future investments, particularly among relationship-based borrowers. We also find that lender-specific shocks after the contract is in place affect investments, and that this effect varies depending on the composition of the covenants in place. Overall, the results are consistent with financial covenants being a channel through which financial sector shocks propagate to the real sector.
RELEVANT ACCOUNTING INFORMATION FOR CREDITORS AND INVESTORS IN RISK CONDITIONS: A STUDY IN COUNTRIES WITH MANDATORY IFRS
MACHADO, CAMILA
NAKAO, SILVIO
Category: FA = Financial Analysis
This research analyses companies from 25 countries that have mandatorily adopted International Financial Reporting Standards (IFRS) to determine whether relevant accounting information for investors differs from relevant accounting information for creditors under some risk conditions. The underlying premise is that the set of accounting information used by these accounting information users in their capital provisioning decisions is different, as empirically identified in this research. The study shows that accounting information is less relevant to investors in countries where there is greater informational risk (less enforcement), but this risk does not influence the relevance of the accounting information to the creditors. Regarding credit risk, accounting information is found to be more relevant to creditors in conditions in which companies have higher leverage and low credit ratings assigned to borrowers; the opposite evidence is found for investors in ratings.
DOES SHAREHOLDER ACTIVISM CURB INEQUALITY AND EXCESSIVE CEO COMPENSATION?
MACKAY, WILL
HOWIESON, BRYAN; SHAN, GEORGE
Category: GV = Accounting and Governance
This article sheds further light on the efficacy of “say on pay” (SOP) voting regulation to improve corporate governance and curb the exploitation of shareholders’ funds by powerful CEOs through excessive remuneration schemes. Australia introduced binding “two strikes” SOP regulation in July 2011, the only country to do so. This study of 3,477 firm-year observations provides evidence on its impact. We identify changes in shareholder voting patterns, changes to executive remuneration following shareholder dissent, and a willingness by the board to engage in management renewal following higher levels of shareholder dissatisfaction.
MULTINATIONAL CORPORATIONS, CROSS-LISTING AND ACCOUNTING QUALITY
MAGNAN, MICHEL
LI, TIEMI (SARAH); SHI, YAQI
Category: FR = Financial Reporting
Drawing on institutional theory, agency theory and on the bonding hypothesis, this study investigates whether and to what extent legal institutions, both internal and external to a multinational corporation (MNC), impact its accounting quality. We employ a multi-country sample of MNCs registering affiliates or subsidiaries in offshore financial centers (OFCs) during the period 2002-2013. Our analyses show that MNCs cross-listing in the U.S., an external legal institution, exhibit lower abnormal accruals, higher accruals quality and more persistent earnings patterns compared to MNCs not-cross-listing in the U.S., thus supporting the bonding hypothesis. However, the positive association between cross-listing and accounting quality is negatively moderated by a MNC’s choice of OFCs in which to operate subsidiaries or affiliates, thereby suggesting that the internal legal institutions underlying foreign subsidiaries or affiliates’ operations do relate to the accounting quality of the parent firm. Moreover, the impact of a MNC’s home country governance on accounting quality is also moderated by its OFC attributes. Our study underscores, to regulators and investors, the importance of enhancing monitoring efforts for MNCs with opaque and complex structures that emanate from countries where their affiliates or subsidiaries are located, to better detect opportunistic earnings management.
EXPECTATION ACCURACY, COST BEHAVIOR, AND SLIPPERY PRICES
MAHLENDORF, MATTHIAS
HOFFMANN, KIRA; MAHLENDORF, MATTHIAS; PETTERSSON, KIM
Category: MA = Management Accounting
This study investigates the relation between the accuracy of managerial demand expectations and cost behavior. Based on a unique dataset of 4,107 firm-year observations from 737 companies in Denmark, this paper first shows that cost stickiness is substantially stronger for unforeseen negative demand shocks than for expected demand shocks, which is in line with the argument that adjustment costs are typically higher when the time horizon for making the adjustments is shorter. Second, we find empirical evidence that omitting selling price changes can mislead researchers’ inferences about resource adjustments and cost stickiness when sales are used as a proxy for activity level, which is a common practice in existing literature. Finally, we show a moderating effect of managerial expectation accuracy on the relationship between demand volatility and cost elasticity. This helps reconciling the ongoing debate on whether companies increase or decrease cost elasticity in response to demand volatility.
ENABLING SUSTAINABILITY CONTROL SYSTEM COMPONENTS TO ACHIEVE SUSTAINABILITY OUTCOMES
MAHMOUDIAN, FERESHTEH
HERREMANS, IRENE M; NAZARI, JAMAL A
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Scholars have given considerable attention to investigating the role of isolated management control system components designed to achieve sustainability outcomes. However, there is a dearth of research examining these components in an integrated system. We investigate organizations’ sustainability management control systems designed to achieve sustainability objectives by exploring both strategic and operational components. Our statistical analysis was conducted by using a large sample of international companies, and we found that control systems, which are more comprehensive at both the strategic and operational levels, are associated with higher environmental performance and sustainability reporting. By taking a more comprehensive approach towards control systems and sustainability, this study provides theoretical contributions as well as practical implications by demonstrating how integration of various control mechanisms can enable better sustainability reporting and performance outcomes.
THE EFFECT OF THE MANDATORY IFRS ADOPTION ON THE ASSOCIATION BETWEEN CONDITIONAL CONSERVATISM AND COST OF EQUITY CAPITAL IN EU
MAK, CHUN YU
CAO, LIFANG
Category: FR = Financial Reporting
International Financial Reporting Standards (IFRS) is mandatorily adopted for all European countries in 2005, recent studies concentrate on the capital market effects of this event. This study aims to examine the change of cost of equity capital in pre- and post- IFRS period, and explore the role of mandatory IFRS adoption and concurrent enforcement in the association between conditional conservatism and cost of equity capital. We find that cost of equity capital is lower after mandatory IFRS adoption, especially for the countries adopt IFRS with strong enforcement. Also, the negative association between conditional conservatism and cost of equity capital is more pronounced for the countries which make substantive change of enforcement at the same time with IFRS adoption, while mandatory IFRS adoption alone has no impact on the association.
EARNINGS MANAGEMENT IN THE AFTERMATH OF THE ZERO-EARNINGS DISCONTINUITY DISAPPEARANCE
MAKAREM, NASER
HUSSAINEY, KHALED ; MAKAREM, NASER; ZALATA, ALAA
Category: FR = Financial Reporting
The purpose of this paper is to investigate earnings management by firms reporting a small profit or a small loss after the recent evidence that the discontinuity around zero earnings has disappeared. Using a large sample of US firms for the period 2002-2011, regression analysis and earnings distribution approach are employed to examine the earnings management of small profit and small loss firms in terms of both accruals management and real activities manipulation. The results suggest that both small profit and small loss firms are engaged in upward manipulation of accruals and real activities. This implies that failure to document a difference between firms to the right and left of zero by prior studies is not due to small profit firms not managing earnings, but rather this is more attributable to loss firms engaging in upward manipulation. Furthermore, it is indicated that the discontinuity around the distribution of earnings change has also recently disappeared as firms reporting a small earnings decrease demonstrate similar earnings management behavior to those reporting a small earnings increase. Our findings suggest that the disappearance of the discontinuity around zero earnings and zero change in earnings should not be interpreted as a sign of no earnings management. It also explains how earnings management could have contributed to the disappearance of the discontinuities in earnings distribution.
INTEGRATED THINKING AND REPORTING: ONE SIZE FITS ALL?
MALAFRONTE, IRMA
BUSCO, CRISTIANO; PEREIRA, JOHN; STARITA, MARIA GRAZIA
Category: FR = Financial Reporting
Filling a gap in the existing literature on integrated thinking and reporting (ITR), this work provides new empirical evidence on the nature and determinants of European companies’ approaches to ITR over the period 2002-2015. Employing univariate and multivariate analysis, and drawing from socio-political and economic theories, we identify distinctive approaches, observe their evolution, and investigate the contribution of company-level and contextual factors as drivers of ITR. The main results show that companies’ approaches to ITR (Holistic, Integrated, Conservative, and Minimalist) are related to company characteristics and tend to remain consistent over time exhibiting routine and imitation. Based on legitimacy theory and stakeholder theory, companies with greater size, leverage, and board activism are more likely to exhibit a Holistic level of integration, while Minimalist approach is driven by the same variables in opposite direction. Environmentally-sensitive and consumer-oriented industries, as well as economic growth and market performance, significantly contribute to higher integration. We suggest that these findings could drive companies’ choices alongside policymakers’ initiatives, by identifying which levers should be pulled to achieve the desired level of integration. Finally, within the debate on the future developments of integrated reporting, these results suggest the need for a tailored approach, rather than a one size fits all.
IN PURSUIT OF ACCOUNTABILITY: AUDITING IN EUROPEAN LOCAL GOVERNMENTS
MANES ROSSI, FRANCESCA
BRUSCA, ISABEL; CONDOR, VICENTE
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
At the core of democratic control, accountability is a pivotal point in public administration as it is essential for evaluating value for money and indispensable for gaining citizens’ trust. The information disclosed should be reliable and in compliance with clear rules. Consequently, the audit function is fundamental for guaranteeing trustworthiness to various stakeholders. The aim of this paper is to compare the auditing processes in 20 European countries through an exploration of the audit requirements of local governments (LG), investigating who carries out the audits, their frequency, the types of audits and the auditing standards adopted. Furthermore, we will try to relate the different audit models with each country’s administrative characteristics. The results provide interesting insights for scholars, auditors and standard setters, showing that harmonisation in auditing is far from being achieved.
EXPECTED EARNINGS PERSISTENCE AND THE VALUE IMPACT OF LARGE CHANGES IN CONSENSUS ESTIMATES
MANGELMANS, JOB
Category: FA = Financial Analysis
Based on the market's reaction to large positive and negative changes in consensus estimates, we measure the expected stickiness of changes in earnings forecasts. Our results suggest that investors expect moderately positive changes in earnings expectations to be permanent. Downward and extreme changes in earnings forecasts have lower expected persistence. The value impact of innovations in earnings estimates depends on the market's expectations of changes, levels and visibility of earnings rather than historic earnings persistence. The value impact of changes in earnings forecasts increases with the measurement period, suggesting that innovations in consensus forecasts should be measured over longer periods. Changes in required rates of return do not appear to be driving our results.
IFRS INFORMATION OVERLOAD? EVIDENCE FROM ANALYST FOLLOWING AND ACCURACY IN SWITZERLAND
MANGENEY, LOUIS
Category: FR = Financial Reporting
The paper contributes to the recent debate on the net benefits of the growing complexity and detailed disclosure requirements of International Financial Reporting Standards (IFRS). I investigate the impact of a voluntary turn away from IFRS on analysts in a country specific setting, Switzerland, where departure from IFRS is made possible for listed firms. Using difference-in-difference analysis, the article studies analysts’ following and accuracy around the switch from IFRS to the Swiss domestic accounting standard (Swiss GAAP). Firms leaving the international standard experience lower analyst following and accuracy. However, further analysis provides evidence that such effects are principally driven by foreign analysts, and analysts without prior experience on Swiss GAAP. Overall, IFRS -despite its demanding requirements and complexity of information- delivers beneficial information to international analysts.
NON-FINANCIAL DISCLOSURE ON FACEBOOK AND CORPORATE REPUTATION
MANIORA, JANINE
POTT, CHRISTIANE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper examines the impact of firms’ dissemination of non-financial information through Facebook on corporate reputation. We use corporate social responsibility (CSR) disclosure to proxy for non-financial information. We investigate this relationship empirically in the German setting by using a corporate reputation index that tracks the general public’s perceptions of corporate reputation over time. Using firms’ discretionary use of Facebook to communicate CSR information, we find that firms posting single or multiple CSR information experience a decrease in corporate reputation. More specifically, this effect becomes larger with time. Additional analyses indicate that non-professional stakeholders perceive reputation as being lower if a firm increases the number of CSR postings suggesting a diluting effect if CSR communication is high (quantity effect). However, if we differentiate postings based on whether their content relates to an environment, social or economic activity of a firm, we find a positive effect on reputation for firms posting environmental information (quality effect). Also, only firms with an above-average amount of earned media attention, as well as “Likes”, “Comments”, and “Shares” experience a significant decrease in corporate reputation with an increase in the number of CSR posts. Overall, findings suggest that non-professional stakeholders perceive social and economic activities related to CSR as a greenwashing tool.
CONSERVATISM AND ENDOGENOUS PREFERENCES
MANTHEI-GEH, CHRISTINA
DINH, TAMI; SCHULTZE, WOLFGANG
Category: FA = Financial Analysis
Literature suggests that individuals have endogenous preferences for accounting conservatism due to intrinsic loss aversion. However, no empirical evidence for this claim exists. This paper provides first experimental insights on individuals’ endogenous preferences for conservative compared to neutral accounting. Findings suggest that in a judgment context based on innate loss aversion, individuals value conservatism more highly than neutrality in accounting. We further investigate if individuals also show explicit preferences for conservative vs. neutral accounting by implementing a choice setting. Our results provide evidence that individuals do prefer conservative accounting when presented with both options. The study contributes to the ongoing discussion on accounting conservatism by establishing that a disregard for peoples’ endogenous preferences for conservatism associated with neutral accounting can have detrimental economic consequences, such as a lower willingness to invest.
STRONG CORPORATE GOVERNANCE DRIVES TAX AVOIDANCE
MANTHEY, JOHANNES
KIESEWETTER, DIRK; MANTHEY, JOHANNES
Category: TX = Taxation
This paper analyses the relationship between corporate governance and tax avoidance. This study aims to highlight the wide-ranging effects of institutional investors, which channel into corporate policy. This analysis uses a regression discontinuity design (RDD) in a two-stage instrumental variable (IV) model and takes advantage of the exogenous variation in the index membership around the index threshold. The sample comprises the firms in the German prime standard indexes. The DAX (MDAX) index consists of the largest 30 (next-largest 50) publicly listed firms by market capitalization in Germany. This paper argues that the differences in corporate governance result from the value-weighted composition of the market capitalization-based indexes. The findings show a significant discontinuity in the level of the corporate governance characteristics at the cutoff. The largest MDAX firms show stronger corporate governance characteristics compared to the smallest DAX firms. The analysis shows that strong corporate governance characteristics drive down the effective tax rate for the DAX companies. This paper contributes to existing research by establishing a causal relationship between corporate governance and taxes. This is the only paper measuring corporate governance directly in the index setting. Different from previous research, the largest MDAX firms do not show increasing tax rates upon inclusion in the DAX. Instead, lower tax rates are observed.
THE SPILL-OVER EFFECTS OF CORPORATE CORRUPTION ON PEER FIRMS’ EARNINGS MANIPULATION
MARANGONI, CLAUDIA
Category: FA = Financial Analysis
I examine whether the corrupt actions of some firms affect the propensity of their peers to engage in earnings management practices. Controlling for firm characteristics, industry fixed effects, and manipulation incentives and ability, results show that firms engage more in upward earnings manipulations during the years in which their corrupt rivals distort competition by bribing. In addition, the evidence indicates that these spill-overs are more pronounced, the higher the degree of severity of corruption, proxied by the unfair profits that corrupt firms earn through their bribery. The findings suggest firms exposed to rivals’ corruption experience relative performance evaluation pressures. When corrupt firms gain performance-enhancing favors, their non-corrupt peers face a competitive disadvantage and seek to (re)establish a comparative edge. This is pursued by engaging in larger income-increasing manipulations relative to firms not exposed to competitors’ corruption. The documented existence of spill-over effects of corporate misbehavior complements the recent evidence on contagion of a single type of firm financial misconduct and provides insights into how the financial reporting environment is affected by corruption. This may drive policy makers’ efforts when designing the instruments to curtail this phenomenon.
