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STRATEGIC THINKING AND ACCOUNTING: BENEFITS AND PITFALLS FROM A MANAGERIAL PERSPECTIVE
AALTOLA, PASI
Category: MA = Management Accounting
This study explores the strategic thinking of managers from an accounting perspective. Purpose of this article is to explore the ways in which managers find accounting useful in strategic thinking and also to identify any disadvantages they have experienced. Qualitative content analysis is used to analyse first strategic development plans written by managers and, second, through interviewing these managers. By building on data from managers working with strategic roles in various organizations, an understanding is offered of the experienced benefits and pitfalls of accounting in strategic thinking. This article further develops Kaikkonen’s (1994) work about accounting’s role in strategic thinking and offers contribution by outlining also the disadvantages of using accounting in strategic contexts. This interpretative qualitative study provides explanations and reasons for why accounting is often seen to be problematic and, therefore absent, in various cases.
CARBON PRACTICE, CARBON REPUTATION, AND ECONOMIC PERFORMANCE: A STUDY OF CARBON INTENSIVE AND NON-INTENSIVE INDUSTRIES
ABDEL-KADER, MAGDY
JABBOUR, MIRNA; ROHANI, ALIREZA
Category: SEE = Social, Environmental & Ethical
We investigate whether corporate economic performance is influenced directly and indirectly (through carbon reputation) by carbon performance and quality of carbon disclosure in both carbon intensive and non-intensive industries. We further examine the extent to which corporate carbon performance is reflected in its carbon reputation and whether symbolic carbon disclosure mediates the negative impacts of carbon performance on carbon reputation. Based on pooled cross sectional time series data of 95 UK firms over the period from 2009 to 2013, we found that worse carbon performers in non-intensive industries have a higher reputation scores and quality of carbon disclosure is positively related to corporate carbon reputation in these industries. We also found non-significant association between carbon reputations and both carbon performance and quality of carbon disclosure in carbon intensive industries. Finally no relationship was found between carbon performance as well as quality of carbon disclosure and corporate economic performance in both carbon intensive and non-intensive industry sectors, and carbon reputation as an intangible asset only improves economic performance of carbon intensive companies. Finally, our findings showed that unlike carbon non-intensive companies, corporate carbon reputation is a valuable intangible asset for the companies with greater carbon exposure (i.e. carbon intensive companies).
SPLIT-DAY TRADING ON SHANGHAI STOCK EXCHANGE
ABDEL-KHALIK, A. RASHAD
Category: FR = Financial Reporting
Unlike stock exchanges in the West, large exchanges in the orient close for one to two hours in mid-day for a “lunch break.” Operating exchanges in two shifts per day is a unique phenomenon for China, Hong Kong, Indonesia, Japan, Malaysia and the Philippines. The split-day trades provide corporate managers with a different factor in timing the release of accounting information. In this paper we try to understand the properties of trading in different sessions (morning vs afternoon) before we could examine different effects of accounting information arrival during different sessions. We also hypothesize that suspension of trades during the lunch hour is cultural in that the break allows traders to consult with their superiors and peers and arrive at collective judgment about adjusting their morning trading strategies for in the afternoon. We examine the split-day trades on Shanghai Stock Exchange for the period 2005 – 2013 and arrive at several conclusions: (1) Traders are less aggressive in the afternoon. (2) Tail performers (top and bottom deciles) in the morning reverse in the afternoon (3) Top and bottom deciles have higher volatility in the afternoon as compared to the morning (4) Traders appear to use the lunch break for two purposes: (a) to allow for the brokerage firms to develop different strategies for the afternoon after discussing their morning performance with their superiors, and (b) host new clients for sales meetings at lunch. (5) Morning-to-afternoon results are very much different from afternoon-to-next-day morning.
TRADING VOLUME AND EARNINGS QUALITY
ABDEL-MEGUID, AHMED
SUH, SANGHYUN; FERNANDO, GUY; SCHNEIBLE JR., RICHARD
Category: FR = Financial Reporting
In this paper, we investigate the impact of earnings quality on trading volume. We argue that different investors will apply different abilities and resources to interpreting the valuation consequences of the information contained in an earnings announcement. We expect that as earnings quality declines the differences between investors will become more pronounced resulting in differential belief revision due to differential interpretations of the announcement. We find that poor earnings quality leads to greater abnormal trading volume, a proxy for investor differential belief revision. We also find that this differential belief revision is caused by differential interpretation of earnings information by investors. Our results suggest that lower earnings quality exacerbates investor differences, biasing in favor of sophisticated investors who are able to identify and see through poor earnings quality.
VOLUNTARY DISCLOSURE AND INFORMATION ASYMMETRY: EVIDENCE FROM CARBON EMISSION DISCLOSURES
ADHIKARI, AJAY
KWON, CHAD; ZHOU, HAIYAN
Category: SEE = Social, Environmental & Ethical
We study the effect of voluntary carbon emission disclosure on the equity market reactions. Using PricewaterCooper’s survey of carbon emission disclosure annual reports, we identify the U.S. firms that respond to the survey in various formats. Using relative bid-ask spread, trading turnover, and volatility as measures of market reactions, we test for the significance of carbon emission information on a sample of disclosers. Our results show the reports create noise; the act of disclosure magnifies trading activities in the equity markets. Re-estimating our models using institutional ownership as an instrumental variable yields similar results.
ACCOUNTABILITY AND SOCIAL REPORTING IN ITALIAN PUBLIC SCHOOLS: AN EXPLORATORY ANALYSIS
AGOSTINONE, STEFANO
RAUCCI, DOMENICO; TARQUINIO, LARA
Category: ED = Accounting Education
The paper analyzes the issue of social reporting and accountability in Italian public schools. The Italian reform process of the school system which focused on school autonomy and assessment has required schools to overcome their self-referentiality and to make themselves more accountable to their own stakeholders. The development of a social reporting process therefore can be considered as an effective response to that, which will enable schools to become accountable for their own actions, triggering fruitful stakeholder engagement processes, and implementing, at the same time, an important management tool. In this framework, this study aims to investigate, through a questionnaire, the degree of awareness and dissemination of social reporting among Italian public schools. The interest in the subject, properly framed within the international literature on school accountability, arises from the absence of similar studies in our country. Findings show how social reporting is still scarcely spread in practice, although schools have begun to be quite acquainted with it – at least from a theoretical point of view. Particularly interesting is the Italian public schools’ tendency towards an “integrated approach to accountability” within the emerging area of study defined Intelligent Accountability.
COMPETITION AMONG STAR ANALYSTS AND FIRMS’ INFORMATION ENVIRONMENT
AHARONI, GIL
SHEMESH, JOSHUA; ZAPATERO, FERNANDO
Category: FA = Financial Analysis
We find that direct competition among star analysts plays a key role in their forecast accuracy. When two or more star analysts cover the same stock (battleground stock), they are roughly 20% more accurate than instances in which only one star covers a firm. Using an exogenous shock to head-to-head competition between star analysts, our results suggest that the higher accuracy in battleground stocks is not driven by star analysts’ ability to pick stocks with a better information environment. Rather, we document a strong incentive to concentrate on battleground stocks. Our results show that star analysts’ performance relative to other stars materially improves the probability of being re-selected as a star in the annual rankings from Institutional Investor magazine.
THE EFFECT OF CEO TENURE ON PERFORMANCE: THE ROLE OF REAPPOINTMENT INCENTIVES
AHN, TAE-SIK (T.S.)
CHOI, YOUN-SIK; HYEON, JIWON; HYUN, JEONG-HOON
Category: MA = Management Accounting
We examine whether CEO ‘Reappointment’ opportunities (i.e., the possibility of being consecutively appointed once again as the CEO) affect firm performance, which has been ignored by prior studies. We address this issue using the quasi-experimental setting embedded in the performance evaluation system used by Korean State-owned enterprises, where 1) the decision whether to reappoint CEOs is heavily influenced by political reasons (exogenously given factor) – regime change – as well as the CEO’s performance, 2) CEOs can be reappointed only once. We compare the performance between CEOs with and those without the reappointment incentive, and find that CEOs without reappointment opportunities underperform. More specifically, we find that CEOs whose tenure ends in the same year with the regime change underperform. We also find that reappointed CEOs significantly reduce their efforts just after their reappointment due to the loss of reappointment possibility. Moreover, in line with prior research, we find an inverted U-shaped relationship between CEO tenure and firm performance, which is likely to be driven by the CEO’s reappointment incentive. Our empirical findings extend the literature on the relation between CEO tenure and firm performance by implying that a ‘reappointment’ opportunity plays an important role in motivating CEOs.
PERFORMANCE AUDIT: DO AUDITORS DESIRE THE BALANCE BETWEEN BEING RESPONSIVE AND INDEPENDENT?
AL SUBHI, SHEIKHA SAID
AL SUBHI, SHEIKHA ; RODGERS , WAYMOND
Category: AU = Auditing
Performance audit provides governments with a self-analysis considered as a basis for more informed and publicly defensible decision-making. Thus an important role is reserved to performance external audit executed by external state of audit institutions, sometimes known as national audit offices. This paper examines whether performance audit practices and reporting consider the public perspective and social value. Moreover, it emphasises understanding the process of decision-making by performance auditors during their assessment and evaluation of the public sector performance. Auditors from the State of Audit Institution in Oman participated in this study by responding to an online questionnaire. The data was analysed using throughput modelling, illustrating the effect of using performance information and perception regarding public perspective and social value in Judgment and decision. The findings show that auditors in performance audit rely heavily on performance information of the audited entity in their assessment, with no influence from their perception of social value and public perspective. Meanwhile, there was a direct relationship between the performance perception regarding the public perspective and social value and decision and a strong relationship between the judgment and decision choice in performance audit. These findings located some areas of weakness in current performance audit practice and are of great value in their empirical contributions
EXPERTS’ PERCEPTION OF THE EFFECTS OF THE IFRS ADOPTION IN CENTRAL AND EASTERN EUROPE
ALBU, CATALIN NICOLAE
ALBU, NADIA
Category: FR = Financial Reporting
We gather ex post survey data to gauge experts’ perceptions about the effects and the institutional context of the International Financial Reporting Standards (IFRS) adoption in ten Central and Eastern European (CEE) countries members of the European Union (EU). Our survey of accounting professionals employed by Big 4 firms as auditors and/or consultants in IFRS adoption provides unique insights about the materialization of various benefits, the cost-benefit relation and the importance of the institutional factors in the context of an under-researched region. Our findings suggest a moderately optimistic opinion about the effects of IFRS adoption in CEE countries: a medium to high level of difficulty was estimated, while benefits are seen to overcome the costs on the long term. Immediate benefits, which appear rather at the firm-level, appear to materialize to a higher extent than the long-term, country-related ones. At the micro-level we identify the stakeholders’ role, market pressures and organizational enablers as important factors for the materialization of benefits and for perceiving higher benefits than costs. We also find that the immediate benefits, and in a few cases, the cost-benefit relation, are perceived differently in different countries.
WHAT ARE THE CAUSES OF FINANCIAL UNSUSTAINABILITY IN REGIONAL GOVERNMENTS AND HOW IT COULD BE AVOIDED?
ALCAIDE-MUÑOZ, LAURA
LÓPEZ SUBIRES, MARIA DESEADA; NAVARRO GALERA, ANDRÉS ; RODRÍGUEZ BOLÍVAR, MANUEL PEDRO
Category: PSNP = Public Sector & Not-For-Profit
Governments’ financial sustainability is a subject of great current interest to academics, policymakers, and public managers, as the economic crisis has led to high volume of debt and deficit as well as serious difficulties regarding the viability of public services. However, there are few studies that have been devoted to identifying the causes of the problems of the public sector’s sustainability, although international organisations and previous research has recommended the analysis of demographic and financial-economic variables to search for solutions and precautionary actions. Based on empirical research focused on Spanish regional governments during the 2006–2013 period, this study has identified risk factors that could cause the financial unsustainability of public services. Our findings show that some demographic and financial-economic variables could provoke the financial unsustainability of regional governments—such as the immigrant population, unemployment rate, and structure of expenditure and debt—providing useful information that can help managers and politicians take preventive actions and aid financial planning.
ADVANCING PRACTICES OF TRANSPARENCY ON SUSTAINABILITY THROUGH TECHNOLOGICAL DEVELOPMENTS IN REGIONAL GOVERNMENTS
ALCARAZ QUILES, FRANCISCO JOSÉ
NAVARRO-GALERA, ANDRÉS; ORTIZ-RODRIGUEZ, DAVID
Category: PSNP = Public Sector & Not-For-Profit
International Organizations (EU, OECD, World Bank Group) and previous studies recommend that Governments provide sustainability information to citizens, because stakeholders are demanding greater transparency, which requires the research of ways of increasing the volume of online information on sustainability. This paper contributes to the understanding of influential factors on the sustainability transparency in regional governments, and identifies useful tools for the developers and managers of websites in order to stimulate the volume of information online. Our results identify some explanatory variables of sustainability transparency (such as collection of information online, broadband availability, online services provided) and discover useful tools to enhance the effect of influencing factors such as convergence with the information society, accessibility and the usability of the websites.
CORPORATE TAX REFORMS AND TAX-MOTIVATED PROFIT SHIFTING: EVIDENCE FROM THE EU
ALEXANDER, ANNA
DE VITO, ANTONIO; JACOB, MARTIN
Category: TX = Taxation
This paper reassesses the role of taxation in profit shifting of multinationals. Using a large European sample of multinationals and their subsidiaries, we exploit multiple tax rate reforms in a difference-in-differences setting to examine when and why tax rate changes affect profit shifting. Our results suggest that lowering the statutory corporate tax rate in the country of the parent company (i.e. inbound profit shifting) incentivizes subsidiaries to shift back profits to the parent country. A one standard deviation decrease in the change in the tax difference (2.7 percentage points) reduces profit (i.e. tax reform response) by 7% in the host country. This effect is substantially stronger when the change in the tax difference is large enough to reverse the sign of the tax rate difference. In addition, profit shifting responses to tax reforms in the parent country are muted by economic growth in the host country of the subsidiary but are strengthened by strong institutions in the host country. We characterize tax changes that occur in the host country as outbound profit shifting. In this analysis, we find that the tax reform is effective only when the change in tax difference between host and parent countries is large enough to reverse the sign of the tax difference. Our findings are important for policymakers when designing tax policy that intends to curb international tax-motivated profit shifting.
THE IMPACT OF FAIR VALUE MEASUREMENT ON AUDIT FEES: EVIDENCE FROM THE BANKING INDUSTRY IN 24 EUROPEAN COUNTRIES
ALEXEYEVA, IRINA
MEJIA-LIKOSOVA, MARGARITA
Category: AU = Auditing
The purpose of the study is to investigate the relationship between fair value measurement and audit fees. The association between the proportions of fair-valued assets and audit fees is examined by the audit fee model for financial institutions. Using a sample of 177 banks from 24 European countries over the period of 2008-2013 we find that the total proportion of fair-valued assets does not affect audit fees. This finding represents, as opposed to Ettredge et.al. (2014) and Goncharov et.al. (2014), the third possible scenario for fair-valued assets/audit fee relationship. The result can be attributed to structural difference in the total proportion of fair-valued assets which in contrast to U.S. banking industry is dominated by Level 1 valuation inputs. Further, we show that an increase in audit fees is caused by high-uncertainty fair valued assets. The result is consistent with the suggestion that more complex estimates require greater audit efforts.
THE NON-ECONOMIC CONSEQUENCE OF DISCLOSURE: EVIDENCE FROM ISLAMIC BANKS
AL-MAGHZOM, ABDULLAH
ABOU-EL-SOOD, HEBA; AL-MAGHZOM, ABDULLAH; EL-HALABY, SHERIF; HUSSAINEY, KHALED
Category: FR = Financial Reporting
This paper aims at examining the effect of sharia; social and financial disclosure on stakeholders’ loyalty towards Islamic banks. It aims also to examining to what extent trust and satisfaction mediate this effect. It uses data collected from 600 respondents to survey questionnaires disseminated to stakeholders from 15 countries dealing with Islamic banks. Structural equation modelling (SEM) is adopted with a partial least squares (PLS) approach. The results indicate that, there is a significant association of disclosure on stakeholders’ trust, satisfaction, and loyalty. The results also indicate that, there is a partial mediating of trust and satisfaction in the relationship between disclosure and loyalty. This paper is one of the first studies examining the effect of disclosure on stakeholders’ loyalty. We provide novel findings having theoretical and practical implications for disclosure in Islamic banks and their relationship with stakeholders.
VALORIZATION OF THE AUDIT ROLE IN TODAY’S SOCIETY: AN EMPIRICAL INVESTIGATION OF FINANCIAL STATEMENTS USERS VIEWS
ALMEIDA, BRUNO
ALMEIDA, JOSÉ
Category: AU = Auditing
The main goal of this investigation is to study the relationships between society and audit in Portugal, through a methodology based on a questionnaire sent to public and the insurance companies, as well as to the financial analysts. For that, we developed a group of 25 questions addressing problems related with: the size of the audit companies and their independence, the audit report, the relations between society and audit, audit and going concern, audit and the search of illegal acts and frauds and the perception of the characteristics of an audit. For that, we used a scale of Likert of 5 points followed by an appropriate statistical treatment–percentage, p-value, correlations of Spearman, test of Mann-Whitney, allowing us to discover correlations and statistical associations of strong and moderate intensity. We concluded that the relationships between society and audit give evidence to a group of concerns aligned with the international tendencies.
THE DRIVERS OF CHOICE FOR PERFORMANCE SYSTEMS DESIGN IN THE KINGDOM OF SAUDI ARABIA MANUFACTURING SECTOR
AL-OMIRI, MOHAMMED
Category: MA = Management Accounting
Abstract: In recent years, many authors have been claimed that many companies adopt new approaches to their performance and measurement systems. The BSC is one of the most widely used approaches making new in roads into the academic and business literature. Therefore, this paper examines the contextual factors that influence the characteristics of performance systems design using a postal questionnaire instrument and examines the extent of the adoption rate of the balanced scorecard (BSC) in KSA manufacturing. Results demonstrate that there is indeed a significant relation between BSC adoption and Intensity of the competitive environment; Size; extent of the application of total quality management approaches; extent of use of JIT techniques; and extent of use of innovative/strategic management accounting techniques. These potential explanatory factors giving direction for further research.
GOVERNANCE AND CORRUPTION: TAX ENFORCEMENT IN TRANSITION ECONOMIES
ALON, ANNA
HAGEMAN, AMY
Category: GV = Governance
The paper examines the country-level governance environment and its impact on the persistence of tax-related corruption experienced at the firm level. We focus on the relationship between governance mechanisms and corruption that firms encounter in the area of tax, and its interaction between governance mechanisms and tax enforcement in the context of transition economies. We examine trust dimensions typically associated with a rule-based governance. Based on a sample of nearly 6,000 firms representing 21 transition economies, we show that firms located in countries with stronger rule-based trust are less likely to make unofficial payments for tax purposes, while such unofficial payments are more likely in firms located in countries with higher levels of dispositional trust. The presence of tax enforcement activities in the form of visits and inspections by tax officials further strengthens the negative relationship between rule-based trust and unofficial payments. However, verification activities exacerbate the positive relationship between dispositional trust and unofficial payments. This study adopts a governance framework and identifies mechanisms specific to transition economies. Governance dimensions associated with rules-based governance are hybridized and result in some of the outcomes associated with relation-based mechanisms. In doing so, the article complicates expectations related to firms’ tax environments where enforcement mechanisms can have unwelcome consequences and, under certain conditions, create conditions for the persistence of corruption. This study highlights the importance of institutional landscape and how corruption weakens various institutions. The results have implications for reforms in corporate governance by highlighting that regulators and practitioners must carefully consider governance complexities of the national environment when making specific tax reforms or doing business in transition economies.
POLITICAL DYNAMICS IN MICRO ORGANISATIONAL ACCOUNTING CHANGE: AN INSTITUTIONAL CASE STUDY
ALSAID, LOAI
MUTIGANDA, DR. JEAN CLAUDE
Category: MA = Management Accounting
This paper analyses how macro political dynamics might lead to the micro organisational changes of cost management practices in public sector organisations operating in a developing country. It draws on Dillard et al.'s (2004) version of institutional theory. Empirical data came from an extended case study conducted in a state-owned enterprise in the Egyptian’s electricity and energy sector from 2013 to 2014. The data are based on semi-structured interviews, field observations and documentary analysis. Findings show that cost management change at micro organisational level was outcome of macro institutional political change that combined wider political objectives of the State and the narrower economic objectives of the firms.
THE ROLE OF AFFECT IN ECONOMIC DECISION-MAKING: HOW DO MANAGERS’ MOOD STATES INFLUENCE THEIR BUDGET REPORTING HONESTY?
ALTENBURGER, MARTIN
Category: MA = Management Accounting
The present study investigates whether managers’ budget reporting honesty depends on their mood state at the time of their decisions. Although mood is an everyday phenomenon and influences our behavior in many ways, its effect on ethical decision-making in accounting has rarely been researched so far. Drawing on the literature of various related fields, this paper studies the link between a manager’s mood state and its consequences for budget reporting honesty. The results from a laboratory experiment suggest that mood can have a considerable influence on managers’ budget reporting behavior. In particular, managers in a positive mood are more honest than managers in a negative mood. The process behind this finding might be the wish of people to maintain their positive mood state. The results also reveal that the differences in honesty between managers in positive and neutral mood as well as between managers in neutral and negative mood are less pronounced. Additionally, an analysis based on the experimental data was conducted to assess the expected firm profit of two contract forms. This analysis shows that a contract which trusts in managers’ honesty should be preferred compared to a truth-inducing contract which is derived from conventional economic theory. In sum, organizations might consider the managers’ mood as a potential way to enhance their honesty and the corresponding firm profit.
IMPACT OF BOARD OF DIRECTORS ON THE INTERNAL AUDITING COMPLIANCE WITH THE STANDARDS
ALZEBAN, ABDULAZIZ
Category: AU = Auditing
This study provides empirical evidence of the differences in the degree of internal audit compliance with the International Standards for the Professional Practice of Internal Auditing (ISPPIA) in five Gulf Countries, and examines the association between the characteristics of the board of directors, and internal audit compliance with the ISPPIA. The data set, coming from annual reports and a total of 113 usable questionnaire responses completed by Chief Internal Auditors in listed companies within those countries, indicated that no significant country differences were evident in their internal audit compliance with the ISPPIA. At the same time, it was found that ISPPIA compliance by internal audit departments was influenced by board characteristics (size, and independence). In bringing a Middle Eastern perspective to the existing literature on the adoption of the ISPPIA, the paper provides a welcome insight into the quality of Gulf companies’ corporate governance.
BIDDER EARNINGS FORECASTS IN MERGERS AND ACQUISITIONS
AMEL-ZADEH, AMIR
LEV, BARUCH; MEEKS, GEOFF
Category: FR = Financial Reporting
We provide evidence on the benefits and costs of voluntary earnings forecasts by bidding firms during acquisitions, shedding light on the motives and capital market consequences of voluntary disclosures. Specifically, we find a higher propensity of forecast disclosure when the acquisition is made with stock and during periods of high bidder valuations, when target shareholders are concerned about receiving overvalued shares. These forecasts are associated with a higher likelihood of deal completion, expedited deal closing, and with a lower acquisition premium. Our results are most consistent with forecast disclosure positively affecting the value perceptions of target shareholders. The evidence, however, also suggests that the benefits of forecast disclosure only accrue to bidders that have built a credible forecasting reputation prior to the acquisition. Furthermore, we document that merger forecasts attenuate the generally negative investor reaction to acquisition announcements. Explaining why not all bidders forecast, we provide evidence on high forecasting costs, particularly higher likelihood of post-merger litigation.
(DE-) INSTITUTIONALISATION OF MANAGEMENT CONTROL SYSTEM PACKAGES
AMMAR, SAMEH
AMMAR, SAMEH
Category: MA = Management Accounting
Little is known about what constitute components of Management Control System (MCS) as a package. How couplings are created among components of MCS packages remain largely unexplored. Several theoretical frameworks have been suggested that conceptualise management control system, but they ended with calls to explore what constitute these systems as packages. This paper aims to explore conditions and unfold process by which cultural, planning, cybernetic, reward and compensation, administrative controls are shaped. By focusing on MCS as a package, this paper aims to unfold, through fieldwork with an oil refinery company, dynamic processes constitute management control practices to become interdependent and constituting packages. More specifically, it aims to understand how interdependence among practices of management control system is (re-)created over time constituting packages; and how existing institutionalised packages of management control system could be de-stabilised to make sense to organisational transformation. The empirical data has been illuminated through the lens of institutional theory to provide understanding of a two interrelated processes which have brought about management control system into re-configuration, namely; (i) deinstitutionalisation and (ii) institutionalisation. The paper highlights importance of interdependence, among and across management control system packages, to understand what constitute management control system as package.
PROPERTIES OF ANALYST FORECASTS AND BOND UNDERWRITING RELATIONSHIP: EVIDENCE FROM KOREA
AN, NA YOUNG
BAE, SEONGHO; JEONG, SEOK WOO; LEE, WOO JAE; OH, KWANGWUK
Category: FA = Financial Analysis
Previous studies find that analysts forecast earnings more optimistically but inaccurately when they face the conflict of interest (COI). We extend this line of research by examining whether analysts’ forecasting behavior affected by the mere existence of potential COI are related with underwriting contracts. We document that analysts affiliated with security companies that become underwriters ex post issue more optimistic but less accurate forecasts for firms to issue bonds in Korea. We also find that firms to issue bonds are likely to award underwriting contracts to security companies with analysts who issue more optimistic but less accurate forecasts.
ACCOUNTING QUALITY AND LOAN PRICING: THE EFFECT OF CROSS-COUNTRY DIFFERENCES IN LEGAL ENFORCEMENT
ANAGNOSTOPOULOU, SERAINA
Category: FR = Financial Reporting
This study examines whether the strength of legal enforcement at the country level plays a role in the value-relevance of accounting quality for loan pricing determination, using an international sample of firms reporting under IFRS. The underlying hypothesis is that stronger vs. weaker enforcement should affect the informativeness of financial statements, due to their increased credibility, and thus result in a stronger influence of accounting quality on loan pricing, is case this information is considered more reliable by potential lenders. Evidence indicates that accounting quality is consequential for the determination of loan pricing only in combination with the level of legal enforcement, and this only holds for the countries with stronger legal enforcement. This evidence indicates that financial statement quality information is value-relevant and has a significant impact on the determination of loan pricing only if this information is considered to be credible enough by loan providers in a country, and this is the case when legal enforcement is stronger.
REJECTION, REPRODUCTION AND RESHAPING - A FIELD STUDY ON GLOBAL BUDGET CONTROL PRACTICES IN MULTINATIONAL COMPANIES
ANDER, KATHARINA
KORNACKER, JULIA; TRAPP, ROUVEN
Category: MA = Management Accounting
This paper examines the ‘travelling’ of budget control practices from the German headquarters to the Chinese subsidiaries of multinational companies. In particular, we first examine whether and why the headquarters impose standardised budget control on their subsidiaries that operate in the dynamic and volatile Chinese setting. Second, we study how standardised budget control is used at the subsidiaries level. Drawing on Giddens’ social theory of modernity, we thus illuminate whether global budget control structures were reshaped, reproduced or rejected in the local. Our study relies on data collected in a field study of 23 dyads comprising German headquarters and Chinese subsidiaries from different industries and of different sizes. Given the considerable economic, political and cultural distance between the headquarters and their Chinese subsidiaries involved in this study, we take account of several environmental factors that may impact the paths of travel of global management control systems. Our findings suggest that these paths are particularly contingent on the perceived utility of budget control structures in the local subsidiaries, which is interrelated with the perceived predictability of future developments. In turn, competitive intensity, market regulation and regulatory density constitute factors that impact the perceived predictability.
THE EFFECT OF CORPORATE TAXATION ON BANK TRANSPARENCY: EVIDENCE FROM LOAN LOSS PROVISIONS
ANDRIES, KATHLEEN
GALLEMORE, JOHN; JACOB, MARTIN
Category: TX = Taxation
We examine how the corporate tax system, through the tax treatment of loan losses, affects bank financial reporting choices. Our identification strategy exploits cross-country and intertemporal variation in corporate tax rates and the tax deductibility of loan loss provisions. Using an international sample of banks, we find that the loan loss provision is increasing in the corporate tax rate for countries that permit the tax deduction of general provisions. Furthermore, we show that this effect is driven by the corporate tax system encouraging timelier loan loss recognition: the extent to which future and current loan portfolio quality deteriorations are incorporated in the loan loss provision is increasing in the tax rate when the provision is tax deductible. We also find evidence that the corporate tax system encourages provisioning by banks with capital ratios close to the regulatory requirement and in countries with relatively weak banking supervisors. Finally, we find that the rules regarding the tax deductibility of provisions discourage growth of U.S. banks. Overall, our results suggest that the corporate tax system is an important determinant of timely loan loss recognition and hence the financial reporting transparency of the banking sector.
GOVERNMENTALITY AND PERFORMANCE FOR THE SMART CITY
ARGENTO, DANIELA
GROSSI, GIUSEPPE; JÄÄSKELÄINEN, AKI; SERVALLI, STEFANIA ; SUOMALA, PETRI
Category: PSNP = Public Sector & Not-For-Profit
In answer to an emerging need of systematic research on the relationship between public governance and performance, this paper focuses on the smart city scenario by adopting a critical perspective and an interpretivist approach. The analysis is informed through the Foucauldian “governmentality” framework (Foucault, 2009) and its bio-political implications (Foucault, 2008) to capture the approach adopted by municipalities driving smart city programs in the pursuit of governmentality goals (that is, a balance between moral responsibility and economic rationality). We contend that smart cities striving for sustainable development engage in programs trying to direct or reorient “regimes of practices” towards desired aims. The presence of networks of organizations in the implementation of such programs may entail the use of performance measurement as a “technology of government” involving both the vertical dimension of performance investigation and – especially – horizontal forms of performance measurement. By conducting a longitudinal case study with interventionist elements with reference to the City of Helsinki, we have addressed both the benefits and obstacles/problems faced in Helsinki’s programs of using performance measurement as a technology of government. We have also revealed the role assumed by the development of performance measurement projects in reorienting regimes of practices s towards specific objectives. Our findings show that performance measurement operates as a useful, but also problematic technology of government, especially considering fragmentation in inter- and intra-departmental processes and a lack of horizontal accountability. Performance measurement developments in horizontal logic emerge when reshaping “the conduct of conduct.”
PROFESSIONAL SCEPTICISM, TRUST AND INDEPENDENCE IN THE RELATIONSHIP BETWEEN AUDITORS AND CLIENTS: AN ANALYSIS OVER TIME
ASCHAUER, EWALD
KOPP, LORI
Category: AU = Auditing
Both, in auditing research as well as in the regulative discussion one of the most controversial issues is whether an increasing duration of the relationship between auditor and client (audit partner tenure) leads to an erosion of auditor independence. This study investigates whether over time an excessive amount of trust is created that threatens the professional scepticism of the auditor. Based on a dataset of 199 auditor-client dyads the level of trust the auditor has in his client and the professional scepticism perceived by the client is analysed. It is shown that the level of trust rises very quickly and declines to an average level after a period of idealization after three years. At the same time, the level of perceived professional scepticism increases until the fifth year of the relationship and then also settles at an average level. These results question common assumptions and shed new light on the discussion of auditor rotation regulations.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ADOPTION BY THE AFRICAN COUNTRIES
ASKARY, SAEED
Category: FR = Financial Reporting
This paper classifies African countries in terms of adoption of International Financial Reporting Standards (IFRS) using cluster analysis. Three clustering methods are used: IFRS, IFRS with region, religion, population, language and income grouping individually and aggregately. West Africa has the highest rate of IFRS adoption, while North Africa has the lowest rate. In terms of the relationship between IFRS adoption and religion, most of the Christian countries in Africa have adopted IFRS, while only a few Muslim countries have adopted IFRS. In addition, there is an inverse relationship between IFRS and population, meaning less populated African countries have mostly adopted IFRS, as opposed to African countries with large populations. There is also a surprising relationship between national income and the adoption of IFRS: African countries ranked as low income countries have mostly adopted IFRS. Half of the countries that speak a mixture of the main languages spoken in Africa, which are French, Arabic, and English, have adopted IFRS.