INCENTIVE DESIGN AND EMPLOYEE SELF-SELECTION
MARGOLIN, MAXIMILIAN
MAHLENDORF, MATTHIAS D.; SCHAEFFER, UTZ
Category: MA = Management Accounting
When given a choice, employees select incentive schemes that best fit them. Therefore, firms can design incentives to attract specifically employees with the desired skill level, risk preferences, and personality traits. While prior research provides evidence on the relationships between skill level and incentive selection as well as risk preferences and incentive selection, there is little evidence on the role of personality. Using survey data from 406 lower, middle, and higher-level employees, we investigate what incentive schemes individuals choose depending on their level of Core Self-Evaluation (CSE). We argue that high-CSE employees prefer and self-select into incentive schemes (1) which offer a performance-based pay component, (2) where the share of performance-based pay is larger relative to total compensation, (3) which rely stronger on financial performance measures, and (4) where firms provide stronger implicit promotion-based incentives. Our results support the first two notions while we find no support for the effects of financial performance measures and implicit incentives.
CAN EMPLOYEES GLIMPSE THE FUTURE? EVIDENCE FROM A SOCIAL MEDIA PLATFORM
MARKOV, STANIMIR
HUANG, KELLLY; LI, MENG
Category: FR = Financial Reporting
We investigate whether employee social media disclosures are informative about future earnings, and whether they are efficiently used by analysts and investors. We document that employee predictions of company performance, available on Glassdoor.com, are prevalent and incrementally informative about future earnings; the informativeness is increasing in the difficulty of forecasting earnings and the size of the employee base. Finally, information in employee social media disclosures is not fully incorporated in analyst forecasts and in stock prices of companies with low analyst coverage, resulting in predictable consensus forecast errors and predictable stock returns. Our results establish the role of employee social media disclosures as a source of new information in capital markets.
CSR DISCLOSURE, CORPORATE GOVERNANCE AND COUNTRY-LEVEL CULTURE
MARQUES, ANA
DEVILLIERS, CHARL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Corporate social responsibility (CSR) disclosure is of strategic importance, and thus must be considered by the board of directors. We overcome several methodological weaknesses of the prior studies, analyse a large multi-country sample, and control for CSR performance, in order to yield reliable results on the association between board characteristics and CSR disclosure. We find that four board characteristics are positively associated with CSR disclosure (board activity, optimal size, independence level, and independence policy), while two are negatively associated (CEO chair, and length of tenure). Second, we find that country culture is a significant determinant of CSR disclosure, particularly the cultural dimensions of individualism, masculinity, and a long term orientation (which favours savings over social spending). Third, we find culture impacts the association between CSR disclosure and board characteristics. For example, the presence of women on boards is only relevant for CSR disclosures in countries with specific cultural traits.
CFO COUNTRY OF ORIGIN AND ACCOUNTING QUALITY. A CROSS-COUNTRY INVESTIGATION
MARRA, ANTONIO
Category: FA = Financial Analysis
Prior research has analyzed accounting quality around the world only working on institutional differences mainly at country level. Little research has been devoted to top management cultural values (here defined as CFO’s country of origin), which has turned out to be able to generate unique results on firms’ outcomes. In this work, building a unique hand collected dataset based on 954 unique CFOs across Europe and 4,478 firm-year observations I investigate the effect of CFO country of origin on accounting quality in the European Union. My findings show first, as a validity test, that there is a CFO fixed effect on accounting quality also in a cross-country setting (i.e. outside the US). Then, I show that in the EU foreign CFOs are able to foster accounting quality relative to local peers. Moreover, working on economies clusters I find that CFOs working in insider economies, but born elsewhere (outside this area) are able to marginally improve accounting quality for the firm they work with. On the contrary, this does not apply if a CFO born in an insider economy works outside his area of birth. Finally, working on CFO turnover, I find that overall CFO changes have an effect on accruals quality level. Nonetheless, cross-sectional tests reveal that such changes are significant when CFO turnover happens from CFO born in a low (high) IP country to a CFO born in a high(low) IP country, where accounting quality improves(worsens).
THE DISCLOSURE FUNCTION OF THE U.S. PATENT SYSTEM: EVIDENCE FROM THE U.S. PATENT AND TRADEMARK DEPOSITORY LIBRARY PROGRAM
MARTENS, TIM
Category: FA = Financial Analysis
Does the U.S. patent system transfer patent information to the financial market? This study uses variation in the local patent information availability to identify local changes in trading volume in reaction to the release of a patent. The variation comes from changes in the geographic location of U.S. Patent and Trademark Depository Libraries over time. I find strong evidence for a significant increase in the local trading volume of stocks after the release of a patent in counties that have access to patent information, after controlling for county, patent event, and firm characteristics.
BOARD CHARACTERISTICS AND DISCLOSURE TONE
MARTIKAINEN, MINNA
MIIHKINEN, ANTTI; WATSON , LUKE
Category: GV = Accounting and Governance
We examine the role of corporate boards of directors in shaping disclosure tone. Boards of directors play an important governance role with respect to firm disclosures, leading us to expect them to influence financial reporting narratives. We investigate whether the tone of firms’ narrative annual report disclosures is associated with the human and social capital of its board of directors. Analyzing a large sample of SEC registrants from 2003 to 2014, we find that directors’ age is negatively associated with negative, positive, uncertain, and total disclosure tone. These results are consistent with older directors reporting cautiously. Meanwhile, board gender balance is associated with less rich, yet more optimistic tone. Education and financial expertise are positively associated with all four types of tone, indicative of richer narrative disclosures. Board turnover is positively associated with negative and total tone yet negatively associated with positive and uncertain tone, suggesting that new directors bring fresh disclosure styles. Our study helps decode the “black box” of disclosure tone, which Loughran & McDonald (2011) show has important economic implications.
EXAMINING THE DYNAMIC NATURE OF EXECUTIVE COMPENSATION: A FIRM LIFE CYCLE APPROACH
MARTIN, MELISSA
DRAKE, KATHARINE
Category: MA = Management Accounting
Contracting practices reflect a response to the nature and severity of a firm’s agency problem. We expand from the traditional static theorization of the principal-agent model and employ an evolutionary framework to examine the dynamic nature of the agency problem and thus, executive compensation contracting as firms evolve over their life cycle. Specifically, we test and find significant differences in the level and mix of compensation across stages of firm development. Additionally, our results suggest differing weights on accounting and market measures of performance across the life of the firm, consistent with differences in the informativeness of each signal across life cycle stages. Using disclosed bonus contract performance metrics, we identify differences in the number and types of metrics used, as well as the weights on alternative performance measures, as the firm evolves. One implication of our results, important for researchers, suggests systematic biases in traditional pooled cross-sectional models of executive compensation, highlighting the need to understand the role of the dynamic agency problem in firm contracting decisions.
ASSURANCE PROVIDER QUALITY AND THE COST OF CAPITAL
MARTÍNEZ FERRERO, JENNIFER
GARCÍA-SÁNCHEZ, ISABEL-MARÍA ; RUIZ BARBADILLO, EMILIANO
Category: AU = Auditing
In a sustainability assurance context, the aim of this paper is to examine the impact on the cost of capital of some attributes of assurance providers. Specifically, it examines the impact of the type of assurer, industry specialization and experience on the cost of capital by identifying those attributes of practitioners that increase investors’ confidence in assurance reports: independence and competence. For a sample of international listed companies from the period 2007–2014, our evidence shows a lower cost of capital when assurers’ independence and competence are greater, that is, when the assurers are from accounting firms and industry specialists and have greater experience in the assurance market but not more than six years. Moreover, we evidence the complementary effect of accountancy firms on the relationship between industry specialization and experience and on the cost of capital. In addition, we report how these attributes allow firms to enjoy a lower cost of capital than the mean of their country, providing them with a financial advantage.
GOING PUBLIC: EMPLOYEE RESPONSES TO RELATIVE PERFORMANCE DISCLOSURE
MARTINEZ-JEREZ, F.ASIS
CASAS-ARCE, PABLO; DELLER, CAROLYN
Category: MA = Management Accounting
This paper studies differential employee responses to the public disclosure of individual performance information throughout an organization. We argue that, to the extent that employees care about the perception that colleagues have of their productivity, public disclosure will increase motivation. Moreover, the effect should be stronger for employees whose colleagues expect them to have higher performance. We obtained data from a bank that transitioned from private to public disclosure of employee rankings, and find significant heterogeneity in the employee responses to public disclosure, consistent with our hypothesis. Employees that had performed poorly in the past increase their output more than good performers in response. Likewise, more highly educated employees also react more strongly to the change. However, contrary to the literature that finds gender differences in motivation under relative performance compensation systems, we do not find systematic gender differences in the response to public disclosure. Overall, the results suggest that public disclosure is an important dimension to consider when designing a compensation system.
ARE MANAGEMENT ACCOUNTANTS PUNISHED FOR REPORTING BAD NEWS?
MATANOVIC, SASCHA
SCHMIDT, MAXIMILIAN; WÖHRMANN, ARNT
Category: MA = Management Accounting
In firms, reporting belongs to the key activities of management accountants. Usually, a manager is responsible for a decision and informed about the decision’s success by a report. We investigate how reporting (un)favorable news to the manager affect how managers perceive the reporting skills of the management accountant. Many other situations exists in the business world where decision-makers similarly evaluate others who are not otherwise involved in the decision at hand than reporting the decision’s outcome. Using a laboratory experiment, we predict and find that the favorability of the news reported bias managers’ subjective performance evaluation of the management accountant. This biased is even magnified if the manager’s compensation depends on the reported results. We also find evidence that the bias is context-dependent, that is the manager’s evaluation of reporting-related skills is biased but not the assessment of reporting-unrelated skills.
BOARD MONITORING AND COVENANT RESTRICTIVENESS IN PRIVATE DEBT CONTRACTS DURING THE GLOBAL FINANCIAL CRISIS
MATHER, PAUL
ABUBAKAR, INTAN ; KHAN, ARIFUR; TANEWSKI, GEORGE
Category: GV = Accounting and Governance
We examine the association between board independence and restrictiveness of covenants in U.S. private debt contracts around the global financial crisis (GFC). We show that board independence is associated with less restrictive covenants suggesting lenders willingness to delegate some monitoring of firms with independent boards. The more nuanced analysis between the pre-GFC, GFC and post GFC periods shows mixed results. We also suggest that during the GFC and aftermath, lenders place more emphasis on ex-ante screening relative to ex post monitoring. We contribute to the literature by providing evidence on covenant use and lenders choices in periods of credit rationing.
BEHAVIORAL PROFILES AND COMPETENCES OF BRAZILIAN ACCOUNTING OFFICE OWNERS
MATIAS DA SILVA, VALDERIO
CODA, ROBERTO; PRESADA, WILLIAM; ROUX CESAR, ANA MARIA
Category: ED = Accounting Education
This article presents the results of an exploratory study to identify behavioral styles of individuals performing functions in accounting offices. The M.A.R.E Diagnostic was used to analyze motivational orientations and behavioral competences and profiles of these professionals through a quantitative research applied to 66 owners of accounting offices affiliated to SESCON-SP, Brazil. A comparative analysis with a national sample and with a sample of students of MBA´s programs in finance and accounting collected in previous studies was also conducted. The results showed that these professionals are significantly more focused on the Mediating and Entrepreneuring motivational orientations. Behaviorally, they are predominantly, Motivators, Coordinators, Mentors and Achievers, indicating that the behavioral development of accounting office’s owners is associated with their efforts to focus on people management, implementation of procedures concerned with the continuity of the organization, as well as in improving productivity patterns and organization standards and mainly on becoming aware of and implementing much needed innovation processes.
ON THE INFLUENCE OF TASK INTERRUPTION AND SOCIAL INTERACTION ON ESTIMATION ERROR IN TIME-DRIVEN COSTING SYSTEMS
MAUSSEN, SOPHIE
HOOZÉE, SOPHIE
Category: MA = Management Accounting
Time estimates are an important part of many costing systems. As they may be subject to estimation error and hence result in measurement error in product and service costs, it is important to understand the sources of this estimation error. We performed a computer-based lab experiment to test the impact of task interruption and social interaction during the estimation process on the inaccuracy of time estimates. As predicted, we find that the negative impact of task interruption on time estimation accuracy is mitigated when participants can socially interact with others before making a final time estimation alone. Hence, managers may offset the detrimental effect of task interruption by encouraging their employees to socially interact during the time estimation process.
THE ROLE OF MANAGEMENT TOOLS WITHIN COMPLEX ORGANIZATIONS : A STUDY THROUGH INSTITUTIONAL LOGICS THEORY AND FRENCH PRAGMATIC SOCIOLOGY
MAZARS CHAPELON, AGNÈS
VILLESÈQUE-DUBUS, FABIENNE ; AMANS, PASCALE
Category: MA = Management Accounting
In this paper, we intend to answer the following question: what role can management tools play in organizations that are faced with institutional complexity, i.e in organizations confronted with multiple and potentially contradictory logics which shape organizational process. To that end, we have based our study on institutional logics as well as the theoretical framework proposed by Boltanski and Thévenot (1991, 2006). We have also carried out a qualitative case study of an organization which provides a textbook example of institutional complexity, the French Scènes Nationales, which are characterized by artistic, managerial and political logics. We show that management tools can help to bring about a compromise between the various logics to make them complementary or hybridized rather than competing.
ENTRENCHMENT THROUGH CORPORATE SOCIAL RESPONSIBILITY: EVIDENCE FROM CEO NETWORK CENTRALITY
MAZBOUDI, MOHAMAD
CHAHINE, SALIM; FANG, YIWEI; HASAN, IFTEKHAR
Category: GV = Accounting and Governance
This paper reports that corporate social responsibility (CSR) expenditures in firms with CEOs who are more centrally located in their social networks are negatively associated with firm value. However, this negative association is mitigated in firms with better governance. Furthermore, we find that CSR expenditures by more centrally positioned CEOs are positively associated with future increases in CEO compensation and future improvement in a CEO’s network position. Additional tests show that the negative association between CSR expenditures by more central CEOs and firm value is lower during periods of positive exogenous shocks to the societal demand for CSR (disasters and financial crises), and in counties with higher social capital. Overall, our findings suggest that more central CEOs use CSR to entrench themselves and gain private benefits rather than to access relevant information.
COMPENSATION OF INTERNAL AUDITORS – EMPIRICAL EVIDENCE FOR DIffERENT IMPACT FACTORS
MAZZA, TATIANA
BEHREND , JOEL ; EULERICH, MARC ; KRANE, RONJA
Category: AU = Auditing
This paper examines the different factors that impact internal auditors’ compensation. In order to analyse the effects of internal audit function characteristics, stakeholder relationships, and firm characteristics on the chief audit executive’s compensation we run an ordered logistic regression using survey data from 298 chief audit executives. Our study finds positive significant effects for internal audit function competence and independence on chief audit executive compensation. Furthermore, we find positive significant effects for the internal audit function’s subordination to the audit committee as well as for size and complexity. Our results contribute to the existing literature by providing empirical evidence regarding determinants of internal auditor compensation.
A GLOBAL META-DATA ANALYSIS OF FACTORS INFLUENCING SUSTAINABILITY REPORT EXTERNAL ASSURANCE
MCALEER, CPA, DOROTHY L.