MANAGERIAL COMPENSATION, BONUS BANKS, AND LONG-TERM ORIENTATION
ASSEL, MARIA
CHENG, MANDY; SCHULTZE, WOLFGANG; WEILER, ANDREAS
Category: MA = Management Accounting
This paper provides a formal analysis of the investment incentives of bonus banks. Such incentive schemes are said to result in long-term orientation, but no analysis of this claim exists. We find that efficient investment decisions are generally not induced by bonus banks as proposed in the practitioners’ literature. Modifications needed to attain strong goal congruence result in convergence with the concept proposed in accounting research, where the bonus bank is directly linked to value creation via economic value created (O’Hanlon and Peasnell 2002). The latter concept requires managers to truthfully report about value creation. We analyze a situation in which an internal market is used to provide incentives for truthful reporting. We show that allowing the manager to sell the bonus bank to a successor when leaving the firm can induce efficient investment decisions under restrictive conditions. Under asymmetric information, efficient investment decisions require the succeeding manager to have superior capabilities which at least compensate for potential overstatements of value creation.
THE IMPACT OF MANDATORY (NON-)AUDIT FEE DISCLOSURE ON AUDIT QUALITY
AVERHALS, LIESBETH
VAN CANEGHEM, TOM; WILLEKENS, MARLEEN
Category: AU = Auditing
This study empirically examines the impact of mandatory (non-)audit fee disclosure on audit quality. Because mandatory disclosure of (non-)audit fees was intended to enhance auditor independence, we empirically test whether it results in higher audit quality. In addition, we expect that increased price competition resulting from an improvement in transparency with regard to audit pricing will affect audit quality. Using a dataset including both pre- and post-disclosure audit fees and audit quality data we find evidence of audit quality being higher in the post-disclosure period.
INTERNAL AUDITING AND SIGNALING THEORY: EVIDENCE FROM A “COMPLY OR EXPLAIN” GOVERNANCE REGIME
AXÉN, LINUS
AXEN, LINUS
Category: AU = Auditing
Previous research results show that a complementary relationship exists between internal and external monitoring mechanisms. Companies that believe in strong corporate governance culture and advocate monitoring activities are likely to invest resources in both internal and external audit. By using the lens of signaling theory, a more profound discussion can be made regarding the use and value of an internal audit function (IAF). This study examines how the existence of an internal audit function is related to the external audit fees. The analysis is based on empirical data from companies listed on Nasdaq Stockholm during 2013. The findings show that listed companies that have implemented an IAF pay higher external audit fees than companies that have refrained from such implementation. This study contributes to the literature by elucidating the use of an IAF from a signaling theory perspective and it supports the view that a complementary relationship exists between internal and external audit.
THE IMPACT OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE ON CORPORATE REPUTATION
AXJONOW, ANASTASIA
ERNSTBERGER, JÜRGEN; POTT, CHRISTIANE
Category: SEE = Social, Environmental & Ethical
This paper examines the impact of corporate social responsibility (CSR) disclosure on corporate reputation as perceived by non-professional stakeholders. Proponents of CSR disclosure like the Global Reporting Initiative (GRI) claim that CSR disclosure can be considered as a tool for reputation management. We empirically investigate this claim using a reputation index which tracks the general public’s perceptions of corporate reputation over time. In our analysis, we focus on disclosure in stand-alone CSR reports and control for a firm’s CSR performance. We find that stand-alone CSR reports do not influence corporate reputation among non-professional stakeholders. In additional tests, we find that disclosure in CSR reports influences corporate reputation among professional stakeholders and we provide some evidence that transparent disclosure on corporate websites even can influence corporate reputation among non-professional stakeholders.
THE IMPACT OF MANDATORY PARTNER ROTATION ON AUDIT REPORTING LAG AND AUDIT FEES: EVIDENCE FROM AUSTRALIA
AZIZKHANI, MASOUD
JIANG, ALICIA; YAP, WEN JING
Category: AU = Auditing
Motivated by the regulatory requirement of mandatory partner rotation in Australia, this study examines the impact of mandatory partner rotation on audit reporting lag and audit fees. Using a sample of 6,228 firm-year observations from 2010 to 2014, we find that companies have shorter audit reporting lag in the year of the mandatory partner rotation. Further, companies audited by non-Big 4 auditors not only have shorter audit reporting lag but also pay higher audit fees in the initial year of mandatory partner rotation. The results suggest that the costs of mandatory partner rotation may be higher for non-Big 4 audit segment and non-Big 4 auditors at least partially pass on the cost to their audit clients, especially to those larger clients who require more timely completion of audit reports
LINES OF DEFENSE COORDINATION FOR INTERNAL AUDIT QUALITY
AZZALI, STEFANO
MAZZA, TATIANA
Category: AU = Auditing
This study analyzes the effects on Internal Audit (IA) quality of coordination between third and second lines of defense, among internal control functions. These functions need to be coordinated to avoid duplication of efforts and gaps in risks coverage. We expect that IA quality increases with coordination between IA and second lines of defense. Using private data collected with questionnaires on a sample of Italian companies, we perform multivariate analysis in order to test our hypothesis. We find that the coordination index is positively and significantly associated with IA quality, confirming the improvement of IA quality due to coordinated activities. We find also that coordination activities are a critical area in financial industry, where bank of Italy introduced several new second line of defense functions: if they are not well coordinated, IA quality could decrease. Finally, we find the both listed and non-listed companies benefit of a positive and significant association between coordination activities and IA quality, with higher effect for non-listed companies, due to less stringent regulation requirements. We contribute to literature underlying the criticism related to coordination activities between IA and second line of defense. Frameworks for IA quality need to emphasize the importance of coordination among control functions. Regulators of the financial industry may benefit from the findings of this study in becoming aware of the consequences of introducing numerous internal control functions, all with a high level of independence.
CEO SUCCESSION PLANNING DISCLOSURE AND STOCK MARKET REACTIONS TO CEO TURNOVER ANNOUNCEMENTS
BAE, JIHUN
JOO, JEONG HWAN ; PARK, CHUL
Category: FR = Financial Reporting
Observing the disclosure of CEO succession planning, investors may form an expectation that a successor will inherit his or her predecessor’s leadership style and business strategy and will produce performance similar to that of the incumbent CEO. In contrast, without the disclosure, investors may expect that the successor’s performance will approximate the average performance of peer firms. Building on these investor expectations, we first hypothesize that stock market reactions to the announcements of well-performing (poorly-performing) CEOs’ departures are incrementally positive (negative) when firms previously disclosed CEO succession planning compared to when they did not. Second, we hypothesize that this positive (negative) impact is more (less) likely to hold for firms with more independent boards. Third, we hypothesize that the positive (negative) impact is more likely to hold for firms with less entrenched CEOs. Our evidence supports the first and third hypotheses when firms announce a CEO resignation and appointment simultaneously and when the resignation is not caused by non-routine reasons (e.g., a scandal or a dismissal). The results of testing the second hypothesis are mixed. Overall, our findings suggest that CEO succession planning disclosure is informative to investors in the event of routine CEO turnover.
VISUALIZING FINANCIAL STATEMENT IFRS COMPLIANT: PRELIMINARY EXPERIMENTS ADOPTING EYE TRACKING METHODOLOGIES
BALDI, RACHELE
DI PIETRA, ROBERTO; FEDERIGHI, PAMELA; RUFA, ALESSANDRA
Category: FA = Financial Analysis
Starting from Behavioral Accounting Research and moving to Neuroaccounting methodologies we tried to link positively visual attention and visual profile of accounting information, during decision making processes, through the implementation of Eye tracker in the first preliminary experiment. To do so we designed our experiment opposing, and making respondents unknown of this opposition, visual profile of accounting coming from two different perspective: IFRS regulation and Italian accounting standards. Considering the supposed superior quality of IFRS standards coming from the existing literature, visual attention should be positively linked with visual profile of accounting information from IFRS perspective. Moreover we expect to find that the visual profile of accounting selected could be a real mean to be used for accounting tests. Preliminary results show that the most representative visual profile of accounting information IFRS compliant (i.e. their disclosure into reports), is positively linked with visual attention. Instead, there is no meaningful link between visual attention and accounting concepts IFRS perspective generates. This could mean that visual attention is more attracted by visualizing accounting information into reports. Those prospects can help decision maker to choose a formulation instead of another better than just relying on different accounting concepts without looking at their disclosure.
THE EFFECT OF STRATEGY AND MANAGERIAL ABILITY ON ASYMMETRIC COST BEHAVIOR
BALLAS, APOSTOLOS
NAOUM, VASSILIOS-CHRISTOS; VLISMAS, ORESTES
Category: MA = Management Accounting
The current study examines the effect of strategy and managerial ability on the sticky behavior of SG&A expenses. We use US listed firms for the period 1991-2014 to provide empirical evidence that sticky cost phenomenon is also associated with strategic management and the efficiency of the firm’s management ability. Specifically, we conclude that firms that classified as prospectors exhibit SG&A cost stickiness whereas firms that classified as defenders exhibit SG&A cost anti-stickiness. Additionally, our study provides some evidence that in the case of prospectors, the degree of SG&A cost stickiness increases with the level of managerial ability. The results suggest that strategy and managerial ability should be considered as additional determinants of asymmetric cost behavior.
POLICY UNCERTAINTY AND ANALYST PERFORMANCE
BALORIA, VISHAL
MAMO, KALEAB
Category: FA = Financial Analysis
This study examines whether policy uncertainty affects the forecasting performance of financial analysts. We conjecture that policy uncertainty increases the complexity of the forecasting task for analysts, resulting in less accurate earnings forecasts. We find robust evidence that forecast accuracy decreases in the presence of policy uncertainty. We also document that the negative association between forecast accuracy and policy uncertainty is more pronounced when policy uncertainty is particularly high and when firms are more sensitive to policy uncertainty. Our results hold consistently across alternative measures of policy uncertainty and analyst performance. Collectively, our evidence suggests that policy uncertainty contributes to the complexities analysts encounter in predicting firm performance.
ORGANIZATIONAL EFFECTS OF FINANCIAL STATEMENTS CERTIFICATION IN PUBLIC SECTOR: THE CASE OF FRENCH PUBLIC HOSPITALS
BARREDA, MARLÈNE
BARREDA, MARLÈNE; GEORGESCU, IRÈNE
Category: AU = Auditing
The law "Hospital, Patient, Health and Territory "(HPST) of 12 July 2009 introduces certification of the accounts in the French hospital organizations. Based on the neo-institutional theory, the purpose of this paper is to explore the organizational effects of financial statements certifications introductions in the French public hospitals. This research is based on 25 semi-structured interviews conducted with financial directors in different certified or in the process of being certified hospitals. Our result show that the certification has an organizational impact by introduction of steering committees, the creation of workplaces assigned to the harmonization on internal procedures and information systems, and also has a positive effect on the professionalization of the employees. We found that the certification induces new practices which may increase legitimacy of some public hospitals. However, this process is not entirely introduced in all publics’ hospitals. Based on our empirical findings, we conclude that the certification practices have as main purpose to express and demonstrate conformity with institutionalized rules.
OCCUPATIONAL LICENSING AND ACCOUNTANT QUALITY: EVIDENCE FROM LINKEDIN
BARRIOS, JOHN
Category: FR = Financial Reporting
I use the staggered state-level adoption of the 150-hour Rule (the Rule) as a natural experiment and the career histories of professional accountants' from LinkedIn to test the Rule's impact on the quality of CPAs. My analysis is premised on the economic theories of barrier to entry, human capital, and screening. I find that the Rule is associated with increases in CPA exam pass rates and a reduction in candidate supply. My analysis of LinkedIn data shows that individuals subject to the Rule are more likely to be employed at a Big 4 public accounting firm and to specialize in tax. These individuals spend a larger part of their career in public accounting, have the same likelihood of promotion, but exit public accounting at faster rates than their non-Rule counterparts. Results point to the Rule not been purely a screening mechanism nor do the screening/human capital elements dominate the other effects.
ASSESSING THE IMPACT OF TEACHING BUSINESS ETHICS ON ACCOUNTING STUDENTS’ ETHICAL DECISION MAKING
BASIOUDIS, ILIAS
KHARUDDIN , KHAIRUL AYUNI; O'LEARY, CONOR
Category: ED = Accounting Education
This study explores the effect of teaching ethics on accounting students’ ethical decision making. A survey was performed on university accounting students who were enrolled in the second year Financial Accounting module in one of the business schools in the UK. We provide evidence that there is an improvement in the students’ ethical decision post ethics instruction period, suggesting the positive impact of teaching ethics in an accounting programme in the higher education. In addition, the study has found that the instruction of ethics is more effective within the traditional setting of lectures and tutorials as compared to the group ethics coursework assigned to the students in the module. This study contributes to better understanding of the accountancy students’ attitude towards business ethics, assessment of the impact of ethics education in accountancy courses and comparison of the effectiveness of different teaching instruction methods on the accounting students’ ethical decisions.
AUDITOR IDENTITY WORK: A DYNAMIC OF PROCESS AT THE HEART OF INSTITUTIONALIZATION
BEAU, PAULINE
JERMAN, LAMBERT
Category: IC = Interdisciplinary/Critical
According to Empson and Chapman (2006), Big audit firms’ regulation is based on the principle of “Up-or-Out”. However, because of the recent economic crisis, Big audit firms appear no longer able to keep their promises of promotion. So, what does it mean to be recognized as a “good” auditor in this new institutional order? One must ask questions about the role of identity work in this institutional change. We attempt to answer the following research question: by what means does auditor identity work help maintain or disrupt institutional order in auditing? The literature often characterizes identity as the consequence of institutional change (Creed et al., 2010; Lok, 2010). But Hwang and Colyvas (2011, p. 63) suggest that the influence of identity construction remains under-examined in analyses of institutional work. To address this gap, we propose to analyze the influence of auditor identity work on institutionalization. Through an ethnographic study and semi-structured interviews with auditors from big audit firms, we analyze an unexamined problematic identity situation: promised professional advancement that was halted by economic problems and that poses identity challenges for the auditors interviewed.
MANAGEMENT GOING CONCERN DISCLOSURES: COMPARATIVE IMPACT OF AN AUDIT REPORT STANDARD AND AN ACCOUNTING STANDARD
BEDARD, JEAN
BROUSSEAU, CARL; VANSTRAELEN, ANN
Category: AU = Auditing
This paper exploits recent changes in Canadian accounting and auditing standards, which offer a natural experiment, to examine the effects of standards on management reporting behavior. Specifically, we investigate the impact of stricter guidance from an accounting standard regarding the going concern assumption and of a requirement for the auditor to add an emphasis of matter paragraph when management reports a going concern uncertainty. Our empirical results suggest that “responsibilizing” management for going concern uncertainties through a specific accounting standard increases management’s propensity to disclose such uncertainties. However, requiring auditors to include an emphasis of matter paragraph in the auditor report reduced the propensity of management to disclose such uncertainties.
EXPLORING THE DIMENSIONS OF ABNORMAL ACCRUALS
BELLORA-BIENENGRAEBER, LUCIA
SCHIEMANN, FRANK
Category: FR = Financial Reporting
During the last years, a plethora of measurement approaches for abnormal accruals has been applied. While arguments for new measures usually claim to improve existing measures, a discussion about potentially different conceptual domains covered is scarce. We explore the dimensionality of the conceptual domain of abnormal accruals and derive 16 abnormal accruals measures arising from three major measurement approaches found in literature: indirect vs. direct, total vs. current, and matched vs. unmatched approaches. We use a Compustat US sample from 1988 to 2014 with 125,843 firm-year observations. First, we test the power of our 16 measures by analyzing their detection rate in a simulation of seeded abnormal accruals. Second, based on an exploratory factor analysis, we identify three factors influenced by the choice to apply indirect or direct accruals measures and, for the latter, matched or unmatched abnormal accruals. Interestingly, total vs. current abnormal accruals belong to the same factor. Finally, we disentangle the different conceptual domains covered by the measures by investigating how the three factors are related to established antecedents and consequences in their nomological network as well as to criterion variables for abnormal accruals. Our findings call for a thoughtful specification of the domain of abnormal accruals addressed by future research. We support researchers in parsimoniously capturing the different dimensions for main and robustness analyses.
WHAT DETERMINES CORRUPTION? EVIDENCE FROM LOCAL GOVERNMENT POLITICIANS
BENITO, BERNARDINO
BASTIDA, FRANCISCO; BENITO, BERNARDINO; GUILLAMÓN, MARÍA-DOLORES; RÍOS, ANA-MARÍA
Category: PSNP = Public Sector & Not-For-Profit
This paper mainly focuses on decisions taken by politicians that may affect the level of municipal corruption. Specifically, we study whether local politicians' incentives to be corrupt are influenced by the wages they receive and/or their intention to run for next elections. This issue has hardly been empirically tackled before. We use as gauge of corruption the number of cases of urban corruption reported in the online press in the period 2000-2009. Using a sample of 324 Spanish municipalities over 20,000 inhabitants, our results indicate that politicians’ wages and their intention to run for next election affect corruption. First, higher municipal politicians’ wages ensure less corruption. Second, when politicians want to be re-elected, corruption decreases. Finally, we also find that population, income level, income inequality, education level and touristic nature of the municipality affect corruption.
ASYMMETRIC TREATMENT OF TAX LOSSES AND CORPORATE INVESTMENT
BETHMANN, INGA
JACOB, MARTIN; MÜLLER, MAXIMILIAN
Category: TX = Taxation
While profits lead to immediate tax payments, tax losses are treated asymmetrically because they do not lead to immediate refunds. Most countries allow reducing tax payments on future profits by carrying losses forward, but only some allow immediate refunds of tax payments on past profits by carrying losses back. Since a substantial fraction of loss firms remains unprofitable, it is an open question whether the less asymmetric treatment of losses via carrybacks relative to carryforwards stimulates loss firms’ investment. Using a large sample of European private firms, we find that a less asymmetric treatment of tax losses increases loss firms’ investment by 6.3% to 8.1%. In line with theory, the tax loss asymmetry effect on investment is strongest for financially constrained loss firms and for larger tax refunds. However, we also document a trade-off in granting less restrictive tax refunds to firms: While a lower tax loss asymmetry translates into higher economic output, this comes at the risk of misallocation. We find that low productivity firms have higher survival rates under carryback regimes preventing that market share is moved from less productive loss firms to more efficient competitors.
FOREIGN DIRECTORS
BIANCHI, PIETRO ANDREA
BARRIOS, JOHN; ISIDRO, HELENA ; NANDA, DHANANJAY
Category: GV = Governance
We examine the macro determinants of director appointments on foreign boards and the micro determinants related to director characteristics associated with foreign appointments. Using a gravity model, we find that corporate boards in economically significant countries have more foreign directors from other economically significant countries. Further, common borders and geographic proximity increase cross-country director appointments. We further find that the likelihood of gaining a foreign appointment is lower for professionally certified directors, female directors, and directors with a single board appointment, and higher for directors that are older and more experienced, with an MBA or an Ivy League degree, and with greater reputation.
WHAT DRIVES THE CONSEQUENCES OF INTENTIONAL MISSTATEMENTS? EVIDENCE FROM RATING ANALYSTS’ REACTIONS
BIEREY, MARTIN
SCHMIDT, MARTIN
Category: FA = Financial Analysis
This paper analyzes the adverse consequences that firms face after an intentional misstatement becomes publicly known. Using a mixed methods approach, we examine (i) the mechanisms through which misstatements adversely affect misreporting firms, and (ii) to what extent and how persistently these mechanisms adversely affect firms’ credit ratings. A content analysis of rating reports reveals seven mechanisms. Rating analysts are most concerned about misstatement-related violations of debt covenants that increase a firm’s liquidity risk. We find that the identified mechanisms have a persistent adverse effect on firms’ credit ratings. After a misstatement becomes publicly known, we find a significantly negative effect on credit ratings in the subsequent six years. The adverse effect of the misstatement on firms’ credit ratings is particularly pronounced in cases where rating analysts express concern about misstatement-related violations of debt covenants in their rating reports. Our results suggest that misstatement-related violations of debt covenants appear to be the most severe mechanism through which misstatements adversely affect firms’ creditworthiness.
HOW ACCOUNTING FIRMS COMPETE FOR FINANCIAL ADVISORY ROLES IN THE M&A MARKET
BILINSKI, PAWEL
YIM, ANDREW
Category: AU = Auditing
Thomson Reuter’s quarterly rankings consistently place accounting firms among top ten financial advisors on mergers and acquisitions (M&A) in the mid- and low-end of the market. We propose that accounting firms lever their audit expertise to produce fairer target valuations, particularly in industries where the auditor specializes, and when the target has low reporting quality. These competitive strengths of accounting firms translate into tangible gains for bidders as transactions advised by accounting firms have (1) higher announcement day price reactions compared to deals with investment-bank financial advisors, (2) a lower likelihood the acquirer overpays for the target, and (3) a lower likelihood the deal will not complete. These acquirer benefits translate into more repeat business for accounting firms as they are more likely to advise on subsequent transactions.
PUT YOUR MONEY WHERE YOUR MOUTH IS: HOW TO TELL REAL COMMITMENT TO SUSTAINABILITY APART FROM EMPTY RHETORIC?
BINI, LAURA
BELLUCCI, MARCO; GIUNTA, FRANCESCO
Category: FR = Financial Reporting
Companies exhibit growing interest in sustainability rhetoric. Such an interest is alternatively justified by a company’s need to address legitimacy instances, rather than to satisfy stakeholders’ requests about its sustainability performance. Whatever the case, a main debated issue concerning sustainability rhetoric deals with the difficulties in understanding whether companies’ commitment towards sustainability is “real”, or it only consists of “empty words” that hide opportunistic strategies. Our paper contributes to this debate, proposing a methodological approach, which is based on a company’s business model (BM) representation. We argue that the inclusion of adequate sustainability information in a company’s BM representation can testify to a real company’s engagement, as it illustrates how sustainability affects its value creation process. Compared to extant methodological proposals, mainly based on linguistic analyses, our approach does not require specific competences to be applied. Our approach is consistent with previous contributions that propose a company’s BM as a representation device able to illustrate strategic information that cannot be represented in the traditional corporate reporting. We propose a possible answer to address the challenges faced by regulators and standard setters involved in the regulation of sustainability disclosure.
HOW PERFORMANCE MEASUREMENT SYSTEMS HELP FIRMS ACHIEVE INTENDED AMBIDEXTERITY: THE ROLE OF COGNITIVE CONFLICT
BISBE, JOSEP
BEDFORD, DAVID; SWEENEY, BREDA
Category: MA = Management Accounting
This paper examines the extent to which design- and use- attributes of Performance Measurement Systems (PMS) intervene in the conversion of intended ambidexterity competence into actual achieved ambidextrous innovation outcomes. Building on organisational conflict theory, it further emphasises the role of cognitive conflict in shaping the relationships between PMS and ambidexterity. Using cross-sectional survey data from a sample of 90 Irish firms, the paper investigates whether a) the balance of performance measures and b) the degree of debate and discussion among the top management team (TMT) around PMS intervene in the generation of cognitive conflict and in the management of it in order to achieve innovation ambidexterity. Findings reveal that cognitive conflict significantly drives the achievement of innovation ambidexterity outcomes. Furthermore, the results of this study indicate that the intentions of developing ambidexterity competences do not generate cognitive conflict by themselves. It is through the combined presence of balance in the design of PMS and a high level of debate and discussion around PMS measures that cognitive conflict is activated, which emphasises the significant role of PMS in ambidextrous firms.
INSTITUTIONAL GAAP ENFORCEMENT HETEROGENEITY AND ENFORCEMENT STRATEGY
BISSESSUR, SANJAY
LITJENS, ROBIN
Category: FR = Financial Reporting
This paper examines how heterogeneity in the implementation of IFRS enforcement in the EU affects variation in IFRS enforcement outcomes. Economic theory suggest many reasons can influence the incentives of regulators, allowing regulators to have discretion in enforcing these regulations, thereby affecting regulatory outcomes. Regulatory discretion is assumed to determine enforcement strategy as constituted by (i) types of actions and (ii) tactical choices by enforcers. This paper examines heterogeneity in resource and investigatory constraints as determinants of enforcement strategy. We focus on use of regulatory deterrence versus regulatory compliance strategy (types of actions) and public accounting enforcement releases (tactical choices) to capture actual enforcement strategy. We find a significant association between regulator weaknesses and regulator incentives and the observed enforcement strategy. Furthermore, this variation in actual enforcement strategy translates into different economic consequences of enforcement actions.
PUBLIC SECTOR RISK MANAGEMENT IN GERMANY: A PARTIAL LEAST SQUARES ANALYSIS OF FACTORS ASSOCIATED WITH THE EXTENT OF IMPLEMENTATION
BLÄTTLER, STEPHANIE
HUNZIKER, STEFAN; MENK, MICHAEL TORBEN
Category: PSNP = Public Sector & Not-For-Profit
The development of risk management enables municipalities to systematically identify, analyse, evaluate, monitor and control risks as they consider the involvement and participation of a multitude of actors. While many studies assess risk management in a private sector context, public sector risk management and particularly with a focus on German municipalities are lagging behind. One main question in this regard is what factors drive the implementation of risk management in German municipalities. This article addresses that research gap by means of a structural equation model (PLS-SEM). While some factors are tested in literature applied in the public sector, others are shown in the context of private institutions. The results derived from a web-based survey of 209 German municipalities evidencing that the stage of risk management implementation is positively related to fraud, competence, legal regulations, risk management training, support of the executive and resources such as time available. Furthermore the article shows that the implementation stage of risk management is positively related to the quality of risk management. The organisation size shows a moderating effect on the results.
MENTAL ACCOUNTING AND THE TIMING OF TAXATION
BLAUFUS, KAY
HUNDSDOERFER, JOCHEN; SÜNWOLDT, MATTHIAS; WOLF, NADJA
Category: TX = Taxation
We study whether the timing of pension taxation influences work effort and risk taking decisions. In a real effort experiment, participants first earn money within one hour and second invest the money earned by making five independent portfolio decisions. Whereas participants in the immediate taxation treatment have to pay taxes on their wages but their invested pension capital and the respective returns are tax-exempt, participants in the deferred taxation treatment do not have to pay taxes on their wages but on their withdrawal of the invested pension capital and the returns. After-tax payoffs are equal in both tax systems. However, due to mental accounting, we expect and find that participants in the deferred taxation treatment perceive their work payment to be significantly fairer and that the perceived fairness significantly influences the work effort. Moreover, we find that deferred taxation decreases risk taking.
THE ASYMMETRIC EFFECT OF REPORTING FLEXIBILITY ON PRICED RISK
BLOOMFIELD, MATTHEW
Category: FR = Financial Reporting
I examine the link between the costs of obfuscation (“reporting flexibility”) and systematic risk exposure. Using SOX compliance and internal control status as proxies for reporting flexibility, I find that firms with greater degrees of reporting flexibility comove more strongly with downmarkets than with upmarkets, a phenomenon I refer to as “risk asymmetry.” Using an event study/regression discontinuity design, similar to that of Iliev (2010), I provide empirical evidence demonstrating that reporting flexibility causes risk asymmetry. Taken together with prior literature (noteably Ang, Chen and Xing (2006), who document that risk asymmetry is priced even after controlling for standard determinants of a firm’s cost of equity capital), my results suggest that firms can lower their costs of equity capital by credibly reducing their reporting flexibility. Furthermore, commonly used multifactor models are insufficient to fully capture the pricing-relevance of risk asymmetry, thereby warranting the inclusion of an additional factor-mimicking portfolio designed to capture the effects of reporting flexibility.
IS EXTREME TONE EMOTIONAL OR INFORMATIONAL? INVESTOR RESPONSE TO EXTREME LANGUAGE IN EARNINGS CONFERENCE CALLS
BOCHKAY, KHRYSTYNA
BOCHKAY, KHRYSTYNA; CHAVA, SUDHEER ; HALES, JEFFREY
Category: FR = Financial Reporting
We develop a dictionary of the words and phrases spoken in earnings conference calls and analyze how investors react to extreme versus more moderate positive and negative language. We document that extremely positive (negative) tone in earnings conference calls is associated with significantly higher (lower) abnormal stock market returns around the calls. Linguistic extremity is also associated with a significant increase in trading volume. Firms with more uncertain information environments or higher information processing costs experience particularly strong stock and volume reactions to the extreme positive tone in conference calls. Finally, while linguistic extremity contains information about a firm's future earnings, investors appear to overreact to extreme language on the day of the earnings conference call. Our results suggest that investors are influenced not just by what managers say in communicating performance, but also how they say it.
STATUS MOTIVES AND AGENT-TO-AGENT INFORMATION SHARING: HOW EVOLUTIONARY PSYCHOLOGY SHAPES AGENTS’ RESPONSES TO CONTROL SYSTEM DESIGN
BOL, JASMIJN
LEIBY, JUSTIN
Category: MA = Management Accounting
The quality of decision making within firms often depends on the willingness of agents to share information with other agents. In two experiments, we examine the effects of status motives, i.e., the desire to gain the respect of and deference from others, on information sharing in two different control systems: one in which agents have incentives to share and one in which agents incur costs to share. We draw on theory from evolutionary psychology to argue that status motives modify agents’ responses to the control systems, constraining information sharing when agents have incentives to do so but motivating information sharing when agents incur costs to do so. Results support our predictions. We discuss the implications of our findings for information sharing, and the implications of applying an evolutionary framework of agent motivation to understand decision making in firms.
FORMAL FACTORS OF ADVERSE OPINIONS ISSUED BY THE SÃO PAULO STATE AUDIT OFFICE (TCE-SP), IN BRAZIL
BORALI, NATASHA
REZENDE, AMAURY; ZOBOLI DALMACIO, FLAVIA
Category: PSNP = Public Sector & Not-For-Profit
The main objective was to characterize the causes of rejection in the 1,642 adverse opinions on annual government rendering of accounts of 644 municipalities in the state of São Paulo, Brazil, issued by the São Paulo State Audit Office (TCE-SP) from 2000 to 2007. The study is justified by the possibility of improvement in accounting and administrative practices in municipal public administration as well as in the analysis focuses of the government audit performed by TCE-SP agents. As for procedures, document analysis was performed with the final opinions, i.e., after reconsideration. We concluded that the frequency of rendering of accounts rejection is greater in the last year of the term in office, which is justified primarily by Article 42 of the Brazilian Fiscal Responsibility Law. It is also more frequent in municipalities of higher municipal human development index (MHDI), current net revenue from taxes, GDP and population density. Finally, we concluded that the opinions issued by the TCE-SP lack standard organization in their publication, enabling the supposition that they are yet to reach their full accountability potential.
AN INTERDISCIPLINARY CONCEPTUALIZATION OF INTELLECTUAL CAPITAL
BORDIANU, ANDREEA
Category: IC = Interdisciplinary/Critical
While it is increasingly argued that the potential of more traditional physical and financial assets have been exhausted, intellectual capital is seen as a “new” untapped force for economic prosperity. Despite this, the emerging picture of intellectual capital in the literature is somewhat confusing and questions remain unanswered about what we actually know about this concept. In answering these questions, the paper contributes to the existing body of knowledge by providing an account of what is already known within the intellectual capital literature and mapping what is yet to be uncovered, while critically examining the limitations of past efforts. It finds that the intellectual capital measurement and its impact on performance are the two main areas where further improvement is needed in the conceptualization of intellectual capital. It then proceeds at taking an interdisciplinary perspective on intellectual capital to better understand how these areas have been explored in the accounting and strategic management disciplines with the aim of suggesting future directions to further the field into a more mainstream territory.
UNDERSTANDING THE COST STRUCTURE OF A FIRM: BALANCING ACTIVITIES AND ACHIEVING ECONOMIES OF SCOPE
BORMANN, SARA
BOUWENS, JAN; HOFMANN, CHRISTIAN
Category: MA = Management Accounting
This paper studies if it matters whether a firm’s products are produced jointly in one organizational unit or separately in multiple organizational units. We propose that spillovers between products (e.g., knowledge and information transfers) are more likely to occur when production takes place in one organizational unit. Our evidence confirms that when multiple products are produced in one organizational unit, such economies-of-scope effects materialize. We also find that the spillover effects start to dissipate when the activity levels for the products are unequal. For example, we find that the positive spillover of Product B with regard to the efficiency achieved in producing Product A is significantly reduced as the level of activities in producing Product A differs from the level of activities in producing Product B. Importantly, our findings are unrelated to the centralization or decentralization of decision rights, as the decision rights are identical across organizational units, independent of the number of products assigned to a unit. Our results are based on single firm study. In particular, we study a divisional setting of a transportation firm where, at each location, the firm either decides to offer two services (i.e., food and non-food transportation) or to offer only one service (i.e., either food or non-food transportation).