LODH, SUMAN; NANDY, MONOMITA
Category: FR = Financial Reporting
This study undertakes a global analysis of meta-data corresponding to sustainability reports generated by various organizational types including for profit and non-profit, listed and non-listed in addition to small and large firms to understand those factors reasonably expected to influence firm decisions to externally assure the reports and the contingent firm choice of assurance provider. Using a sample of 4,504 sustainability reports generated in 2015 by organizations from 31 countries, the research applies a sequential binomial logistical regression analysis to identify the country, firm and report level factors corresponding with the firm decisions to externally assure the reports and the choice of external assurance provider. We find that the Environmental, Social and Governance (hereafter ESG) Report, organizational and country level factors reasonably expected to influence firm choice to externally assure ESG Reports and the contingent firm choice of assurance provider. This study contributes to the extant academic literature relating to the firm choice to externally assure ESG Report and the contingent choice of external assurance provider, which remains inconclusive to date.
WHAT SHALL WE DO WITH THE DRUNKEN SAILOR? ACCOUNTING AND CONTROLS FOR ALCOHOL IN THE ROYAL NAVY IN THE TIME OF NELSON
MCBRIDE, KAREN
HINES, TONY
Category: HI = History
This study seeks to understand how accounting was used in the Royal Navy in the eighteenth century to control the use of alcohol on board ships. Regulations for provisioning of beer (and other alcohol) are used to investigate the role of accounting as ‘government’ in the Navy. Accounting regulations were introduced to provide a means of cost control and governance of provisions for the well-being of the seafarers. Beer was initially believed to protect against scurvy, the allowance of beer continued as a means of controlling the sailors and for keeping them happy. The evaluation is informed by the later work of Foucault.
THE DEVELOPMENT AND NURTURING OF JUDGEMENT SKILLS IN ACCOUNTING PROGRAMS
MCGUIGAN, NICK
BIRT, JACQUELINE; COPELAND, SCOTT; KAVANAGH, MARIE; MCGRATH, DIANNE; MUIR, JANINE
Category: ED = Accounting Education
This paper discusses the need to measure academic standards and promote teaching and learning of the skill of professional judgement in accounting, through practise and assessment. We report on a pilot study using a survey instrument developed to allow pre and post measurement of the ability of students at a large Australian university to exercise judgement skills. We investigate methods to scaffold the learning of judgement skills to a professional level across undergraduate business and commerce curricula. We find that appropriate learning strategies, interventions and assessment must be in place in courses such as auditing to promote skills development in students. The paper empowers academics to enable students to make self-managed decisions to improve and document their own standard of learning of the skill of judgement.
DISCLOSURE, RECOGNITION, AND DEBT CONTRACTING
MCMARTIN, ANDREW
PHILLIPS, MATTHEW
Category: FA = Financial Analysis
We examine the control implications of recognition versus disclosure and argue that it is easier to write more complete contracts when amounts are recognized in the financial statements, as opposed to disclosed in the footnotes. We use this framework to predict that recognition of otherwise disclosed amounts will not only increase covenant use, but also decrease covenant tightness and the cost of debt capital. We find evidence consistent with this prediction around the adoption of SFAS 158. More importantly, the results are consistent with the claim that accounting standards can affect the efficiency of debt contracts, and that lenders trade off between contracting mechanisms based on whether accounting information is recognized or disclosed.
AN EVENT AND EARNINGS MANAGEMENT STUDY OF A KEY AUDIT MATTERS DISCLOSURE
MCNAMARA, RAY
KELLY, SIMONE; MATHEWS, JESTIN
Category: AU = Auditing
This paper examines the events that follow from a critical audit matter (now called a Key Audit Matter, KAM) to determine its economic consequences and whether these events constitute a response to prior earnings management or other explanations such as a “big bath’ by an incoming CEO or a corporate response to a whistle blowing event related to the KAM. A single-firm event study with key-competitors comparison assesses the economic consequences of twelve events (including write downs and fines) and an earnings management study assesses the motivation for the events. The methodology combines the insight of a case study analysis with the statistical benchmarking of a larger-sample study. The results show the events had a significant economic implication while the earnings management analysis places the company’s abnormal accruals in lower five percent of the companies making up the FTSE350 and the lowest seven percent of the industry sector. The study provides a single case analysis of a now compulsory audit-judgment disclosure. The wealth effect of the incoming CEO’s decisions on the investing public exceeded £1.27 billion plus significant investigatory costs and subsequent fines to the company.
THE COMPENSATION OF INDEPENDENT DIRECTORS WORLDWIDE. AN EMPIRICAL ANALYSIS WITH AN INSTITUTIONAL-BASED APPROACH OF AGENCY THEORY
MELIS, ANDREA
ROMBI, LUIGI
Category: GV = Accounting and Governance
This study investigates independent non-executive directors’ compensation from an agency theory perspective which incorporates country-level institutional characteristics. Using a sample of 5,585 independent non-executive directors serving on 805 boards of non-financial listed firms in 23 countries, we find that country-level, firm as well as director-specific characteristics explain INED compensation amount, while compensation design is fundamentally influenced by isomorphism at the country-level.
POSITION, STRATEGY AND EFFECTIVENESS IN THE LEASE STANDARD-SETTING PROCESS: SPECIAL ATTENTION TO THE BIG FOUR AUDIT FIRMS
MELLADO-BERMEJO, LUCÍA
PARTE, LAURA
Category: FR = Financial Reporting
The objective of this paper is to analyse position, strategy and effectiveness in the IASB-FASB’s lease standard-setting process, and in particular analysing Big Four audit firms’ comment letters. The study is mainly based on last re-exposure draft of 2013 and on final standards published in 2016. The sample contains 655 comment letters collected from IASB and FASB website in the public consultant period. We conduct a content analysis to find evidence about position, strategy and effectiveness. Additionally, we focus on Big Four audit firms’ comments letters to provide a comprehensive analysis considering the general approach, the definition of a lease, the reflection of the leases expenses on the lessee’s income statement, lessor accounting and lease terms and variable payments, some of the critical matters of the lease proposal.
TEXTUAL ATTRIBUTES AND ASSURANCE OF INTEGRATED REPORTING: DOES NEW CORPORATE DISCLOSURE ADD VALUE?
MELLONI, GAIA
CAGLIO, ARIELA; PEREGO, PAOLO
Category: FR = Financial Reporting
Integrated Reporting (IR) represents a recent and innovative initiative to connect in one company report a firm’s financial and non-financial performance in a clear and concise manner. This emergent approach is a relevant shift from existing reporting practices, which generally involve the production of financial statements in accordance with accounting standards and a separate, mostly voluntary, stand-alone sustainability report. We examine the alleged benefits associated with the adoption of IR in the context of South Africa where it is mandatory since March 2010. We specifically focus on the textual attributes of IR that capture both the “amount” (length) and the “style” of information (readability and tone). Our results suggest that IR readability and conciseness are associated with several market benefits for companies, in terms of firm value, stock liquidity, analysts’ forecast dispersion, as well as with ESG (environmental, social and governance) effects. We additionally explore the role of external assurance on IR as a credibility-enhancing mechanism for this form of reporting. In so doing, we shed light on the intended value-enhancing ability of IR for different types of users and audiences. Furthermore, we provide evidence that IR assurance moderates the negative associations among low quality textual attributes and the economic consequences investigated and that such results hold true considering both the presence of assurance and its quality.
THE EFFECT OF MANAGERIAL CAREER CONCERNS ON DISCLOSURE CHARACTERISTICS
MENACHER, JULIA
Category: FR = Financial Reporting
This paper studies the link between career concerns and narrative disclosure characteristics. While prior theoretical and empirical literature has focused on the withholding of bad news, I investigate whether more career-concerned managers strategically use the language attributes of tone, complexity, self-serving attribution, and financial sophistication to favorably influence the market’s assessment of their ability. To identify career concerns as a driver of disclosure characteristics, I use tenure as well as exploit exogenous variation in CEO and CFO remaining tenure on the board of directors provided by classified board structures. To attribute disclosures directly to individual managers, I analyze their disclosure behavior in the context of earnings-related conference calls of U.S. firms. The results indicate that career concerns affect executives’ disclosure characteristics, indicating that managers strategically exploit language in their outside communication. This study contributes to the disclosure literature by shedding light on the link between career concerns and manager-specific characteristics in narrative disclosures.
CONDITIONAL CONSERVATISM AND MANAGEMENT EARNINGS FORECASTS
MERCADO, FACUNDO
GARCÍA OSMA , BEATRIZ
Category: FR = Financial Reporting
We study the links between conditional conservatism and voluntary disclosure of management private information. We argue that conditional conservatism acts as a mechanism that lends credibility to voluntary disclosure by providing a 'hard' reporting benchmark that allows outsiders to better evaluate the truthfulness of management forecasts. Using a large sample of US fi rms we show that more conditionally conservative firms issue more good news forecasts. We also show that good news forecasts are associated with greater market reactions in conditionally conservative firms, signaling greater credibility of disclosure.
THE EFFECT OF CEO EXTRAVERSION ON ANALYST FORECASTS: STEREOTYPES AND SIMILARITY BIAS
MERKLE, CHRISTOPH
BECKER, JOCHEN; MEDJEDOVIC, JOSIP
Category: FA = Financial Analysis
In an experiment with professional analysts, we study their reliance on CEO personality information when producing financial forecasts. Drawing on social cognition research, we suggest analysts apply a stereotyping heuristic believing that extraverted CEOs are more successful. The between-subjects results with CEO extraversion as treatment variable confirm that analysts issue more favorable forecasts (earnings per share, long-term earnings growth, and target price) for firms led by extraverted CEOs. Increased forecast uncertainty leads to even stronger stereotyping. Additionally, personality similarity between analysts and CEOs has a large effect on financial forecasts. Analysts issue more positive forecasts for CEOs similar to themselves.
DRIVERS OF OVER- AND UNDERCOSTING IN SOPHISTICATED COST SYSTEMS: A PRODUCT PORTFOLIO PERSPECTIVE
MERTENS, KAI
MEYER, MATTHIAS
Category: MA = Management Accounting
This paper investigates antecedents of product unit cost accuracy and quantifies their effects with respect over- and undercosting from a portfolio perspective. It complements current literature on cost system design, which has mainly focused on the overall accuracy of cost systems. We develop a model which explicitly models production technology and conduct numerical experiments to identify what drives product cost accuracy and how the patterns of product cost estimation errors are influenced by these drivers. We show that individual products in sophisticated cost systems like Activity Based Costing (ABC) can be both over- and undercosted and that product cost biases are best described as a tendency, while traditional volume-based system produce cost estimates with a low variance. We quantify the effects of a number of variables on product unit cost accuracy and identify a general tendency of ABC systems to undercost mass-products while they tend to overcost complex products in small volumes. Finally, we provide insights how cost system refinements work from a portfolio perspective and document that strongly overcosted products benefit much more from refinements then strongly undercosted products.
WHAT REALLY MATTERS IN CEO SUCCESSION? EVIDENCE FROM SUDDEN CEO DEATHS
MERZ, ALEXANDER
WEIDEMANN, FELIX
Category: GV = Accounting and Governance
Chief executive officers (CEOs) are arguably the most important individuals in a firm and when they need to be replaced, the decision to pick a successor can have long-lasting implications. Understandably, the succession literature is a vast field, yet most studies are plagued by endogeneity issues, as any planned succession is a choice by the firm and thus subject to self-selection. We exploit the exogenous event of a sudden CEO death and employ a differences-in-differences method to approach more causal inferences about how the CEO succession impacts firm performance. Our results show that effects are strongest in the medium run (up to ten years) where we find a positive effect on accounting performance and Tobin's Q which is intensified by large cash holdings and attenuated by high levels of entrenchment.
DO PERSONAL VALUES HAVE A DIRECT OR INDIRECT INFLUENCE ON CORPORATE ENVIRONMENTAL DISCLOSURES?
MESA, ENRIQUE
HUSILLOS-CARQUES, FRANCISCO JAVIER; LARRINAGA, CARLOS; LUQUE-VILCHEZ, MERCEDES
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper aims to take a further step in the examination of the influence of internal factors over environmental information disclosed by companies. This study seeks to examine the influence of managers’ personal values over the environmental disclosure quality. The empirical analysis explores, using structural equation modelling, whether these values determine environmental disclosure quality directly, or whether this influence is mediated by factors related with the organisational structure. In this sense, the main contribution of this work is to show that the relationship between managers’ personal values and Environmental Disclosure Quality is not direct, but is fully mediated by the organisational structure.
THE MAXIMIZATION PROBLEM IN CREDIT UNIONS AND EARNINGS MANAGEMENT: EVIDENCE AND REAL EFFECTS
MESA TORO, ANDRES
GOMEZ-BISCARRI, JAVIER; LÓPEZ-ESPINOSA, GERMÁN
Category: FR = Financial Reporting
The credit union sector has undergone considerable growth in recent years, to the point of becoming a significant part of the overall financial system. However, given the relative low sophistication of credit union operations and of their depositor/member base, little attention has been paid to issues of financial transparency and, more specifically, to the use of accounting (earnings) discretion by credit unions. In this paper we provide the first comprehensive evidence of the use of earnings management strategies by credit unions through the use of discretionary charges to the loan loss provision. We show that credit unions carry out strategies of income smoothing, big baths and loss avoidance similar to those of other financial institutions. We then go one step further and show how this earnings discretion may be, at least partly, explained by their particular maximization problem (saver/borrower orientation), analyzing the effects of earnings discretion on the supply of loans by credit unions. We also examine a local exogenous shock and show how those credit unions which managed (increased) their earnings through discretion were able to achieve significantly higher rates of growth of their loan portfolio without losing members or deposits.
THE REVIVAL OF A MANAGEMENT ACCOUNTING TECHNIQUE: ZERO-BASED BUDGETING AND SHAREHOLDER ACTIVISM
MESSNER, MARTIN
COYTE, RODNEY; ZHOU, SHAN
Category: MA = Management Accounting
The paper examines the recent ‘revival’ of zero-based budgeting (ZBB). This particular approach to budgeting had initially emerged in the 1970s and has only recently reappeared on a larger scale, as evidenced by a surge in corporate and media attention since 2014. Our paper analyzes the origins behind this revival. By means of a qualitative analysis of media articles, we first trace the re-emergence of the concept and how it has been framed as a solution to corporate problems. We thereby identify the particular role of an activist shareholder, 3G partners, in bringing ZBB to the attention of corporate executives. We then use archival data to examine the firm characteristics that make it more likely that a firm has adopted, or is considering adoption of, zero-based budgeting. We find evidence that firms in certain industries and with cost inefficiencies are more likely to adopt the technique. Finally, we examine the economic outcomes of adoption. We find some evidence suggesting that adoption reduces cost inefficiencies. Overall, our paper highlights how shareholder activism can drive the adoption of a management accounting technique.
CSR PERFORMANCE PROXIES IN LARGE-SAMPLE STUDIES: “UMBRELLA ADVOCATES”, CONSTRUCT CLARITY, AND THE “VALIDITY POLICE”
MICHELON, GIOVANNA
BOUTEN, LIES; CHO, CHARLES H.; ROBERTS, ROBIN W.