GIVING TO CULTURE: LOCAL BUSINESS PHILANTHROPY AND THE VALUE OF DONATION
BOSA, IRIS
Category: IC = Interdisciplinary/Critical
Organisations’ philanthropy has increasingly attracted the attention of academic researchers, particularly in the last decade. Researchers tend to study the philanthropy of public corporates neglecting attention to other companies, such as private corporates and small-medium-businesses. Research tends to assess the impact of donation on the organisation’s performance via data retrieved from annual accounts and Corporate Social Responsibility reports. While these documents are very important, they might provide an incomplete understanding of the impact of donation as they focus only on official information. The current paper aims to close this gap. Additionally, the literature has shown scant attention to giving to cultural events. This paper researches how philanthropy giving of private corporates is measured and the way its impact is assessed. It investigates the rationale for a business to give to a cultural festival. To achieve this, a regional cultural festival was selected and semi-structured interviews have been undertaken with the corporates supporting the initiative. All businesses claim strong bonds with their community. While giving to the festival is seen as a contribution back to the local community, some interviewees have also highlighted benefits for their workers. Rather strikingly, the impact of the contribution is not assessed, as the value of the overall impact on the business is seen as not measurable.
HOW SHOULD INFORMATION TECHNOLOGY BE COVERED IN THE ACCOUNTING PROGRAM?
BOULIANNE, EMILIO
Category: ED = Accounting Education
Professional accountants associations, business schools, and accounting professors are faced with an important question: Which information technology (IT) competencies should be developed in accounting programs to train skilled professional accountants? Key references shows evidence that advanced-level education in IT is very important for accountants’ careers. Through content analysis, this study investigates how Canadian CPAs are trained in IT. Results indicate that IT has lost ground in the CPA program which may be due to three main reasons: 1) a larger coverage in finance, strategy, and governance topics, 2) challenges to teach and test IT in terms of course development, and 3) the lack of recognition of and incentives for academic work on IT. Compare to key players in accounting education, it appears that Canada has taken a different route with regard to the required IT competencies.
DO INVESTORS PAY SUFFICIENT ATTENTION TO OTHER COMPREHENSIVE INCOME ITEMS?
BOULLAND, ROMAIN
PAUGAM, LUC
Category: FR = Financial Reporting
We explore whether investors overlook the information content of other comprehensive income (OCI) items. OCI items are gains and losses that bypass the income statement and affect directly equity. Although they convey information about performance, owing to limited investors’ attention, the information content on OCI may be disregarded for several reasons: (1) a perceived lack of persistence, (2) a lack of a clear conceptual basis for OCI, (3) limited available granular disclosure, or (4) a functional fixation on earnings. Drawing from a sample of US banks, where unrealized gains and losses on available-for-sale (AFS) securities are material and a prominent component of OCI, we show an annual difference of 7% in future cumulative abnormal returns between banks that have reported in the previous period unrealized gains on AFS securities and banks that have reported unrealized losses on AFS securities. We also find that investors are slow to react to the information content of OCI. Investors’ response to OCI information is insignificant one month after OCI information has been released and starts only four months after information becomes public. Investors’ response to OCI information doubles 10 months after it has been released. Next, we create a zero-cost trading strategy that relies on public information regarding unrealized gains and losses on AFS securities. Our strategy generates a monthly alpha ranging between 1.1% and 1.3%.
THE TRANSMISSION OF CORPORATE RISK CULTURE: EVIDENCE FROM BANK ACQUISITIONS
BOURVEAU, THOMAS
BOISSEL, CHARLES ; MATRAY, ADRIEN
Category: FR = Financial Reporting
This paper examines the transmission of risk assessment practices related to future loan defaults in the banking industry. Using bank acquisitions as shocks in a difference-in-differences research design, we provide evidence that acquiring banking groups transfer their discretionary risk assessment practices to newly acquired banking subsidiaries. Specifically, we document an increase in the comovement between acquiring and target banks' loan loss provisions following the acquisition that is not explained by banks' underlying risk factors. We further perform additional tests to plausibly rule out reverse causality and selection concerns. Overall, our findings shed light on how discretionary risk assessment practices are transmitted, which is relevant to regulators trying to assess factors affecting the systemic risk of the banking industry.
KNOWLEDGE SPILLOVER AND AUDITING LONG-TERM PLANS
BRADBURY, MICHAEL
RAFTERY, ADRIAN; SCOTT, TOM
Category: AU = Auditing
This paper provides new evidence on knowledge spillover by using the New Zealand municipal setting where audited Long-Term Plans (LTP) are required every three years. We find consistent evidence that LTP audit fees are positively related to municipal annual report audit fees, whilst other fees are not. This suggests that knowledge spillovers from auditing long-term financial forecasts are dependent on the nature of the additional services provided. After controlling for factors associated with audit fees, we find consistent evidence of a private sector audit fee premium for annual report and forecast financials (i.e. the triennial LTP). LTP audit fees are associated with municipal size, complexity and political competition. Thus, we also provide evidence into the market for auditing forecasts.
ANALYST DIVIDEND FORECASTS AND THEIR USEFULNESS TO INVESTORS: INTERNATIONAL EVIDENCE
BRADSHAW, MARK
BILINSKI, PAWEL
Category: FA = Financial Analysis
Recent finance and accounting studies indicate that dividends are ‘sticky’ and declining in economic importance. If so, there should be little investor demand for analyst dividend estimates and analyst dividend forecasts should simply mirror time-series estimates. We examine firms from 16 countries spanning 2000–2013 and find that only 25% of firms exhibit sticky dividends, while the majority either increase (54%) or decrease (21%) their annual dividends. In contrast to the disappearing dividends view, we predict that this high variability in dividend payments across stocks actually increases investor demand for dividend information. Accordingly, analysts respond to this demand by producing informative dividend forecasts. Our analysis indicates that analysts’ dividend estimates are indeed useful to investors because they (i) are more accurate and better aligned with market dividend expectations than other estimates, such as standard time-series modelling approaches, (ii) convey incremental information to the market beyond that contained in other fundamentals, and (iii) help investors interpret the persistence of earnings news.
BENEFITS OF FORMAL ERM IMPLEMENTATION AND THE ROLE OF RISK AWARENESS
BRAUMANN, EVELYN
Category: MA = Management Accounting
ERM has been linked to better profitability, less volatility, and overall improved performance because it enables organizations to make better decisions. Still, frameworks, processes and standards for risk management are not enough to ensure that organizations reliably manage their risks and meet their strategic objectives. As the most critical part of risk culture, risk awareness is increasingly seen as informal driver in a firm’s risk management system influencing results and contributing to a firm’s strategic advantage. This study examines the mediation effect of risk awareness on the relationship between formal ERM implementation and company performance. The investigation is based on survey data from 121 non-financial companies in Austria. Hence, I contribute to strategic ERM research by addressing the role of risk awareness in a formal ERM system and explore its benefits. Results support a positive association of formal ERM implementation and company performance and a mediation effect of risk awareness. Furthermore, respondents occupying a controller position but being responsible for the company’s overall risk management process have a more conservative perception of company performance. This empirical investigation is particularly distinctive to earlier ERM studies as it takes an innovative and comprehensive approach to measure the level of formal ERM implementation by developing a composite score based on risk management practices and processes.
WHO WANTS TO BE AN ACCOUNTANT? − EARLY EVIDENCE ON CAREER DECISIONS AND PERSONALITY TRAITS OF GERMAN STUDENTS
BRAVIDOR, MARCUS
KRÜGER, JAN; LOY, THOMAS R.; SCHARF, CHRISTINA
Category: ED = Accounting Education
Accounting students are said to conform to the precise and trustworthy, but dull and boring “bean counter” stereotype. We present additional evidence on the effect of personality traits on the decision to major, the intention for a first job and the desire to pursue a professional examination in accounting. The study is based on a survey of 1,100 students at 15 German universities. Personality traits are measured using the Big Five Inventory, commonly used in psychology and human resources. In contrast to prior studies, we differentiate between students in managerial, financial and tax accounting as well as finance. Our results confirm prior evidence on the predominance of the “bean counter” stereotype. Results are particularly strong for tax accounting students. We find weaker effects for managerial accounting where students even switch to the “business professional” stereotype in some cases. We observe nearly no effects for students in financial accounting. Effects vary between accounting facets and decisions, indicating differences in timing and extent of potential filtering effects.
INFORMATION AND FINANCIAL INTERMEDIATION: EVIDENCE FROM PUBLIC DISCLOSURE REGULATION
BREUER, MATTHIAS
HOMBACH, KATHARINA; MÜLLER, MAXIMILIAN ANDRE
Category: FR = Financial Reporting
We provide novel evidence on the importance of private information for financial intermediation by exploiting variation in a substitute of private information, public information, generated via discontinuous regulatory reporting requirements assigned to otherwise similar small and medium-sized private firms. We find that more public information decreases information asymmetries among competing banks but discourages private information acquisition from incumbent banks as evidenced by a shift from concentrated, relationship-based financial intermediation to more transactional lending approaches. In particular, we document that more public information leads to contracting with multiple banks, at greater geographical and hierarchical distances, and at shorter maturities. Consistent with public information increasing competition, the effects are strongest in concentrated local credit markets and result in credit rationing of risky firms.
THE IMPACT OF INCENTIVES ON RISK-TAKING BEHAVIOUR: EVIDENCE FROM THE UK FINANCIAL SERVICES INDUSTRY.
BRICKMAN, KAREN
OTLEY, DAVID; WARREN, LIZ
Category: MA = Management Accounting
Abstract It has been argued that poor remuneration policies at financial institutions were a major contributor to the 2008 financial crisis. Consequently, global regulators have developed several remuneration codes of conduct for designing incentive schemes whereby the behaviour of employees under those schemes are more aligned with the relationship between risk and return. The primary aim of these remuneration codes is to mitigate employees’ propensity for excessive risk-taking. In view of these changes, the purpose of this paper is to examine the impact of the three most prominent changes brought about by these codes: a bonus cap; deferral of bonus payments; and a clawback clause on bonuses, on traders’ risk-taking behaviour. We present a qualitative analysis of semi-structured interviews with bankers from ten large investment banks. The findings indicate that bonus deferrals have no impact on risk-taking behaviour, with the impact of a bonus cap and bonus clawback being contingent upon the circumstances in which they are implemented. We conclude that uncapped pay-per-performance incentive schemes encourage risk-taking, and that the vital ingredient in reducing traders’ propensity for excessive risk-taking is the commitment of senior management to a strong risk culture, not the remuneration codes.
INTEGRATED REPORTING: THE UNGREENING OF SUSTAINABILITY REPORTING?
BRIDGES, CAROLINE M
Category: SEE = Social, Environmental & Ethical
Integrated Reporting (IR) has attracted global attention since its inception in 2010. The International Integrated Reporting Council (IIRC) has adapted and changed the stated outcomes as they have sought to gain global adoption of integrated reporting as the corporate reporting norm. In 2010 the remit of the IIRC as stated was to account for sustainability. However, in 2014, sustainability no longer appears in the definition of IR. IR is now “A process founded on integrated thinking….about value creation over time.” Has this resulted in a move away from the sustainability ambitions of 2010 or has sustainability been captured in the wider definition of value creation? The desire to become the norm for corporate reporting and institutionalise IR has resulted in a more business oriented, less environmentally focussed framework. Using interview data with key decision makers from the IIRC and related documents publically available on the IIRC website this paper traces the history of the IIRC to examine the development of IR and identify the drivers for its formation and how the objectives have changed and diluted the ‘green agenda’. This paper provides insight into the framework development and contributes to the emerging literature on IR.
SOCIALISTIC BUDGET LAPSING AND INVESTMENT DECISIONS
BRUGGEN, ALEXANDER
FEICHTER, CHRISTOPH
Category: MA = Management Accounting
We examine the effect of budget lapsing on managers’ investment decisions under different levels of uncertainty. Budget lapsing is not only common in operational budgets, but also in investment budgets. However, under ‘classic budget lapsing’ it is often unclear to divisional managers if and how unused funds are re-allocated. In contrast, when unused funds are explicitly reallocated to divisions in need for capital, budget lapsing becomes a form of corporate socialism, labelled as ‘socialistic budget lapsing’. In a two-by-three experiment, 120 participants form experimental firms and make investment decisions to maximize their own divisional profit. We manipulate the level of uncertainty of investment outcomes (high, low) and budget lapsing in three forms (absent, classic budget lapsing, socialistic budget lapsing). Results are in line with our expectations. In absence of budget lapsing managers underinvest when uncertainty is high, compared low uncertainty. Also under classic budget lapsing managers tend to lower their investments in high uncertainty settings but overinvest under low uncertainty. Under socialistic budget lapsing, however, uncertainty does not affect investment levels and the investment levels are close to the most beneficial level of investment. Supplementary analysis reveals two underlying mechanisms that drive these results, namely the insurance character of socialistic budget lapsing and the fairness of the allocation procedure.
OWNERSHIP AND TAX AVOIDANCE—THE IMPACT OF CAPITAL MARKETS AND CORPORATE FAMILY INVOLVEMENT
BRUNE, ALEXANDER
THOMSEN, MARTIN; WATRIN, CHRISTOPH
Category: TX = Taxation
To improve our understanding of the determinants of tax avoidance, we investigate different firm types. More precisely, we analyze tax avoidance in public non-family firms, public family firms, private non-family firms, and private family firms. Among the diverging characteristics of these different firm types, the most important is exposure to capital market pressure and corporate family involvement. In this context, we examine a dataset of German firm-years from all four firm types from 2009 to 2013. We report three main results. First, we find that tax avoidance is greater in public firms than in private firms. Second, considering the findings of prior studies, we conjecture that tax avoidance is greater in non-family firms than in family firms. However, the results are ambiguous: while tax avoidance in public family firms seems to be greater than in public non-family firms, we do not make analogous findings when analyzing private firms. Finally, we expect and find that tax avoidance in public non-family firms is greater than tax avoidance in the other three firm types (i.e., public family firms, private non-family firms, and private family firms). Thus, our results suggest that special firm characteristics, such as capital market pressure and corporate family involvement, can be considered as additional factors that determine the degree of tax avoidance by a firm.
THE ASSOCIATION BETWEEN AUDIT COMMITTEE CHAIR CHARACTERISTICS AND EARNINGS MANAGEMENT
BRUYNSEELS, LIESBETH
KRISHNAMOORTHY, GANESH; WRIGHT, ARNOLD
Category: AU = Auditing
Prior research and governance stakeholders from practice have emphasized the importance of the audit committee chair in ensuring the effectiveness of audit committees. However, there is limited prior research on the association between characteristics of the chair of the audit committee and the quality of financial reporting. Specifically, we examine the role of audit committee chair financial expertise and status in enhancing audit committee effectiveness by curbing earnings management. Based on a sample of US public companies over the period of 2004-2012, we find that AC chair accounting financial expertise (AFE) is associated with lower levels of absolute discretionary accruals and income-increasing accruals. Importantly, the positive effects of AFE reported in prior research are found to be the result of such expertise residing in the AC chair and not in the rest of the AC. We further find that AC chairs who are AFEs and have high status constrain earnings management when accruals are income-increasing, a high risk scenario. In addition, results reveal that the AC chairs who are AFEs and have higher status relative to the CEO constrain management’s opportunistic income-increasing accruals to a greater extent than when the AC chairs are only AFEs. The findings have important public policy implications regarding the importance and qualifications of the chair of the audit committee.
EXTERNAL FORCES AND STRATEGIC RESPONSES OF BUSINESS EDUCATION PROVIDERS IN EASTERN EUROPE
CADEZ, SIMON
Category: ED = Accounting Education
An increasingly common strategy among business schools, despite being heavily contested, is pursuing the elite status by securing (high) placement in business school (MBA) rankings. Contrary to the elite schools, our knowledge is strikingly nascent about strategic orientations of non-elite schools, although this group is far larger and very heterogeneous. This is particularly the case for schools operating in periphery contexts, where, despite odds, aspirations to join the global elite are increasing as well. The study herein examines market and institutional forces in the field of business education from a global and regional perspective and strategic orientations in response to these pressures in an Eastern European context. Several findings emanate from the study. Although institutional pressures and legitimating agencies give rise to some isomorphic conducts, business schools in the periphery exhibit very distinct strategic orientations. A significant mediator of these orientations is schools’ governance system. While the overall quality of business education in the periphery is rather modest, some regional champions have eloquent aspirations to join the global elite.
DO KEY STAKEHOLDERS CARE ABOUT HUMAN RIGHTS ISSUES? AN ANALYSIS OF INDONESIAN COMPANIES’ DISCLOSURES
CAHAYA, FITRA ROMAN
HERVINA, RIZKA
Category: SEE = Social, Environmental & Ethical
This study examines Indonesian Stock Exchange (IDX) listed companies’ human rights disclosures. Year-ending 2012 annual report disclosures of 75 IDX listed companies are analyzed. Global Reporting Initiative (GRI) guidelines are employed as the disclosure index checklist. The results show a low level of voluntary human rights disclosure (36.74%). The highest level of communication is for Assessment issues. Very few companies disclosed information about Child labour and forced and compulsory labour. Statistical analysis reveals that board size significantly influences ‘human rights’ communication in a positive direction. Company size, one of the control variables in this study, is also found to be positively significant. Managerial stakeholder theory partially explains the variability of these disclosures. The main implication of the findings is that key stakeholders do not see the importance of human rights issues to be disclosed. Companies may also attempt to hide certain information regarding child labour and forced and compulsory labour.
SOCIOEMOTIONAL WEALTH THEORY AND EARNINGS MANAGEMENT BEHAVIORS: THE CASE OF IFRS ADOPTION AMONG PRIVATE COMPANIES
CAMPA, DOMENICO
CAMERAN, MARA; PETTINICCHIO, ANGELA KATE
Category: FR = Financial Reporting
This paper empirically investigates the Socioemotional Wealth (SEW) theory (Gomez-Meija, Cruz, Berrone, & De Castro, 2011) by analyzing earnings management behaviors of different types of private family firms in a context where companies might have incentives to manage earnings: the voluntary adoption of IFRS (Ewert & Wagenhofer, 2005). We propose multiple proxies to capture the ‘family control’ and ‘family identification’ elements of SEW and using a large database composed of Italian private companies, we document that, after the voluntary IFRS adoption, ID family firms and CTRL family firms use different earnings management tools. More specifically, the former use more real earnings management while the latter focus more on accrual manipulation. Our study contributes to the debate on the appropriateness of SEW as theoretical framework in the family business field, providing empirical foundation to the paper of Gomez-Mejia, Cruz, and Imperatore (2014). Our findings clearly highlight that papers analyzing family companies’ accounting behaviors should differentiate inside this group and that the fact that a large part of accounting studies has treated family firms as an homogenous group potentially explains the conflicting findings obtained so far (Prencipe, Bar-Yosef, & Dekker, 2014). Finally, we show that it is important to consider different types of earnings management tools (i.e. real vs accrual earnings management) when studying family firms’ accounting choices.
AN EXAMINATION OF EARNINGS MANAGEMENT THAT IS BENEFICIAL TO EXISTING SHAREHOLDERS
CAO, WENJIAO
JIA, YUPING; ZENG, YACHANG
Category: FR = Financial Reporting
Most earnings management studies label earnings management as an undesirable financial reporting practice and thus expect negative market consequences (i.e. greater executive turnover or negative stock market reactions) when earnings management is revealed. We argue that there is a good side of earnings management, thus the power of the tests related to earnings management could be significantly enhanced by disentangling efficient from opportunistic earnings management. We use a python program to read through the SEC Enforcement Action documents (i.e., AAERs) issued between 2004 and 2014 and to attribute the detected earnings management firms to Harmful Incentives Group and Beneficial Incentives Group based on pre-determined keywords lists. We find that the turnover rates and forced turnover probabilities are significantly higher for CEOs/CFOs in Harmful Incentives Group than those in Beneficial Incentives Group. We also find evidence that market reactions to the release of SEC enforcement actions are also significantly more negative for Harmful Incentives Group than for Beneficial Incentives Groups. Finally, we show that firms are more likely to actively disclose the departure of their CEOs/CFOs if these CEOs/CFOs manipulate earnings at the cost of existing shareholders and firms (Harmful Incentives Group).
DOES COMPANY REPUTATION MATTER FOR VOLUNTARY DISCLOSURE QUALITY? EVIDENCE FROM MANAGEMENT EARNINGS FORECASTS
CAO, YING
CASSELL, CORY; MYERS, LINDA; OMER, THOMAS
Category: FA = Financial Analysis
In this study, we explore the association between company reputation and voluntary disclosure quality as proxied for by the issuance and characteristics of management earnings forecasts. We follow prior literature and proxy for company reputation using measures based on Fortune’s America’s Most Admired Companies List. We find that companies with higher reputations are more likely to issue earnings forecasts, and forecast earnings more frequently. We also find that for the subsample of companies selected to the Most Admired List, earnings forecasts issued by higher reputation companies are more accurate. We provide supporting results from a battery of sensitivity analyses designed to alleviate concerns related to potential endogeneity, the influence of managerial ability, and the influence of information demand. Our study contributes to the voluntary disclosure literature by identifying a unique factor that motivates companies to voluntarily disclose better forward-looking information, and to the reputation literature by demonstrating the effect of company reputation on company efforts to reduce information asymmetry with stakeholders.
TASK SPECIFIC EXPERIENCE AND AUDITOR EFFORT
CAPKUN, VEDRAN
ALISSA, WALID; SUCA, NADJA
Category: AU = Auditing
Using a sample of 37,688 tax audits, we analyze the impact of task-specific experience on auditor effort. We find that when auditors are faced with tasks with which they have little task-specific experience, instead of increasing their effort to compensate for their lack of experience, they actually decrease their effort. Specifically, we find that audit teams, as well as individual auditors, spend less time on income tax, value added tax (VAT), and firm audits when they have low levels of experience with those types of audits. These results suggest that auditors commit less to, or give up on, what they perceive to be more difficult audits.
THE SELECTION AND MOTIVATION EFFECTS OF TOURNAMENT PRIZE SPREAD
CARDINAELS, EDDY
CHEN, CLARA XIAOLING ; YIN, HUAXIANG
Category: MA = Management Accounting
Firms often administer wage policies based on tournaments. The prize spread in these tournaments (the difference between wage to the high performers and wage to the low performers) varies across firms. We experimentally investigate whether the availability of tournament prize spread information prior to selection can enhance productivity for organizations both through a selection effect and through a motivation effect. We predict and find that: (1) When employees have the opportunity to select into tournaments of varying prize spreads (which proxies for an environment where prize spread information is available), compared to low ability employees, high ability employees are more likely to select into the tournament with a larger prize spread. Thus, the availability of prize spread information leads to a separation of employees based on ability and makes the tournament more homogeneous with respect to contestant ability, and (2) Employees exert more effort when they can select tournaments based on prize spread information compared to when they are randomly assigned to the tournaments (which proxies for an environment where prize spread information is absent). We show that this result is driven by the greater homogeneity in the ability of tournament contestants in the presence of self-selection opportunity. Further, we find that the effort-enhancing effect of self-selection is more pronounced in the tournament with a larger prize spread.
THE LIFE AND CAREER OF ROBERT WILLIAM GIBSON: ACCOUNTING RESEARCHER, EDUCATOR AND EDITOR
CARNEGIE, GARRY
CARNEGIE, GARRY
Category: HI = History
This biographical study presents a portrait of Robert William Gibson (1931-2014), who spent the bulk of his academic career at the University of Melbourne, the Gordon Institute of Technology and Deakin University, spanning the period 1960 to 1993. Gibson was a prominent researcher in the historical development of regulated company accounting and in exploring issues in contemporary financial reporting. He stimulated curiosity as an accounting educator across a range of subjects, especially accounting theory. Gibson was an editor of accounting history publications, specifically as joint editor of the Accounting History Newsletter (1980-1989) and as editor of the initial or first series of Accounting History (1989-1994). His active life and productive academic career as an all-rounder are examined in this study, which includes an outline of his administrative leadership at Deakin University, and his often long-lived voluntary roles beyond higher education institutions, which continued into his retirement. The recognition afforded to Gibson’s contributions to accounting academia is also outlined.
ELITE ACCOUNTANTS, CULTURAL CAPITAL AND THE DEATH OF PUBLIC MAN?
CARTER, CHRIS
ARCHEL, PABLO; HUSILLOS, JAVIER; SPENCE, CRAWFORD
Category: IC = Interdisciplinary/Critical
Recent literature suggests that elites are increasingly fragmented and divided. Yet there is very little empirical research that maps the distinctions between different elite groups. This article explores the cultural divisions that pertain to two ‘expert elite’ factions. It is found that a public sector faction exhibits a much broader, more aesthetic set of cultural dispositions than their private sector counterparts. This permits two inter-related contributions to be made to literature on elites. Firstly, the findings demonstrate that culture acts as a salient source of distinction between elite factions. Secondly, it is shown how culture is socially functional as certain cultural dispositions are strongly homologous with specific professional roles.
COMPLEXITY OF CEO COMPENSATION PACKAGES
CARTER, MARY ELLEN
ALBUQUERQUE, ANA M.; LYNCH, LUANN
Category: MA = Management Accounting
We examine the extent to which the complexity of CEO compensation packages is consistent with the efficient contracting or the rent extraction view. Using samples of firms from ExecuComp and Incentive Lab from 2006 – 2012, we construct both an ex-post and an ex-ante measure of the complexity of CEO compensation and examine their relation with both economic determinants of contract complexity and excess CEO pay. We find that proxies for firm complexity are associated with more contract complexity, after controlling for other economic characteristics, CEO characteristics, and the number of consultants hired by the firm. In addition, we find that excess CEO pay is positively related to the complexity of CEO compensation packages. As a whole, our results provide support for both the efficient contracting view and the rent extraction view of the design of CEO compensation packages. To validate the rent extraction view, in further analysis we show that the component of contract complexity related to excess pay is associated with poor future performance. Finally, we document that contracts have become more complex after 2009 but that they have also become clearer from a linguistic perspective.
THE DECISION USEFULNESS OF FINANCIAL ACCOUNTING INFORMATION: AN EXPERIMENTAL INTERVIEW STUDY OF INSTITUTIONAL INVESTORS
CASCINO, STEFANO
CLATWORTHY, MARK ; GARCÍA OSMA, BEATRIZ; GASSEN, JOACHIM; IMAM, SHAHED; JEANJEAN, THOMAS
Category: FR = Financial Reporting
The abandonment of a separate stewardship role in the IASB’s 2010 Conceptual Framework led to significant disquiet in the accounting community, yet empirical evidence on whether stewardship decisions require information with different properties to valuation decisions remains scarce. We conduct a large international face-to-face interview survey of 81 professional investors to investigate whether they assess accounting information differently under stewardship and valuation objectives and whether accounting data is implicated in managerial compensation. We find that professional investors whose objective is to value the firm consistently assess financial accounting information to be more relevant than those assessing the performance of management. In contrast, we find that the existence of accounting-based compensation arrangements has no clear effect on assessments of representational faithfulness of financial reporting information. Subsequent analyses show that the latter result seems influenced by professional investors views of preparers’ overall corporate governance as a key determinant of representational faithfulness. Our findings are relevant for standard setting in general and the current IASB Conceptual Framework for Financial Reporting deliberations in particular.
THE CHALLENGE OF APPLYING ACTOR NETWORK THEORY IN ACCOUNTING RESEARCH: SEMIOTIC AND POWER ISSUES
CATALFO, PIERLUIGI
DONZELLO, CRISTIAN
Category: IC = Interdisciplinary/Critical
Despite Actor-network theory (ANT) has been increasingly applied within the accounting literature, the ontology of inscriptions has been under investigated. This paper seeks to speculate about some controversial aspects of ANT argument in accounting research. Specifically, a theoretical speculation on two main issues is provided: the semiotic and the agency power of accounting inscriptions. We advance reflections on the attitude of inscriptions in providing materialization and visualization to accounting practices. Then, we provide a critical analysis about the power of inscriptions, and their performativity attitude in accounting phenomena. Finally, we suggest a re-consideration of inscriptions as agencies that exert power, prompt knowledge creation, and influence decision-making processes actions. As such, this conceptual paper aims to stimulate an epistemological debate on the “how” accounting inscriptions really act, and to advance new directions in ANT-based accounting studies.
JUSTIFICATIONS AND RATIONALITIES WITHIN A COUNTER-STORY: THE DOMINATION OF THE ACCOUNTABILITY FOR SUSTAINABILITY OVER THE ACCOUNTABILITY FOR THE MONETARY
CHAKHOVICH, TERHI
VIRTANEN, TUIJA
Category: SEE = Social, Environmental & Ethical
The accountability for financial and monetary issues has often been seen to dominate the accountability for wider sustainability. In this paper, we present a case in which the opposite takes place: in the case company, accountability for sustainability is dominant and accountability for the monetary is, surprisingly, peripheral. The study shows how accountabilities for such peripheral and dominant issues are justified. Rationality has often been drawn on in justifications and here it is shown how rationality can, surprisingly, be used to justify two different, even contradictory accountabilities by claiming it is rational to favor each form of accountability – something that sounds not only irrational but also logically impossible. The dominant accountability is justified by tying it to the “bigger pictures” of sustainability and rationality. The justification for the more peripheral accountability takes place by tying this form of accountability to the dominant form and to wider ideas such as private sector practices (promoted as preferable) and rationality. It is shown how the accountability for sustainability relies on a “logical” form of rationality while the accountability for the monetary is tied to an “appearance” form of rationality. Consequences are discussed for an understanding of such rationality forms and for the associated promotion of sustainability over the monetary more widely in society.
EARNINGS QUALITY IN STOCK-FOR-STOCK MERGERS
CHANG, CHE-CHIA
PAN, HUNGHUA
Category: FR = Financial Reporting
Prior studies suggest that acquirers manage their current accruals upward in the quarter immediately prior to the stock-for-stock merger announcement. However, we posit that intense public scrutiny and high post-merge litigation risk will force stock-for-stock acquirers report timelier accrued losses and do real earnings management. In support, we first find that stock-for-stock acquirers purposely report timelier accrued losses in their current accruals. Next, we find that stock-for-stock acquirers do real earnings management by accelerating their sales through more lenient credit terms, and then the growing credit sales increases their accounts receivable. Therefore, stock-for-stock acquirers’ high discretionary current accruals found by prior studies results from real earnings management rather than accrual-based earnings management.
DOES HAVING MORE AUDIT CLIENTS LEAD TO LOWER AUDIT QUALITY? A VIEWPOINT FROM AUDITORS' SPAN OF CONTROL
CHANG, RUEY-DANG
TSENG, YEE-CHY
Category: AU = Auditing
This study introduces the theory of “span of control” in management science into an auditing context. The study examines the relationship between audit partners’ span of control (surrogated by auditors’ number of clients) and audit quality (surrogated by clients’ financial restatements and real earnings management) to examine whether audit partners’ span of control serves as an important factor influencing audit quality. The study hypothesizes that the positive relationship between large client base and audit quality may not persist endlessly because the enormous client base will probably turn out as a detrimental factor to audit quality due to overlarge span of control. Data were collected from the TEJ data bank with complete corporate information from 2004 to 2013. Empirical results indicate that clients of the audit partners with "broad span of control" conduct more real earnings management. In addition, audit market competition was found to have a moderating effect on the relationship between auditor's span of control and both client restatement and real earnings management. Results of this study can thus help answer how the unique requirement of "dual signature" system in Taiwan works in the gauge of audit quality. Results of this study provide answers about whether a non-linear relationship between number of individual auditors’ clients and audit quality exists. Finally, results of this study are able to highlight concern on the issue of audit partners’ span of control and serve as a supplement to literature regarding audit quality.