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Corporate social responsibility (CSR) performance is a multidimensional, “umbrella” construct, that has generated concerns about construct validity and reliability of empirical proxies of CSR performance (CSRP), attracting the “validity police”. Although the breadth and depth of CSRP measurement continues to increase, its links to an underlying, agreed-upon theory remains in doubt. Meanwhile, a market for quantitative measurement of CSRP has grown dramatically. The purpose of our study is to review the CSRP constructs and proxies employed in studies published in a select set of journals and working paper series, and to determine how evidence may be influenced by the selection of CSRP proxies. We situate our analysis within the academic debate on the calibration of construct and proxy convergence and precision, which provides a basis for evaluating the empirical durability of CSRP constructs across proxy specifications. Using a combination of statistical techniques and interviews with professionals involved in the CSR ratings industry, our analyses show the potential for empirical results to be significantly sensitive to proxy selection and provide qualitative evidence that helps explain the need for more precise and thorough construct and proxy development. This research is critically important because accounting literature builds on significant results generated by different proxies for CSRP.
THE EFFECT OF ACTIVITY COST POOL INTERDEPENDENCY ON THE ACCURACY OF ENERGY COSTING INFORMATION – A SIMULATION STUDY
MICKOVIC, ANA
Category: MA = Management Accounting
The objective of this paper is to investigate factors that determine the size of errors in energy costing systems. Many companies, especially non-energy intensive ones, use imprecise methods for measuring and allocating energy costs. As a result, their energy cost information is likely to be inaccurate and they lack the information necessary for energy management. However, getting more accurate energy cost information comes at a cost. It requires investment in sub-metering and more advanced IT systems for capturing and managing data, as well as expenses for staff analyzing the data and preparing reports. A cost-benefit tradeoff is required. The main goal of this paper is to better understand which factors determine the accuracy of energy cost information. To model the influences of these energy specific factors on accuracy we use numerical simulations. Specifically, we model simplifications that occur as a result of interdependencies between activity cost pools and cause errors in energy costing systems. The benefits of investing in more refined energy cost information depend on how accurate a company’s current energy cost information already is. Therefore it is useful to know under which conditions even imprecise methods already provide relatively accurate information on energy costs, and under which other conditions more refined (and more expensive) methods actually provide significantly more accurate information.
IN THE SEARCH OF MEANING: ENVIRONMENTAL VALUES IN CSR AND FINANCIAL REPORTING.
MIDDLETON, ALEXANDRA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
In this explorative study, I investigate semantic structures of CSR and financial reports. I study how the meaning of environmental values is translated in the language of accounting and CSR reports. The study is conducted using a case company’s CSR and annual financial reports for 2009-2012. To analyse semantic structures, contextual and referential meanings of environmental values I use Tropes software. Semantic strictures analysis reveals that CSR reports uses intensity mechanism and leave space for interpretation and reflection on the feelings of their composers. Semantic analysis helps us understand the translation of environmental values’ meaning done by the reports preparers. Financial reports create the notion of impartiality and indifference, while CSR reports favor inclusive pronouns to emphasize participation and involvement. I find that environmental values have different referential meaning in two types of discourse. In CSR there is more connotation towards action and proactive thinking while in financial reporting there is connection to risk and to quantification. These findings add to the discussion of the potential bridging CSR and accounting functions, and consequently their discourses.
A POSITIVE ASPECT OF THE PERCENTAGE-OF-COMPLETION METHOD IN IT COMPANIES: EVIDENCE FROM JAPAN
MIHARA, TAKETOSHI
Category: FR = Financial Reporting
This paper compares the Percentage-of-Completion Method (PCM) with the Completed-Contract Method (CCM) of revenue recognition in IT companies. As intangible items such as customized system products become increasingly important for business clients, there is ongoing debate concerning the superiority of PCM revenue recognition. From a managerial perspective, the application of PCM to long-term contracts indicates effective internal control that meets PCM criteria while limiting management’s accounting discretion. On the other hand, from an agency theory perspective, PCM may increase agency costs due to revenue management (e.g. top-line smoothing) involving manipulation of completion percentages for each fiscal term. This paper examines discretionary changes in gross accounts receivable of listed IT companies in Japanese markets and finds a deterrent effect of PCM on revenue management. The paper contributes to accounting scholarship and practice by finding empirical support for the use of PCM for revenue recognition in the IT industry.
AUDITING MANDATORY NON-FINANCIAL INFORMATION: THE ASSOCIATION BETWEEN DISCLOSURE AND AUDIT FIRM - PARTNER CHARACTERISTICS
MIIHKINEN, ANTTI
BOZZOLAN, SAVERIO
Category: FR = Financial Reporting
The assurance of non-financial information is on the top list of the agenda of professional bodies since the enforcement of the European Directive that from 2017 onwards requires an estimated 6,000 large EU companies to prepare a Statement of Non-Financial Information that should be audited. By exploiting the unique features of a setting in which the disclosure of non-financial information and the positive assurance on the disclosure from an audit firm became mandatory, we investigate the relationship between the quality of disclosures and both audit firm and audit partner characteristics. Our evidence from this quasi-natural experiment suggest that audit partner expertise is one of the most important component of audit quality for narrative information and audit partner characteristics are important elements in explaining disclosure behavior and cross-sectional variation in disclosure quality after the enforcement of a regulation. Along this way, we extend the recent evidence on the audit partner effects in the assurance of numbers on the auditing of non-financial narrative information.
POPULISM, POLITICAL ACCOUNTABILITY AND ECONOMIC IRRATIONALISM IN THE GREEK NATIONAL HEALTH SYSTEM
MILIOS , VASILEIOS
Category: IC = Interdisciplinary/Critical
Populism is a term that dominates the political agenda. Citizens, politicians and media talk about populism and the disastrous consequences that it might have. This study contributes to the interdisciplinary accounting research by connecting the phenomenon of populism with economic rationalism. It will examine the parliamentary debate for the establishment of the Greek National Health System through the lens of political accountability, in order to evaluate how populism can have animpact on the proper development of accounting. In particular, it examined how populist politicians understand and use accounting concepts. The analysis of the discourses illustrated that populism constituted a master political narrative, it highly influenced political accountability as it was used in a context of excessive polarization and, it defined the ways in which politicians made themselves accountable to the citizens. Thus, accounting was used in order to enhance polarization and economic rationalism was undermined. Populism created a mentality that more and more resources have to be spent, without enhancing the necessity of providing a clear plan for the proper use of these resources. Accounting concepts such as planning and savings were completely ignored. In this way a negative relationship between populism and public sector efficiency has been identified.
THE ROLE OF MANAGEMENT TALENT IN THE PRODUCTION OF INFORMATIVE REGULATORY FILINGS
MILLER, BRIAN
HOLZMAN, ERIC; MILLER, BRIAN
Category: FR = Financial Reporting
This study examines the extent to which managerial talent plays a role in shaping the clarity of regulated financial disclosures. Consistent with the notion that more talented managers are likely to commit to more transparent disclosure policies, we find that more able management teams are associated with the production of more readable regulatory filings. To mitigate potential concerns that our results are driven by firm characteristics or current period performance, we show that our results are robust to the inclusion of firm fixed effects and hold across both high and low partitions of current firm performance. We also take advantage of a set of exogenous shock-based analyses (regulatory and death) that provide better identification that our results are driven by underlying differences in managerial talent. Finally, we isolate cross-sectional variation in annual report readability attributable to differences in underlying managerial talent and show that this component explains a significant amount of variation in post 10-K filing stock return volatility. In sum, our evidence suggests that managerial talent impacts a firm’s financial filing readability and has meaningful stock market implications.
AN INVESTIGATION INTO INVESTORS’ REACTIONS TOWARD CSR COMPANIES FOLLOWING AN ACCOUNTING MISSTATEMENT.
MINTCHIK, NATALIA
BOYLE, ERIK; WARNE, RICK
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We experimentally investigate nonprofessional investor reactions to misstatements for companies that issue corporate social responsibility (CSR) reports. We rely upon Stereotype Content Theory and Betrayal Aversion Theory to predict that investor reactions to misstatements will differ based on the level of CSR performance (average vs. high) and misstatement type (unintentional vs intentional). We expect that high-performance CSR companies are more likely to be forgiven for unintentional misstatements but are more likely to generate feelings of betrayal in investors for intentional misstatements. We find that while investors experience stronger feelings of betrayal in cases of intentional misstatements than unintentional misstatements, CSR performance shields a company from negative investor reactions to both types of misstatements: intentional and unintentional. We also report that this effect is due to investors having a higher assessment of warmth for high-performing CSR companies, and this sentiment fully mediates the relationship between CSR performance and investor reactions. Rather than feeling more betrayed following an intentional misstatement, we find that investors are more willing to forgive a high-performing CSR company than an average-performing CSR company in both conditions.
CEO TENURE, INFORMATION RISK AND AUDIT PRICING
MITRA, SANTANU
LEE, SANG MOOK ; SONG, HAKJOON
Category: AU = Auditing
We examine the relationship between CEO tenure and audit fees. After controlling for client and auditor attributes in the analyses, we find that audit fees are higher in the initial three years of CEOs’ service, suggesting that CEOs in their early career is likely to show high risk-taking behavior and manage earnings that increases the probability of financial misreporting. Auditors incorporate this risk in their audit pricing decisions resulting in higher audit fees. We also find that audit fees are higher in the final year of CEOs’ service, supporting the argument for departing CEOs’ horizon problem that CEOs in their final year of their service are more likely to manage earnings, and auditors consider this action as increasing reporting risk - in their audit pricing decisions, which leads to higher audit fees. However, we do not find any effect of CFO power on audit fees in these two time-periods, nor do we find that there is any difference in audit fees between the firms exhibiting corporate social responsibility and the firms that are not engaged in such socially responsible behavior. Finally, we find evidence that the firms with more effective audit committees pay relatively lower audit fees in initial years of CEOs’ service indicating that effective audit committees reduce financial reporting and audit risk during that time-period.The main results hold when the effects of several CEO characteristics, client bargaining power are included in the analyses.
WHY DO FIRMS RETAIN THEIR DEFINED BENEFIT PLANS? EVIDENCE FROM THE UK
MITROU, EVISA
HORTON, JOANNE; KIOSSE, PARASKEVI VICKY
Category: FA = Financial Analysis
This study examines the determinants of defined benefit (DB) pension plan provision in the United Kingdom (UK). Using hand-collected data for a sample of FTSE 100 firms sponsoring DB plans and a duration hazard research design, which models the cause-specific hazards of closure, we find that firms where human capital is important as well as firms where the CEO and CFO participate in the main DB pension plan as the rest of the employees are more likely to retain their pension plans, even though the results are stronger for CEOs. On the contrary, DB plans are less likely to be retained by firms that voluntarily adopted FRS 17. Overall, these results suggest that DB plans are an important retention and motivational tool consistent with the labor economics literature. In addition, CEO incentives in particular play an important role in DB plan retention decisions. Moreover, the results provide some evidence that the introduction of new accounting standards may be used to legitimize corporate decisions.
THE USEFULNESS OF THE MANAGEMENT REPORT ON INVESTMENTS DECISION-MAKING: EVIDENCE FROM EGYPT
MOHAMED, MOSTAFA
ALLINI, ALESSANDRA; FERRI, LUCA; ZAMPELLA, ANNAMARIA
Category: GV = Accounting and Governance
This paper aims to investigate the usefulness of disclosure provided in the Management Report by Egyptian firms from the viewpoint of institutional investors and financial analysts for their investment decisions. A survey was carried out formulating questions that cover both mandatory and voluntary management disclosure. The sample includes all Egyptian banks and insurance companies (as institutional investors), and the financial analysts who work at stockbrokerage firms. The final sample consists of thirty-six respondents working in institutional investors firms and seventy-eight respondents working as financial analysts. Our main findings reveal that our sample finds some voluntary information more useful than mandatory information, which highlights a gap between regulation requirements and users’ information needs. Moreover, the respondents consider information related to ownership structure more important than information on risks and forward-looking performance. Our findings could be useful to regulators for revising rules that ensure Management Report of high-quality information. In addition, our research could be helpful to managers because it provides a clear view of important voluntary disclosure items that should be include in the Management Report. Finally, this study provides evidence about the institutional investors and financial analysts’ perception on usefulness of information for their decision making.
ECONOMIC CONSEQUENCES OF HIRING WALL STREET ANALYSTS AS INVESTOR RELATIONS OFFICERS
MOLDOVAN, RUCSANDRA
HOPE, OLE-KRISTIAN; HUANG, ZHONGWEI
Category: FR = Financial Reporting
This paper examines economic consequences associated with the emerging practice of hiring financial analysts as investor relations officers (IRO). We posit that analysts-turned-IROs have a competitive advantage in communicating with investors, thereby lowering the effort expended by the investment community to process corporate disclosures. Using a unique manually-collected dataset on the employment history of IROs (compiled from LinkedIn, Capital IQ, RelationshipScience.com, and appointment press releases) and a difference-in-differences research design with matched control sample, we first show that 8-K disclosure readability improves after firms hire former analysts as IROs through reductions in length, complexity, and the proportion of uncertain financial terms. We also find some evidence that these companies are more likely to host analyst/investor days. Perhaps most importantly, we find increases in analyst following, institutional investors, and stock liquidity after hiring a former analyst as IRO. Overall, our findings suggest that firms benefit from hiring Wall Street analysts as IROs.
TRADE CREDIT VS. BANK LOAN DURING ECONOMIC CYCLES – COMPLEMENTS OR SUBSTITUTES?
MÖREC, BARBARA
Category: FA = Financial Analysis
The relationship between trade and bank credit is one of the frequent research topics in both the banking and finance literature. Nevertheless, there is still contradictory and limited empirical evidence on how general economic condition changes affect this relationship and if they have a differential impact on different classes of firms. This paper builds on Love et al. (2007) study of crisis effect on trade credit vs. bank loan relationship, and on Huang et al. (2011) analysis of the counter-cyclical substitution effect. I employ robust fixed effects panel regression model with time varying coefficients on the full population of Slovenian non-financial companies (including micro companies) for the 2006-2016 period. Results confirm the substitution effect between trade credit and bank loan for large, medium-sized and small companies, where the effect’s strength changes with firms’ sizes and economic conditions. However, for micro firms this relationship evolves from substitution to complementarity as long-term credit crunch evolves into liquidity crisis. This indicates tighter conditions to get a bank loan lead to tighter conditions to grant trade credit to micro firms, i.e. firms with low collateral.
INTRA-VARIABILITY IN PRESIDENT’S LETTERS: OBFUSCATION IN CRISIS?
MORENO, ALONSO
Category: FR = Financial Reporting
A deliberate location of information within the corporate disclosure can be used for misleading purposes. It could result in capital misallocation. This study analyses if managers provide systematically information in different locations of the president’s letters with impression management purposes. The paper examines the variability intra-document in syntactical complexity and attributions between companies in two radically market-based different periods, determined by the international financial crisis. The setting is provided by a civil-law country, Spain. The results show that, in line with impression management, managers are more prone to use variability in attributions, but not in syntactical complexity. Financial Services and Real Estate is the sector with the highest evidence of impression management. This latter finding can be related with the key role that this sector played in the detonation of the financial and economic crisis.
ANALASYS OF FACTORS AFFECT THE NATIONAL EXPENDITURE EFFICIENCY: A CROSS COUNTRY STUDY
MORENO ENGUIX, MARIA DEL ROCIO
GRAS-GIL, ESTER; LORENTE-BAYONA, LAURA VANESA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper analyses national expenditure efficiency effects of e-government; human capital or population’s level of education; state of development; democracy and corruption. On a second step, we reproduce the same model by focusing on the main government functions -education; health care; and social protection-. Our results show that e-government development; as well as human capital promote national expenditure efficiency. On the other hand, corruption promotes public inefficiency.
DO RISK DISCLOSURES MATTER WHEN IT COUNTS? EVIDENCE FROM THE SWISS FRANC SHOCK
MUHN, MAXIMILIAN
HAIL, LUZI; OESCH, DAVID
Category: FA = Financial Analysis
We examine the long-term transparency effects of past risk disclosures following an exogenous shock to macroeconomic risk. In 2015 the Swiss National Bank (SNB) abruptly announced it would discontinue the longstanding minimum euro-Swiss franc exchange rate. We show that firms with more transparent disclosures regarding their foreign exchange risk exposure ex ante exhibit significantly lower information asymmetry ex post. The gap in bid-ask spreads appears within 30 minutes of the SNB announcement and persists for two weeks. We confirm the informational role of past risk disclosures with a field survey of three groups of market participants: (1) Sell-side analysts emphasize existing disclosures to evaluate the translational and transactional effects of the currency shock. (2) Lending banks’ credit officers rely on past disclosures as the primary resource available for smaller unlisted firms in the immediate aftermath of the shock. (3) Investor-relations managers use existing financial filings as a key internal information source when communicating with external stakeholders. In sum, the results imply that risk disclosures continue to attenuate information asymmetry and the costs of adverse selection well beyond their initial publication date.
REGULATORY DISCLOSURE AND THE IRISH FINANCIAL SERVICES OMBUDSMAN
MULCAHY, MARK
HOURIGAN, NIAMH
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study investigates the effectiveness regulatory disclosure, specifically the power to name and shame persistently offending financial service providers (FSPs) in its annual reports awarded to the Irish Financial Services Ombudsman (FSO) in 2013. The existing literature on ombudsmen focuses mainly on the global spread of the ombudsman concept since the 1960s but is largely silent on the effectiveness of financial ombudsmen. As the first country to award its financial ombudsman name and shame powers, Ireland represents a novel setting in which to test the impact of regulatory disclosure by an FSO on the behaviour of FSPs. Our results show that the number of complaints lodged against FSPs dropped precipitously in its immediate aftermath (in a comparison of means test p < 0.01) and, following a one-year lag, so did the percentage of complaints lodge that proceeded to a full investigation and finding (in a comparison of means test p = 0.07). This study argues that despite international scepticism on the efficacy of name and shame strategies, the experience of the Irish FSO suggests that regulatory disclosure had considerable impact in shaping the preferences of FSPs and improving the effectiveness of the FSO.
25TH ANNIVERSARY OF THE EUROPEAN ACCOUNTING REVIEW: A BIBLIOMETRIC ANALYSIS
MULET FORTEZA, CARLES
HORRACH ROSELLÓ, PATRICIA; MERIGÓ, JOSÉ M.; VALLUZZI, CHIARA
Category: IC = Interdisciplinary/Critical
The European Accounting Review (EAR) is an international journal of the European Accounting Association (EAA). EAR publishes papers related to business, management and accounting. The first issue was published in May 1992, thus celebrating its 25th anniversary in 2017. Inspired by this event, this paper shows a lifetime overview of the journal by using bibliometric indicators. The aim of this paper is to provide a complete overview of the academic structure of the journal. This analysis includes key factors such as the most cited articles, leading authors, originating institutions and countries, plus an insight of the publication and citation structure. In order to conduct that analysis, the paper uses the Scopus database for all the journals’ information available in that database (1992-1995 and 2007-2016). We collected the non-available information for the remaining years (1996-2006) from the ‘view secondary documents’ of Scopus database and the EAR webpage. Additionally, the paper uses the VOS viewer software in order to create a graphic map of the bibliometric results. This graphical analysis uses bibliographic coupling and co-citation. By using this analysis we get a deeper understanding of how EAR is linked to other journals and researchers across the globe. Results indicate that EAR is a journal which must be taken into account in the area of business, management and accounting by a wide range of authors, institutions and countries from all over the World.
LESS CHEATING? THE EFFECTS OF PREFILLED TAX RETURNS ON COMPLIANCE BEHAVIOR OF TAXPAYERS
MÜLLER, NADJA
FOCHMANN, MARTIN; OVERESCH, MICHAEL
Category: TX = Taxation
As a consequence of the digital transformation, taxpayers are more and more confronted with already prefilled tax returns instead of completing blank forms. However, there is almost no evidence on how prefilled tax returns impact compliance behavior. In a controlled experiment with 213 participants, we study this research question. We show that prefilled tax returns have a meaningful influence on compliance behavior and consequently on tax revenues. If tax returns are correctly prefilled, we find that subjects are significantly more tax compliant than with blank tax returns. However, in cases of an incorrect prefilling, our results suggest that prefilling can have reverse and asymmetric effects. If prefilled income is lower than actual income, individuals tend to reduce tax compliance compared to correctly prefilled tax returns. In contrast, if prefilled income is higher than actually income, no further influence on compliance behavior is observed.
COLLEGE-FIRM DISTANCE AND EARNINGS MANAGEMENT
MULYA, ANDIKA PERWIRA
FILIP, ANDREI; LUI, DAPHNE
Category: FA = Financial Analysis
This paper examines the association between college-firm distance (i.e., the geographical location of the college that a CEO attended relative to the location of the firm’s headquarters) and earnings management. Past research shows that a person’s college experience is often important in shaping their identity and social network, and they are likely to develop good local social connections and knowledge in the region during their college years. We expect that these local social connections decrease information asymmetry and thus increase the scrutiny from local stakeholders, which in turn increase the costs of conducting earnings management. In addition, their local networks and knowledge may allow CEOs to make more accurate earnings forecasts, which decrease their incentive to manage earnings to achieve their own forecasts. As college-firm distance increases, the CEO’s social connection and their local knowledge advantages decrease, and the CEO’s incentive to manage earnings increases. Consistent with this view, we find that college-firm distance is positively associated with accruals earnings management. Further analyses show that the effect is mainly driven by incomeincreasing abnormal accruals. In addition, we also find that this relationship is only statistically significant for big firms, consistent with the view that CEOs of big firms who attended colleges farther away from their firm’s headquarters tend to be more overconfident about their performance, leading to them having to manage earnings to meet or beat their overoptimistic earnings forecasts. Overall, this paper shows that local connections and knowledge that CEOs acquired during their college time reduces their incentives to conduct earnings management.
ARE AUDITORS’ ASSESSMENTS AFFECTED BY PRIOR AUDIT OPINIONS?
MUNOZ-IZQUIERDO, NORA
CAMACHO-MIÑANO, MARÍA-DEL-MAR; PASCUAL-EZAMA, DAVID
Category: AU = Auditing
When conducting an audit for a firm with a conclusive poor (healthy) financial condition, the result leads to an indubitable going concern (unqualified) opinion. However, when financial distress symptoms are not that explicitly interpreted by the accounting data, the audit opinion could be influenced by diverse factors. The aim of this paper is to analyze whether the prior year audit opinion can sway the next report choice in doubtful financial conditions in contrast with unequivocal negative conditions (experiment 1). Additionally, we test if auditor experience tempers this effect (experiment 2). In both between-subjects experiments, the prior year opinion is manipulated in four levels. In the first level, the prior report is not provided. In the other three levels, participants receive different prior opinions: unqualified, unqualified with a matter section, or going concern. Results show that unqualified and going concern prior opinions persuade auditors when suggesting the next report choice more than other situations (unavailability of prior report or a matter paragraph issued). In addition, our evidence suggests that auditor experience mitigates the influence of prior opinions on auditors’ judgments.
THE USE OF ENVIRONMENTAL REPORTING – A STORY OF STEWARDSHIP FROM THE PERSPECTIVE OF NGO’S.
MUNRO, KIRSTY
SHRIVES , PHILIP
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Purpose: This paper explores the use of environmental disclosure by Environmental Non-Governmental Organisations) and in what way the information is used. Previous studies have explored the extent to which this information is used and the relevancy to certain groups but the question remains vacant as to how exactly the information is used. It commences by discussing the gap in the environmental reporting literature in particular the absence of understanding around the use. Relevant theory is covered including stewardship theory which traditionally is adopted within a financial reporting context but provides invaluable insight to the area. Design/methodology/approach: The data consists of 15 semi-structured interviews with senior representatives of major UK NGOs. The data provides insight as to if the reports are used and if so how in particular the information is used. Analysis is adopted from O’Dwyers earlier work of thematic coding through an intensive reflection process. Findings: A use of these reports is clear from the findings as well as a demand for the information. Many of the groups provided explanation of using such information for the purposes of stewardship, while others a resource decision making use (typically expected of shareholders). In addition, there were other ways in which these groups highlighted the use of this information; through self-stewardship and a way in which to instigate relationships with organisations. These responses indicate environmental reports as a way of providing somewhat key information for this user group. Originality: This paper is an extension of somewhat limited work exploring these theories in the area of demand for environmental reporting. Stewardship theory has faced increased attention particular in relation to financial reporting but is yet to receive significant focus within other forms of accountability and communication. Additionally, the research provides new insight to one particular group’s use of such information and adds to the theory further. Finally, it is one of the first steps to recognise the similarities between the demands of this group and other stakeholders with regards to environmental reporting.
STATIONARY CONTRACT AND TIMELINESS OF ACCOUNTING INFORMATION
MURAKAMI, YUTARO
MIWA, KAZUNORI ; SHIIBA, ATSUSHI; TAGUCHI, SATOSHI
Category: FR = Financial Reporting
This paper investigates the potential relationship between contractual rigidity and the timeliness of accounting information in a two-period principal-agent setting. Specifically, we first analytically and then experimentally examine the role of the timeliness of accounting information in different contractual settings, that is, flexible and stationary contracts. Under the flexible contract regime, a principal can set different fixed wages and incentive weights in the first and second periods, respectively. In contrast, under the stationary contract regime, a principal must set the same fixed wages and incentive weights over the two periods. We compare the overall performance in high- and low-timeliness cases and find the following three main results. First, we find that the timeliness of accounting information plays a key role under the stationary contract regime. Second, we show that the timeliness of accounting information does not matter under the flexible contract regime because a principal can accommodate the timeliness of accounting information by adjusting the parameters of a compensation contract. Third, we analytically show that the overall performance under the flexible contract regime is better when compared to the stationary contract regime. However, our experiment shows that the efficiency of the stationary contract exceeds the efficiency of the flexible contract.
CAN VISUALIZATIONS LINKED TO SOURCE FINANCIAL INFORMATION MITIGATE THE EFFECT OF DISTORTED GRAPHS?
MURTHY, UDAY
GAYNOR, LISA; ZHANG, YIBO (JAMES)
Category: IS = Accounting and Information Systems
This study investigates whether using hyperlinks that connect summarized financial graphs with detailed financial statement information reduces the effect of graphical distortions on nonprofessional investors’ perceptions of firm performance. Using 206 undergraduate accounting students as proxies for nonprofessional investors, we find that while distorted graphs do bias nonprofessional investors’ perceptions of firm performance, the provision and use of hyperlinks to the underlying source information eliminate those effects (i.e., de-bias). Using the dual-process theory of cognitive processing (Kahneman and Frederick 2002; Evans 2006, 2008), we find that hyperlinks enhance the overriding effect of System 2 processing (i.e., analytical processing) on System 1 processing (i.e., intuitive processing) and indirectly reduce nonprofessional investors’ perceptions of a firm’s future earnings growth potential. The study contributes to standard setting as well as financial reporting practice by providing empirical evidence that the SEC’s policy guidance on implementing hyperlinks has benefits to nonprofessional investors. Second, it contributes to both the literature on distorted graphs and hyperlinks by suggesting hyperlinking to source data mitigates the effects of graphical distortions.
ON THE RELATIONSHIP BETWEEN ACCRUALS AND CASH FLOWS: EARNINGS AS A CONFOUNDING VARIABLE
NA, HYUN JONG
KANG, SOK-YON; YANG, SEUNGHEE
Category: FR = Financial Reporting
Bushman, Lerman, and Zhang (2016) present remarkable evidence contradicting the long held-notion that accruals and cash flows are negatively correlated. We postulate that the absence of a consistent negative correlation can be better understood by recognizing that there exists a “confounding” variable (Elwert and Winship 2014), namely, earnings. We offer a conceptual framework based on the premise that accounting earnings are the best available indicator of economic events which precipitate the creation of accruals and cash flows. We then demonstrate conceptually and empirically that the negative correlation between accruals and cash flows is not to be taken as an empirical regularity. We further show that, once we condition the accrual-cash flow regressions on earnings partitioned on a portfolio basis, the negative correlation and explanatory power emerge consistently. Our study demonstrates the importance of considering earnings and the underlying economic activities to understand accrual-cash flow relationships.
CEOS' OUTSIDE OPPORTUNITIES AND RELATIVE PERFORMANCE EVALUATION: EVIDENCE FROM A NATURAL EXPERIMENT
NA, KE
Category: GV = Accounting and Governance
This paper examines the effect of CEOs' outside opportunities on the use of relative performance evaluation (RPE) in CEO compensation. My tests exploit the staggered rejection of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous increase in CEOs' outside opportunities. I find that the rejection of the IDD leads to a significant increase in the sensitivity of CEO pay to systematic performance (less RPE). This increase is more pronounced for CEOs with greater labor market mobility and not related to measures of governance quality. These results suggest that firms link CEO pay to systematic performance to retain talent and ensure participation.
THE QUALITY AND MARKET PRICING OF NONRECURRING ITEMS AFTER THE IFRS ADOPTION
NAGAR, NEERAV
AGARWAL, NISHANT
Category: FR = Financial Reporting
Using a sample of firms from mandatory IFRS adopting countries that reported significant nonrecurring items during the fiscal year, we find that the persistence of nonrecurring items has increased for the IFRS firms relative to the non-IFRS benchmark firms after mandatory IFRS adoption. We also find that the propensity of firms to use positive nonrecurring items in order to avoid losses and to avoid decline in earnings has decreased after the IFRS adoption. Our results suggest that managers are using the inherent flexibility in these standards to better convey their private information about the future prospects of the firm. We also find that the IFRS adoption has led to a more efficient market pricing of both positive and negative nonrecurring items.
CAN THE FRAUD TRIANGLE PREDICT FRAUDULENT FINANCIAL STATEMENTS?
NAKASHIMA, MASUMI
Category: GV = Accounting and Governance
The reliability for the capital market in Japan has fallen by accounting fraud which occurred at one of the excellent firms in Japan. Why did accounting fraud occur in Japan? First, it is likely that governance mechanism and the internal controls system did not work well in Japan. Second, it is likely that since forensic accounting education is not cultivated in Japan, there have been no chances to learn theory of fraud systematically and theoretically. Although a forensic accounting course will first be opened in Japan in Fall 2017, Huber (2017) argues that the fraud triangle does not apply to fraud and the model that attempts to predict and detect fraud should be considered, since the fraud triangle is not supported by empirical studies. Urgent studies to clarify a fraud mechanism and to detect and predict fraud will be needed. This is the motivation of my study. Therefore, I examine whether the fraud triangle can apply to financial statement fraud. The effectiveness of the fraud triangle should be clarified through this analysis.
BOARD REFORM REGULATION AND CHERRY-PICKING DIRECTORS
NAM, JONATHAN
Category: GV = Accounting and Governance
This study examines how the endogenous mechanism that determines board structure is affected by the adoption of board independence regulations. Although being mandated to have a high-independent board uniformly, firms still try to tailor board structure to firm-level economic factors by choosing different board remodeling options. Empirical evidence shows how firms adapt themselves to a new environment and rebuild board structure accordingly.