DOES THE BIG-4 EFFECT EXIST? EVIDENCE FROM AUDIT-PARTNER SWITCHES
CHE, LIMEI
HOPE, OLE-KRISTIAN; LANGLI, JOHN CHRISTIAN
Category: AU = Auditing
This paper studies whether Big-4 firms provide higher quality audits when the characteristics of audit partners and auditees are held constant. When an audit partner switches her affiliation with an audit firm to a different firm, some auditees switch over to the new firm with the audit partner (hereafter, the partner-auditee pair). Employing a unique dataset of individual auditors for a large sample of private companies, we utilize this setting to analyze audit quality of the partner-auditee pairs that switch affiliations between Big-4 firms and Non-Big-4 firms. We proxy for audit quality using earnings management and deviations from clean audit reports. We find that the partner-auditee pairs affiliated with non-Big-4 firms report more conservatively after switching their affiliations to Big-4 firms, but their earnings management is not significantly changed. Furthermore, audit quality of the audit partner-auditee pairs affiliated with Big-4 firms does not change after they switch affiliations to non-Big-4 firms; this could be due to a relatively short sample period, in which the decaying audit quality has not been fully reflected after removing their affiliations with Big-4 firms.
EXECUTIVE EQUITY INCENTIVES AND DIVIDEND SMOOTHING
CHEN, CHAO-JUNG
Category: GV = Governance
Using data from 2001 to 2014, this study first examines the relationship between the equity incentive and the dividend smoothing, and further investigates the effect of institutional investors on this relationship between equity incentives and dividend smoothing. Empirical results show that the positive relation between equity incentive and dividend smoothing. That implies managers’ personal wealth changes as a result of share price changes provide equity incentive, managers are motived to enhance firm value through smooth dividend policy, so as to increase their personal wealth. The results also indicate that the relation between equity incentives and dividend smoothing was more notable in non-electronics industry than in electronics-industry. According the monitoring effect of institutional investors, this paper also finds that the positive relation between equity incentives and dividend smoothing is more pronounced when firm in electronic industries with high concentration of institutional investors. The positive influence of institutional investors on the relation between equity incentive and dividend smoothing was higher in the electronics industry than in the non-electronics industry.
ACCOUNTING EXPERTS, INFORMATION COST, AND ACCOUNTING CONSERVATISM
CHEN, KEN Y.
HUNG, SHENGMIN
Category: GV = Governance
Corporate governance mechanism can be used to mitigate information asymmetry between shareholders and managers, and firms with better corporate governance mechanism exhibit a higher degree of accounting conservatism. This study further examines the effect of accounting financial experts in the audit committee on conditional accounting conservatism, by taking the cost of acquiring information for the independent director into consideration. We predict and find that firms with accounting financial experts in audit committee have higher degree of accounting conservatism than firms without an accounting financial expert in audit committee, as the information cost increases.
THE ECONOMIC CONSEQUENCES ASSOCIATED WITH INTEGRATED REPORT QUALITY: EARLY EVIDENCE FROM A MANDATORY SETTING
CHEN, LILY
BARTH, MARY; CAHAN, STEVEN; VENTER, ELMAR
Category: FA = Financial Analysis
We examine whether integrated report quality (IRQ) is associated with stock liquidity, firm value, expected future cash flow, and cost of capital. Our study is motivated by the recent focus on sustainable capitalism and the global interest shown by firms, investors, and regulators in the work of the International Integrated Reporting Council (IIRC). We use data from South Africa because it is the only country where integrated reporting is mandated. We use a measure of integrated reporting quality based on proprietary data from Ernst & Young who rate these reports as part of its Excellence in Integrated Reporting awards. We find that integrated reporting is positively associated with both stock liquidity (measured using bid-ask spreads) and firm value (measured using Tobin’s Q). Our results are consistent whether we analyze levels or changes. When we decompose the firm value into an expected future cash flow effect and cost of capital effect, we find that the positive association between integrated reporting quality and firm value is driven mainly by the cash flow effect, consistent with investors revising their estimates of future cash flows upward as a result of a better understanding of the firm’s capitals and strategy or future cash flows increasing because of improved internal decision making by managers. We provide results from a DuPont analyses which are consistent with the latter conjecture.
LITIGATION THREAT AND SECONDARY LOAN MARKET: LEAD ARRANGERS’ REPUTATION
CHEN, MEI-HUI
CHIN, CHEN-LUNG
Category: FA = Financial Analysis
This paper examines whether litigation threat influences loan resale likelihood and bid-ask spread on the traded loans in the secondary loan market, and whether the reputation of lead arrangers of syndicated loans plays an important role in mitigating the adverse effect of litigation threat on loan resale. Using a sample of publicly listed firms during 1996-2012, we first find that loans of firms with greater litigation threat are less likely to be traded in the secondary loam market; for loan traded in secondary loan market, we find that loans of firms with greater litigation threat are traded at higher bid-ask spread. Finally, as predicted, we find that the adverse effect of litigation threat on loan resale and bid-ask spread on the traded loans is less pronounced for loans syndicated by more reputable lead arrangers than for those by less reputable lead arrangers.
SHARE REPURCHASES AND CREDIT RATINGS
CHEN, NI-YUN
Category: FA = Financial Analysis
We examine the association between share repurchase announcements and the firms’ credit ratings in Taiwan. Our results show that the fraction of debts used to finance share repurchases is negatively associated with credit ratings. Especially, the negative effect of debt-financed repurchases is more pronounced for firms with high level of free cash flow. Repurchasing firms need to disclose three discrete purposes: Purpose 1 is to transfer shares to employees; Purpose 2 is to fund the conversion of convertible securities; and Purpose 3 is to signal undervaluation. Following prior studies which suggest that share repurchase purposes have different effects on debtholders, we further partition the whole sample into the wealth transfer (Purpose 1 or 2) and the signaling (Purpose 3) groups. The results shows that negative association between debt-financed repurchases and credit ratings and the intensity role of free cash flow in the aforementioned association hold for the wealth transfer group, but not for the signaling group.
UNEXPECTED AUDIT FEES AS AN OUTCOME OF BILATERAL NEGOTIATION
CHEN, PO-CHANG
ABDEL-KHALIK, A. RASHAD
Category: AU = Auditing
This paper investigates the determination of audit fee in repeated audit engagements through the lens of bilateral negotiation. Specifically, we view each audit contract as a contract negotiated in dyad—bilateral negotiation between the client and the audit firm. Using unexpected audit fees as the proxy for negotiation outcome, we predict and find that several factors play important roles in the fee negotiation process by giving the auditor (client) an increase in bargaining power with which the audit fee is increased (decreased).
PENSION PLANS’ FUNDED STATUS VOLATILITY AND CORPORATE CREDIT RISK: SFAS NO. 158 PERSPECTIVE
CHEN, TSUNG-KANG
Category: FA = Financial Analysis
This study examines the idiosyncratic risk effects on corporate credit risk from the perspective of pension plans’ funded status volatility (FSV) by employing American bond observations from the year 1997 to 2009. Empirical results of this study show that a firm’s FSV positively relates to bond yield spreads while the firm’s funded status (FS) level has an insignificant effect. In addition, the FSV effect on corporate credit risk significantly becomes stronger in post-SFAS No.158 period while has an insignificant change in pre-SFAS No.158 period. Moreover, a firm’s employee satisfaction and FS level both significantly enhance the FSV effect while the firm’s labor union strength significantly weakens the FSV effect. Finally, our results remain hold with considering endogeneity issues, another deflator of funded status level, and another estimation period of FSV.
SHORT INTEREST AND CORPORATE INVESTMENTS: EVIDENCE FROM BUSINESS PARTNERS
CHEN, XIA
GONG, GUOJIN; LUO, SHUQING
Category: FA = Financial Analysis
Short interest contains valuable information about a firm’s business fundamentals. We investigate whether such information affects business partners’ real investment decisions in the supply-chain setting. We predict and find that a supplier’s future investments (including inventory, R&D, and tangible asset investments) decrease with its customer’s current short interest. This negative relation is stronger when the supplier faces greater difficulty in assessing its customer’s business fundamentals and when short interest is more likely to indicate long-lasting deterioration in the customer’s fundamentals. Additional analysis does not support the alternative explanation that the supplier adjusts investments in response to unfavorable information obtained via private communication with its customer. We also find that suppliers who are more responsive to the customers’ short interest in reducing investments experience weaker wealth transfer from these customers and better investment efficiency. Overall, our evidence suggests that customers’ short interest has significant information value in facilitating suppliers’ investment decisions, and suppliers who adjust their investments based on such information enjoy greater economic benefits.
HUMAN INFORMATION PROCESSING AND BALANCED SCORECARD: THE EFFECT OF MOTIVATED REASONING AND DISSENT ON INFORMATION SEARCH AND STRATEGY EVALUATION DECISION
CHEN, YASHENG
JERMIAS, JOHNNY; PANGGABEAN, TOTA
Category: MA = Management Accounting
Motivated reasoning theory suggests that motivation may lead individuals to search out information that supports their beliefs. This study examines whether motivation to justify a course of action, due to one’s own involvement in the initial selection of the strategy, is exhibited in information search behavior. We also investigates how information search bias arising from motivated reasoning can be mitigated by applying dissent in the form of a devil’s advocate (DA) view. In a 2 x 2 between subject design experiment, an eye-tracking device was used to record and measure information search behavior of individuals while evaluating a Balanced Scorecard. Consistent with our prediction of motivated reasoning, we showed that participants who were involved in the initial implementation of BSC were motivated to search for information in a more directive way, compared to those who were not involved in the implementation. We also found that those in the DA group will access a wider range of information by employing a sequential search. Interestingly, we discovered that subjects who employed a directive were more likely to rate the new strategy as a success than those who employed a sequential search. Furthermore, this result shows how DA can change the behavior of individuals in searching and using information, which can in turn lead to a better decision.
HOW CAN FORMAL PERFORMANCE EVALUATION INFLUENCE SUBORDINATE PERFORMANCE: INSIDER-OUTSIDER PERSPECTIVES OF GUANXI
CHEN, YU-LIN
Category: MA = Management Accounting
Drawing on the insider-outsider perspectives of guanxi in Confucian cultures, this study examines how the impacts of formal performance evaluations on subordinates’ performance are through perceived quality of performance feedback, procedural justice, and workload. Data from 65 bookkeeping firms in Taiwan include a supervisor survey, an insider subordinate survey, and an outsider subordinate survey. The results of this study show that for insiders/outsiders, the quality of performance feedback acts as a full/partial mediator in the relationship between formal performance evaluations and procedural justice perceptions. In contrast, for outsiders/insiders, the quality of performance feedback serves as a full/partial mediator in the relationship between formal performance evaluations and workload. Furthermore, for insider subordinates, the relationship between formal performance evaluations and task performance is mediated by the quality of performance feedback and procedural justice perceptions. By contrast, for outsider subordinates, this relationship is indirectly mediated through the quality of performance feedback and perceived workload. Overall, this study suggests that the underlying psychological mechanisms of formal performance evaluations differ for Taiwanese insiders and outsiders.
THE CONSEQUENCES OF REGULATING INSIDER TRADING IN FAMILY FIRMS-DOMINATED FINANCIAL MARKETS: EVIDENCE FROM HONG KONG
CHEN, ZHIHONG
GUAN, YUYAN; KE, BIN
Category: GV = Governance
Using a Hong Kong corporate lobbying that led to the unexpected reversal of a tough insider trading blackout regulation, we examine whether the lobbying firms’ objection was motivated by insiders’ self-interests or shareholder value maximization. We find that firms more significantly affected by the blackout rule, inferred from the lobbying, were reputable family firms and firms with greater agency conflicts. However, the stock market reactions to the events associated with the reversal of the blackout rule were significantly positive for the lobbying firms relative to a matched control sample of non-lobbying firms. The stock market reactions were more positive for reputable family lobbying firms but there is no evidence of a difference in the stock market reactions for the lobbying firms with low versus high agency conflicts. There is no evidence that the insiders of lobbying firms, especially those of reputable family lobbying firms and lobbying firms with greater agency conflicts, were more likely to trade on the forthcoming earnings news in the blackout window or delay earnings announcements. Overall, our results suggest that the lobbying firms’ objection was motivated by shareholder value maximization. Our results suggest caution in imposing one-size-fits-all insider trading regulation in family firms-dominated financial markets.
CORPORATE SOCIAL RESPONSIBILITY, FAMILY FIRM, AND FIRM PERFORMANCE
CHENG, CS AGNES
HAO, PAULA; HO, JOANNA
Category: GV = Governance
Prior studies show that family firms perform better than nonfamily firms. This study examines whether and how family firms undertake CSR differently from nonfamily firms due to their unique ownership structure, and whether different CSR strategies explain higher value and performance of family firms. We use data from S&P 1500 firms for the period 1996-2011 and find that compared to nonfamily firms, family firms perform better in internal CSR but do not differ in public CSR. We also find that the association between family firms and Tobin’s q is explained by CSR, especially by public CSR; however, internal CSR can better explain the relationship between family firms and ROA. Moreover, internal CSR helps family firms enhance sales margin, employee productivity, and sales growth. Our further analysis shows that these results are mainly driven by the CSR dimension of employee relations.
EARNINGS INFORMATIVENESS UNDER IFRS VS. US GAAP: OVERALL AND FOR FIRMS IN INDUSTRIES MOST IMPACTED BY SPECIFIC ACCOUNTING AREAS
CHIU, PENG-CHIA
PINCUS, MORTON; ZHOU, KAREN
Category: FR = Financial Reporting
We assess the incremental informativeness of earnings as reflected in long-window earnings response coefficients (ERCs) of European Union (EU) firms relative to US firms; we do this overall and with regard to a set of specific accounting standards that differ between IFRS and US GAAP. Both US GAAP and IFRS are generally viewed as high quality accounting regimes but one manifestation of the differences between the two is that US GAAP tends to incorporate in its standards or guidance industry differences whereas that is generally not the case under IFRS. We examine ERCs cross-sectionally in the post-IFRS adoption period in the EU and find that incremental overall mean ERCs are lower for IFRS firms than for US firms. Moreover, using a difference-in differences approach, wherein we identify industries that likely are most affected by particular accounting policies, we gauge the incremental informativeness of earnings for IFRS firms in the EU in such industries relative to US GAAP firms in the US in the same industries. We find that the use of IFRS is incrementally associated with lower ERCs for inventory costing, lease accounting, and goodwill accounting. In addition, the results are generally incremental to country-level legal tradition and the strength of country-level legal enforcement.
EFFECT OF CUSTOMERS’ RISK FACTOR DISCLOSURES ON SUPPLIERS’ INVESTMENT EFFICIENCY
CHIU, TZU-TING
KIM, JEONG-BON ; WANG, ZHENG
Category: FA = Financial Analysis
In this study, we examine the effect of downstream firms’, i.e., customers’, risk factor disclosures contained in annual reports on the investment efficiency of upstream firms, i.e., suppliers. We find that informative disclosures of customers’ risk factors are associated with less under- or overinvestment by suppliers. In addition, this association is stronger for suppliers in durable goods industries, those with customers operating in more concentrated industries, and those whose customers’ risk factor disclosures are more dissimilar across years. Overall, the results suggest that risk factor disclosures provided by the customers for capital market participants have a spillover effect on the input market and help suppliers make investment decisions.
REGIONAL CRIME RATES AND REPORTING QUALITY: EVIDENCE FROM PRIVATE FIRMS IN LONDON
CHO, HYUNGJIN
CHOI, SERA; LEE, WOO-JONG; YANG, SEUNGHEE
Category: FR = Financial Reporting
Prior literature suggests that social norms or social capital influences corporate managers’ propensity to seek private rents, thereby being associated with financial reporting quality. Analyzing private firms headquartered in London, we examine whether borough-level crime rates are associated with financial reporting quality of the residing firms. Our findings suggest that firms in a borough with higher crime rates are more likely to get involved in earnings management. We also find that firms in such boroughs tend to exhibit higher levels of tax avoidance. Our results imply that crime rates, an extreme form of social capital breakdown, influence the incentives to provide credible accounting information.
DO INDUSTRY EXPERT AUDIT ENGAGEMENT PARTNERS EARN FEE PREMIUMS? EVIDENCE FROM LABOR USAGE AND THE HOURLY CHARGE RATE
CHOI, SEUNG UK
BAE, GIL S.; LEE, JAE EUN; RHO, JOON HWA
Category: AU = Auditing
Using propriety engagement partner identity information for the Big 4 audit firms in Korea over the 2001-2011 period, we find that expert engagement partners obtain significantly higher total compensation than do non-expert partners. Importantly, we also find that expert partners increase the number of audit hours compared to their non-expert counterparts. The hourly billing rate, calculated as total fees divided by total audit hours, of expert partners is not higher than that of non-expert partners, indicating that there is no expert partner premium reflected in the hourly rate. This finding suggests that the increase in total audit fees is attributable mainly to the increase in the quantity of audit hours that expert partners work, not from the higher fee per hour. The results are not attributable to auditor selection bias.
THE DETERMINANT OF THE ADOPTION OF COMPUTER ASSISTED AUDIT TOOLS AND TECHNIQUES IN ACCOUNTING FIRMS
CHOU, LING-YI
HUANG, SHI-MING
Category: AU = Auditing
Previous studies have emphasized that using IT can enhance the business performance of firms, such as with the application of computer-assisted audit techniques and tools (CAATs), like the ACL software, which can make up a lack of knowledge about information systems. However, CAATs are still not in widespread use among accounting firms, and previous studies mainly explore the use of generalized audit software (GAS) by external auditors in small- and medium-sized audit firms. The main objectives of this study are thus to use contingency theory to develop a cognitive model by extending the unified theory of acceptance and use of technology (UTAUT), and this study examines what factors affect the adoption of the CAATs among accounting firms in order to improve CAAT usage in Taiwan. This result shows that a clear profile related to CPAs’ opinions was provided for subsequent research. Therefore, the author determined distinct evidence to expand the scope of computer auditing and identified factors related to CPAs’ acceptance of using CAATs.
DIFFUSION OF CORPORATE RISK MANAGEMENT CHARACTERISTICS UNDER AN ENVIRONMENT OF CONFLICTING CULTURES: A MONITORING AGENT’S PERSPECTIVE
CHRISTOPHER, JOSEPH
Category: IC = Interdisciplinary/Critical
This study draws on a multi-theoretical approach to governance and the views of chief audit executives (CAEs) to examine the diffusion of risk-management characteristics within Australian public universities. The findings suggest that the unitary perspective required for the holistic diffusion of corporate risk management across the governance levels has not occurred. Instead Australian public universities are practicing a corporate approach to risk management at the strategic level of governance and a pluralistic approach to risk management at the operational level of governance. Two theoretical propositions emerge from these findings. First, the conflicting management cultures of Australian public universities have resulted in them practicing a hybrid form of risk management. Second, Australian public universities are pursuing a corporate approach to risk management but they are still going through a process of change by working through the tensions of management cultures at the operational level of governance. These findings contribute to the literature by providing a better understanding of the values of the drivers of the process at the strategic and operational levels of governance and the influence they have on the ultimate holistic adoption of risk management in public universities. There are opportunities for further research to test the two theoretical propositions.
ACCOUNTING EXPERTISE AND THE COMPLEXITY OF REPORTING STANDARDS
CHYCHYLA, ROMAN
LEONE, ANDREW; MINUTTI-MEZA, MIGUEL
Category: FR = Financial Reporting
Prior research finds that firms with relatively high financial reporting complexity (FRC) experience lower financial reporting quality (e.g., increased likelihood of restatements and internal control weaknesses), which decreases the usefulness of accounting information (e.g., increased analyst forecast dispersion and investor under-reaction to annual reports). However, it is not yet clear whether firms are aware of their financial reporting environment and take measures to curtail the potential consequences of costly reporting outcomes when FRC is high. In this study, we examine whether investment in accounting-related expertise is higher for firms with relatively higher FRC. We develop an FRC measure based on the amount of text in accounting standards and regulations that govern disclosure of items reported in 10-K filings. We find evidence consistent with high FRC firms making significantly higher investments in accounting expertise. FRC is positively associated with the size of the board of directors and audit committee, as well as the level of accounting expertise of the board of directors, audit committee, and chief financial officers.
FUNDAMENTAL RELATIONS BETWEEN MARKET AND ACCOUNTING VALUES IN A SAMPLE OF LARGE US COMPANIES
CLOUT, VICTORIA
FALTA, MICHAEL; WILLETT, ROGER
Category: FA = Financial Analysis
This paper tests the ability of models of market returns for book value, earnings and dividends based on error correction principles to predict the direction of changes in proportional returns one period ahead in 10 year hold-out samples, in addition to the usual specification and inferential criteria. Book value, earnings and dividends show little short-run association with firm market value. The long-run relation between these accounting aggregates and returns is stronger but only dividends show an ability to predict returns at a level of significance higher than 10%. Reported earnings exhibit mean reversion, giving the erroneous impression that market value predicts earnings. In fact there is no evidence that market value predicts the accounting variables in the long-run. Multiplicative models provide for an easy reconciliation of parameter estimates with accounting arithmetic and with the roles assumed for the fundamental financial statement ratios, boo-to-market, price-earnings and dividend yield. The estimated parameters show a greater variation in the cross-section than in the time series, the opposite of the position normally assumed in prior literature which suggests the possibility of earnings management and with implications for judging the variation in accounting coefficients based on cross-section models.
OPENING THE BLACK BOX OF ACCURACY: AN ANALYSIS OF INTERACTIONS AMONG ERRORS IN COSTING SYSTEMS
COLLER, GRAZIANO
COLLINI, PAOLO
Category: MA = Management Accounting
Accuracy of costing systems is a central issue in management accounting research. Previous research on accuracy, has identified three main sources of errors affecting the design of a two stage costing system such as Activity Based Costing (ABC): aggregation, specification and measurement errors. Aggregation errors are modeled as a reduction in the number of resource or activity pools used to allocate resource costs to cost objects, and this modeling implies that biased and benchmark allocation mechanisms are not directly comparable. As a consequence, the interaction among errors is analyzed in terms of cost figures resulting from the biased versus the benchmark allocation mechanism, instead of comparing the allocation mechanisms step by step. In this sense, accuracy is a black-box that needs to be opened to fully understand the mechanisms underlying costing errors and their interactions. In this paper, we propose an analytical model in which aggregation errors are introduced without reducing the number of resource and activity pools. This approach allows for a direct comparison of the biased and the benchmark systems, and allows us to deepen our knowledge on error interactions.
INSTITUTIONAL ENTREPRENEURSHIP AND POWER: RESPONSIBILITY CENTRES IN PORTUGUESE HOSPITALS
CONCEIÇÃO, ANA
CLEGG, STEWART; MAJOR, MARIA
Category: MA = Management Accounting
The purpose of this paper is to theorize the changes derived from the introduction of a responsibility centre within a cardiothoracic surgery service. Grounding analysis in institutional theory we use Clegg’s (1989) ‘circuits of power’ framework to explain how the change process unfolded, despite all the pressures for stability. Our aim is to provide an analysis of a management accounting change steered by institutional entrepreneurs that incorporates a more explicit conceptualization of power than is often the case. Institutional entrepreneurship has rarely accounted for how changes are connected with power strategies in order to initiate an institutional change process. We find that in addition to the enabling conditions for divergent change noted by the institutional entrepreneurship literature, more explicit consideration of power relations is required. The institutionalization of change is conditioned by entrepreneurship that flows through three circuits of power. Strategies should be adapted according to possible changes in exogenous environmental contingencies and alterations in the actors’ relationships. The paper demonstrates the role of power relations in initiating and blocking institutional change.
BANKRUPTCY IN GROUPS
CORREIA, MARIA
BEAVER, WILLIAM; CASCINO, STEFANO; MCNICHOLS, MAUREEN
Category: FA = Financial Analysis
We examine bankruptcy within business groups. Using a large cross-country sample of group-affiliated firms, we show that group structure matters for parent and subsidiary bankruptcy prediction. The association between parent and subsidiary default probabilities varies with the level of subsidiary integration within the group and country-level institutional quality. A shock to the parent probability of default is less likely to propagate to subsidiaries in countries with strong anti-self-dealing, investor protection, director liability and related-party transaction regulations. Our evidence is consistent with intra-group credit risk management in the form of propping and tunneling of funds among group firms.
THE INFLUENCE OF THE CEO’S PERCEPTION TOWARDS AUDITING ON AUDIT DEMAND
CORTEN, MAARTEN
LYBAERT, NADINE; STEIJVERS, TENSIE
Category: AU = Auditing
This study examines the influence of the CEO’s perception towards auditing on both audit quality (whether the firm hires a Big4 auditor or not) and audit quantity (the amount of audit effort that has to be performed) demand. While agency theory suggests that including this perception would not lead to an additional demand effect because of the assumption of rational behavior, upper echelons theory contests this and considers CEOs to take at best bounded rational decisions. This study provides evidence that the upper echelons theory is also (partly) able to explain audit demand because the CEO’s perception towards auditing was found to be an additional driver for this demand. More specifically, relying on the four dimensions of perceived value defined in the marketing literature (functional value, price value, social value and emotional value), we found the perceived social value of auditing to be significantly positively associated with audit quality demand only. In the audit quantity demand model, both the perceived social value and the perceived price value were found to have a significant negative effect while the effect of perceived functional value was found to be significantly positive. The CEO’s perceived emotional value of auditing was not found to be significantly associated with audit quality or audit quantity demand.
THE IMPLICATIONS OF ASSET REVALUATIONS ON MATCHING, MAPPING OF ACCRUALS, AND RELATIVE CONSERVATISM
COSTA, FABIO
ROSA, GINA; TIRAS, SAMUEL
Category: FR = Financial Reporting
In this study, we examine the implications of upward asset revaluations on a sample of firms in the UK and Australia, from 1996-2014. Prior research has documented that asset revaluations improve a firm’s debt-to-asset ratio and are predictive of future performance, but has not examined the income statement effects after revaluation. We find that firms that revalue in the UK and Australia exhibit better matching of revenues and expenses and less error in the mapping of accruals to cash flows. We further find in the UK, revaluation firms report earnings that are more conservative, relative to non-revaluation firms, in years subsequent to revaluing their assets. Overall, our results suggest that the reported earnings of firms that revalue their operating assets are more representationally faithful of firm performance than non-revaluation firms.
ACCOUNTABILITY AND NOT-FOR-PROFIT ORGANISATIONS: IMPLICATIONS FOR AN INTERNATIONAL FINANCIAL REPORTING FRAMEWORK
CRAWFORD, LOUISE
CORDERY, CAROLYN J.; MORGAN, GARETH G.
Category: PSNP = Public Sector & Not-For-Profit
This research provides empirical evidence which informs contemporary debates (Crawford et al., 2014; IFRS, 2015) on developing not-for-profit (NPO) international financial reporting standards to enhance NPO accountability. Drawing from a global survey with respondents showing experience of NPO reporting in 179 countries, we explore: practice and beliefs about NPO financial reporting, internationally; perceptions of accountability between NPOs and stakeholders; and implications for developing international financial reporting standards. Interpreting our research in the context of accountability, we find considerable support for developing international financial reporting standards in pursuit of demonstrating broad stewardship accountability to all stakeholder, but prioritising accountability upwards to funders/regulators.
PARTNERING BUSINESS FOR STUDENT SUCCESS: ONLINE LESSONS LEARNED
CRIPPS, JEREMY
OEDEKOVEN, OLIN
Category: ED = Accounting Education
Abstract: Opinions on the matter of education quality relative to program delivery modality vary, with all sides claiming to know best on how to deliver business programs to students. Such opinions, however, are typically based on assumptions or antidotal evidence. Quantitative data regarding retained student knowledge for US-based school based upon program delivery modality is presented. Peregrine Academic Services has provided over 150,000 program-level assessment exams to students completing online, blended, and traditional campus-based business degree programs. Results are statistically compared using paired t-tests in order to bring facts and data into the discussions regarding the effectiveness of management education, as expressed by an assessment of retained knowledge using a nationally normed exam, based upon the delivery modality of the higher education program. Results showed statistically significant differences based on delivery modality with generally online program students outperforming their blended and traditional program counterparts Keywords: Online academic instruction, Statistical analysis of comparative results, Program delivery modality, student performance. Practical Application: the analysis in this paper provides important data for knowledge transfer, for the use of online instruction, and for the implementation of hybrid programs.
SUSTAINABILITY ASSURANCE AND COST OF CAPITAL
CUADRADO-BALLESTEROS, BEATRIZ
GARCÍA-SÁNCHEZ, ISABEL MARÍA; MARTÍNEZ-FERRERO, JENNIFER
Category: SEE = Social, Environmental & Ethical
Using a large sample of international companies from the period 2007–2014, this paper examines the informational value of sustainability assurance and the type of assurance provider on cost of capital. We find empirically, that the decrease in cost of capital for companies that publish social and environmental reports is greater when the assurance statement is provided. This finding suggests that not only voluntary sustainable disclosures decrease the cost of capital; companies also have the opportunity to lessen the investor´s return rate to a greater extent through assurance. In addition, the decrease in the cost of capital is significantly higher when such assurance is provided by a top-tier accountancy firm, rather than when it is provided by engineering or consultancy firms.
MARKET RESPONSES TO QUALITY OF NON-GAAP EARNINGS EXCLUSIONS FOLLOWING REGULATION G AND THE SEC’S COMPLIANCE AND DISCLOSURE INTERPRETATIONS
CZERNKOWSKI, ROBERT MARIUSZ J.
BOND, DAVID; LEE, YONG-SUK; LOYEUNG, ANNA
Category: FR = Financial Reporting
This paper examines the consequences of the non-GAAP reporting resulting from Regulation G as required by Section 401(b) of the Sarbanes-Oxley Act of 2002 and the SEC’s issuance of Compliance & Disclosure Interpretations (C&DIs) in 2010. Similarly to Kolev et al. (2008) and Kyung (2014), we find (i) that both Regulation G and C&DIs are associated with an increase in the quality of non-GAAP earnings exclusions and, (ii) a decline in the probability of meeting or slightly exceeding analysts’ forecasts when firms exclude positive non-GAAP exclusions. Moreover, we find (iii) a reduction in the earnings response coefficients (ERCs) during the post-C&DIs period, but an increase in the post-Regulation G period. This study contributes to the voluntary disclosure literature by providing evidence on whether Regulation G and C&DIs have encouraged informative or opportunistic non-GAAP earnings. Furthermore, this study adds to the expansion regarding the regulation literature by highlighting the unintended economic consequences of regulation by regulatory bodies.
NONFINANCIAL DISCLOSURE AND ANALYST FORECAST ACCURACY: EVIDENCE ON CARBON EMISSION AND CORPORATE SOCIAL RESPONSIBILITY DISCLOSURES IN THE US.
DAL MASO, LORENZO
REES, WILLIAM
Category: FA = Financial Analysis
We examine the association between both carbon emission disclosure and corporate social reporting and analyst forecast accuracy for a US sample and confirm, following the implementation of controls for endogeneity, a significant reduction in error and forecast dispersion for those firms that disclose either carbon emissions or corporate social responsibility. Our results suggest that, of the two, carbon disclosure is marginally more important and also that nonfinancial disclosure plays an important role in the US despite previous evidence that suggests it is relatively insignificant in the US when contrasted with a diverse international sample. This is inconsistent with the view that the US is an environment in which social reporting is unimportant. We also note the results our sensitive to the approach taken for controlling for endogeneity and that our results, and those reported in earlier papers, should be interpreted carefully in the light of this sensitivity to empirical method.
WHAT DRIVES SUSTAINABILITY ASSURANCE QUALITY? THE RELATIVE IMPORTANCE OF FIRM INCENTIVES VERSUS COUNTRY FACTORS
DALLA VIA, NICOLA
KOLK, ANS; PEREGO, PAOLO
Category: AU = Auditing
This paper examines whether the quality of third-party assurance statements accompanying sustainability reporting (SRA) can be better explained by voluntary decisions taken at firm-level or rather by national legal and economic environments. Our study exploits a large hand-collected dataset comprising a content analysis of about 1,200 SRAs issued by a panel of G500 firms in the period 2005-2013 across 24 countries. We document that a higher emphasis on stakeholder engagement and executive compensation schemes linked to sustainability is significantly associated with enhanced levels of SRA quality. The relative importance of these two internal mechanisms remains confirmed even in presence of country-level factors capturing institutional settings characterized by a stronger emphasis on sustainability and stakeholder orientation. On the contrary, external firm-level demand factors captured by the inclusion in sustainability ratings and the extent of analyst coverage appear not significantly associated with SRA quality. Our findings confirm that the complement view of governance mechanisms advanced by Doidge, Karoly and Stultz (2007) applies in the novel auditing setting of SRA. Voluntary assurance of sustainability reports appear to be strengthened by the presence of a country’s institutional environment that privileges the enforcement of a legal infrastructure aimed at the protection of social and environmental dimensions of corporate practices.
ARE R&D INTENSIVE FIRMS MISPRICED? EVIDENCE FROM AN INTERTEMPORAL CAPITAL ASSET PRICING MODEL
DARGENIDOU, CHRISTINA
ANDRONOUDIS, DIMOS; KONSTANTINIDI, EIRINI
Category: FA = Financial Analysis
Prior research argues that the positive relation between current R&D activity and future returns is evidence of mispricing, a compensation for risk inherent in R&D or a transformation of the value/growth anomaly. This paper contributes to this debate by taking into account the link between R&D activity, equity duration and systematic risk. This link motivates us to employ Campbell and Vuolteenaho (2004)'s intertemporal asset pricing model (ICAPM) which accommodates stochastic discount rates and investors' intertemporal preferences. The results support a risk based explanation; R&D intensive firms are exposed to higher discount rate risk.Hedge portfolio strategies show that the mispricing explanations is not economically signi cant.
THE ROLE OF EXTERNAL ACCOUNTANTS AS SERVICE PROVIDERS FOR SMES AND THEIR IMPACT ON SME PERFORMANCE: A LITERATURE REVIEW
DE BRUYCKERE, STEFANIE
COPPENS, CARINE; EVERAERT, PATRICIA ; SARENS, GERRIT; VERPLANCKE, FREDERIK
Category: IC = Interdisciplinary/Critical
This study explores the existing literature concerning the role of the external accountant as a service provider for SMEs and his/her impact on SME performance. The accounting literature comprises a broad perspective of different dimensions in the relationship between an external accountant and the owner-manager of an SME. The ‘transaction cost economics theory’ and ‘resource based theory’ are extensively studied in this respect. The importance of trust, mutual expectations and transparent communication concerning the range of potential services provided by the external accountant cannot be neglected when building a long-term relationship with an SME-client. The changing role of the external accountant is emphasized, as this evolution creates opportunities for future research. Furthermore, the impact of the external accountant on SME performance is discussed. The purpose of this paper is to explore the findings and contributions of previous studies, in order to identify gaps for future research. As the role of external accountants is changing, new and additional perspectives are to be explored. This review is expected to provide input for future research, external accountants, owner-managers and educational institutions.
DIRECTOR TURNOVER CONSEQUENCES OF OPPORTUNISTIC INSIDER TRADING BEHAVIOR
DE GROOTE, SANDER
BRUYNSEELS, LIESBETH; GAEREMYNCK, ANN
Category: GV = Governance
In this paper, we examine the effects of opportunistic insider trading behavior by corporate directors on their chances of renewal in the board. Overall, the evidence presented is consistent with firm’s self-regulating opportunistic insider trading behavior. Using the methodology developed by Cohen et al. (2012), we focus on opportunistic insider trades and find that the likelihood of director turnover increases with the relative amount of director opportunistic trades. This effect, however, is not spread equally across all directors. Our analyses indicate that high-value directors who are difficult to replace are not subject to disciplinary turnover following opportunistic insider trading. Furthermore, we find that director-CEO connectedness also influences the disciplinary turnover process. Specifically, directors who are appointed by the CEO or share a social tie with the CEO also seem to be shielded from an increased likelihood of turnover following opportunistic insider trading Our findings are consistent with the argument that firms try to safeguard firm legitimacy by replacing directors that engage in behavior that is perceived by the public as unethical. The results of this paper tie in to both the insider trading and director turnover literature, being the first to document the effects of individual director decisions on director turnover. Additionally, we are the first to relate director insider trading behavior to labor market consequences.
EMPLOYMENT OF GRADUATE ACCOUNTANTS BY PUBLIC ACCOUNTING FIRMS: PERSPECTIVES ON THE SKILLS SHORTAGE, INTERNATIONAL GRADUATES AND COMMUNICATIONS SKILLS
DE LANGE, PAUL
WINES, GRAEME
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. Internet and newspaper advertisements also represent important methods for recruitment. 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; 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.
CSR IN BUYER-SELLER MARKETS: THE IMPACT OF ASSURANCE OF SUSTAINABILITY REPORTS AND MATERIAL INCENTIVES
DE MEYST, KAREN
CARDINAELS, EDDY; VAN DEN ABBEELE, ALEXANDRA
Category: MA = Management Accounting
This paper uses an experiment to investigate how assurance and material incentives for CSR investments affect behavior of preparers and users of sustainability reports in competitive markets. In our market setting, sellers prepare – besides price offers –sustainability reports that disclose how much they invest in CSR. Disclosures may deviate from actual CSR investment. Buyers, as users, select sellers on the basis of this information. We manipulate whether or not there is assurance of seller’s sustainability reporting by means of an audit and whether or not sellers receive material incentives for CSR investments. We argue that 1) sellers may use sustainability reports to signal to potential buyers that they have CSR preference and 2) that assurance of these reports can have an impact on economic outcomes in particular in markets where material incentives create social expectations for CSR investment. Consistent with our predictions, results show that sellers are more willing to invest in CSR and buyers are willing to pay higher prices because of CSR, when assurance is combined with material incentives. Our results add to the recent debate by investigating when and how CSR disclosures can introduce real economic market effects.
DO CLIENT CHARACTERISTICS REALLY DRIVE THE BIG N AUDIT QUALITY EFFECT? NEW EVIDENCE FROM PROPENSITY SCORE MATCHING
DEFOND, MARK
ERKENS, DAVID; ZHANG, JIEYING
Category: AU = Auditing
A large auditing literature concludes that Big N auditors provide higher audit quality than non-Big N auditors. Recently, however, a high profile study suggests that Propensity Score Matching (PSM) on client characteristics eliminates the Big N effect (Lawrence, Minutti-Meza, and Zhang 2011, hereafter, LMZ). We conjecture that this finding may be affected by PSM’s sensitivity to its design choices and/or by the validity of the audit quality measures used in the analysis. To investigate, we examine random combinations of PSM design choices that achieve covariate balance, and four commonly used audit quality measures. We find that the majority of these design choices support a Big N effect for most of the audit quality measures. Overall, our findings show that it is premature to suggest that PSM eliminates the Big N effect.
VALUE RELEVANCE OF ACCOUNTING INFORMATION FOR DIFFERENT CAPITAL STRUCTURES OVER TIME: MIST COUNTRIES
DEMIR, VOLKAN
ERTUĞRUL, MELIK
Category: FR = Financial Reporting
In this paper, we examine value relevance for different capital structures of Mexican, Indonesian, Korean and Turkish (MIST) firms between 2005 and 2014. We perform regressions for high levered and low levered samples for each country in our dataset. We also divide this time interval into two in order to observe this relationship. For the same purpose, we use two different dependent variables: market capitalizations measured after three and six months from the fiscal year end. Also, we deflate all variables in our regressions in order to reduce scale effects. Our regressions indicate several outcomes. First of all, value relevance of the whole sample decreases over time. For all countries, we realize that while net income coefficients tend to lose their statistical significance over time; book value of equity coefficients preserve their explanatory powers on the market capitalization values. Also, we find that adjusted R2 values of the last quintile decrease over time for all countries. Since we perform our regressions on two different dependent variables, outcomes for the first quintile cannot be generalized; however, note that adjusted R2 values of the first quintiles of Mexico and Turkey decreases and the first quintile of Korea shows an increase in value relevance over time. *This paper has been financially supported by Galatasaray University Research Fund (Project Number: 15.102.001).
THE VALUATION IMPLICATIONS OF STRATEGY IN R&D-INTENSIVE INDUSTRIES
DEMIRAKOS, EFTHIMIOS
BALLAS, APOSTOLOS
Category: FA = Financial Analysis
The primary research purpose of this study is to investigate the valuation impact of firm’s strategic choices in a setting of intangibles-rich industries. We adopt the conceptual framework of Miles and Snow (1978, 2003), which identifies three viable types of firms based on their organizational strategy profiles: Defenders, Prospectors, and Analyzers. We use a replicable strategy score, whose scoring convention is based on rolling ratings of six ratios for the previous four years (Bentley et al., 2013), to distinguish between prospector and defender strategies. We offer empirical evidence that supports the hypothesis that prospector strategies are positively associated with firm value in the industries of Electronics & Electrical Equipment, Pharmaceuticals & Biotechnology, and Technology Hardware & Equipment. The findings of this paper are useful to managers, who would like to pursue a value-adding strategy in dynamic industrial environments that are characterized by high levels of innovation, risk, and growth. To the best of our knowledge this is the first study that explores the value relevance of Miles and Snow’s (1978, 2003) strategy typology in the context of four R&D-intensive industries within the European Union.
THE ROLE OF ACCRUALS QUALITY AND RELATIONSHIP LENDING FOR GERMAN PRIVATE FIRMS’ COST OF DEBT
DENO, SNJEZANA
GOLDBACH, STEFAN; HOMBURG, CARSTEN; NASEV, JULIA
Category: FA = Financial Analysis
We investigate the effect of accruals quality on German private firms’ cost of debt and how relationship lending moderates this effect. Using two unique German datasets from the Deutsche Bundesbank, we find evidence that firms with strong relationships get 61% lower cost of debt benefits from accruals quality. Furthermore, we show that small firms suffer from the “lock in effect” of relationship duration and that good accruals quality helps to mitigate this effect.
THE REAL CONSEQUENCE OF REAL EARNINGS MANAGEMENT
DESAI, PRAJAKTA
ESPENLAUB, SUSANNE; KHURSHED, ARIF
Category: FA = Financial Analysis
Manipulating earnings around important corporate events may have a severe negative impact on subsequent corporate performance. We examine the link between earnings management at the time of an Initial Public Offering (IPO) and consequent delisting. We add to the existing literature by examining real earnings management in addition to accruals-based strategies. Over the period 1995-2007, our results show significant real earnings manipulation at the time of the IPO. Further, managing earnings more aggressively at the IPO using real earnings manipulation makes early delisting more likely. More specifically, our survival analysis indicates that an increase in real earnings manipulation by one unit decreases survival time by a multiple of 0.810.
INDEPENDENT DIRECTORS AND CORPORATE SOCIAL PERFORMANCE (CSP): AN INDIVIDUAL LEVEL PERSPECTIVE
DESCHÊNES, JÉRÔME
Category: GV = Governance
The real power and the genuine impact of directors on the performance of the firm have always been subject to a lot of discussion. This is even truer with independent directors. To give insight into this fundamental question, I look at a non-financial performance metric: corporate social performance (CSP). I investigate whether or not there is an individual a priori regarding CSP issues by independent directors. I use a modified version of the MSCI IVA dataset score as the measure of CSP as well as the environmental pillar and the social pillar scores of the same data for the 1999-2014 period. By using a two-way fixed effect for both firms and directors, I discover that there is an association between individual independent directors and the environmental dimension of CSP. However, I uncover the fact that this association is considerably weaker than the relation between inside directors and CSP. In fact, for the independent directors, most of the variance of CSP is explained by the firms fixed effects while it is the opposite for the inside directors. In a second set of tests, I am also able to link individual attributes to the independent directors related to a better (worse) CSP. Observable characteristics of independent directors account for a small part of the association of individuals to CSP. It underlines the fact that using observable characteristics might not be sufficient to uncover the fundamental association between individuals and a given performance metric.
STIGMA MANAGEMENT AND JUSTIFICATION OF THE SELF IN DENAZIFICATION ACCOUNTS
DETZEN, DOMINIC
HOFFMANN, SEBASTIAN
Category: IC = Interdisciplinary/Critical
This article studies how two accounting professors at the Handelshochschule Leipzig pursued their denazification following World War II. It was a period when German citizens were subject to stigmatization due to any link with the Nazi regime. We argue that the two accounting professors carried a stigma due to their affiliation with a university that was aligned with the regime. Exploring how they presented themselves, their actions and behavior in justification accounts crafted after the war, we discuss how they created a Goffmanesque frame aimed at defying any link with the regime. Hence, the professors downplayed frame breaks, i.e. their Nazi party memberships, but were preoccupied with the vulnerability of experience, exploiting that past behavior lacks evidence, requires context, and is thus open to interpretation. We show how a biography can be re-constructed by way of assigning roles and powers to characters therein and by providing context and definite interpretations on the part of the reader. We call this strategy ‘authoring of past information’ and suggest that it is successful only on the surface, as a closer look unveils the ambiguity of the narratives, making such a strategy risky and fragile.
TEAM PLAY FOR STRETCHING IFRS IN THE EU: THE NEW INSTITUTIONAL EARNINGS MANAGEMENT
DI FABIO, COSTANZA
AVALLONE, FRANCESCO; QUAGLI, ALBERTO; RAMASSA, PAOLA
Category: FR = Financial Reporting
This paper explores a new kind of earnings management (new institutional earnings management) based on the cooperation between national regulators and a group of preparers. Respect to this opportunistic behaviour we demonstrate the inherent limitations of the current IFRS enforcement system in the EU. This study adopts the theoretical framework of the new institutional accounting (NIA), that allows to enlarge the research scope to explain the interactions between players that can be seen as formal and informal institutions. We apply this framework to analyse the complex case of BI share revaluation and the consequent accounting treatment adopted by its shareholders in their financial statements. This singular case shows the complex interactions among all the key actors at different levels: (i) preparers; (ii) their industry association; (iii) a national State; (iv) national and European enforcers; and (v) national and international standard setters.
EFFECTS OF CEOS’ AND CFOS’ COMPENSATION MECHANISMS ON REAL ACTIVITIES AND ACCOUNTING MANIPULATION
DI MEO, FABRIZIO
DI MEO, FABRIZIO; GARCIA LARA, JUAN MANUEL; SURROCA AGUILAR, JORDI
Category: FR = Financial Reporting
In this paper, we study whether CEOs and CFOs adopt different earnings management strategies when both of them are rewarded through compensation mechanisms such as stock options, equity stocks, annual bonuses, and restricted stock grants. We use two different measures of manipulation: real activities manipulation and accounting manipulation. Our empirical results show that stock options, equity stocks, and restricted stock grants lead CEOs to manipulate real activities. Also, most of the compensation mechanisms lead CEOs and CFOs to engage in accounting manipulation. While CEOs’ decision to distort accounting numbers is likely to be adjusted to the magnitude of real activities manipulation previously achieved because of the trade-off between the two kinds of earnings management, CFOs can only engage in accounting manipulation. CFOs’ restricted earnings management choices to achieve their personal objectives lead CFOs to engage in accounting manipulation more intensively than CEOs.
EXAMINING THE COMPLEX RELATIONSHIP BETWEEN STRATEGY, SUSTAINABILITY AND MANAGEMENT CONTROL
DILLA, WILLIAM
BEUSCH, PETER; FRISK, ELISABETH; ROSEN, MAGNUS
Category: MA = Management Accounting
Managers struggle to translate sustainability strategies into actions. This study examines the use of a management control system (MCS) and sustainability control system (SCS) to support the implementation of an integrated sustainability strategy. It is based on in-depth interviews with key finance and sustainability managers in a Swedish global industrial company. We draw upon the levers of control (LOC) concept to analyze the organization’s use of MCS and SCS. The interactive components of the firm’s SCS are characterized by dialogue between strategic and tactical level managers in a non-invasive environment. Thus, the firm deploys these strategic performance controls in an enabling as opposed to a constraining fashion. Strategic validity controls, however, are only well-developed for a subset of the firm’s products and services. These findings suggest that the manner in which an organization deploys interactive controls within its SCS is influenced strongly by the organization’s culture and the industry in which it operates. The organization’s MCS and SCS exhibit technical integration, but it faces challenges with respect to organizational and cognitive integration. Yet, technical integration appears to compensate in part for the lack of integration along the other two dimensions. This study contributes to an emerging body of research that adapts management control frameworks to examine the relationship between strategy and sustainability.
VALUE-BASED MANAGEMENT: AN INSTRUMENT FOR UNDERPERFORMER?
DIRMHIRN, MARKUS
Category: MA = Management Accounting
The consistency of value-based management implementations in corporate practice is a function of prior performance of the adopting company. Companies facing large performance problems compared to a matched control group tend to implement value-based management consistently in management control systems. After the adoption of value-based management these companies increase performance. In contrast, companies that implement value-based management only for non-monetary dimensions of management control systems do not underperform prior to the adoption. One part of these companies increases performance after the adoption and does not proceed in implementing value-based metrics in compensation systems. The remaining companies fail to increase performance and implement short-term value-based board compensation, which eventually leads to an increase in performance. The results are important for corporate practice as they show that value-based management is a viable instrument for management control especially in turnaround situations. Further the results help to explain the common partial implementations of value-based metrics in corporate practice. The results are also of major importance for existing literature on value-based management that does not differentiate between different forms of value-based management applications and neglects prior performance aspects.
ACCOUNTING DISCRETION OVER BANKS DEBIT VALUATION ADJUSTMENT OF OWN CREDIT RISK
DONG, MINYUE
DOUKAKIS, LEONIDAS
Category: FR = Financial Reporting
Gains or losses of debt valuation adjustment (DVA) stemming from the change of a firm’s own credit risk have been controversial and since the recent financial crisis, been criticized as accounting abominations. Using European listed banks over the period of 2008-2013, we first investigate the determinants of the non-discretionary part of DVA. Consistent with the DVA definition, our results indicate a positive association between the change in bond yield spread and DVA, implying that when credit risk is higher, banks are more likely to generate a larger positive DVA. After decomposing the total DVA into the discretionary (abnormal) and the nondiscretionary parts, we examine accounting discretions associated with DVA in smoothing earnings, while controlling for abnormal loan loss provision (LLP) and the realization of securities gains or losses (RSGL). We find that pre-managed earnings are negatively associated with abnormal DVA during the financial crisis, that is, when pre-managed earnings are low, banks are likely to report high DVA and vice versa. The interaction model also shows a complementary relationship between the abnormal DVA and abnormal LLP.
CREDITOR RIGHTS AND ROLE OF FINANCIAL INFORMATION IN DEBT CONTRACTING
DONG, YASHU
Category: FR = Financial Reporting
This paper examines whether legal protection for creditors compliments or substitutes the role of financial information plays in debt contracting. By examining the explicit use of financial covenant and the implicit use of financial information in loan pricing in the international setting, I find fewer financial covenants are used and observe a lower loan pricing sensitivity to financial restatements for loans issued in countries with higher creditor control rights. This substitute impact of creditor rights on the role of financial information in debt contracting is mainly documented in countries with strong enforcement rules for debt contracting and is found to be robust by using different research designs and sub-samples. I also find the impact of accounting standard change of adopting IFRS on loan pricing is less pronounced in strong creditor countries. A deeper study shows that the substituting impact is only partial as only functions of balance sheet related covenants and information is found to be attenuated by creditor rights. Further study shows less accounting conservatism is demanded by creditor from strong creditor countries while no such evidence is found for the cash-predicting power of earnings.
SHAREHOLDER PAYOUT AND FOREIGN CASH
DOWNES, JIMMY
BEYER, BROOKE; RAPLEY, ERIC
Category: FR = Financial Reporting
This study examines the relation between shareholder payouts (i.e., dividends and stock repurchases) and internal capital market frictions arising from holding foreign cash. We first establish a perceptible difference between the association of foreign cash and payouts compared to domestic cash and payouts. The findings suggest that foreign cash increases internal capital frictions resulting in a negative association with the level of payouts. However, we provide evidence that internal capital market frictions are attenuated by parent-to-subsidiary agency frictions and ability to raise capital. Specifically, greater agency frictions between the parent and foreign subsidiaries lead to a reduction in the negative association between foreign cash and payouts. Additionally, the negative association between foreign cash and payouts becomes positive for those firms with less costly access to external capital. The results provide evidence that multinational firms not only consider repatriation taxes, but also consider agency frictions and the cost of external finance when deciding to repatriate foreign cash.
COORDINATION AND COMMUNICATION CHALLENGES IN GLOBAL GROUP AUDITS
DOWNEY, DENISE
BEDARD, JEAN C.
Category: AU = Auditing
This paper investigates the coordination and communication challenges faced by auditors in performing effective and efficient global group audits. Prior research suggests that management of geographically distributed work can be problematic in any context, but made more difficult when diverse teams perform interdependent activities in a complex environment such as auditing. We investigate sources of complexity that differentiate engagement experiences identified by a sample of group audit leaders as having significant vs. insignificant challenges. We then study three specific coordination and communication strategies identified by prior research and used in the auditing context: (1) modularization (planned reduction of interdependencies between team members); (2) tacit coordination methods (leveraging and developing common ground between team members based on shared knowledge); and (3) ongoing communication methods (building and using communication channels). Results show that greater component auditor knowledge and engagement experience (measures of tacit coordination) are associated with a lower probability of challenges from all sources of complexity that we study. Other effects of strategies are contingent on the nature and level of complexity. Taken together, our results provide the first available evidence for a large sample of global group audits on factors that make these engagements challenging and provide insight into specific areas of concern raised by regulators.
COMPETITION, RENTS, AND AUDIT QUALITY: SOME COSTS OF COMPETITION
DOWNING, JEFF
Category: AU = Auditing
One common idea is that competition weakens the ability of incumbent audit firms to extract rents from clients. Another is that rents give audit firms incentives to do higher-quality audits. In this paper, I build a model that connects these two ideas by showing how competition's impact in reducing rents weakens the incentives of incumbent audit firms to do high-quality audits. Consequently, audit failures are more likely. This effect harms not only the incumbent audit firm but also the client itself. Furthermore, insofar as audit failures can cause an audit firm to become insolvent, stronger competition can have a negative impact on audit-market stability. Altogether, the analyses in this paper indicate that an increase in competition in the audit market might not be as beneficial as is commonly assumed.
UNDERSTANDING THE EMERGENCE OF NEW ACCOUNTING PRACTICES IN HEALTHCARE BY ANALYSING THE INSTITUTIONAL CONTEXT: A COMPARATIVE STUDY
DOYLE, GERARDINE
CAMPANALE, CRISTINA; CINQUINI, LINO
Category: PSNP = Public Sector & Not-For-Profit
This is a comparative study that responds to a call for future research by Cardinaels and Sodertrom (2013), which analyses how internal parties (from multiple professional groups) together with external stakeholders (regulators, insurers and patients) impact the variation of accounting practices in hospital settings. This research compares the emergence of new accounting practices across Italy and Ireland adopting a qualitative research design. A comparison between these research sites is interesting as the process of implementing new accounting practices differs despite similarities within the respective healthcare systems. Results show that the process of implementing new accounting practices within hospitals is different due to differing degrees of interaction between the internal parties alongside differing and changing pressures from external stakeholders.
JUDGMENTAL EFFECTS OF PERFORMANCE MEASURES LINKED TO STRATEGY IN BALANCED SCORECARD EVALUATIONS: REPLICATION AND EXTENSION IN AN IRISH SETTING
DRECHSLER, CHRISTOPH
Category: MA = Management Accounting
This study examines whether evaluators rely more on strategically linked measures than non-linked measures in balanced scorecard performance evaluations. The study also assesses, indirectly, the efficacy of providing specific strategy information including a strategy map as a performance evaluation decision aid. Ninety-six MBA students of a large Irish university’s business school averaging almost eleven years of work experience participated in the study. I find that (1) evaluators do not place significantly greater (less) weight on strategically linked (non-linked) measures in BSC performance evaluations, and (2) the impact of providing specific strategy information including a strategy map in BSC evaluations is smaller than found by Banker et al. (2004, 2011). My findings suggest that firms should support BSC evaluations by additional approaches to achieve more consistency with strategic objectives in performance judgments made.
THE EFFECTS OF REVIEW FORM AND TASK COMPLEXITY ON AUDITOR PERFORMANCE
DUH, RONG-RUEY
KUO, LI-CHUN; YAN, JIA-CIOU
Category: AU = Auditing
This study examines the effects of review form and task complexity on audit quality. Adopting a 2 (face-to-face vs. e-mail review) x 2 (low vs. high task complexity) between-subjects design, we recruited auditors to perform going-concern evaluation in an experiment. Our results reveal that auditors in the face-to-face review group perform better than those in the e-mail review group, and that audit quality decreases as task complexity increases. Consistent with our hypotheses, auditors in the face-to-face review group perform better than those in the e-mail review group when task complexity is low, but not when task complexity is high.
THE EFFECT OF SIGNALING FAMILY GOVERNANCE TO NONPROFESSIONAL INVESTORS: AN EXPERIMENTAL APPROACH
DUNCAN, KEITH
HASSO, TIM
Category: GV = Governance
We explore if equity investors use signals of founding family governance (ownership, involvement in management, board representation) when making investment choices in an experimental setting. We link the literature on investor heterogeneity to signalling theory, and apply it in the context of founding family governance by exploring the presence of investor groups with varying utility functions with respect to founding family involvement in a firm. We show that nonprofessional investors use signals of founding governance in their investment choices. However, using latent class analysis we find that there are three distinct clusters within our sample that have conflicting utility curves with respect to founding family governance. Investor heterogeneity with respect to the value and desirability of family governance may explain the range of findings in prior empirical work. Our results suggest that rather than an agency theory phenomenon we are actually dealing with heterogeneous expectations similar to that found in the experimental asset pricing literature.
HIGHLY VALUED EQUITY AND EARNINGS MANAGEMENT: ‘DETOXIFICATION’
DUONG, CHAU
PESCETTO, GIOIA
Category: FA = Financial Analysis
The paper shows that the existing evidence on income-increasing earnings management by overvalued firms is mainly driven by the pressure to sustain the high market valuation of firms that are substantially overvalued. Relatively highly valued firms, on the contrary, are found to engage in earnings management in a manner that is consistent with the signaling hypothesis. Using a sample of UK listed companies, the paper presents evidence that in the five years period after being found to be relatively highly valued, firms consistently manage earnings downwards, mainly by higher discretionary expenses and underproduction, and do not engage in sales manipulation and accruals management. The evidence, therefore, suggests that substantially overvalued firms inflate earnings, using both real and accruals management, because the mispricing is too large to correct, while relatively highly valued firms try to signal to correct the market overvaluation.
FIRM RISK AND DISCLOSURES ABOUT DISPERSION IN ASSET VALUES: EVIDENCE FROM OIL AND GAS RESERVES
DURO, MIGUEL
BADIA, MARC; BARTH, MARY; ORMAZABAL, GAIZKA
Category: FR = Financial Reporting
This study examines whether mandated disclosure about the dispersion of the value of oil and gas (O&G) reserves provides information about firm risk. Based on a sample of Canadian O&G firms between 2004 and 2011, we find that the difference between the 10th and 50th percentiles of O&G reserves, which is a measure of dispersion of the reserves distribution, predicts total and idiosyncratic future equity return volatility and future systematic risk. We also find that disclosures of increases in this asset value dispersion are associated with weaker stock price reactions to increases in reserve levels and increases in bid-ask spreads, both of which indicate the disclosures convey information about the uncertainty of the reserves. Additional tests reveal it is unlikely that our findings are attributable to managerial opportunism in estimating the reserves. Taken together, our study provides evidence that disclosures relating to the uncertainty of asset values provide information relevant to assessing firm risk.
TRANSACTION CHARACTERISTICS, TRUST, CONTROLS AND PERFORMANCE IN INTER-FIRM INNOVATIONS
DYBALL, MARIA CADIZ
WANG, ANDY F
Category: MA = Management Accounting
This study examines the effects of: 1) the transaction characteristics of asset specificity, uncertainty and complexity, and, goodwill and competence trust on the use of formal and social controls in inter-firm innovations, and, 2) the use of formal and social controls on inter-firm innovation performance. Survey data from organisations in innovation–active industries in Australia were analysed using Partial Least Square technique. The results show that when there are higher levels of uncertainty, firms use more social controls and that higher levels of complexity were partnered with a greater use of both formal and social controls. Asset specificity was not linked to the use of formal and social controls. Goodwill trust was positively associated with the use of formal and social controls whereas competence trust was positively linked to the use of social controls only. The use of formal and social controls individually impacted on inter-firm innovation performance. The results are discussed in relation to prior research findings.
IS R&D STORYTELLING CONTINGENT ON R&D EXPENSES LEVEL? THE STUDY ON ANNUAL REPORTS OF EUROPEAN BIOTECHNOLOGICAL COMPANIES.
DYCZKOWSKA, JOANNA
Category: FR = Financial Reporting
Biotechnological industry encompasses R&D intensive companies which invest huge amounts in basic research and clinical studies. Since most of R&D expenditures are expensed as incurred and the time needed to develop new products is considerably long, biotechnological companies often report negative earnings for years. Therefore, investors seek for non-financial information on R&D activities which is more informative in the context of assessing a firm’s value than reported earnings. The main purpose of this research study was to examine whether the way how European biotechnological companies depicted their business within R&D context was contingent on R&D expenses level and differed in various clusters of companies. The research sample was composed of 49 entities included in the 2500 world top companies 2014 R&D ranking. The research results proved the existence of a moderate, positive and statistically relevant relations between a level of R&D expenses and two variables, including a length of annual reports and a length of R&D narratives. The analysis of R&D narratives indicated both similarities and dissimilarities between groups obtained through application of agglomerative hierarchical clustering approach. The research results provided no evidence that R&D narrative was contingent on R&D expenses level, however the findings showed that the lengths of annual reports and R&D narratives turned out to be diverse between clusters.
WHAT REALLY MATTERS? – EXAMINING DISCLOSURES OF NON-PROFIT ORGANISATIONS FROM DONORS’ PERSPECTIVE
DYCZKOWSKI, TOMASZ
Category: PSNP = Public Sector & Not-For-Profit
Non-profit organisations are aware that their success in fulfilling social missions depends on support received from individual and institutional donors. In this respect the paper aims at diagnosing whether obligatory annual statements, including financial, non-financial and narrative disclosures they carry, do stimulate donors in their giving and in what ways. The results of the paper are based on the analysis of randomly selected 177 annual reports of public benefit organisations (PBOs) from Poland combined with the outcomes of an experiment supported by 59 participants. The author found out that, first of all, despite inconsistencies and mistakes, financial disclosures presented in PBOs’ annual statements did influence donors’ decisions on which organisation they wanted to support. Secondly, it turned out that with a limited use of profitability, liquidity or financing structure analyses, a ratio estimating value of voluntary work was useful to donors. Thirdly, decisions of donors appeared to be conditioned by their perception of resources matching social goals along with effects being adequate to resources and cost incurred. Moreover, combined methodologies of text mining and the experiment allowed to identify nine key groups of topics which PBOs focus on in their narratives. It became visible that organisations which potential donors wanted to support the most discussed their performance in more details and focused on slightly different issues than all the rest.
ACCELERATED VS. TRADITIONAL ACCOUNTING EDUCATION AND CPA EXAM PERFORMANCE
EAMES, MICHAEL
LUTTMAN, SUZANNE; PARKER, SUSAN
Category: ED = Accounting Education
Accelerated accounting programs provide a means for non-accounting majors to acquire the necessary accounting units for CPA licensure. Such programs reduce the barriers for non-accounting majors to enter the profession, but there is the concern that accelerated programs entail a lowering of academic standards and produce a less qualified graduate relative to a traditional semester-based accounting education. Our accelerated programs entail the same upper-division accounting classes as required of our undergraduate accounting majors, but entail four- and eight-hour meetings offered on a calendar-shortened basis with no diminution of contact hours. Controlling for age, advanced degrees, a monetary bonus for passing the exam, possession of another certification, working at an accounting firm, accounting GPA, gender, and months since graduation, we find no difference in CPA exam passing rates and the number of attempts required to pass for the accelerated and traditional programs. We find that our accelerated program alumni take longer after graduating to pass the CPA exam and that the GPA in students’ accounting courses is positively associated with passing and inversely associated with the number of attempts required and the time required to pass the CPA exam. Interestingly, we find that the availability of an employer bonus for passing on a timely basis and working at an accounting firm are not associated with CPA exam performance.
ERROR ANNOUNCEMENTS, AUDITOR TURNOVER, AND EARNINGS MANAGEMENT – EVIDENCE FROM GERMANY
EBNER, GERMAR
HOTTMANN, JOHANNES; TEUTEBERG, TORBEN; ZÜLCH, HENNING
Category: FA = Financial Analysis
This paper provides additional insights how shareholders perceive error announcements in the German enforcement system whose task is to ensure a preventive and sanctioning function via adverse publicity. Although US research provides large and unambiguous evidence of sanc-tions which are based on capital market reactions, but also personal consequences of respon-sible managers and auditors, the few studies which investigated the German enforcement sys-tem do not yield comparable results, thereby questioning its efficacy. Building on this, we investigate whether firms with error announcements exhibit higher auditor turnover than comparable non-error firms in the German setting. In addition, we investigate the impact of auditor changes on accounting quality. We find some evidence that firms with auditor chang-es exhibit an increase in accounting quality, which however already takes place in the gap year between error announcement and auditor change. Consequently, we interpret auditor changes serving as a ‘label’ of improved corporate governance, rather than indeed improving corporate governance.