DO HIGHER LEVELS OF THE ENFORCEMENT OF ACCOUNTING STANDARDS IMPROVE INVESTMENT EFFICIENCY? EVIDENCE FROM IFRS-ADOPTING COUNTRIES
NARESWARI, PINGKAN
JIANG, WEI; STARK, ANDREW W
Category: FA = Financial Analysis
The purpose of this study is to investigate the impact of differential levels of the enforcement of accounting standards on a particular capital market outcome - investment efficiency. We investigate this impact using a sample of listed firms from countries that use IFRS. We find strong evidence that the higher the level of enforcement of accounting standards, the higher the level of investment efficiency. Specifically, higher levels of the enforcement of accounting standards result in lower investment-cash flow sensitivities, and a higher sensitivity of investment to growth opportunities. We also find that higher levels of the enforcement of accounting standards result reduce both underinvestment and overinvestment problems.
BETTER TO PREVENT THAN TO CURE: ASSESSING FIRMS’ HEALTH
NEGAKIS, CHRISTOS
KOUSENIDIS, DIMITRIOS; LADAS, ANESTIS
Category: FA = Financial Analysis
Previous research has provided indicators of financial distress based on discriminant analysis and binary regression models, among others, where the causality between the predictors of financial distress and the financial distress indicator had to be determined. However, financial distress may manifest in a number of ways and is of complex nature. Furthermore, for some of the financial distress measures, the estimation of the parameters of the model, used to calculate the financial distress measure, is based on a dependent variable, which in most cases is a binary variable related to the occurrence of bankruptcy. In this respect, the estimated measures are rather related to the prediction of an extreme event (bankruptcy) rather than the deterioration of financial health. The present study attempts to provide a new measure of firms’ financial health based on the use of economic network analysis as well as a set of variables found to predict financial distress in previous studies. The novelty of this approach relates to the ability of economic networks to map relations in a system. In this respect, by viewing the firm as a system, the network is used to search for relations that become stronger among financial ratios that have been found to relate to financial distress. The proposed measure is found to relate directly to proxies of financial distress as well as to have incremental predictive ability over other well-known measures of financial distress.
SOCIO-EMOTIONAL WEALTH AND ACCOUNTING DISCRETION IN FAMILY FIRMS: THE CASE OF GOODWILL WRITE-OFF
NERI, LORENZO
GRECO, GIULIO
Category: GV = Accounting and Governance
In recent years, academic research has been featured by an increasing interest on accounting choices in family firms. Basing on the socio-emotional wealth (SEW) theory, this paper investigates the differences within family firms regarding accounting discretion in goodwill impairment decisions. It analyses a sample of US public firms in the period 2003-2015. The findings show that first generation family firms are more likely to exploit accounting discretion in goodwill impairment decisions than second or later family firms. First generation family firms display SEW concerns different from those of second or later generation family firms. This leads to a different approach to goodwill impairment. Our paper can contribute to SEW studies and to the literature on earnings management in family firms. Family firms cannot be considered as a homogeneous group with the same propensity to exploit the discretion allowed by accounting rules in highly subjective fair value measurements. Generational change significantly influences the firm’s accounting choices, leading to more credible earnings and assets values for second or later generation family firms. This study suggests that earnings management literature needs a more fine-grained investigation on how family ownership structures affect accounting discretion.
TOP MANAGEMENT TEAM INCENTIVE DISPERSION AND EARNINGS QUALITY
NG, JEFF
KIM, TAEJIN; KYUNG, HANGSOO
Category: MA = Management Accounting
This paper examines the relation between the dispersion in pay-performance-sensitivity among the top management team and earnings quality. We first develop a model analyzing managers’ incentive to manipulate earnings when their compensation is dependent on firm value, such as with equity and options grants. Generally, equity and options compensation creates incentives for managers to manipulate earnings upward. Our model shows that dispersion in pay, however, hampers the coordination between managers to manipulate earnings, resulting in better quality financial reporting. We empirically test our theory and find a generally positive relation between pay-performance-sensitivity dispersion and earnings quality. The stock market appears to understand these effects and price the firms’ equity accordingly.
CDS TRADING AND STOCK PRICE CRASH RISK
NG, JEFFREY
LIU, JINYU; TANG, DRAGON YONGJUN; ZHONG, RUI
Category: FR = Financial Reporting
Credit derivatives provide an alternative trading venue especially for pessimistic investors, facilitating the revelation of negative information that corporate managers attempt to hide. Supporting such information impounding view, we find that stock price crashes are less frequent after the inception of credit default swaps (CDS) trading on a firm’s debt. The stock crash-reduction effect is stronger for firms whose managers actively manipulate the information content of their corporate reports or when managers can benefit from higher share prices. Our study offers novel evidence on how financial innovations in the debt market help improve the price discovery of the equity market.
CSR DISCLOSURE, FINANCIAL REPORTING QUALITY, AND INFORMATION ASYMMETRY
NGUYEN, LAN-PHUONG
TOUCHAIS, LIONEL; VIVIANI, JEAN-LAURENT
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Using firm-level data from 39 countries, we examine the relationship between CSR disclosure and firm’s information asymmetry with the presence of financial reporting quality at firm-level and country-level. We found a negative relationship between CSRD and information asymmetry. We also found that financial reporting quality positively determines the amount of CSR information in CSR reports. Using two sub-groups: low-CSRD firms and high-CSRD firms, there is strong evidence that firms which disclose a greater amount of CSR information have a lower degree of information asymmetry, but this negative relationship is less pronounced or even disappears in firms with high financial reporting quality. It suggests that financial and CSR disclosure act as substitutes in reducing information asymmetry. Finally, there is a weak evidence for the negative effect of institutional financial reporting quality on CSRD as well as its moderation on the link between CSRD and information asymmetry. This study promotes the contingent role of financial reporting quality in CSRD-related research, enriching the understanding of CSR disclosure and its consequences.
HOW DO ANALYSTS VALUE NEW-ECONOMY COMPANIES? EVIDENCE FROM US INFORMATION TECHNOLOGY AND BIOTECHNOLOGY FIRMS
NGUYEN, TRANG
HO, TUAN QUOC
Category: FA = Financial Analysis
This paper investigates the valuation model choice of sell-side equity analysts when valuing information technology and biotechnology firms, which can be classified as new economy companies. Based on a content analysis of 180 equity research reports from for 18 US-listed firms published from July 2013 to June 2015, we find that analysts are more likely to use discounted cash flow (DCF) model when valuing new economy companies. We also find that analysts with CFA designation are more likely to use DCF to value new economy firms. The valuation model choice, however, does not have significant impact on the target price forecasting performance of equity analysts. The findings suggest that analysts choose valuation models with more flexibility when valuing new economy companies which are associated with higher uncertainty and their valuation model choices do not necessarily leads to more reliable stock price forecasts and investment recommendation.
ACCOUNTING CONSERVATISM AND BANKING EXPERTISE OF BOARDS OF DIRECTORS
NGUYEN, TRI TRI
BUI, HUNG; DUONG, CHAU; NGUYEN, NGUYET
Category: GV = Accounting and Governance
In this study, we examine the role of banking expertise on the board of directors on accounting conservatism. We provide an innovative way to measure banking expertise based on working history in banks of all individual directors on the board. We argue that directors with banking expertise would have information advantage about the market-level demand for accounting conservatism, hence having them on the board can help non-financial firms avoid excessive conservatism. Also, directors with banking expertise often possess an interpersonal network in the banking industry which can act as a private communication channel in debt contracting, resulting in less demand for accounting conservatism at firm-specific level. We find that accounting conservatism is negatively correlated with our measures of banking expertise on the board. The results are not affected by self-selection bias and robust as we use different models. The evidence has some implications for boards of directors.
INFERRING AGGREGATE MARKET EXPECTATIONS FROM THE CROSS-SECTION OF STOCK PRICES
NICHOLS, DAVID CRAIG
BALI, TURAN; WEINBAUM, DAVID
Category: FA = Financial Analysis
We introduce a new approach to predicting market returns that combines the cross-section of dividends, earnings, and book values to explain current stock prices and extract aggregate expected returns. Our measure of market return expectations is strongly correlated with popular ex-ante equity premium measures and business cycle variables. We infer aggregate risk aversion using our measure and find estimates that are economically sensible and vary over time with the business cycle. The proposed measure portends a significant fraction of the time-series variation in stock market returns at horizons of one month to one year, achieving an out-of-sample R2 of 12.6 percent at the annual horizon, where its predictive ability dominates that afforded by popular predictive variables. We also find that our measure predicts returns in international markets.
REPUTATIONAL CAPITAL AND OPERATING PERFORMANCE: THE POWER OF PRESS SHAPING CORPORATE REPUTATION
NIEDERKOFLER, THOMAS
Category: FA = Financial Analysis
This paper examines the association of corporate reputation and firm performance on a balanced panel data sample of 49 FTSE UK firms over the period 2005-2015. Analysing 169,994 news media articles from four main UK newspapers (Financial Times, The Times, The Guardian and The Mirror), I construct a corporate reputation index. Next, the association of corporate reputation and operating performance, as well as with profit drivers (sales, profit margin, operating expense and salaries expense) are investigated. Results from regression analysis provide evidence that corporate reputation has a strong positive association with operating performance, sales growth and profit margins and outperforms Britain’s Most Admired Companies index [used as a benchmark] as an explanatory variable. However, the study was not able to provide any evidence of a significant association between corporate reputation and operating expenses or salaries expenses. Nevertheless, this study contributes to the academic literature on unrecorded intangible assets by introducing a new [objective] measure of corporate reputation and providing evidence of its association with operating performance through various profit drivers.
ACCOUNTING AND CORPORATE GOVERNANCE IN CHRISTIAN ORGANIZATIONS
NIEDERWIMMER, KARIN
FELDBAUER-DURSTMÜLLER, BIRGIT
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Despite the importance of religious organizations, not much research activity has yet examined the fundamental relationship between accounting and religion or religious organizations. An increasing focus of scientific investigations on the relationship between religion and modern management systems is apparent. The objective of the present literature review is to present a broad view of the current state of the journal literature on accounting in Christian organizations. Acceptance and design of accounting, as well as regulations of responsibility, are strongly influenced by underlying corporate governance. Role-related questions about people affected by accounting in Christian organizations potential for conflict and can impact the value and quality of accounting. In this context, this review aims to discuss contextual particularities identified by studies and to clarify parallels and differences. The research question was answered through a systematic literature review in order to get a current state of research on accounting in Christian organizations. The findings show: 1)Christian organizations today depend more than ever on the goodwill of stakeholders. 2)Stakeholders demand transparent disclosure based on professional accounting standards and ethically founded corporate governance. 3)A stable financial basis enables them to achieve spiritual targets. 4)Conflicts occur primary on the personal level, when individual roles and expectations are threatened.
ANALYSTS’ FORECAST BEHAVIORS TO FINANCIAL AND NON-FINANCIAL INFORMATION DISCLOSED FROM THE SUPPLY CHAIN COMPANY
NIEN, KAI-TING
Category: FA = Financial Analysis
This study examines whether both financial and non-financial information on analysts’ forecasts transfer along the supply chain for the semiconductor industry. I find that when releasing or revising earnings forecasts, analysts incorporate both financial and non-financial information contained in conference calls held by their downstream firms in the supply chain. In addition, the extent to which such information is incorporated in analysts’ forecasts is conditioned on the echelon distance in the supply chain. Specifically, I find that the non-financial information is more informative for related upper-stream analyst than financial information when the echelon distance goes further in the supply chain. Finally, I find that foreign analysts rely on both financial and non-financial information in conference calls held by its downstream supply chain partners, while local analysts focus mainly on non-financial information.
MANDATORY BOOK TAX CONFORMITY AND ITS EFFECTS ON STRATEGIC REPORTING AND AUDITING
NIGGEMANN, FELIX
Category: TX = Taxation
Financial reporting standard setters and tax regulators jointly determine the level of mandatory book tax conformity that describes the correlation between tax and financial accounting treatments. This paper provides a theoretical framework of the strategic interactions in a dual reporting and auditing process in that a manager issues a tax and a financial report subject to potential audits by a tax and an independent auditor. I analyze the effects of exogenous changes in the level of mandatory book tax conformity, i.e. IFRS adoptions and the CCCTB, and discuss their potential implications on the taxation process and on the properties of financial reports. I show that the tax and the financial reporting and auditing processes are strategically interrelated. Furthermore, I find that moving towards a one book system improves the efficiency of the taxation process but decreases strategic auditing incentives that cause conformity reports to become red flags for financial statement users. When financial reporting incentives are strong, some managers find it optimal to overpay taxes for fraudulent earnings that remain undetected more frequently. The reliability of financial reports is ambiguously affected by changes in the level of mandatory book tax conformity. The results are useful to guide the political and academic book tax conformity debate and highlight the importance of jointly considering the strategic interplay of the tax and the financial reporting processes.
INTERDEPENDENCE OF CAPITAL AND INCENTIVE PROVISION
NISCH, MARKUS
Category: MA = Management Accounting
Capital budgeting is an important management process within firms. Empirical evidence suggests that incentive aspects and capital budgeting are interdependent and should be analyzed in combination. This paper analyzes a model with a founder (agent) who approaches a firm (principal) for funding and execution of a proposed project. The execution of the project requires productive effort by the founder and the firm can decide whether to allocate capital before or after effort is exerted. The founder can also exert lobbying effort to influence the capital allocation decision. The model shows that the firm takes into account the misallocation costs and the incentivization costs that differ for the capital allocation options. It can be shown that the optimal capital allocation mechanism and corresponding incentive provision depends on environmental conditions and firm characteristics. Capital budgeting schemes should therefore not only vary between firms but also change and adapt over time. Lobbying effort proves to be partially beneficial and therefore the firm wants to control this influence activity in some scenarios to reduce misallocation costs. However, we also find that there are scenarios where output sharing as an incentive instrument is not sufficient to fully control productive and lobbying effort.
THE EFFECT OF AGGREGATE PERFORMANCE MEASUREMENTS ON FLEXIBLE ROLE ORIENTATION: A COMPUTATIONAL SIMULATION
NISHII, TAKESHI
KONDO, TAKAHITO
Category: MA = Management Accounting
The objective of this study is to reveal a mechanism that a relaxed application of controllability principle accompanied by aggregate performance measures leads to flexible role orientation. Although the prior literature has acknowledged a negative effect that the relaxed application for the principle increases the members’ role stress, some of the studies have emphasized their flexible attitudes toward given works without any regard to their own profits. However, such optimistic perspective has veiled a mechanism bridging these opposite effects. By using a computational simulation, called agent-based modeling, we have investigated how the flexible role orientation is formed in a network structure in which distributed agents interact with the neighbors to improve their contributions given a level of aggregation. We found that more aggregate measures are more likely to enhance the formation of flexible role orientation through the observation of micro-macro loop (i.e., repetitive interactions between each agent’s activities and the emergent outcome). Based on a mathematical feature of this model, this finding suggests that even if the aggregation negatively affects the agents' performances, an ambiguity accompanied by the aggregate measures is likely to provoke the agents to show their flexible role recognitions because they cannot recognize such negative effects correctly.
DETERMINANTS IN THE CREDIT RATING OF FINANCIAL INSTITUTIONS IN EMERGING AND NON-EMERGING COUNTRIES
NIYAMA, JORGE KATSUMI
ALVES DANTAS, JOSÉ; GOMES NETO, JOÃO
Category: FA = Financial Analysis
The Basle Accords and the financial crisis that was triggered after 2007, highlighted the importance of the credit rating of financial institutions assigned by the main rating agencies. Shareholders, investors, governments and regulators regard this rating as a sign of the health of financial institutions. As the importance of this rating for the banking sector has increased, questions have arisen about the existence of disparities between the rating attribution of financial institutions located in emerging or non-emerging countries and about whether the sovereign rating of a country should be the maximum threshold for the rating of financial institutions. In the light of this, the aim of this research is to analyze the differences in the determinants of the credit ratings of financial institutions, having as a differential, the subsequent segregation of these determinants in the two blocks of countries. It can be concluded from the findings that there are really differences between the rating determinants of these institutions, whether they are located in emerging or non-emerging countries. The size and quality of credit transactions are the variables that most influenced the sample of financial institutions (FIs) in non-emerging countries, followed by the sovereign rating. In the case of institutions located in emerging countries, it was found that the sovereign rating was the main rating determinant of these institutions, together with the total debt to total assets ratio.