MANAGEMENT COMPENSATION: THE IMPACT OF EARNINGS MANAGEMENT AND MANAGERIAL ABILITY
EL DIRI, MALEK
ALHADAB, MOHAMMAD; CLACHER, IAIN; KEASEY, KEVIN
Category: FR = Financial Reporting
We contribute to the extensive literature on earnings management by analyzing the impact of earnings management behavior on executive compensation conditioned on managerial ability. We find managers who utilize accrual earnings management receive higher compensation than those who undertake real earnings management. This is consistent with real earnings management being detrimental to firm value. However, high quality managers are rewarded less for accrual earnings management and punished less for real earnings management. The results show that managerial ability is a crucial input in assessing the costs and benefits of earnings management at the firm level.
HETERARCHICAL MANAGEMENT ACCOUNTING: THE CASE OF CATEGORY MANAGEMENT IN A UK SUPPLY CHAIN
EL SAYAD, SAMAR
STONER, GREG; WICKRAMASINGHE, DANTURE
Category: MA = Management Accounting
Reporting on a qualitative case study, this essay explores whether newer form of management accounting develop when forms of organizations and their practices become more fluid, malleable, and experimental. It examines how superseding the category management (CM) practices in a UK supply chain justified, instigated, and maintained a heterarchical form of management accounting, as opposed to its hierarchical-bureaucratic counterpart. The case analysis confirmed that a heterarchical form of management accounting emerges as a distributed form of intelligence that penetrates through lateral accountable relations. This makes it possible to value and use diverse principles of evaluation, and in turn, construct a new space for calculating, intervening, and countering. Consequently, heterarchical management accounting constructs and conserves one of the key corresponding organizational properties, namely, ‘boundarylessness’. The message of the essay is that, despite the inevitable ambiguity, temporality, and incompleteness of these ensuing accounting practices, the heterarchical form of management accounting itself gives rise to ultimate clarity and engenders the compromise necessary to reach decisions and take actions out of the frictions and power struggles.
INVESTIGATING THE RELATION BETWEEN FORMAL AND INFORMAL MANAGEMENT CONTROL SYSTEMS WITHIN MCS PACKAGE
ELBASHIR, MOHAMED
WASIMI, MOHAMMAD
Category: IS = Information Systems
This study examines the relationship between formal and informal management control systems (MCS) as a package and the impact of business strategy on this relationship. Drawing upon Malmi and Brown (2008)’s framework of MCS package, this study develops a theoretical model that examines the role of informal controls (represented by the knowledge creation process as a proxy for organization culture) on the use of formal ‘cybernetic’ controls (represented by Business Intelligence (BI)-enabled MCS), and the moderating effect of business strategies on this relationship. The theoretical model is tested using survey data collected from Australian organizations in the public sector. The results show that the knowledge creation process facilitates the use of formal ‘cybernetic’ controls. Further, the study finds that the influence of the knowledge creation process on the use of formal ‘cybernetic’ controls is moderated by business strategies. This study reinforces the need to consider MCS as a package to evaluate the performance of formal and informal MCS, and highlights the importance of considering strategy as a contextual moderator for research that examines the relation between strategy and MCS. The study also provides valuable insights for public sector managers on how to improve the effectiveness of formal MCS innovations with the help of informal cultural controls.
EFFECTS OF FDI ON THE EGYPTIAN AUDIT MARKET: WHAT DO BIG 4 PARTNERS’ PERCEPTIONS TELL US?
ELDALY, MOHAMED KHALED
ABDEL-KADER, MAGDY
Category: AU = Auditing
This study examined effects on the Big 4 audit firms of massive FDIs that entered the Egyptian capital market during the first decade of the 21st century. Facing increased numbers of cross-border clients is not only an Egyptian phenomenon. Our findings contribute to the literature by suggesting particular impacts of FDI on developing audit markets. Our analysis is extended to provide a better understanding of how the Big 4 firms reacted to the identified effects.
IS THE COST OF EQUITY HIGHER FOR RISKY BANKS? EVIDENCE OF STOCK MARKET DISCIPLINE USING THE IMPLIED COST OF CAPITAL
ELFERS, FERDINAND
EL CHAMAA, MARWAN
Category: FR = Financial Reporting
In this paper we use the implied cost of capital (ICC) to gauge market monitoring by banks' stockholders. Estimating the ICC allows us to disentangle the discount factor from (possibly positive) cash flow effects from risky bank behavior and thus provides a clearer understanding of the relation between banks' distress risk and stock prices. For a large sample of U.S. bank holding companies from 1990 to 2012, we find that the implied risk premium (IRP) increases significantly with established accounting measures of bank risk. Second, the IRP has informative value in predicting bank distress on top of such accounting risk indicators, but is inferior to other market based risk indicators in the short run. Our results suggest that (a) banks' stock prices are indeed sensitive to business risk and (b) banks' IRP can serve as an early warning indicator for bank risk.
RELATED PARTY TRANSACTIONS AND EARNINGS MANAGEMENT IN A POOR INVESTOR PROTECTION CONTEXT
ELHELALY, MOATAZ
GEORGIOU, IFIGENIA ; LOWE, ALAN
Category: FR = Financial Reporting
Related Party Transactions (RPTs) are considered a potential tool for financial misstatement as they offer opportunities to transfer wealth between the firm and related parties. RPTs conducted for opportunistic motives are more likely to be associated with Earnings Management (EM). This paper aims to provide evidence on the relationship between EM and RPTs in a poor investor protection context, Greece. We examine whether EM as measured by income smoothing is systematically related to RPTs. Our results show a negative and significant relationship between EM and RPTs. The results are robust across a number of robustness tests including controls for corporate governance variables. These findings do not support the presumption that RPTs are necessarily conducted to mask fraud or to extract firm resources. The negative relationship between EM and RPTs is only robust for the firms audited by one of the Big-4 audit firms. This shows that high audit quality may limit the negative effects ofRPTs.
ACCRUALS QUALITY AND THE COST OF DEBT: THE EUROPEAN EVIDENCE
ELIWA, YASSER
GREGORIOU, ANDROS
Category: FA = Financial Analysis
This paper investigates the association between the cost of debt (CoD) and accruals quality (AQ) of European listed firms. The results show a significant negative association between AQ and CoD. This trend is confirmed in most of the 15 countries under review. Also, this study tests the impact of the interrelationship between the financial crisis (2008-2009) and earnings quality (EQ) on CoD. The results show that in the crisis period the creditors relatively give more attention to the quality of accounting information to the pre-crisis period in determining the cost of debt of firms. We also report a link between the magnitude of this relationship and national characteristics and give evidence of the significant effects of national characteristics and market forces on the CoD. These findings support the essential role of accounting information to help creditors to make useful decisions. Theoretical studies suggest that this role is attained by enhancing the precision of accounting information and reducing information asymmetry and estimation risk, which is expected to lead to a lower CoD.
STOCK PRICE INFORMATIVENESS OF RISK-RELATED DISCLOSURE: DOES TIME ORIENTATION MATTER?
ELSHANDIDY, TAMER
ELSHANDIDY, TAMER
Category: FR = Financial Reporting
This paper investigates the extent to which firms’ stock prices might incorporate, measured by synchronicity, risk-related information (aggregate risk disclosure levels) differently from its time orientation (non-forward-looking and forward-looking risk disclosure). Our empirical results suggest that, whereas the UK market does not incorporate aggregate risk information, suggesting such information is likely to be generic, it does react significantly to time orientation of the content of risk information. Specifically, we find that non-forward-looking (forward-looking) risk information is significantly and negatively (positively) associated with stock prices’ co-movements, suggesting that this information is firm-specific (generic) and such information is difficult (simple) to anticipate or replace with market-wide factors. When we further look at whether that observed informativeness is conditional upon the UK FTSE all-share non-financial firms’ strength of governance and riskiness, our findings continue to strongly support the significant impact of the time orientation (forward- and non-forward-looking) rather than the aggregate levels of risk information. Principally, we find that strongly governed and less risky firms are likely to reveal meaningfully more informative non-forward-looking risk information than other firms. Our previous conclusions still hold after various robustness checks. These results are likely to have theoretical and practical implications as they stress the importance of considering the content rather than the level of aggregate risk information and they also add more insights to the debate on the informativeness of the narrative sections of annual reports.
DOES INSIDER TRADING REVEAL VALUABLE INFORMATION TO INVESTORS? A MODERATING IMPACT OF INSIDER TRADING ACTIVITY ON INTRA-INDUSTRY INFORMATION TRANSFERS
ELSILÄ, ANNA
Category: FR = Financial Reporting
Economic theory suggests that insider trading activity contains information valuable to investors in own investment decisions. We test this theory by investigating whether recent insider trading activity helps investors to interpret external news which increase uncertainty about firm value. Specifically, we identify a setting – a restatement announcement by an industry peer – in which investors would be particularly attentive to past insider trading signals and would likely use these signals to revise own expectations of firm value. In line with these arguments, our empirical results show the short-term market reaction to announcements of restatements by industry peers (the intra-industry information transfer) is significantly more negative for companies with recent insider net selling relative to companies with recent insider net buying. We also show that recent insider trading signals are more informative to investors in situations characterized by a greater information asymmetry and when insider trading on private information is more likely.
RECENT PUBLIC SECTOR ACCOUNTING REFORMS IN THE UK CENTRAL GOVERNMENT: INTENDED BENEFITS VERSUS ACTUAL OUTCOMES
EMMETT, ELAINE
Category: PSNP = Public Sector & Not-For-Profit
Set within the United Kingdom central government, this paper uses institutional theory to explore the reasons why the UK has continued to view New Public Management ideas as the most appropriate means to improve accounting within the public sector. Focusing on the introduction of Resource Accounting and Budgeting, International Financial Reporting Standards, Whole of Government Accounts and the Clear Line of Sight Alignment Project, and utilising extensive document content analysis of official publications, the paper compares the intended benefits of each accounting reform with their published outcomes. The findings show that each of these accounting reforms are promoted in the same manner despite evidence to suggest that post implementation, the accounting reforms struggle to deliver their purported benefits.
AN INVESTIGATION INTO THE AMOUNTS AND THE PROPERTIES OF INTANGIBLE INVESTMENTS REPORTED IN SG&A
ENACHE, LUMINITA
SRIVASTAVA, ANUP
Category: FR = Financial Reporting
We investigate the amounts and the properties of outlays reported in the selling, general, and administrative (SG&A) category of expenses that have the nature of intangible investments, but are not research and development (R&D) and advertising expenses. We propose a new method to distinguish such investments from the other outlays reported in the SG&A category that support or maintain current operations. We validate our method by showing that the investment outlays we identify are associated positively with future earnings growth and negatively with earnings quality. However, the maintenance outlays do not bear similar associations. These SG&A investments are economically important because they exceed R&D by three times on average and are the fastest growing category of U.S. firms’ operating investments. Their risk-return tradeoffs lie between those of capital expenditures and R&D outlays.
SIGNALING EFFECTS OF SCHOLARLY PROFILES – A LONGITUDINAL PERSPECTIVE ON THE EDITORIAL BOARDS OF THE ACCOUNTING REVIEW
ENDENICH, CHRISTOPH
TRAPP, ROUVEN
Category: IC = Interdisciplinary/Critical
This paper represents a longitudinal analysis of the editorial team of The Accounting Review (TAR) with regard to the subject areas and research methods represented by its members. From a signaling theory perspective, we consider the scholarly profiles of the editorial team members a powerful signal that TAR sends to the academic community with regard to the types of research preferred for publication. In this way, our paper addresses a controversial debate: On the one hand, scholars criticize the narrowing preconceptions about publishable research on the part of the editors of leading accounting journals. On the other hand, the TAR Senior Editors emphasize openness towards multiple subject areas and research methods, while attributing the narrowness of the research published to author self-selection. Accordingly, we first develop a signaling theory framework, emphasizing the editorial board composition as a crucial aspect of the communication between editors and scholars intending to submit their manuscripts. Second, we compile scholarly profiles of 682 editors, associate editors and editorial board members serving within a 25 year time frame based on 4,478 papers (co-)authored by them. Our findings show that the TAR editorial team represents a considerably narrowing area of research that rebuts the self-selection argument. In light of signaling theory, we argue that this decreasing variety discourages authors of non-confirming manuscripts from submitting their work to TAR.
THE IMPACT OF CONTEMPORARY PERFORMANCE MEASUREMENT SYSTEMS ON BUSINESS PERFORMANCE: A META-ANALYSIS OF EMPIRICAL EVIDENCE
ENDRIKAT, JAN
GUENTHER, THOMAS; TITUS, ROBERT
Category: MA = Management Accounting
This study examines the association between contemporary performance measurement (CPM) systems and business performance. Based on a systematic literature review we synthesize 69 effect sizes from 40 quantitative studies encompassing in total 22,201 firm-years. Applying quantitative Hedges-Olkin-type meta-analysis we expand current narrative reviews on the consequences of CPM systems and provide a rigorous assessment of the available empirical evidence. Overall, we find a positive and significant mean effect, which is robust across different types of industry, across different countries, different points of time and across different methodological issues such as the sampling procedure, the temporal sequence of measurement, and the measurement approach used for measuring business performance. The meta-analytic results also reveal that the specific type of CPM system, the type of business performance measure, the type of industry, the employed sampling procedure, and the used measurement approach moderate the association. Based on our findings, we provide avenues for future research on the association between CPM systems and business performance.
THE IMPACT OF JAPANESE REGULATORY CHANGES ON ACCRUAL-BASED AND REAL EARNINGS MANAGEMENT
ENOMOTO, MASAHIRO
YAMAGUCHI, TOMOYASU
Category: FA = Financial Analysis
The purpose of this study is to investigate the changes in accrual-based earnings management (AEM) and real earnings management (REM) in response to Japanese regulatory changes. After the U.S Sarbanes-Oxley Act (US-SOX) in 2002, the Financial Instruments and Exchange Act of 2006 (J-SOX) was established in November 2006 in Japan, effective as of March 2009. We shed light on the time lag between the US-SOX and the J-SOX as a transition period. In that period, several regulatory bodies addressed the issue of internal control, considering both the US-SOX and the forthcoming J-SOX. This study focuses on the J-SOX and a series of related laws and regulations in this transition period, and their effects on AEM and REM. Our results show that the level of both AEM and REM changes during the transition period before the establishment of J-SOX. In addition, the level of REM decreases after the introduction of the J-SOX. The evidence generally supports the view that J-SOX and the series of regulatory changes before the implementation of J-SOX have an impact on financial reporting quality of Japanese firms.
ATTRACTING EARLY-STAGE INVESTORS: IS DEBT A DETERRENT OR AN INCENTIVE?
EPURE, MIRCEA
GUASCH, MARTÍ
Category: FA = Financial Analysis
This study analyzes the relationship between debt and outside equity investments in entrepreneurial firms. Although there is consensus that start-up financing plays a key role for performance and growth, there is still scarce evidence on how the initial financing structure is related to outside equity injections. First, we theoretically argue that outside investors may respond differently to higher or lower levels of debt. Second, we analyze the conditions under which personal and business debt could affect outside equity investments in new ventures. The empirical application employs the Kauffman Firm Survey that provides eight yearly follow-up interviews for 4,928 new ventures founded in 2004. Our empirical strategy is based on a Heckman selection model and a propensity score matching analysis. We consistently show that debt, and in particular business debt, is positively related to outside equity investments, especially in times of economic distress. We interpret this result using signaling theory and posit that start-ups with higher levels of business debt can send more credible signals to capital markets. In addition, we explain how cash holdings and the firm-bank relationship are possible information mechanisms that could attract outside equity.
NOT ALL CLAWBACKS ARE THE SAME: CONSEQUENCES OF DETERRENT VS. NON-DETERRENT CLAWBACK PROVISIONS
ERKENS, MICHAEL
GAN, YING; YUTOGLU, BURCIN
Category: GV = Governance
A clawback provision is a governance mechanism to deter executives from misbehavior ex ante and to recover erroneously awarded compensation ex post. There is limited evidence on the causes and consequences of heterogeneity in firms’ clawback provisions. We construct a Deterrent Index based on a comprehensive linguistic analysis of 4,464 provisions to quantify their deterrent level. The index intends to capture the central elements of a clawback policy as proposed by the Securities and Exchange Commission pursuant to Dodd-Frank Section 954. Using this index, we report a significantly lower incidence of accounting misstatements and restatements only for firms that adopt a high deterrent clawback policy, but not otherwise. We also show that the incremental increase in total and incentive-based compensation is lower for high deterrent adopters compared to low deterrent adopters. Finally, we document a decrease in the likelihood of CEO turnovers after firms adopt high deterrent clawbacks. Our results indicate that the effects of clawback adoption depend on the design and deterrent level of such provisions, rather than merely the adoption itself. We add to the current debate on clawback regulation and provide insights into the design and consequences of clawback policies.
YOUR GAIN MY PAIN? THE EFFECTS OF ACCOUNTING INFORMATION IN UNCERTAIN NEGOTIATIONS
ESSA, SAMY
DEKKER, HENRI; GROOT, TOM
Category: MA = Management Accounting
Prior studies on buyer-supplier negotiations show that refined accounting information can enhance negotiation processes and outcomes. We extend these studies by considering the influence of uncertainty, which is commonly present during negotiations. Uncertainty increases friction between negotiators as they take different reference points, exacerbating the level of conflict. We theorize that refined accounting information, even when unrelated to the source of uncertainty, helps to limit its adversarial effects on behavior and outcomes by enabling negotiators to identify tradeoffs. We develop an experiment in which 89 dyads of buyers and suppliers participate to test our expectations how uncertainty interacts with accounting information in affecting negotiation behavior and outcomes. Results show that uncertainty reduces negotiators’ use of integrative tactics relative to distributive tactics, which in turn negatively influences joint profit. Refined accounting information, however, weakens the negative impact of uncertainty on behavior, mitigating the negative impact on joint profit.
WHAT DRIVES THE EXTENT TO WHICH EXTERNAL AUDITORS USE THE WORK OF INTERNAL AUDITORS? EMPIRICAL EVIDENCE FROM THE PERSPECTIVE OF CHIEF AUDIT EXECUTIVES
EULERICH, MARC
RATZINGER-SAKEL, NICOLE
Category: AU = Auditing
This study examines the extent to which external auditors make use of the work of internal auditors. Prior research has focused primarily on environmental factors as well as on the quality factors of the internal audit function (IAF) and their influence on the reliance of external auditors (EAs) on IAF. This study, however, focuses on the determinants likely to be associated with the extent of the reliance decision. Using survey data from the German Institute of Internal Auditors, we find that numerous other variables of an IAF, such as the objectives of an IAF or the purposes for which IAF results are used, also drive the extent to which the EA relies on the IAF. Overall, we contribute to the literature by following Bame-Aldred et al.’s (2013) recommendation to provide more evidence on the drivers of the extent of IAF reliance.
‘THE LIVES OF OTHERS’ – GENDER AND THE AUDIT PROFESSION IN THE CONTEXT OF GERMAN REUNIFICATION
EVANS, LISA
DETZEN, DOMINIC ; HOFFMANN, SEBASTIAN
Category: IC = Interdisciplinary/Critical
Abstract German reunification in 1989-90 had a fundamental impact on social, political and economic contexts in both parts of Germany. Two different employment patterns and family models met: a strongly gendered division of labour in the West versus a weakly gendered division in the East. Auditing was male dominated in the West but female dominated in the East. Privatisation in the East created new markets for West German audit firms, who brought with them mainly senior personnel, but hired also locally. As a result, East German members of a downgraded, feminised occupation became instantly members of a high-status, male-dominated profession. We present findings from an oral history project on the lived experiences of female and male East and West German auditors and accountants during and post- reunification. We find that while the immediate aftermath of reunification opened up career opportunities in auditing for women, this appears to have gradually reversed in the following years. Changes affected also institutional arrangements that had faciliated the integration of mothers into the labour market, as well as work-life balance, family planning and marital relationships. We tentatively theorize that the participation of women in the accounting labour market prior to and during reunification appears to have been driven, in both parts of Germany, by male priorities and by the increasing predominance of West German values.
BOOK-TAX CONFORMITY AND REPORTING BEHAVIOR – A QUASI-EXPERIMENT
EVERS, MARIA THERESIA
MEIER, INA; NICOLAY, KATHARINA
Category: TX = Taxation
We examine how a comprehensive change in book-tax conformity affects firms’ reporting behavior. To this end, we exploit a Reform Act as a quasi-natural experiment which implied a decrease in book-tax conformity in Germany in 2010. In particular, this reform allows firms to exercise tax accounting options independently from financial accounting. Our study builds on a unique dataset of linked individual financial statements and actual tax return data. It covers roughly 150 incorporated firms for the years 2008 to 2012. Exploiting the exceptional change in conformity, we contribute to the ongoing debate on the impact of book-tax conformity. Our results show that profitable companies, which have a clear tax sheltering incentive, actually use the newly introduced reporting leeway to manage taxable income downwards. This is especially attributable to companies exploiting favorable tax depreciation rules. Moreover, we find larger opportunistic tax reporting responses for small companies with less complex and predominantly domestic group structures. In addition, we observe that a decrease in book-tax conformity induces a decrease in the general persistence of taxable income, but at the same time gives rise to higher financial earnings persistence. This corroborates our finding of increased tax sheltering activity in post reform years.
THE IMPACT OF THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005 REPO ‘SAFE-HARBOR’ PROVISIONS ON INVESTORS
FABRIZI, MICHELE
CHIRCOP , JUSTIN; PARBONETTI, ANTONIO
Category: FR = Financial Reporting
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 significantly expanded the exemptions from the normal workings of the U.S. Bankruptcy Code. Using a sample of U.S. banks we study investors’ reaction to news about the promulgation of BAPCPA Repo ‘Safe harbor’ provisions and the influence extending such exemptions to repos collateralized by riskier collateral has on equity market information asymmetry. We find a negative market reaction to news events about the promulgation of BAPCPA, which subsequent cross-sectional analysis suggests is primarily driven by repo exposure. This finding suggests that investors’ perceived increase in finance risk from the extension of the ‘safe harbor’ provisions dominates the perceived gain from accessing cheaper finance. We also find that the promulgation of BAPCPA without corresponding changes in accounting regulations extending disclosures about repo collateral gave rise to increased information asymmetry for banks with higher repo exposure. This finding vindicates the recent changes in accounting regulations mandating increased repo disclosures.
HOW DO DIFFERENT TYPES OF ENVIRONMENTAL REPORTING REGULATIONS AFFECT REPORTING PRACTICES?
FALLAN, EVEN
Category: SEE = Social, Environmental & Ethical
This study’s purpose is to explore how four different types of environmental reporting regulations affect reporting practices. The Norwegian regulation regime consists of Accounting Act requirements, accounting standard requirements, accounting standard recommendations, and no regulation (voluntary disclosure). These types of regulations are associated with different levels of reporting obligations. The research design is chosen to compare disclosures made by enterprises subject to these regulations with those of enterprises that are not. There are separate regression models for disclosure related to each type of regulation. The sample consists of 235 enterprises from the private and public sectors. Content analysis is used to measure environmental disclosure. Enterprises subject to regulations report significantly more types of the information content required by law than other enterprises, which is in line with the higher regulatory legitimacy risk. There is no such difference in disclosure between the two groups of enterprises for the information required and recommended by the accounting standard. This may suggest that pragmatic, cognitive, and moral legitimacy arguments are stronger than the regulatory legitimacy risk for disclosures pertaining to such regulations, or that the general legitimacy risk is low. If the level of reporting is considered insufficient, enforcement of regulations is likely to improve reporting by increasing the regulatory risk. For information that is voluntary for all enterprises to disclose, enterprises that are not subject to any regulations report significantly more types of information than those that are. This result is not in line with predictions made from any of the four types of legitimacy. Some alternative explanations are discussed, including information characteristics of the different types of required information and the role of mandatory reporting in determining voluntary disclosure strategies. Since regulatory regimes may include several types of means, the main contribution of this study is the comparison of four types of regulations within the same regime, as opposed to analysing only one type per study like it is done in the extant literature. The study also explores different types of legitimacy and addresses the relative lack of research on environmental reporting in the public sector.
EFFECTS OF IRRELEVANT ALTERNATIVES IN RELATIVE PERFORMANCE EVALUATION
FEHRENBACHER, DENNIS D.
JIANG, QIAN (GRACE); SCHULZ, AXEL
Category: MA = Management Accounting
In this study we examine the effect of the presence of irrelevant performance information on the rank order decisions made by supervisors in relative performance evaluation (RPE). Specifically, we investigate the effect of two types of irrelevant performance information patterns in what has been termed an asymmetric dominated decoy and a viable decoy. We also examine whether relative performance information (RPI) size (evaluating 3 versus 9 subordinates at a time) can moderate the adverse influence of irrelevant information. The empirical results from our experiment support that the asymmetrically dominated decoy information pattern (where an additional subordinate is included in the RPE whose performance is similar to and is dominated by one of the original subordinates – referred to as the target subordinate) can increase the rank ordering of the target subordinate. Contrary to our expectation, we do not find that the viable decoy information pattern (where an additional subordinate is included in the RPE whose performance is partially dominating the target subordinate) has a significant influence on the rank ordering decisions of subordinates. Our results also provide support for an interaction between the decoy information and RPI size for the asymmetric dominated decoy such that the rank order effect is only present when the RPI size is small (evaluating 3 subordinates in our case). Our study informs designers of accounting information systems in several ways.
THE INFORMATION CONTENT OF DISCRETIONARY ACCRUALS DURING THE GLOBAL FINANCIAL CRISIS: EVIDENCE FROM ITALY
FERA, PIETRO
CINQUE, ETTORE; MOSCARIELLO, NICOLA
Category: FA = Financial Analysis
This study investigates the impact of discretionary accruals on information asymmetry. Prior research shows a positive association between discretionary accruals and information asymmetry. However, managerial discretion in accounting choice can also be a vehicle to convey private information to investors. This paper contributes to a better understanding of the double nature of discretionary accruals by analyzing their association with the bid-ask spread during the global financial crisis. After controlling for several variables that can affect spread, we find a significant negative relationship between discretionary accruals and the bid-ask spread for firms characterized by strong corporate governance. Results are robust to different time-windows for the bid-ask spread and to alternative measures of discretionary accruals. Our findings support the role played by discretionary accruals in unblocking managers’ inside information in a turbulent and uncertain context. The results also highlight the risk of an erroneous interpretation of discretionary accruals estimates that do not control adequately for uncertainty in the macroeconomic environment.
FINANCIAL AUDITOR AND SUSTAINABILITY REPORTING: AN EXPLORATORY STUDY AMONG COMPANIES FOLLOWING THE GRI GUIDELINES
FERNANDEZ-FEIJOO, BELEN
ROMERO, SILVIA; RUIZ BLANCO, SILVIA
Category: AU = Auditing
In this paper we investigate on the yet-to-develop assurance market, its links with the mature auditing market, and the role that the Big4 auditing companies play in the former. We present four research questions and in order to investigate them we use a sample of sustainability reports (SR) registered in GRI during the period 2011-2013, from 18 countries. To the best of our knowledge, this study is a pioneer in its approach. We find that there is an effect in levels of disclosure and credibility of SR when the financial auditor is a Big4. KPMG is the Big4 with the highest proportion of clients contracting assurance of SR as well as financial auditing services. Our results indicate that large companies are less likely to hire the same Big4 than small and medium ones. We also find that the likelihood of hiring the same Big4 is lower in countries in the English legal system than in the Scandinavian legal system, which might be linked to the high risk of litigation. This paper contributes to previous research of sustainability assurance market and provides valuable insights to accountants firms in developing their global services.
ARE LEVEL 3 FAIR VALUES MEASURED RELIABLY? EVIDENCE FROM THE 2008-2009 FINANCIAL CRISIS
FIECHTER, PETER
MEYER, CONRAD; NOVOTNY-FARKAS, ZOLTAN; RENDERS, ANNELIES
Category: FR = Financial Reporting
Prior literature finds that investors discount fair value estimates based on unobservable inputs (i.e., Level 3). However, these value relevance tests cannot discern whether the discount is attributable to managerial opportunism or illiquidity concerns. Based on a sample of 934 U.S. bank-quarter observations, we investigate Level 3 fair values changes. We present four pieces of evidence that collectively suggest that Level 3 fair values are not always measured reliably. First, we show descriptive evidence that the recognition of unrealized fair value losses on recurring Level 3 assets is rare. Second, we find that small banks non-audited by a Big 4 auditor are less likely to recognize unrealized Level 3 income. Third, we find that unrealized Level 3 income is associated with market liquidity but less than changes in Level 1 and Level 2 fair values. The relation between unrealized Level 3 income and market liquidity is further attenuated for banks with low Tier 1 capital, consistent with incentives to avoid losses that further deplete regulatory capital. Finally, we investigate transfers into Level 3 and find that banks with low Tier 1 are more likely to transfer assets from Level 1 and 2 into Level 3 to have more flexibility in reflecting "market" changes in fair values.
TRANSFORMING PROMISE INTO REALITY—PERFORMANCE IMPLICATIONS AND ANTECEDENTS OF CFO COMMITMENT TO VALUE-BASED MANAGEMENT
FIRK, SEBASTIAN
SCHMIDT, LARS TORBEN; WOLFF, MICHAEL
Category: MA = Management Accounting
Commitment is what transforms a promise into reality. This statement by Abraham Lincoln should resonate well with most proponents of Value-Based Management (VBM), who consistently stress the importance of commitment of the top management for the successful implementation of VBM. Furthermore, it underscores the importance of the individual for the implementation of accounting practices, which is stressed by recent studies that highlight the significance of the CFO. Given the CFO’s responsibility for all accounting- and finance-related matters, he/she should have a strong effect on the implementation of VBM. To investigate the role of commitment, we develop a methodology to assess CFO commitment to VBM based on his/her remarks within the company’s conference calls. After controlling for various confounding effects, we provide empirical evidence that commitment enhances the perfor¬mance of VBM adopters and, hence, might indeed be crucial for transforming the promise of value creation into reality. This phenomenon can, however, become a significant issue for organizations when new CFOs take over office as our results show that successor CFOs, who have not been in charge of the implementation, are typically less likely committed to VBM. Nevertheless, we also find that the commitment of successor CFOs to VBM can be perpetuated by tying their compensation to VBM.
SFAS 166/167 AND THE COST OF EQUITY CAPITAL: EVIDENCE FROM BANKS
FORGIONE, DANA
ZHAO, QIUHONG
Category: FR = Financial Reporting
This study examines whether SFAS 166/167 eliminating the exclusion of consolidation for qualifying special purpose entities (QSPEs) impacted the cost of equity capital for a sample of banks. This exclusion previously allowed banks to avoid consolidation of many asset securitization transactions, and these types of transactions become increasingly prevalent during and after the financial crisis of the late 2000’s. We compare changes in the cost of equity capital for a treatment sample of firms that consolidated special purpose entities after implementation of SFAS 166/167 to changes in the cost of equity capital for a control group that reported no material impact from implementation of SFAS 166/167. We find that after SFAS 166/167, the cost of equity capital increased more for the group of firms consolidating previously unconsolidated SPE’s than for the firms that were relatively unaffected by the rule change. In sum, the results suggest that SFAS 166/167 resulted in an increased cost of equity capital as the consolidations of former QSPEs and expanded disclosures of variable interest entities (VIEs) in conformity with the revised standards might convey new risks to the market, while SFAS 166/167 might improve the transparency of information regarding QSPEs.
COMMON AUDITORS AND PRIVATE LENDING BY BANKS
FRANCIS, JERE
FRANCIS, JERE; WANG, WEI
Category: AU = Auditing
We examine how loan structure is affected when a U.S. bank has the same (common) auditor as the borrowing firm. Common auditors are expected to reduce information asymmetries between the bank and borrower, resulting in a more favorable loan structure for borrowers. For a large sample of private bank loans in DealScan we find this to be the case: firms with common auditors have lower interest rates, less covenant intensity, and a less concentrated syndicate structure among the lending banks. The results are incremental to the effect of having a brand name Big 4 auditor, and are of comparable magnitude. Importantly, the results only hold for more opaque firms in the sample, where the greatest information asymmetry exists, and where the benefits of having a common auditor are likely to be the greatest. The common auditor effect is also greater at the beginning of the bank-borrower relationship, when information asymmetry problems are more pronounced.
ENFORCEMENT ACTIONS AND AUDITOR CHANGES
FRANKE, BENEDIKT
BROCARD, MARCUS; VOELLER, DENNIS
Category: AU = Auditing
In this paper, we examine the relation between erroneous financial statements uncovered by enforcement actions and auditor changes. We argue that enforcement actions provide new information about the auditor or the client. Therefore, the relation between a firm and its external auditor should be affected during the ongoing enforcement process. In line with this argument, our empirical findings indicate that firms with erroneous financial statements are more likely to subsequently change the auditor. Further, our results show that firms are significantly more likely to change from a Non-Big4 auditor to a Big4 auditor. This suggests that firms not only want to blame accounting errors on the incumbent auditor, but also commit to improved audit oversight in the future. These effects are even more pronounced if an uncovered error is more severe. Moreover, additional tests suggest that auditor changes take place even before the public announcement of an error.
DOES RECYCLING IMPROVE INFORMATION USEFULNESS OF COMPREHENSIVE INCOME? THE CASE OF JAPAN
FRENDY, FRENDY
SEMBA, HU DAN
Category: FR = Financial Reporting
The Accounting Standards Board of Japan (ASBJ) proposed a new set of endorsed IFRS standards in June 2015 and ASBJ claims that non-recycling of other comprehensive income (OCI) items decreases the information usefulness of earnings in the proposed comprehensive income (CI) standard. This study aims to test whether recycling of CI improves information usefulness of comprehensive income measured by four earnings properties: value relevance, persistence, variability, and predictive ability. This paper uses a sample of listed non-financial Japanese firms from 2012 to 2014. This study finds that CI which incorporates recycling has better value relevance, higher persistence, lower variability, and better operating cash flow predictive power — than that of CI without the recycling components. This study is the first empirical evidence that examines information usefulness of comprehensive income recycling in Japan. International accounting standards setters aiming to increase the information usefulness of CI should consider mandating the recognition and disclosure of recycling for relevant OCI items.
INDIVIDUAL AUDITOR TAX EXPERTISE AND CORPORATE TAX AVOIDANCE
FREY, LISA
Category: AU = Auditing
This study examines how individual auditors with tax expertise are associated with reported tax avoidance of their corporate clients. The study uses a unique German institutional setting which makes it possible to track the expertise of the individual auditors who sign the audit opinion. Empirical results indicate that the individual engagement partners’ tax expertise is associated with less reported tax avoidance. I interpret these findings to suggest that individual auditors with more extensive tax-specific knowledge are more aware of tax avoidance matters and, through their audit, limit the level of reported tax avoidance. My findings enhance the understanding of the role of individual expertise in auditing and suggest that the individual auditor’s expertise is associated with their clients’ level of reported tax avoidance.
WIDENING THE BENEFITS OF PBL: HOW TO IDENTIFY A “GOOD” PROBLEM CREATED BY STUDENTS IN APPLICATION IN MANAGEMENT ACCOUNTING?
FREZATTI, FABIO
MARTINS, DAIANA ; MUCCI, DANIEL
Category: ED = Accounting Education
The aim of this study is to address the problem for Problem Based Learning (PBL) for undergraduate students, taking into consideration the particularities of the group and its context. The study innovates in taking advantage of students’ practical knowledge and in expanding the potential of PBL, including identification and structuring of a problem, as well as the solution highlighted by the literature. The contribution involves approaching the relevant elements in a problem that those students experience in the real world what is different from one in which the students are given a problem to solve. In areas of business, this ability is fundamental and extends the methodology’s potential. This is possible due to the context of the course. The search for sustenance regarding what would be a good problem comes up against aspects of adapting an approach initially developed for medical areas and then subsequently intended for use in the business area. The empirical part of the study takes place in classrooms with groups of students, from the perspective of the “action research” methodology. The main conclusions of the study are: (i) an opportunity exists to widen the potential benefits of PBL; (ii) the hypothesis has a different impact from the traditional approach; (iii) the eleven items are used in a segmented manner; and (vi) the role of the professor requires adaptation due to the level of uncertainty the approach encourages.
THE IMPACT OF FAMILY OWNERSHIP ON PROFESSIONAL CEO TURNOVER DECISION. A COMPARISON OF RELATIONAL SYSTEM MODELS
FRISENNA, CLAUDIA
FRISENNA, CLAUDIA; MAZZONE, ROBERTA; RIZZOTTI, DAVIDE
Category: GV = Governance
This study examines whether family owners are more prone to quickly replace poorly-performing professional CEOs. Moreover, we analyze whether the effectiveness of the family’s monitoring is affected by the country’s relational system. Using a sample of 521 Italian and French firms with 4,689 firm-year observations over the period 2004-2012, we find that the negative relationship between corporate performance and CEO turnover is stronger for family firms with a professional CEO. This finding suggests that, when ownership and control are separated, family plays a critical role in ensuring a better monitoring of managers. Nevertheless, our results show that the effectiveness of the family’s monitoring is affected by the relational system model. Actually, we find that while in a performance relational system, family exercises a more effective monitoring over professional CEO, in a relational system where fidelity ties link family owners and managers the likelihood of dismissal for professional CEO is not related to poor performance.
DEVELOPING FINANCIAL REPORTING AND ITS IMPACT ON DECISION-MAKING
FUCHS, SANDRO
BERGMANN, ANDREAS; ISABEL, BRUSCA
Category: PSNP = Public Sector & Not-For-Profit
While most public sector accounting reforms in developed and developing countries have been assessed on a mere macro-level, this paper will focus on one instrument specifically tackled by accrual accounting reforms, namely the balance sheet, aiming to understand the impact of accrual accounting reforms on a micro-level. Based on comparative, cross-sectional evidence of 15 Swiss states this paper assesses the impact of different accrual accounting reforms on balance sheet information and elaborates how these balance sheet developments have affected decision-making processes. This paper argues that the public sector balance sheet is a necessary and feasible instrument towards achieving more resilient government resources and finances, for example, being capable to absorb fiscal shocks and/or to recover readily from adverse events. Thus, this paper embraces relevant questions for developed and developing countries, particularly in the context of heavily indebted public sector entities, ongoing accrual accounting reforms and the looming EPSAS promulgation. The case of Swiss states reveals that balance sheets can be actively shaped towards a more resilient government and that accounting reforms might act as a trigger point towards a more conceptual and strategic use of balance sheet information.
DO SHORT SALES RESTRICTIONS BIAS THE MEASURE OF CONDITIONAL CONSERVATISM? EVIDENCE FROM HONG KONG
FUNG, SIMON
RADHAKRISHNAN, SURESH ; YAO, JUN
Category: FR = Financial Reporting
Using the unique institutional setting in Hong Kong where only some designated stocks are allowed to be sold short, we examine the effect of absence of short sales on Basu’s (1997) conditional conservatism measure. Consistent with our prediction, we find that the conditional conservatism measure for firms whose stocks are not allowed to be short sold are biased downwards compared to those firms whose stocks are allowed to be short sold. We find similar results after controlling for scale issues and earnings expectations documented in prior studies. We also find evidence suggesting that there is delayed reaction to negative news for firms whose stocks are not allowed to be short sold. As such, when we extend the annual return accumulation period by two additional months, firms whose stocks are not allowed to be short sold also exhibit conditional conservatism. Collectively, we show that the absence of short sales have significant impact on the Basu measure of conditional conservatism, and this has implications for accounting research that examines accounting quality across countries.
ACCOUNTING TREATMENT FOR CARBON EMISSION RIGHTS AS SUSTAINABLE ISSUE
GALLEGO ALVAREZ, ISABEL
CUADRADO-BALLESTEROS, BEATRIZ; MARTÍNEZ-FERRERO, JENNIFER
Category: SEE = Social, Environmental & Ethical
In light of the growing demand for sustainable behavior and the special interest that has emerged regarding the social and environmental impact of firms, the purpose of this research is to analyze the determinants of the accounting treatment of emission rights. To achieve that purpose we use a sample composed of 119 firms worldwide from different countries and activity sectors for the period 2011. To test the hypotheses proposed in this paper, we propose a dependency model in which the dependent variable represents the different accounting treatment of gas emission rights and independent variables represent the factors that have an impact on this treatment, as we proposed in the hypotheses (Emission Trading Schemes, GRI indicators, Kyoto protocol). Also, control variables have been incorporated: size, leverage, profitability and activity sector in which the company operates. The results obtained show different accounting treatments depending on a series of factors. Specifically, firms pertaining to countries that have adopted Emission Trading Schemes (ETS) tend to account for emission rights through provisions, investments, or as inventory. For their part, firms that issue indicators that appear in the report drawn up by KPMG and GRI (2007) tend to account for these entries as expenses, especially as R+D expenses. The findings of this work can be considered of great interest on the international level because our research has contributed to the scant previous literature regarding the accounting treatment of emission rights, as it is one of the first studies to analyze the factors determining the choice of different mechanisms to account for them.
WHEN THE GLOBAL MEETS THE LOCAL: THE JAPAN CORPORATE GOVERNANCE FORUM’S ATTEMPT TO ARRIVE AT A SET OF CORPORATE GOVERNANCE PRINCIPLES
GALLHOFER, SONJA
HASLAM, JIM; YONEKURA, AKIRA
Category: IC = Interdisciplinary/Critical
Focusing on the attempt of the Japan Corporate Governance Forum, a private sector initiative, to arrive at a set of Corporate Governance Principles that would constitute good practice the paper provides insights into the tensions between local corporate governance systems and the Anglo-American corporate governance system, the perceived global standard. Through a critical and contextual analysis of the various versions of the Corporate Governance Principles, which were published between 1997 and 2006, the paper provides insights into the difficulties faced by the Japan Corporate Governance Forum in the context of a general global critique of the Japanese corporate governance system and a pressure for change. Our analysis shows how a local private sector attempt to regulate corporate governance was facilitated as well as restrained by developments in and demands of the global as well as local contexts. The initial two versions of the Corporate Governance Principles indicate a push for the adoption of much of the Anglo-American corporate governance system, whereas the latest version of the Corporate Governance Principles constitutes a much more hybrid system. The insights from this study are also of relevance to policy makers as they draw attention to the interrelationship between the local and the global and thus can inform global attempts to regulate corporate governance and accounting disclosure.
DEBT COVENANTS AND RISK-TAKING
GALLIMBERTI, CARLO MARIA
ARMSTRONG, CHRISTOPHER S.; TSUI, DAVID
Category: FA = Financial Analysis
We examine a comprehensive set of debt contracts that have different types of covenants and performance pricing provisions to determine how these contractual features relate to borrowers’ risk-taking decisions. We predict and find that the relation between covenants and operating risk depends on the type of contractual provision: covenants that restrict the amount of resources invested (capital covenants) have a positive relation with borrowers’ operating risk, while covenants related to the outcome of these investments (performance covenants) and performance pricing provisions both have a negative relation with borrowers’ operating risk. Moreover, these relations are reversed for financial risk, suggesting that lenders face tradeoffs in managing their exposure to different facets of borrowers’ risk-taking. Our estimation strategy aims at distinguishing between adverse selection and moral hazard explanations and indicates that different types of covenants address different agency conflicts, which helps explain the variety of covenants used in debt contracts. Our results are also consistent with concerns that recent banking regulations may actually increase rather than curtail risk-taking by these institutions.
WHAT DOES VALUE STREAM COSTING DO? USING ACTOR NETWORK THEORY TO ANALYSE THE INTRODUCTION OF VALUE STREAM COSTING IN A LEAN ENVIRONMENT
GAMAL, SARAH
SEAL, WILL
Category: MA = Management Accounting
As an action research project informed by Actor Network Theory (ANT), the study was located in a factory of a multinational manufacturing company adopting a lean manufacturing system. The research project began by problematizing the costing system deployed in the factory which did not use value stream costing. The problematization process was informed through examining the conceptual issues related to the adoption of the lean accounting Value Stream Costing (VSC) tool. After enrolling local allies sympathetic to the project, the project proceeded through the installation of VSC. The study tested the performativity of VSC by tracing its effects on product cost and analyzed if, or to what extent, the company is willing to actually implement it. The study suggested that, given the factory current value stream identification pattern, the use of VSC had a negative effect on the product unit cost. This is coupled with other organizational and control reasons negatively affected managers’ willingness to use VSC. The ANT approach contributes to the literature by exploring the performativity of VSC in relation to other artifacts associated with lean manufacturing. It also located VSC within the wider networks of accounting actors in the local division and in the company headquarters. More generally, the use of an ANT framework establishes links between recent developments in lean accounting literature with seminal research on control at a distance and the politics of the product.
THE USEFULNESS OF THE GENERALIZED OHLSON-JUETTNER (GOJ) MODEL FOR EQUITY VALUATION: EMPIRICAL APPLICATIONS OF OHLSON AND JOHANNESSON (2015)
GAO, ZHAN
MYERS, JAMES; MYERS, LINDA; WU, WAN-TING
Category: FA = Financial Analysis
This paper empirically evaluates a new theoretical valuation model developed in Ohlson and Johannesson (2015), which we refer to as the Generalized Ohlson-Juettner (GOJ) model. We test the usefulness of the GOJ model relative to the Residual Income Valuation (RIV) model, the OJ model, and valuation models based on multiples of the forward price-earnings ratio (FPE) and price-to-book ratio (PB). We first use these valuation models to estimate intrinsic value for U.S. non-financial firms from 1982 through 2013, and we compare these intrinsic values in terms of bias, accuracy, and ability to explain stock prices. We find that the intrinsic values from the GOJ model are upwardly biased, whereas those from the RIV, OJ, and PB models are downwardly biased, and those from the FPE model are unbiased. However, the intrinsic values from the GOJ model are significantly more accurate than those from the RIV, OJ, and PB models, but are less accurate than those from the FPE model. Additionally, the intrinsic values from the GOJ model explain more of the variation in stock prices than do estimates from the other valuation models. We also find that the implied cost of equity estimated from the GOJ model is more strongly associated with the market beta than are the implied costs of equity estimated from the RIV and OJ models. Overall, these results demonstrate the empirical validity of the GOJ model and suggest its potential use in both academic and practical applications.
EARNINGS MANAGEMENT AND CONDITIONAL CONSERVATISM
GARCIA LARA, JUAN MANUEL
GARCIA OSMA, BEATRIZ; PENALVA, FERNANDO
Category: FR = Financial Reporting
A common untested assumption in prior empirical literature is that conditional conservatism reduces the incentives and opportunities to engage in earnings management. This assumption is, though, subject to an open debate in the analytical literature. We study the links between conditional conservatism and accruals based earnings management, and whether by imposing limits to accruals manipulation, conditional conservatism leads to real earnings management. Our results are consistent with conservatism triggering this trade-off between accruals and real earnings management, and also consistent with more conservative firms being, overall, less likely to marginally beat earnings targets or to become habitual beaters or these targets. Finally, we also observe that after a regulatory shock to transparency (SFAS 131), there is a decrease in accruals-based earnings management and an increase in real earnings management. These effects of the shock to transparency were substantially less pronounced for the firms that were more conservative prior to the passage of the regulation.
IS BOARD OF DIRECTORS’ DIVERSITY ALWAYS BENEFICIAL? THE INFLUENCE OF AGE AND TENURE DIVERSITIES ON THE DISCLOSURE OF CSR INFORMATION
GARCÍA TOREA, NICOLÁS
DE LA CUESTA, MARTA; FERNANDEZ-FEIJOO, BELEN
Category: SEE = Social, Environmental & Ethical
Several corporate governance initiatives around the world suggest increasing board of directors’ diversity to promote its effectiveness. This paper analyses the influence of two characteristics of board diversity, age and tenure diversities, on the disclosure of corporate social responsibility (CSR) information. CSR reporting can be considered as an outcome of the board’s monitoring and strategic advisory roles. We tested the relationships in a sample of 218 listed firms from several shareholder and stakeholder oriented countries between 2010 and 2012. The results show that age diversity has a negative effect, while tenure diversity has no effect on the disclosure of CSR information. Therefore, although some level of diversity may improve the board’s decision-making process, it seems that higher levels of diversity may lead to conflict, which decreases the board effectiveness in developing their roles. This paper extends prior knowledge on the relationship between board diversity and firms’ outcomes. It also has implications for policy makers, as corporate governance codes should warn that a very high diversity may impede board effectiveness.
VALUE RELEVANCE OF VOLUNTARY INTERNAL CONTROL CERTIFICATION: AN INFORMATION ASYMMETRY PERSPECTIVE
GARG, MUKESH
Category: FR = Financial Reporting
This study investigates whether CEOs’ and CFOs’ voluntary certification of internal controls over financial reporting (ICFR) is value relevant. Using a sample of Australian firms, this study finds that voluntary ICFR certification is positively associated with share price. The financial statements of voluntary ICFR certification are more value relevant for firms with corporate governance relative to others. Moreover, the value relevance of financial statements of ICFR certification is more for firms with lower share price volatility, lower bid-ask spread and lower analysts forecast dispersion. Findings suggest that financial statements of voluntary ICFR certification firms is value relevant to investors and the extent of value relevance depends on the perceived credibility and richness of the information environment of certifying firms.
MONITORING BY INDIVIDUAL INVESTORS
GASSEN, JOACHIM
WITZKY, MARCUS
Category: FA = Financial Analysis
This study uses large-scale survey evidence from German individual investors to explore the determinants of their monitoring behavior. We expect that individual shareholders either trust the monitoring by other stakeholders or that they engage in monitoring activities themselves. First, we document that a significant share of German individual investors lacks trust in their fellow stakeholders and that the level of trust is only marginally affected by demographic characteristics. Second, we study two aspects of monitoring, acquisition of financial reporting information and voting activity, and show that less trusting investors engage in less monitoring. Using structural equation modeling, we document that the main mechanism for this finding is that non-trusting investors tend to have less exposure to the stock market and that exposure is positively related to monitoring activities. Finally, we provide robust evidence that an educational background in economics or business has a positive impact on trust, stock market exposure, and monitoring activities. Hence, improving the financial knowledge of individual investors might increase trust, monitoring activities, and stock market participation.
TALKING TO INTERNAL CUSTOMERS: CONFUSING OR STIMULATING? THE IMPACT OF CUSTOMER CONTACT FREQUENCY ON MANAGEMENT ACCOUNTANT´S ROLE STRESS, INNOVATIVE BEHAVIOR AND SERVICE QUALITY
GEBHARDT, RALF
NEVRIES, PASCAL ; PFENNIG, CHRISTIAN
Category: MA = Management Accounting
It has been argued that modern business environments force management accountants to get into closer contact with managers, their internal customers (Byrne and Pierce, 2007; Hall, 2010). Some studies suggest positive consequences, including innovative endeavors that translate into better quality services. However, the positive effect of close customer contact might be paralyzed by subsequent role stress, as a role theory related strand of literature suggests. Our study argues that in such a setting frequent superior feedback may support positive outcomes. Results from the large-scale survey study (n=399) were obtained using variance-based structural equation modeling techniques (PLS) and yielded some unexpected findings. The positive relation between manager contact and service quality is partially mediated by inter-sender conflicts and innovative behaviors, but inter-sender conflicts are positively associated with innovative behaviors. Furthermore, frequent superior feedback as a moderator variable helps to mitigate inter-sender conflicts, yet, against our expectation, also reduces innovative efforts significantly. In total, the results indicate that when management accountants get into closer contact with customers, more frequent performance feedback by supervisors does not support a more positive relationship with higher quality services.
MAKING UP IDEAL RECRUITS: GRADUATE RECRUITMENT, SUBJECTIVITY AND CONTROL AT ‘BIG FOUR’ ACCOUNTANCY FIRMS
GEBREITER, FLORIAN
Category: IC = Interdisciplinary/Critical
This paper draws on the work of Foucault to argue that the graduate recruitment process of ‘Big Four’ accountancy firms constitutes aspiring accountants as ‘ideal recruits’. Graduate recruitment is conceptualised as both a disciplinary practice, which constructs applicants as much as it selects them, and as an ethical practice, whereby applicants consciously and deliberately transform themselves into the type of subject they aspire to be. The paper concludes by discussing its implications for research on subjectification and control at accountancy firms.
INSTITUTIONAL INVESTOR TRADING SURROUNDING AUDITOR GOING CONCERN OPINIONS
GEIGER, MARSHALL
KUMAS, ABDULLAH
Category: AU = Auditing
Institutional investors are an integral part of the financial markets and prior research finds that they often react to price-relevant information before the information gets publically released. In this study we examine the trading behavior of institutional investors surrounding auditor’s first-time going concern modified audit reports on distressed firms. Our results indicate that institutional investors are net sellers of these firms beginning six months before the release of the auditor’s first-time going concern modified audit report and remain net sellers through three months after its disclosure. We also find that institutional investors are net sellers of firms that subsequently file for bankruptcy beginning three months prior to their receipt of a first-time going concern modified audit report. We find some evidence that the severity of the reasons auditor’s modify their reports is associated with institutional investor trading activity, but only after the reports are publicly released. Our study supports the conjecture that institutional investors are able to anticipate price-relevant information and that they react to this anticipation through their trading behavior.
CONDITIONAL CONSERVATISM IN THE EUROPEAN BANKING SECTOR
GEORGIOU, NADINE
Category: FR = Financial Reporting
The study focuses on banks as debtors and their accounting behavior with respect to conditional conservatism. The paper includes 64 banks in 11 European countries from 2007 to 2013. The empirical questions address the impact of different sources of debt as well as the effect of systemic risk and capital adequacy requirements on conditional conservatism. The results reveal that interbank loans and depositors do not affect the level of timely loss recognition. I find weak evidence that debt securities trigger more conditional conservatism, after controlling for endogeneity issues and the financial crisis. In line with the expectations, systemic risk increases the level of conditional conservatism whereas regulatory requirements do not influence timely loss recognition. By financially distressed institutes, leverage, regardless of the source of debt, does not enhance commitment to more conditional conservatism. In contrast, systemic relevance seems to enhance the already prevalent risk due to financial distress. However, this result is not robust using banks’ size as an alternative measure for systemic relevance.
THE REMOVAL AND REINSTATEMENT OF PRUDENCE IN ACCOUNTING: HOW POLITICS OF ACCEPTANCE DEFEATS FINANCIALISATION.
GEORGIOU, OMIROS
Category: FR = Financial Reporting
In this paper I explore the current debates on the removal and reinstatement of prudence in the revisions of the IASB conceptual framework. I draw on evidence from IASB documents (discussion papers, exposure drafts, meeting agenda papers, comment letters, speeches), the financial press (FT, accountancy magazines), and interviews with IASB staff and UK institutional investors who have been campaigning for the return of prudence in accounting. I find that the renewed interest in prudence was not only part of a larger debate on revising the conceptual underpinnings of accounting standards and on converging IFRSs with US GAAPs, but also of a broader agenda to align accounting with markets, which is linked to the rise of fair value accounting. The broader ideas on recording market, or fair, values do not fit with biasing net worth in any direction. In the reintroduction of prudence I observe the IASB failing to de-legitimise prudence and caving in to pressure by constituents who are concerned with prudence simply „not being there‟ rather than with any specific technical considerations. For a group of UK long-term investors the removal of prudence provided the opportunity to generally criticise IFRSs and question their legality, and thus to highly politicise the debate. The IASB justifies the reinstatement of prudence in terms of „making people comfortable‟ rather than in terms of offering a technically superior solution to an accounting problem. In responding to confusion about prudence, the IASB discussed reframing prudence as needed both for setting standards and for preparing accounts, thus increasing its importance as a concept. I argue that these attitudes by constituents and the IASB constitute the „politics of acceptance‟ that appear to limit the commitment to financialising accounting. I challenge conceptions of financialisation as an even and unstoppable imperative capable of manoeuvring accounting policy-making. I also comment on the perceived higher importance of prudence in accounting in relation to other accounting concepts, such as reliability. These findings have implications for how we understand the nature of decision-making in accounting policy-making and the knowledge basis of the accounting profession.
THE EFFECT OF GOING CONCERN OPINIONS: PREDICTION VERSUS INDUCEMENT
GERAKOS, JOSEPH
HAHN, P. RICHARD; KOVRIJNYKH, ANDREI; ZHOUR, FRANK
Category: AU = Auditing
We examine two distinct channels through which going concern opinions can be associated with the likelihood of bankruptcy: auditors have better access to information about their clients’ bankruptcy risk and going concern opinions directly induce bankruptcies. Using a bivariate probit model that addresses omitted variable bias arising from auditors’ additional information, we find support for both the information and inducement channels. The direct inducement effect of receiving a going concern opinion is a 8.6 percentage point increase in the probability of bankruptcy conditional on previously receiving a going concern opinion, and a 0.8 percentage point increase for clients that did not receive a going concern opinion in the prior year. Despite the direct effect acting as a “self-fulfilling” prophecy, going concern opinions do not predict more bankruptcies than a statistical model based solely on observable data.
EXPLORING AUDITOR MOTIVATION AND JOB SATISFACTION – A STUDY FOCUSING ON GENERATION Y
GERTSSON, NELLIE
BROBERG, PERNILLA; FRIBERG, JOSEFINE; SYLVANDER, JOHANNA
Category: AU = Auditing
The purpose of this paper is to explore motivation in auditing firms and especially generational differences in motivation. The profession faces problems with retaining talented employees and it seems like the profession has a specific challenge in retaining generation Y-employees. In this study motivation is explored by the means of two surveys, one with the aim to explore how motivation affects auditor assistants (junior auditors) choice to quit the profession and the other with the aim to explore how audit employees perceive motivation and how it is affected by for example generation and gender. The results show that generation Y are more likely to quit the profession when experiencing low work-life balance and low perceptions of the profession. Generation Y is shown to be more motivated by social and material rewards in comparison to other generations. However, the results indicate that motivation changes over time, making it hard to distinguish between generational traits and experience. The practical implications for audit firms is that it is important to portray a fair and true view of the profession to potential employees, to ensure that the right individuals are attracted to the profession. Since it is important to generation Y to contribute to society and expects their employees to do so, commercialised audit firms would have a problem recruiting generation Y employees, since commercialisation would lead to low perceptions of the profession.
MAKING PERFORMANCE MEASUREMENT MODELS WORK– REFLECTIONS ON THE COMPLETENESS OF AN OPERATIONAL PERFORMANCE MEASUREMENT MODEL
GEVOLL, LINN
HANSEN, ALLAN
Category: IC = Interdisciplinary/Critical
The role of Performance Measurement Models (PMM) at strategic level of organizations has been debated intensely, yet research is relatively silent on the role of PMMs at operational level. By the means of an case study, we explore the design of a PMM in a Bank. The PMM is put in place to guide front-line employees in their work processes. The paper demonstrates the consequences and strategies to deal with incompleteness of PMM. We focus on design of the two types of performance measures 1)behavior measures and 2)sales measures. Initially the PMM defines a sequential interdependence among the two types of performance measures and put forward the behavioral measures as leading indicators with the assumption: “by concentrating on key behavior the sales results will follow.” The response to the PMM leads to a redesign involving both behavioral and sales measures’ along with new assumptions of a dynamic interdependence between the measures. We conclude that the quest to model causal relations among performance measures in PMMs, may lead to severe incomplete navigation of behavior in operational work processes. We suggest that its fruitful to explore alternative ways to conceptualize the interrelations between multiple performance measures in a PMM. Thus, we suggest that the ways to cope with the incomplete links between leading and lagging indicators may not be further sophistication of the causal mapping but a re-thinking of the interrelations between the performance measures.
WHO JOINS A SINKING SHIP AND WHY? SOME EVIDENCE ON INDEPENDENT DIRECTORS WHO JOIN FRAUDULENT FIRMS.
GHANNAM, SAMIR
BUGEJA, MARTIN ; MATOLCSY, ZOLTAN; SPIROPOULOS, HELEN
Category: GV = Governance
Prior literature documents that following the revelation of fraud independent directors with a weaker ability to monitor and advise are likely to be removed. We investigate the characteristics of the directors that replace these departing directors. We find that within two years fraudulent firms appoint more experienced and qualified directors than a control sample. As a result, the proportion of qualified directors on the board of fraudulent firms is on average higher than the proportion of qualified directors on the board of the control firms. We also investigate the incentives of independent directors to join fraudulent firms and find that joining culpable firms in the post fraud period enhances independent directors’ ability to obtain more future board seats. Independent directors also benefit from higher compensation offered by fraudulent firms in the post fraud period. Last, we explore the stock market’s assessment of the director replacement process. Our results demonstrate that in the first year after the fraud is revealed the stock market reacts negatively to the appointment of new independent directors, however in the second year the market reaction becomes positive.
AUDITOR SWITCHING AND OPINION SHOPPING: FIRM VERSUS PARTNER EFFECTS
GILL DE ALBORNOZ NOGUER, BELEN
DE LAS HERAS CRISTOBAL, ELENA; GARCIA OSMA, BEATRIZ
Category: AU = Auditing
We study the contrasting effects of switching audit firms versus audit partners. In particular, we analyze opinion shopping, as measured by changes in audit opinion. When clients are dissatisfied with the audit opinion, they may attempt to opinion shop by switching audit partners, and if that fails, by switching firms. Our evidence is consistent with opinion shopping at the firm level, after controlling for changes in both client and auditor characteristics. In contrast, partner switches are associated with a lower probability of opinion shopping. Partner switches where both the former and the incumbent auditor give a qualified opinion are positively associated with subsequent firm switches. This may be indicative of failed attempts of opinion shopping at the within-firm level, and suggests that existing partner rotation procedures preserve auditor independence. Overall, our evidence is robust to regulatory changes introduced by the European Union, but suggests mandatory partner rotation may threaten auditor independence.
PUBLIC AUDIT OVERSIGHT AND REPORTING CREDIBILITY: EVIDENCE FROM THE PCAOB INSPECTION REGIME
GIPPER, BRANDON
LEUZ, CHRISTIAN; MAFFETT, MARK
Category: FR = Financial Reporting
This paper examines how audit oversight by a public-sector regulator affects investors’ assessments of reporting credibility. We analyze whether the introduction of the Public Company Accounting Oversight Board (PCAOB) and its inspection regime have strengthened capital market responses to unexpected earnings releases, as theory predicts when reporting credibility increases. To identify the effects, we use a difference-in-differences design that exploits the staggered introduction of the inspection regime, which affects firms at different points in time depending on their fiscal year-ends, auditors, and the timing of PCAOB inspections. We find that capital-market responses to unexpected earnings increase significantly following the introduction of the PCAOB inspection regime. Corroborating these findings, we also find an increase in abnormal volume responses to firms’ 10-K filings after the new regime. Overall, our results are consistent with public audit oversight increasing the credibility of financial reporting.
FIRM INCENTIVES, INSTITUTIONAL FACTORS AND ACCOUNTING QUALITY: THE IFRS ADOPTION IN BRAZIL
GISBERT, ANA
SALOTTI, BRUNO
Category: FR = Financial Reporting
This study examines the role of firm-specific factors that influence the company decision to improve the level of accounting quality after the IFRS adoption in an emerging market economy, with an institutional setting characterized by weak governance mechanisms and low-speed changes. The chosen setting allows to contribute with further evidence to the current literature relative to the role of institutional vs. firm-specific factors on reporting incentives. Changing the accounting system is not enough to improve the context of financial opacity across emerging markets. However when institutional changes do not take place, companies may be force to establish a firm-specific commitment towards the appropriate enforcement of the new accounting system, in order to obtain the attained benefits of a accounting regulatory change.The results provide evidence on the relevance of a set of firm-specific characteristics on the level of earnings quality increase. Particularly, internationalization and growth opportunities are clear determinants of increases in earnings quality. Consistent with the previous literature, the ownership concentration reveals as a limiting factor to increases in earnings quality after the IFRS adoption. Finally, the results also suggest the lack of strong oversight and enforcement mechanisms compared to other institutional settings may harm the expected role of the auditors or alternative governance mechanisms such as the capital markets listing categories.