EFFECTS OF MANAGERIAL CSR REPORTING DISCRETION ON MARKET BEHAVIOUR
NODA, AKIHIRO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The purpose of this study is to examine how managerial discretion in corporate social responsibility (CSR) reporting affects asset pricing in the presence of heterogeneous types of investors. This study presents a costly signalling model, which consists of management who disseminate messages about firm financial and CSR performances, and two types of investors: those who are interested only in financial performance and those who are interested in both financial and CSR performances. Results of equilibrium analysis show that (i) the manager may more aggressively engage in manipulating CSR reporting than financial reporting under appropriate conditions; (ii) both types of investors determine shareholdings by using CSR reporting but not financial reporting; and (iii) the price may react to CSR reporting more sensitively than to financial reporting. Furthermore, this paper shows that managerial reporting discretion may increase the price explanatory power for both financial and CSR performances. This study suggests that management discretion in CSR reporting may increase the price efficiency and therefore, from the point of view of corporate reporting regulation, the results provide a rationale for delegating CSR reporting discretion to firms.
DISCLOSURE OF CSR OVER THE FIRM LIFE CYCLE IN JAPAN
NODA, KENTARO
MATSUYAMA, MASAYUKI
Category: FR = Financial Reporting
This paper investigates how a firm’s life cycle affects corporate CSR disclosure. Using data from Japanese firms from 2006 to 2015, the firm life cycle is classified according to Dickinson (2011). The results show differences in disclosure levels depending on the firm life cycle. In the maturity stage, the amount of disclosure is significantly larger while, in the growth stage, the amount of disclosure is smaller. Additionally, there are differences in disclosure levels depending on the type of CSR information. Environment-related information has a significant influence in Japan. On the other hand, there were no significant differences in terms of governance and society. In Japan, stewardship codes have been introduced and reference those of the United Kingdom. For CSR-related information, disclosure should occur in accordance with laws and regulations, and information other than disclosure based on laws and regulations should also be addressed subjectively. The situation of firms has not been considered thus far. In the future, an appropriate disclosure strategy that considers firms’ growth stage would be employed to improve firm value. Additionally, various studies are being conducted in Japan, Europe, and the United States about the adequate amount of CSR disclosure in reports, including integrated ones. This research shows that CSR disclosure content is not uniform across firms, and a more detailed analysis can contribute to nationwide policy planning. In addition, as responsible investment progresses globally, CSR disclosure is gathering interest in Europe, the United States, and Japan.
COLLEAGUES OR "FRENEMIES”? INTERACTIONS BETWEEN AUDITORS AND TAX SPECIALISTS IN AUDIT AND NON-AUDIT SERVICES CONTEXTS
NOGA, TRACY
BEDARD, JEAN; HUX, CANDICE
Category: AU = Auditing
Tax specialists perform non-audit tax services (NATS) for clients as well as assisting in financial statement audits. Prior research attributes positive financial reporting outcomes from NATS to knowledge sharing (KS), but public data do not provide insight into interactions between tax and audit professionals. Research in other specialist contexts suggests differing effectiveness across engagements, possibly due to variation in KS. We interview highly experienced audit and tax professionals about their experiences in KS while working across service lines. We first investigate the economic context in which these exchanges occur, discussing factors associated with contracting (i.e., client’s decision to purchase NATS services; the audit partner’s decision to use a tax specialist). Regarding KS during task performance, results show that various social and behavioral factors, such as personal relationships and team continuity, client expectations, and the firm and/or team culture (including tone at the top and incentives), are important, but some results differ across service contexts. We also find contention between auditors and tax specialists; e.g., relating to competing incentives, information hoarding, lack of a shared goal, and attitudes towards other service lines. Overall, our findings contribute to KS theory in the audit and NATS contexts and highlight important considerations for practice and future research regarding the collaboration between these two service lines.
COMPETITIVE THREATS, INFORMATION ASYMMETRY, AND INSIDER TRADING
NOVAK, JIRI
Category: FA = Financial Analysis
This paper provides evidence that intensified product market competition increases information asymmetry between corporate insiders and investors. I use volume and gains from insider trading as proxies for information asymmetry. I show that when a firm faces competitive threats insiders purchase and sell more stocks and their trading better predicts future stock returns and long-term profitability changes. These results hold for several alternative measures of competitive intensity and they are related to the degree of restrictiveness of insider trading regulation. I show that future firm performance turns more idiosyncratic when competition intensifies increasing forecasting relevance of firm-specific information better known to insiders. Furthermore, I provide evidence that firms reduce informativeness of mandatory and voluntary disclosures leaving investors in a disadvantage.
ARE LEVEL 3 FAIR VALUE GAINS AND LOSSES RETURN RELEVANT? EVIDENCE FROM FAS 157 ROLLFORWARD DISCLOSURES
NOVOTNY-FARKAS, ZOLTAN
FIECHTER, PETER; RENDERS, ANNELIES
Category: FR = Financial Reporting
Prior literature examining the market pricing of Level 3 fair value levels face the difficulty of disentangling the effects of asset characteristics from managers’ measurement and recognition choices. We investigate the return relevance of Level 3 fair value gains and losses (FVGL), i.e., changes in fair values that reflect actual fair value re-measurements. Using a sample of 219 listed U.S. banks from 2008 to 2011, we find that the pricing of Level 3 FVGL is conditional on the extent they reflect permanent versus temporary changes in underlying asset values. Specifically, consistent with their relatively more permanent nature, Level 3 FVGL in net income are more return relevant and have greater predictive ability for future earnings than Level 3 FVGL in other comprehensive income (OCI). Additional analyses reveal that only Level 3 fair value losses are priced, suggesting that managers cannot credibly convey good news in subjective measurement contexts.
ADVANCED OR STANDARDIZED APPROACHES: BANKS’ CHOICE OF REPORTING RISK-WEIGHTED ASSETS UNDER BASEL RULES
OBERSON, ROMAIN
DONG, MINYUE
Category: FR = Financial Reporting
Under the Basel II guidelines, banks can use either standard or advanced approaches for calculating regulatory capital. Differing from the standard approach, advanced approaches are built upon banks’ own estimated risk parameters. In this study, we examine three questions: What are the factors driving banks to apply advanced approaches? Do banks underestimate risk weighted assets (RWAs) by using advanced approaches? Do investors react differently to the RWAs reported under the two different approaches? Using a sample of European listed banks from 2005 to 2015, we find that beyond country-level specification, the heterogeneity of loans, trading activities and solvency are firm-level factors explaining banks’ RWA reporting choice; however, the relationships vary across credit risk, market risk and operational risk. Consistent with regulatory capital arbitrage, our results suggest that weakly capitalized banks report lower RWAs than well-capitalized banks, regardless of the approach used to compute RWAs. In response to the third question, we provide evidence showing that the credit market reacts significantly to changes in RWAs reported under advanced approaches but not under standard approaches.
REPORTING OF REAL OPTION VALUE RELATED TO ESG: INCLUDING COMPLEMENTARY SYSTEMS FOR DISCLOSURE INCENTIVES.
OCHI, NOBUHITO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper aims to consider ways of granting disclosure incentives in order for the Signaling Theory to develop and encompass the Legitimacy Theory. First, the author discusses that ESG strategies for managing stakeholder externalities create real option value that leads to corporate value creation, both as business opportunities as well as appeals to a company’s legitimacy. At the same time as making real option thinking useful for strategic decision-making by management, it is necessary to structure non-financial information disclosure for convincing optionality related to controlling externalities from the viewpoint of investors. Second, at the stage where conditions are not met for companies able to autonomously undertake management with a view to externalities, the author discusses how supplementing incentives for issuing signals regarding differentiation from other companies in the same industry relating to controlling externalities is required in the disclosure of non-financial information in statutory reporting systems. On the other hand, since the materiality of financial reporting is centered on risks and opportunities for business, disclosure regulations are required separately for material social values. Events not originally related to corporate value can create incentive for the fulfillment of accountability of companies by the mediation of “negative intangibles” through reputation.
EMPLOYMENT OF GRADUATE ACCOUNTANTS BY PUBLIC ACCOUNTING FIRMS: PERSPECTIVES ON THE SKILLS SHORTAGE, INTERNATIONAL GRADUATES AND COMMUNICATIONS SKILLS
O'CONNELL, BRENDAN
DELANGE, PAUL; OCONNELL, BRENDAN
Category: ED = Accounting Education
This paper reports on survey data from 414 employers of accountants in the financial services sector; specifically Australian public accounting practice firms. The aim of the research is to examine a number of pertinent issues relating to the accounting labour market and skills shortages, recruitment methods and graduate skills. Important findings relate to the difficulty these firms have in sourcing high quality graduates. The most important recruitment strategies used by the firms entail some form of recommendation or knowledge of the applicant, such as word-of-mouth, ‘old school ties’ and internship programs. By far the main reason for rejecting graduates at the interview stage relate to poor communication skills and inadequate work experience. Findings reinforce the difficulties international graduates face in gaining employment in the accounting industry; they face a disadvantage with respect to the recruitment methods employed by the respondent firms and the fact only a small proportion of these firms employ international graduates.
WHY DID THE CORRESPONDENCE TO GLOBALISATION OF JAPANESE GAAP GET DELAYED DURING THE PERIOD OF 2009-2012?
OGATA, KENSUKE
Category: IC = Interdisciplinary/Critical
This paper aims to clarify why the ASBJ slowed down the development of revolutionary standards during a period of 2009-2012, with breaking down the three phases, based on the Strategy-Structure-Performance paradigm in organisations theory: ASBJ's self-perception of regulatory environment, its standard-setting strategy, and its organisational structure. According to both organisation analysis and survey of significant documents, it seems that the ASBJ constructed an organisation which put accounting professions and regulators into core positions to globalise Japanese GAAP close to IFRS. However, the organisation and its underlying strategy contradicts its standard-setting behaviour. To explain reason for this gap, we verified discourses of key players in the standard-setting process. It show that all stakeholders defended the advance of globalisation of Japanese GAAP before 2010; but since then, industrial actors changed their negative approaches to the strategy. Probably, the change was due to a shift of the US SEC's prudent stance on mandatory adoption of IFRS, which reminded these actors having worried about huge switching costs to apply IFRS, of an idea that isolation threat from the global society was removed. Accepting their concerns, the ASBJ delayed the development speed of standards to be set as soon as possible. We have two interpretations for the reason of this gap. One could be the intervals. Another could be the revival of consensus-based setting in Japan.
RETHINKING ENABLING CONTROL: IS IT RELEVANT IN RADICALLY DECENTRALIZED ORGANIZATIONS?
O'GRADY, WINNIE
Category: MA = Management Accounting
Purpose: To consider how enabling control operates in non-hierarchical settings. The viable system model (VSM) offers a template for designing recursive organisations around autonomous, self-regulating units. This paper discusses how features of enabling control manifest in the VSM and cybernetic principles enable self-regulation Design/methodology: Evidence from a case study of controls in a radically decentralized organization is (re)analysed from the perspective of enabling control and self-regulation. Data was collected via semi-structured interviews with various levels of management and by material from corporate publications, web sites and presentations. Findings: Repair and flexibility features of enabling control can be incorporated into non-hierarchical organisational designs. Control systems designed to support self-regulating autonomous units reflect top management’s trust in the abilities of operational managers and are therefore perceived to be enabling. While self-regulation increases managers’ ability to handle contingencies it also increases the risk of goal divergence and loss of organisational cohesion. A clear, strong and shared corporate vision and culture minimally constrain autonomy of operational units while preserving cohesion Research limitations: The case company's use of organisational culture to maintain cohesion may not be generalizable Originality: Few studies consider the operation of control in non-hierarchical organizations. The findings reveal differences in the control issues faced by organisations designed around self-regulating autonomous units rather than bureaucratic hierarchies.
THE EFFECTS OF ENVIRONMENTAL PROTECTION ACTIVITIES ON CORPORATE TAX AVOIDANCE IN JAPAN
OHNUMA, HIROSHI
SHIMADA, YOSHINORI
Category: FR = Financial Reporting
This paper examines effects of environmental protection activities on corporate tax avoidance. Focusing on the environmental responsibility, we reveal an association between actual outlays on environmental protection activities and tax avoidance measured by the effective tax rate (ETR), whilst we also use environmental ratings in accordance with previous studies. Utilising tax-deductible costs for environmental protection activities enable us to more directly analyze the effects of environmental protection activities on the ETR compared with the previous studies because the ETR is measured based on monetary amounts. Moreover, we also investigate how corporate governance influences this association because both environmental protection activities and tax avoidance activities are largely related with management decision-makings. The results show that the ETR becomes lower for firms that spend more environmental protection costs whilst the ETR has no relation with the environmental ratings. The results utilising the environmental protection costs are totally different from those using the environmental ratings as previous studies. We also show that such negative effects of environmental costs on corporate tax avoidance become moderated for firms with more outside directors. In addition, the negative relationship between the environmental protection costs and the ETR is found to become stronger for firms with higher institutional ownerships.
WHAT DRIVES DIFFERENCES IN AUDIT PRICING ACROSS THE GLOBE?
OJALA, HANNU
EIERLE, BRIGITTE; HARTLIEB, SVEN; HAY, DAVID; NIEMI, LASSE
Category: AU = Auditing
In this study, we explore audit pricing across the globe to make inferences about various institutional settings related to country-level pricing differences, and the economic signifi-cance of the pricing effects of these macro-level factors. Using a large international sample with firms from 27 countries, and after controlling for purchasing power and the economic development of the country, we find that particularly the litigation risk in a jurisdiction, the general trust in major companies within a society, and the market structure (i.e., market share of Big4 audit firms) in a national audit market are the main drivers for these differences. To the extent that the documented pricing differences attributable to differences in institutional settings reflect audit effort and hence the level of assurance provided, our findings suggest that country-level macro factors have a significant impact on audit quality across the globe.
LOOSE COUPLING IN A BEYOND BUDGETING IMPLEMENTATION: A CASE STUDY
OLIVEIRA, JOAO PEDRO
NAGEL, LISA
Category: MA = Management Accounting
This case study addresses a puzzle encountered while researching a large Portuguese company which started a still on-going adoption of the Beyond Budgeting approach four years ago. It was apparent that the adoption of several principles of Beyond Budgeting was uneven across the company at the time of the research, in particular across different hierarchical levels. This uneven adoption formed a loosely coupled system, which can be explained by two different factors: the anticipated resistance in the lower levels and the strong hierarchies within the organization. The paper discusses the perception of upper and middle level managers on how the coexistence of change and stability and the inherent creation of a loosely coupled system was key to enable a long term, gradual change process to be triggered. In particular, the paper discusses how, by first introducing and gaining acceptance of Beyond Budgeting principles at top management level only, implementation difficulties and tensions at other organizational levels have been avoided and more favorable conditions have been created to a future implementation in the remaining parts of the company.
ARE CSR LEADERS LESS PRONE TO ENGAGE IN IMPRESSION MANAGEMENT?
OLIVEIRA, JONAS
CASTELO BRANCO, MANUEL; COSTA LOURENÇO, ISABEL; SOFIA INÁCIO, ANA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study examines the readability of corporate communication in the CEO letters in the corporate social responsibility (CSR) reports presented by the firms included in the S&P 500 Index. These documents were content analyzed through the use of an automated algorithm provided by Readable.IO. Using a frame of analysis that combines agency theory, legitimacy theory and social psychology theory of impression management, we studied the impression management tactics used. The main findings suggest that leading CSR companies (those listed in the Dow Jones Sustainability Index) do not engage in impression management. They present more readable and longer CSR information. These companies disclose CSR information generally in a positive way. However, the “goal relevance of the impressions” (assessed by firm’s sustainability performance) and the “value of desired goals” (assessed by firm’s financial performance) impacted on manager’s choice of a specific level of readability and length of CSR narrative disclosures.
THE INFLUENCE OF THE CHARACTERISTICS OF THE NATIONAL BUSINESS SYSTEM IN THE DISCLOSURE OF GENDER-RELATED CORPORATE SOCIAL RESPONSIBILITY PRACTICES
OLIVEIRA, MARCELLE
ALBERTO DE FREITAS, GEORGE; OLIVEIRA LIMA, SÉRGIO HENRIQUE; SALGUEIRO RODRIGUES JUNIOR, MANUEL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The objective of the study is to analyse the influence of the characteristics of the National Business Systems in the disclosure of gender-related Corporate Social Responsibility practices by 150 companies in Latin America that signed the Declaration of Support for Women’s Empowerment Principles. Hypotheses based on the literature review regarding the National Business System were tested in order to associate them to the level of disclosure (dependent variable) obtained by data collection and consolidation. We observed a level of disclosure of CSR practices related to gender by companies studied on average 7.41 points on a scale of 0 to 28 points. The highest level of disclosure was related to the principle of establishment of high-level corporate leadership for gender equality. The results were obtained by the use of non-linear Poisson regression model. The following hypotheses were not rejected, confirming the influence of the independent variables in the disclosure of gender-related information: the pressure of unions has a positive influence; the country’s level of concentration of power has a negative influence; the country’s level of individualism has a negative influence; the country’s level of orientation towards femininity has a negative influence; and the country’s level of economic development has a positive influence. The study innovates and contributes by introducing the explanation of gender-related social disclosure with the National Business System approach.
YOU ARE WHAT YOU WATCH: CONSTRUCTING AND GOVERNING TELEVISION AUDIENCES IN THE AGE OF BIG DATA
ONG, YI LING
Category: IC = Interdisciplinary/Critical
The age of Big Data has witnessed an increasing integration of calculative infrastructures into various spheres of contemporary life. Drawing on a field study of the UK television industry, this paper explores the calculative practices emerging in connection with digital analytics, and their role in shaping and regulating television audiences and their viewing behaviour. Using a governmentality perspective (Miller and Rose, 1990; Rose and Miller, 1992), this paper argues that digital analytics are illustrative examples of technologies for governing everyday life. Through continuous, microscopic surveillance and measurement, the calculative technologies of digital analytics render hitherto unruly and elusive audiences visible, knowable and manageable. In this manner, they shape the very contours of television consumption and television culture.
THE EFFECT OF COOPERATIVE LEARNING ON LEARNING APPROACHES IN ACCOUTNING EDUCATION
OPDECAM, EVELIEN
EVERAERT, PATRICIA
Category: ED = Accounting Education
This study measures the effect of team-based tutorials on learning approaches. A quasi-experiment with a pre-test and a post-test was executed. We compared a team learning group (experimental group) with a lecture-based learning group (control group). To implement team learning the 5 basic elements of Johnson and Johnson (1989) were taken into account. Biggs’ Revised Two Factor Study Process Questionnaire (R-SPQ-2F) was used (Biggs,2001) to measure the learning approaches. The results show that both learning group, team and lecture-based learning, had a significant influence on the surface approach. In both groups, the surface approach score increased. The deep approach was also significantly influenced by both learning paths. There was a significant increase of the deep learning approach in the team tutorials and a significant decrease in the lecture-based group. This means that the team tutorials had a positive influence on students’ deep approach. This change in students’ learning approach is exactly what today’s accounting educators aim for: encouraging accounting students to use a deep learning approach, and develop the skills that professionals need in the future workplace.
INTEGRATING REPORTING AND RISK DISCLOSURE IN CONTEXT. DIFFERENT APPROACHES, SAME RESULTS?
ORELLI, REBECCA LEVY
GUTHRIE, JAMES; MANES-ROSSI, FRANCESCA; NICOLÒ, GIUSEPPE
Category: GV = Accounting and Governance
Purpose – Risk disclosure plays a central role to inform investors and stakeholders about risks faced by companies and the recent EU Directive2014/95/UE specifies how companies might disclose non-financial information in their annual reports. The purpose of this paper is to understand how the adoption of Integrated Reporting (IR), a form of voluntary disclosure that can be added to the traditional annual reports, can impact on risk disclosure (RD). Design/methodology/approach – The paper adopts a qualitative and documentary approach to explore RD in the IR of Italian companies at the end of 2015. Findings – The study reveals that many of the companies have embedded financial reporting into an IR, therefore providing one report embedding RD. We found RD about almost all the different types of risk (particularly operations - climate change RD included, integrity and strategy). The RDs vary in terms of metrics, news tenor, and time orientation, with a prevalence of non-monetary - past oriented RD. Research limitations/implications – The research adds knowledge about the possible role of IR in meeting stakeholder’s information needs, in relation to the specific risks faced by a company. Originality/value – The study sheds light on RD provided through IR considering the type of risk disclosure, the metrics of RD, the outlook orientation ), and the type of risk news. The results are relevant to detect how companies act and what can be done to improve RD.
NON-AUDIT SERVICES AND THE COST OF DEBT IN PRIVATE FIRMS
ORENS, RAF
COMPAGNIE, VINCENT
Category: AU = Auditing
EU regulation No 537/2014 contains restrictions on non-audit services (NAS) in public interest entities in order to improve audit quality and restore investor confidence in financial statement information. However, such restraints do not exist for the majority of private firms even though these firms mainly rely on debt financing. If NAS decrease confidence in the financial statements, then these services hinder a private firm’s financing flexibility as creditors demand sound financial information. To test this notion, this study examines whether NAS matter to debt pricing in a private firm setting. We argue that introduced uncertainty due to NAS will increase creditors’ monitoring costs and therefore lead to a higher cost of debt. Based on a sample of Belgian private firms over the period 2010 – 2015, we find that firms engaging in NAS other than audit and tax services are associated with a higher cost of debt. We further find that hiring auditor-provided tax services exhibits a negative association with the cost of debt when audit effort increases.
CORPORATE SOCIAL RESPONSIBILITY AND EARNINGS QUALITY: THE MODERATING ROLE OF FINANCIAL ANALYSTS
ORIJ, RENÉ
BRAAM, GEERT; HUSSAIN, NAZIM
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study examines whether the financial reporting practices of socially responsible firms differ from the companies which are less committed to corporate social responsibility (CSR). More specifically, we analyze whether companies with high (low) levels of CSR performance and larger (smaller) analysts’ coverage, are more (less) likely to report high (low) quality earnings’ numbers. Using a sample of non-financial listed companies from 42 countries during the period 2005-2014, our results show that there is a statistically and economically significant positive relationship between CSR performance and earnings quality, indicating that firms with high levels of CSR commitment are less likely to use earnings management (EM) strategies. For the firms with high levels of CSR performance, we find that financial analysts moderate CSR-EM relationship. These results support the view that CSR commitment and analyst coverage complement each other in affecting firms’ financial reporting behavior in general and constraining earnings management in particular.
WHAT DO WE KNOW ABOUT TAX AGGRESSIVENESS AND CORPORATE SOCIAL RESPONSIBILITY? AN INTEGRATIVE REVIEW
ORTAS, EDUARDO
BURRITT, ROGER; CHRIST, KATHERINE; WHAIT, ROB
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper uses extant academic literature to examine the relationship between tax aggressiveness and corporate social responsibility (CSR). Tax aggressiveness and CSR have been long standing research issues each with significant ethical dimensions and implications embedded in distinct bodies of academic literature. Discussion regarding the nature and extent of the relationship between tax aggressiveness and CSR emerged about ten years ago with perspectives offered from different disciplines using a variety of methodologies and theoretical perspectives. Despite this literature, the relationship between tax aggressiveness and CSR remains contentious. An integrative literature review was employed to identify and discuss the main themes in the literature, and suggest directions for future research. The review revealed four main themes regarding the nature and purpose of taxation, empirical research, normative and theoretical perspectives. Implications for future research are drawn from the literature.
‘BE PRUDENT IN USING THE TERM PRUDENCE’ – A HISTORICAL PERSPECTIVE ON THE CONCEPTUAL TRANSFORMATION OF PRUDENCE IN FINANCIAL REPORTING STANDARD SETTING
ORTHAUS, SELINA
HEILMEIER, RUTH ; KUHNER, CHRISTOPH ; PELGER, CHRISTOPH
Category: HI = History
In the latest revision of its Conceptual Framework, the IASB introduced the distinction between cautious and asymmetric prudence. This paper takes the IASB’s approach as a motivation to explore how the notion of cautious prudence originated and developed over time. By tracing the meaning of prudence in various national settings since the mid-19th century, we find that it increasingly lost its traditional connotation with (asymmetric) conservatism, gradually altering its meaning to the exercise of caution in the preparation of accounts. Using a critical discourse analysis of a multitude of historical documents, we identify the major changes in the economic and accounting environment that triggered and shaped the transformation of prudence. We find that the roots of the change lie in the early American endeavours in financial accounting theory building since the 1940s while subsequently in particular the IASC took over a vital role in the elaboration and dissemination of the modern notion of cautious prudence. Thereby, this paper contributes to our understanding of how prudence became a concept which is continuously accused of evoking confusion in the accounting community.
CONSISTENT INCENTIVE SYSTEM DESIGN FOR SUPERVISORY BOARDS AND EXECUTIVE BOARDS: IMPLICATIONS OF CENTRALIZED AND DELEGATED COMPENSATION AUTHORITY
ORTNER, JULIA
Category: MA = Management Accounting
This paper examines how to design consistent incentive systems in a dual board with a two-tier principal-agent relationship (shareholder, supervisory and executive board). The executive board’s task is to make multi-period investment decisions. Within this setting the implications of both a) centralized and b) delegated compensation authority are analyzed. Accordingly, a) the shareholder designs the incentive systems for both boards or b) the supervisory board designs the incentive system for executive board, while the shareholder designs the incentive system for the supervisory board, anticipating the incentive effects on the delegated compensation authority with respect to the executive board. Prior research neglected two-tier principal-agent relationships and delegated compensation authority. Hence, the requirements stated in literature are not sufficient in this setting. I show how compensation functions and performance measures must be designed to ensure preference similarity, i.e. decisions by both the supervisory and the executive board which are in line with the interests of the shareholder. In general, my findings indicate the importance of similar, but not identical incentive systems for both boards. However, under centralized compensation authority identical performance measures prove indispensable. Furthermore, under delegated compensation authority compensation costs must be considered in the performance measure of the supervisory board.
DOES TAX AVOIDANCE DIMINISH SUSTAINABILITY?
OSHIKA, TOMOKI
JIMICHI, MASAYUKI; SAKA, CHIKA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Firm tax avoidance has gathered substantial public attention in both the real world and academic literature. Stakeholder theory suggests that firms need to maintain good relationships with all firm stakeholders to be sustainable. Although it makes the firm profitable in the short run, tax avoidance may diminish the sustainability of the firm. Therefore, the purpose of this study is to empirically examine the relationship between tax avoidance and sustainability. This study uses 30 years of data from 58 countries, and provides empirical evidence on whether effective tax rates can distinguish sustainable firms from those that are not. Results indicate that tax avoidance diminishes sustainability; tax avoidance is found in most countries and there are significant variations of tax avoidance at the individual firm level.
THE MARKET VALUE OF DECOMPOSED CARBON EMISSIONS
OTT, CHRISTIAN
SCHIEMANN, FRANK
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The paper decomposes carbon performance into an inherent and a managed component. The inherent component captures a company’s average carbon emissions that reflect the firm’s business model and operating environment. The managed component is subject to management’s effort and ability to actively decrease a company’s carbon emissions. While the inherent component of carbon performance is estimated based on a regression of firm characteristics and the firm’s industry, the residuals of this regression reflect the managed component of carbon performance. Using a Heckman-type model to correct for self-selection bias associated with a voluntary carbon disclosure decision, we examine for a sample of large U.S. companies operating in carbon intensive industries whether the capital market values the inherent and managed components differently. Evidence reveals that, on average, the capital market attaches value to both, the inherent and managed component of carbon performance. Investors seem to attach more weight to the inherent component than the managed component, which indicates that the managed component contains considerable measurement error. Our findings suggest that previous empirical tests focusing on total carbon emissions underestimate the firm value effect of carbon emissions due to measurement error.
VALUATION IMPLICATIONS OF FAS 159 REPORTED GAINS AND LOSSES FROM FAIR VALUE ACCOUNTING FOR LIABILITIES
OW YONG, KEVIN
CHUNG, SUNG GON ; LOBO, GERALD
Category: FR = Financial Reporting
This study examines the economic implications of fair value liability gains and losses arising from the adoption of Statement of Financial Accounting Standards No. 159 (hereafter, FAS 159). Consistent with the notion that gains and losses contain value-relevant information, we find a positive correspondence between a firm’s FAS 159 fair value liability gains and losses and current period stock returns. However, further analysis indicates that fair value gains and losses from liabilities have a negative association with future returns, suggesting that investors misprice this earnings component. This negative association is stronger for firms with low levels of institutional ownership. While the value-relevance tests provide some evidence that fair value changes from liabilities have information content, the negative association with future stock returns suggests that these gains are eventually not realizable or that the market has overreacted to the initial recognition of these gains. Overall, our study contributes evidence regarding the controversy over the recognition of fair value liability gains and losses by providing direct empirical evidence that such gains and losses are priced by the stock market but subsequently reversed within the next 12 months.
DOES MANDATORY AUDIT PARTNER ROTATION MATTER TO DEBT MARKET PARTICIPANTS? EVIDENCE FROM UK
OWUSU, ANDREWS
ZALATA, ALAA MANSOUR
Category: AU = Auditing
This paper investigates whether mandatory audit engagement partner rotation provides informational value to the debt market participants. Using a unique dataset from the United Kingdom (UK) where audit engagement partners are mandated to sign the auditor’s report in their names and rotate every five years, we find that credit rating agencies do not reward firms that have experienced audit engagement partner rotation in general. However, they do react positively when a firm experiences the appointment of a new female audit engagement partner during the mandatory rotation period considered (i.e. from 2009 to 2014), leading to significantly higher credit scores. We also find that mandatory audit engagement partner rotation in general and, in particular, the appointment of a new female audit engagement partner during the mandatory rotation period considered improve audit quality. Overall, these results suggest that mandatory audit engagement partner rotation matters to the debt market participants. This is particularly the case when a new female audit engagement partner is appointed probably because they are less likely to impair their independence relative to their male counterparts.
CREDIT RATINGS, TAX CONSIDERATIONS, AND ACCRUAL MANAGEMENT BY PRIVATE UK FIRMS
PAANANEN, MARI
HORTON, JOANNE; KALOGIROU, FANI
Category: FR = Financial Reporting
We investigate how credit market pressures and tax considerations affect financial reporti