ECONOMIC CONSEQUENCES OF AIRLINE HEDGING ACTIVITIES
GLEICHMANN, TOBIAS
GRÜNING, MICHAEL
Category: FR = Financial Reporting
Managing fuel price risks is supposed to affect airlines’ economic performance substantially as fuel cost represent a major operating expense and fuel prices tend to be highly volatile. Aside of operating fuel cost reduction programs airlines also hedge against fuel price changes in order to reduce overall earnings volatility. The extent of hedging activities varies between airlines considerably. This paper on the one hand determines drivers of selective hedging in the airlines industry. On the other hand, we examine if selective hedging strategies, i.e. increasing hedging activities in times of expected undesirable future fuel price developments contribute to airlines profitability. The results of our time-series models in line with economic theory support the view that firms respond to increases in the expected volatility of fuel prices with more intensive hedging while expected price increases do not facilitate hedging activities. Selective hedging is also effective as hedging activities are negatively associated with subsequent volatility of profitability. On the other hand, we found robust empirical evidence that selective hedging is negatively associated with subsequent profitability. Although airlines hedge against undesired future fuel price risks we conclude that this might not support corporate profitability because hedging does not allow to compensate for an undesirable environment completely, and transaction cost overcompensate the economic effects of hedging.
CAN LANGUAGE PREDICT BANKRUPTCY? THE EXPLANATORY POWER OF TONE IN 10-K FILINGS
GLOGER, MARIO ALBERT
JAESCHKE, REEMDA; LOPATTA, KERSTIN
Category: FA = Financial Analysis
We examine whether the language used in 10-K filings reflects a firm’s risk of bankruptcy. Our sample contains 424 bankrupt U.S. companies of the period 1994 to 2015. Based on a logit model of failing and healthy firms our findings indicate that prospective bankrupt firms use significantly more negative words than comparable vital companies in their 10-K filings. This relationship holds up until three years prior to the actual filing for bankruptcy. With our investigation we substantiate results from previous accounting and finance research. 10-K filings contain valuable information even beyond their reported financials. Additionally, we show that 10-Ks filed in the year of a firm’s collapse contain an increased number of litigious words relative to healthy businesses. This indicates that the management of failing firms is already dealing with legal issues when reporting financials before bankruptcy. By referring to our results, analysts should include the presentation of financials into the assessment of bankruptcy risk as it contains explanatory power beyond the financial ratios.
LEARNING FROM ERRORS: AN EXPLORATORY STUDY AMONG DUTCH AUDITORS
GOLD, ANNA
WALLAGE, PHILIP
Category: AU = Auditing
Results from regulator inspections suggest that auditors make errors that are not always detected on a timely basis. Aside from their negative consequences, proper handling of errors can also stimulate learning. This exploratory study focuses on how audit firms handle and learn from errors. There are two primary strategies that organizations use to deal with errors. Error prevention is aimed at reducing the occurrence of errors. Error management on the other hand stimulates open communication about errors, analysis of the root causes, and correcting and learning from errors. While both approaches are important, an excessive focus on error prevention may cause organizational members to avoid sharing errors, due to e.g., fear of sanctions, potentially limiting the potential for learning in the long run. In this study, we conducted interviews with Dutch auditors at multiple hierarchical levels and held a survey among the same population. We observe a high degree of error prevention in audit practice. Interview findings suggest that openness as a key element of a constructive error management culture is recognized but is rarely practiced. Learning takes place in audit firms by means of courses and training, but the emphasis is placed on preventing errors instead of discussing and learning from errors. Survey findings indicate that partners and directors generally have a more positive view of the degree of openness, analysis and learning than lower hierarchical levels.
CHANGING LOGICS OF RUSSIAN HIGHER EDUCATION IN ACCOUNTING
GOLYAGINA, ALENA
Category: IC = Interdisciplinary/Critical
Drawing on the institutional logics literature, the study examines fundamental transformation in the university accounting education in Russia after the collapse of the Soviet Union. In particular, the study outlines the transition from state logic dominating in the Soviet Union period to logic of the state, professions, markets and corporations shaping accounting education after the collapse of the Soviet Union. Contextual analysis shows how Soviet history contributed to the state regulation focus in accounting education. The development of logics of markets, corporations and professions in Russia is associated with increased university globalization and westernization. The study contributes to the accounting literature by connecting field level institutional logics influencing accounting educators with the broader societal changes happening after the collapse of the Soviet Union.
DO MUNICIPAL BOND MARKUPS REFLECT ACCOUNTING QUALITY?
GORE, ANGELA
HENDERSON, BRIAN; JI, YUAN
Category: PSNP = Public Sector & Not-For-Profit
We examine whether accounting measures of information asymmetry – specifically, the presence of internal control problems – impact municipal bond markups. Underwriter profit, or “markup,” is the difference between the price stipulated in the underwriting agreement versus the price paid by investors. Markups are controversial in part because they are not transparent and individual investors comprise a large portion of the investor base. Many academics and the popular press argue that municipal bond dealers take advantage of less-informed individual investors by overcharging them. Primary findings suggest that underwriters charge higher markups for municipal bonds issued by entities with a material weakness in internal controls. Findings are magnified under circumstances of greater information asymmetry between issuers and investors, such as for revenue bond issuances, delayed release of financial information, and retail investor trades. Our evidence is consistent with markups reflecting a risk-based form of compensation, whereby municipal bond underwriters are paid for the additional risk and effort involved in placing bonds issued by entities with serious accounting problems.
IS THERE AN ASSOCIATION BETWEEN VICE CHANCELLORS’ COMPENSATION AND UNIVERSITY RANKINGS?
GOVENDIR, BRETT
BUGEJA, MARTIN; MATOLCSY, ZOLTAN; PAZMANDY, GREGORY
Category: PSNP = Public Sector & Not-For-Profit
The objectives of this paper are to (i) provide descriptive evidence on the level and changes in the level of Vice-Chancellors’ (VCs’) compensation in Australian universities and (ii) to evaluate the association between VCs’ compensation and the performance of universities as measured by levels and changes in external rankings. The results demonstrate that there is no association between VCs’ compensation and external rankings with respect to both the absolute amount and changes in VCs’ compensation. Based on the governance structures applicable in Australian Universities, the level of and growth in VCs’ compensation appears consistent with the ability of management to capture the board (Bebchuk and Fried, 2003). Consistent with prior studies, the major determinant of VCs’ compensation is University size.
THE EQUITY BROKER’S DILEMMA: AN ETHNOGRAPHIC INQUIRY INTO REVERSE BROKERING
GRAAF, JOHAN
JOHED, GUSTAV
Category: IC = Interdisciplinary/Critical
This study addresses the overlooked broker function in equity markets and how equity brokers’ contrarianism contributes to market activity. Based on an ethnographic study at an equity sales desk, we follow how the “Indumine case” (pseudonym) was formulated, sustained and eventually abandoned and how the brokers managed their personal involvement to it. Drawing on actor-network theory, the paper advance the notion of the “equity broker’s dilemma” which implies that without analysts’ and investors’ support for the case, its’ economic potential will not materialize. However, with more supporters committed to case, the brokers run the risk of not being rewarded as their particular contributions diminish. In relation to the equity broker dilemma, the study records an accounting usage which is based on interactions with clients rather than analysts, a practice referred to as “reverse brokering.” This involves information which is varied, temporary, and generalized to other cases as the brokers’ propositions risk being displaced. The brokers’ use of accounting is based on marking distance towards consensus on specific items only, limiting their overall risk exposure yet maximizing their conviction towards particular selected items. This use of accounting is driven by a quest for attribution of responsibility as the case materializes and an escape of blame when it fails.
GHG EMISSION REPORTING WHEN FIRMS ARE LIABLE FOR ENVIRONMENTAL DAMAGE
GRAHN, ALINE
Category: FR = Financial Reporting
How influences liability for environmental damages firm’s GHG emissions and the indicator that is applied for reporting it? We answer this question through a simple multi-task principal-agent-model. We find that in a scenario when the firm is not liable for its emissions neither the principal nor the agent consider the emissions. Under strict liability the firm wants to realize the socially optimal emission level. The precision of the reported indicator is not of interest for the principal or the agent. Under negligence the possible range of the indicator becomes important because now the principal incorporates the possibility that his firm is liable for environmental damages through the probability of exceeding the allowed emission threshold. The expected resulting emission level under negligence is then lower than the so-cially optimal level. Ex post, that means when the bonus contract and the emission reduction are realized, the expected utility of the principal can be enhanced through an improvement of the precision of the indicator. To the best of our knowledge this model is the first to serve the interface of three distinct literature streams: principal-agent-models, liability and reporting quality.
OPTIMISTIC DISCLOSURE TONE AND CEO CAREER CONCERNS
GRANDE HERRERA, CRISTINA
GARCIA OSMA, BEATRIZ; GUILLAMON-SAORIN, ENCARNA
Category: FR = Financial Reporting
This paper examines the association between CEO career concerns and tone in narrative disclosures. An emerging literature in accounting and finance studies narrative disclosure quality and its association with firm characteristics. We argue that CEOs, as they advance in their careers, develop recognizable patterns in their narrative disclosures. In particular, we predict that CEOs use a more optimistic tone at the beginning of their tenure to build a reputation of strong performance. We test this prediction analyzing the tone in 10-K disclosures and its association with CEO tenure. Using a large sample of US companies for the period 1990-2014, the results indicate that tone is more optimistic at the beginning of CEO tenure, consistent with the existence of career concerns. We also document that as CEOs approach retirement, disclosure tone again becomes optimistic. This is consistent with the existence of concerns about maximizing post-retirement benefits.
COMPARING THE ATTITUDES AND ACTIVITIES OF INTERNAL AUDITORS IN AUSTRALIA, CANADA, AND THE UNITED STATES REGARDING GREEN IT
GRAY, GLEN
NO, WON GYUN; ROEBUCK, PETER; YOON, KYUNGHEE
Category: IS = Information Systems
Internationally, sustainability reporting are a growing element of corporate governance. Whether mandated or voluntary reporting, boards and CEOs do not want to be accused of greenwashing (deceptive reporting). With the internal auditors considered control experts it seems logical that the internal audit functions would provide assurance that the appropriate reporting controls have been designed and implemented and are functioning correctly. Additionally, a logical starting point for sustainability activities would be green IT because of internal audit’s existing familiarity with their organization’s IT activities. However, Gray (2014) found only minimal green IT activities by U.S. and Canadian internal auditors. This study compares Australian internal auditors to Gray (2014) results. We expected more green IT involvement in Australia because Australian has more mandatory sustainability regulations than the U.S. and Canada. However, other than a couple minor differences, the green IT attitudes and activities of the internal auditors of these three countries are essentially interchangeable. Future research needs to identify whether there are cultural reasons or deeper, profound systemic reasons why internal auditors are not more proactively involved in the highly-visible, rapid-growing, value-added areas of sustainability and green IT.
IS THERE AN EARLY-MOVER MARKET VALUE EFFECT FOR SIGNALLING ADOPTION OF INTEGRATED REPORTING?
GREEN, WENDY
ARGUELLES, MARY; BALATBAT, MARIA
Category: FR = Financial Reporting
It is argued that Integrated Reporting (IR) provides a potential solution to the inadequacies of current corporate reporting frameworks through its aims to improve the quality of information available to providers of financial capital. Such claimed benefits from adopting (IR) have spurred multiple firms to voluntarily adopt (IR). This study has two aims. First, it examines the firm-level determinants of being an early-moving (IR) firm, and second whether capital markets value the disclosures made under (IR) principles by these firms. We identify a sample of firms signalling early adoption of (IR) (i.e. early-moving firms) through their engagement in the International Integrated Reporting Council (IIRC) Pilot Programme or through self-declaring such adoption in the Global Reporting Initiative (GRI) database. Employing signalling theory, as developed through prior literature on voluntary disclosures of non-financial information, and a modified Ohlson (1995) valuation model we test the value relevance of the early-moving signal. Further, we test whether disclosures made by early-moving firms relating to the principles of (IR) capitals are more value relevant than for firms not signalling their adoption of (IR), and whether the value relevance of these disclosures increases over time. Results show that size, return on assets, and the values of proxies for the (IR) capitals are significant determinants of being an early-moving firm. Further, results indicate that capital markets value the signal as an early-moving firm, as well as their (IR) principles disclosures. This study contributes to literature on (IR) and builds on existing literature on voluntary disclosures and value relevance. Results of this empirical study inform the IIRC and other proponents of (IR) on the benefits from adopting (IR). The results also have implications for firms who are still considering adopting (IR). This is the first study to report on determinants of early disclosure in the (IR) setting as well as the first to examine market effects from the early adoption of (IR).
SUSTAINABILITY REPORTING BY INGO ACCOUNTABILITY CHARTER MEMBERS
GREILING, DOROTHEA
HEBESBERGER, HANNAH; TRAXLER, ALBERT
Category: PSNP = Public Sector & Not-For-Profit
In the course of time, the NGO sector has grown steadily. Therefore, it is not surprising that this growth also promoted an increased influence of many NGOs within it. At the same time many private corporations and organisations of the public sector have changed their behaviour and are getting started to demonstrate their contributions to a sustainable development. Thus, nowadays it is vital for NGOs to illustrate their own efforts regarding sustainability, to maintain a legitimated say within the debate about a sustainable development. To provide a holistic accountability approach, in 2010, the INGO Accountability Charter together with the Global Reporting Initiative issued a sector specific sustainability reporting (SR) framework. NGOs which subscribed the Charter have to use this framework as a foundation for their SR. Against this background the study examined the SR practices of these members. Therefore, the authors conducted a document analysis of current sustainability reports, published by the 18 members. The investigation revealed that most of them do not go well beyond the minimum requirements of the Charter and thus miss the chance to use the reporting framework in order to reach holistic accountability.
THE DRIVERS OF WEALTH DISTRIBUTION POLICIES IN THE US TECHNOLOGY SECTOR
GREY, COLETTE
FLYNN, ANTOINETTE
Category: FA = Financial Analysis
This paper examines the motivations for wealth distribution policies, in particular open market share repurchases in the US technology sector. Our study classifies distribution policies using four categories: no distribution, dividend payments, repurchasing shares, and both dividend payments and repurchasing shares. We test a number of motivations for wealth distributions and find clear evidence that different executive compensation incentives (options versus awards) drive specific distribution decisions, with a distinct difference between repurchasing firms and dividend paying firms. Stock awards are positively associated with stock repur-chases while stock options are negatively associated with dividend payments, a result which might be explained by the growth of stock awards as the dominant executive compensation incentive in US firms in recent times. The free cash-flow hypothesis fails to explain the wealth distribution choices of US technology firms. Indeed, we find that its operating cash flow counterpart, capital expenditure is a better predictor of wealth distribution, confirmed by a significant negative relationship between capital expenditures and dividend payments. The repurchase decision acts as a signal that the technology firm is undervalued; this is not true for dividend-payers. Also, good corporate governance is positively associated with repurchasing firms, suggesting that repurchasing safe-guards shareholders wealth. Our contributions are manifold: insights into the characteristics of wealth distributing technology firms; the separate examination of stock options and stock awards prompted by the US adoption of FAS 123R; the addition of capital expenditures to augment the free cash-flow hypothesis; and the inclu-sion of various corporate governance measures which moderate agency costs.
DISCRETIONARY GOODWILL IMPAIRMENT LOSSES IN EUROPE
GROS, MARIUS
KOCH, SEBASTIAN
Category: FR = Financial Reporting
The impairment-only approach to goodwill has been regularly criticized for offering too much discretion to management, facilitating the manipulation of goodwill impairment losses. Extant research provides mixed results on whether managers use their discretion informatively or opportunistically. This paper examines the determinants of discretionary goodwill impairment losses in Europe. We predict non-discretionary goodwill impairment losses based on economic determinants. Thereafter, we calculate discretionary goodwill impairment losses and examine the determinants. Our results indicate that discretionary goodwill impairment losses are used opportunistically rather than informatively. In particular, we find that managers seem to use their discretion to “clear the deck” or to meet or beat analyst forecasts. However, this opportunistic behavior is constrained by effective governance mechanisms and effective enforcement systems that are able to constrain at least the discretion to recognize goodwill impairment losses that are too low. We conclude that governance mechanisms should be further strengthened to limit opportunistic accounting choices by management.
DOES THE FINANCIAL PRESS ASSUME AN INFORMATIVE ROLE WITH RESPECT TO MANAGERIAL TONE MANAGEMENT?
GROßKOPF, ANN-KRISTIN
HITZ, JOERG-MARKUS
Category: FA = Financial Analysis
We investigate whether and how the financial press assumes an information production role by systematically adjusting or tuning the tone in their articles. Our findings reveal no association of the tone in press articles with the abnormal tone of pertinent earnings announcements, or with analysts’ feedbacks during conference calls. These findings are consistent with prior work, which documents that the observable contribution of the financial press in capital markets is limited to the dissemination of information.
CAN OVERSEAS INVESTMENT IMPROVE EARNINGS QUALITY?
GU, JUNJIAN
SEMBA, HU DAN
Category: FA = Financial Analysis
It is widely assumed that foreign investment is good for companies in several ways. However, there are few studies addressing whether overseas investment can benefit companies' earnings qualities. Using a sample of Japanese firms' overseas investments in global markets, this paper tries to find the relationship between overseas investment and companies' earnings qualities. In this paper, we use the propensity score matching model to control for differences in firms' characteristics between overseas investment Japanese firms and non-overseas investment Japanese firms and regression models to test 6 hypotheses on the associations among earnings qualities, legal systems, and degrees of development. We find that although overseas investment can reduce earnings management risk, it can also impair reporting conservatism. Further analyses show that firms in common law or developed countries have higher level of earnings qualities.
HOW DOES THE VISIBLE HAND SHAPE COST BEHAVIOR? EVIDENCE FROM CHINA
GU, ZHAOYANG
TANG, SONG; WU, DONGHUI
Category: MA = Management Accounting
Banker and Byzalov (2014) find that China exhibits the highest degree of cost stickiness compared to 20 other economies. We hypothesize that to maintain social stability Chinese government has the incentive and ability to influence firms’ employment decisions, thus affecting the labor cost stickiness. We find that, consistent with our hypothesis, China’s state owned enterprises (SOEs) have a higher degree of labor cost stickiness than non-SOEs, and SOEs with politically connected managers have a higher degree of labor cost stickiness than those without. Such effects are stronger in regions with weak institutions and during time periods when government officials are to be promoted. However, the political factors have little impact on the stickiness of other costs. We also find that SOEs with stickier labor cost behavior receive more government subsidies subsequently. Collectively, our analysis lends support to the theory that political incentives sharp firms’ labor employment decisions via ownership control and management political ties.
THE JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH: A CITATION ANALYSIS OF THE FIRST 25 YEARS
GUFFEY, DARYL
HARP, NANCY
Category: MA = Management Accounting
This article provides a citation analysis for the Journal of Management Accounting Research (JMAR) between 1989 and 2013. During this study, citations to articles in JMAR were collected; used to rank articles and authors; and identified individuals and articles contributing the most towards establishing JMAR as a premier accounting journal. Rankings were based on (scaled and unscaled) citation count and citation rate. An analysis of three eight-year periods enabled identification of research transitions over those three intervals. A classification of articles into nine research methodology categories (and scaling by the number of articles in each category) yielded evidence of the most influential research methodologies (per article published).
THE ELECTORAL BUDGET CYCLE ON MUNICIPAL WASTE COLLECTION EXPENDITURE
GUILLAMÓN, MARÍA-DOLORES
BASTIDA, FRANCISCO; BENITO, BERNARDINO; RÍOS, ANA-MARÍA
Category: PSNP = Public Sector & Not-For-Profit
This paper analyses the determinants of municipal waste collection expenditure, specifically the effects of electoral cycles on municipal waste collection expenditure. We use a database with information on Spanish municipalities with more than 1,000 inhabitants for the period 2002-2011. Our results reveal that incumbents adopt an opportunistic behaviour, increasing spending on waste in the pre-election year and reducing it in the election and post-election years. Therefore, we confirm an electoral budget cycle on waste collection expenditures in Spain. Additionally, we find that the levels of income, unemployment and upper-level governments’ transfers have a positive impact on waste collection spending. Finally, population density, level of urbanization, average age of the population of the municipality and less fragmented governments negatively influence waste collection spending.
EARNINGS MANAGEMENT AND IMPRESSION MANAGEMENT
GUILLAMON SAORIN, ENCARNA
AERTS, WALTER; GARCIA OSMA, BEATRIZ
Category: FR = Financial Reporting
Financial reporting communication involves both mandatory and voluntary disclosures. The preparation of these disclosures likely requires the participation of a number of different insiders across the firm, but little is known about how these insiders interact and how the quality of the different disclosures relate to each other. In this paper, we examine the relationship between both accruals and real earnings management in the audited financial statements and impression management behaviour in annual results press releases. We show that earnings management is positively associated with impression management, indicating that firms engaging in self-serving disclosure practices may do so at several levels of firm communication, and that these practices may be jointly used to manipulate outsiders’ perceptions. Expected levels of earnings management are more strongly associated with impression management than unexpected levels of earnings management. Scrutiny concerns and risk of detection moderate this association. In particular, we observe that a stronger association between impression management and unpredicted levels of real earnings management (less visible) than of predicted accruals earnings management (more visible). This effect disappears in a setting with low risk of detection in which unexpected levels of accruals earnings management is positively associated with impression management.
THE EFFECTS OF FORMAL AND INFORMAL CONTROL MECHANISMS ON OUTSOURCING PERFORMANCE
GULLKVIST, BENITA M.
Category: MA = Management Accounting
The study examines the effects of formal (process and outcome) and informal (social) forms of control mechanisms on outsourcing performance in an inter-organizational setting. In particular, it investigates the interaction effect of the different forms of controls on outsourcing performance. The research model, drawing on organizational control theory, was empirically tested with survey data including the service providers (accountancy service firms) as well as their clients. Using Partial Least Squares (PLS), the model was controlled for firm size, firm age, length of relationship and perceived environmental uncertainty. The results suggest that social control is the most important form of control, enhancing perceived outsourcing performance. Further, the results suggest that the interaction effect of social and formal control mechanisms enhances outsourcing performance, suggesting a complementary effect. In addition, the results are significantly different for the two subgroups. The study provides a contribution to the literature on control mechanisms in inter-organizational settings as well as some practical insights into the ways in which managers exercise control mechanisms to achieve effective outsourcing outcomes.
CAPITAL MARKET EFFECTS AROUND DIVIDEND ANNOUNCEMENTS - AN ANALYSIS OF THE BERLIN STOCK EXCHANGE IN 1895
GÜNTHER, JENS
Category: HI = History
This paper analyzes share price and trading effects around dividend announcements of firms listed on the Berlin Stock Exchange in 1895. Based on a sample of 166 firms, I find a statistically and economically significant positive (negative) cumulative average abnormal return following a positive (negative) dividend surprise. The positive price impact already evolves in advance while the price impact of negative surprises arises at the announcement date. Consistent with the dividend signaling hypothesis these effects are more pronounced for smaller firms and firms providing a lower financial reporting transparency. I furthermore find that trading is increased around the announcements. The effect is negatively associated with a firm’s market value and a firm’s financial reporting transparency. These findings are consistent with a differential belief revision among individual investors.
MANAGEMENT CONTROL OF PRODUCT INNOVATION AND PERCEIVED ENVIRONMENTAL UNCERTAINTY: EXPLORING HETEROGENEITY OF CONTROL
GÜNTHER, THOMAS
JANKA, MARC
Category: MA = Management Accounting
Results in the management control research are ambiguous concerning the relationship between different management control systems (MCS) and product innovation. Many researchers refer to Simons’ levers of control (LoC) framework with the purpose to shed some light on ‘the balancing act’ between innovation and predictable goal achievement. Previous researchers thereby follow either a rather reductionist approach or assume that all firms are equal in their comprehensive design of MCS and neglect segment-specific differences. Both approaches have been subject of criticism regarding their partly failure to extend the knowledge about contingency-based MCS configurations research. We contribute to contingency-based research by the identification of two MCS configurations through a response-based segmentation method. Using survey data collected from 276 large-sized German speaking firms, we apply a finite mixture partial least squares (FIMIX-PLS) approach in order to uncover heterogeneity in a well-established research model. Thereby we show that perceived environmental uncertainty (PEU) is a meaningful antecedent of MCS design. While one group in our study exhibits a comprehensive MCS response when facing high PEU another group relies on a loose control response. The different response-types significantly distinguish in their MCS effectiveness which is determined by their ability to focus organizational-attention and to engender product innovation.
EARNINGS MANAGEMENT AND AUDIT QUALITY UNDER THE SPECIAL TREATMENT OF CAPITAL MARKET IN CHINA
GUO, QIANG
HUNG, YU-SHUN
Category: AU = Auditing
This research is aimed to explore the relation between corporate earnings management and audit quality in China’s special treatment system by looking into A-share listed companies especially ST-marked companies during 1999-2011. Specifically, this study investigates the influence of the specialization and independence of audit partner/firm on corporate real and accrued-based earnings management behavior between ST-marked and non-ST-marked companies. The empirical results show that compared with non-ST-marked firms, accrued-based earnings management degree of ST-marked companies will be lowered when audit partner is an industry specialist. In terms of tenure, compared with non-ST-marked firms, accrued-based earnings management degree of ST-marked companies will be enhanced when the firm has a longer tenure; on the contrary, when the audit partner has a longer tenure, real earnings management degree of ST-marked companies will be lowered. With regard to client importance, there is no obvious evidence proving the difference between ST-marked firms and non-ST-marked firms. These evidences suggest that audit quality of audit partners is not the same as that of audit firms as a reference for PCAOB.
STRATEGIC DECISION BEHAVIOR AND AUDIT QUALITY OF BIG AND SMALL AUDIT FIRMS IN A TENDERING PROCESS
HAAK, MARCEL
FOCHMANN, MARTIN
Category: AU = Auditing
We investigate the strategic decision making of audit firms in a tendering process. In particular, we are interested in how audit firms behave to acquire audit clients and which audit quality is ensured. Our main findings are manifold. First, if two big audit firms are competing, we do not observe that each firm tries to acquire all clients. However, if one big and one small audit firm are competing, we find evidence that the big audit firm generally apply strategies to acquire all available clients. In contrast, the small audit firm uses a clear “Guerilla Strategy” which means that the firm concentrates only on few clients whereas the other clients are almost ignored. Second, small audit firms are better off if more clients do exist in the tendering process. Thus, the legislator should ensure that more audit clients are tendered if the competitiveness of smaller audit firms should be enhanced. Third, in a situation in which the competitive advantage of big audit firms increases over-proportionally, we do not observe that big audit firms are able to decrease the market share of small audit firms markedly or are even able to push small audit firms out of the market. Fourth, we find that the quality level of an audit is higher if the client is acquired by a small audit firm. This implies that increasing the number of smaller audit firms could increase the quality level of the audit market.
BEHAVIOUR OF INFORMED AND UNINFORMED INVESTORS: EX-ANTE UNCERTAINTY VS. SIGNALLING THEORY
HADRO, DOMINIKA
MOŚCIBRODZKA, MONIKA; PAUKA, MARKE
Category: GV = Governance
In this paper, we investigate the stock price behaviour of newly listed companies on the stock exchange market with an extremely high level of information asymmetry. We show a unique mechanism of how informed investors influence the stock prices before entering the market to consume abnormal returns. We point out that weak entry regulation and low disclosure requirements, which are implemented by regulators to meet the needs of small and young companies in gaining capital, together with weak legal enforcement, in reality, encourage market participants to overvalue stock prices in the short-term before debut and squeeze out aftermarket uninformed investors.
GREAT EFFORT, SOME CONCERN. HOW MAKING EFFORT TO ACQUIRE INFORMATION INFLUENCES MANAGERIAL REPORTING
HAESEBROUCK, KATLIJN
Category: MA = Management Accounting
I investigate if managers tendency to report opportunistically depends on whether they made effort to acquire the information they need to report. Theory suggests that making effort to acquire information can make opportunistic behavior more justifiable, but can also enhance feelings of responsibility when honesty concerns are sufficiently triggered. I argue that the reporting mode can be an important variable explaining which effect will dominate and when making effort to acquire information may or may not have a detrimental impact on opportunistic reporting. In my 2×2 experiment, managers are either endowed with the information they need to report, or they make an intellectual effort to earn this information. I also manipulate the mode of reporting by varying whether or not managers make a factual assertion about the information they need to report. Results show that when no factual assertion is required, managers report more opportunistically with earned relative to endowed information since they consider their other-regarding preferences less when information is earned. However, when managers are required to make a factual assertion about the information, their honesty concerns are triggered and the negative effect of earned information on opportunistic reporting is alleviated. These results have strong implications for practice by showing when acquiring information has a detrimental impact on reporting behavior in firms.
INTERNAL AND EXTERNAL AUDITORS’ PERCEPTIONS OF THE IMPORTANCE OF ISA 240 ATTITUDES/RATIONALIZATION RISK INDICATORS IN ASSESSING THE RISK OF FRAUD IN THE UAE
HALBOUNI, SAWSAN
Category: AU = Auditing
This study investigates the circumstances in which internal and external auditors in the UAE feel and are motivated by the responsibility to detect financial reporting fraud. This study uses a survey of internal and external auditors’ perceptions of the effectiveness of ISA 240 indicators in predicting the risk of fraud in the UAE. The study used a triangle model of responsibility consisting of three key components—“prescriptions,” “identities,” and “events”—to measure internal and external auditors’ perceived sense of responsibility to detect fraud. The results indicate that internal and external auditors have a low-moderate perception of their ability to influence the occurrence or nature of fraud. The results show a significant association among the “Task Clarity” (ISA 240 fraud risk indicators; incentive/pressure, opportunity, and attitudes/rationalization), the “Personal Control”, and the “Professional Obligation”. The results reveal that internal and external auditors perceived ISA 240 fraud risk indicators as effective in predicting fraud. The results also show that attitudes/rationalization fraud indicators are the most strongly predictive indicator. These findings suggest the need to clarify the professional rule of conduct, which has a significant impact on internal and external auditors’ prediction of the risk of fraud.
DO ANALYSTS SAY ANYTHING ABOUT EARNINGS WITHOUT REVISING THEIR EARNINGS FORECASTS?
HAM, CHARLES
BERGER, PHILIP; KAPLAN, ZACHARY
Category: FA = Financial Analysis
We identify a novel bias in analyst forecasts, after revision bias (AR bias), which we identify by examining an analyst’s reports after his final earnings forecast revision of the quarter. We document that (i) share price target revisions, (ii) qualitative predictions from the text of reports, and (iii) revisions to next quarter’s earnings forecast predict error in the current quarter’s earnings forecast. Market returns are slow to impound both the qualitative prediction and share price target information, as both predict earnings announcement window returns. Analysts disseminate positive news after the quarter’s final earnings forecast, consistent with analysts acting to maintain a beatable benchmark for managers. We argue our findings are consistent either with analysts acting to tip clients as to future earnings without fully affecting market expectations or with analysts not adjusting their earnings forecast because doing so is costly. Our findings contribute to the literatures on analyst forecast bias and analysts’ economic incentives.
UNOBSERVABLE TRANSFER PRICE EXCEEDS MARGINAL COSTS UNDER THE RELATIVE PERFORMANCE EVALUATION OF THE CEO
HAMAMURA, JUMPEI
Category: MA = Management Accounting
This study considers endogenously the performance evaluation of CEOs to investigate the reason why firms set the unobservable transfer price above marginal costs in a competitive market. Consequently, we find that shareholders prefer RPE to absolute performance evaluation of the CEO. RPE leads the firm to choose the transfer price above marginal costs for strategic compliment. This study contributes to the strategic transfer pricing literature in observability of a competitor’s transfer price. In addition, we discuss an important management accounting topic—the performance evaluation of CEOs.
ANALYST FORECAST BEHAVIOR OVER THE FIRM LIFE CYCLE
HAMERS, LARS
RENDERS, ANNELIES; VORST, PATRICK
Category: FA = Financial Analysis
This study examines analyst forecast behavior over the firm life cycle. Investigating a sample that contains information about analyst following and various properties of analyst forecasts in the period 1994-2012, we find that, relative to mature firms, analyst following is higher for firms in the introduction, growth and decline stage. This finding is consistent with the relatively high demand for analyst services arising from investor uncertainty as to firm fundamental value and future viability during these life cycle stages. Whereas this uncertainty is associated with lower forecast accuracy and more dispersion in the introduction and decline stage, analysts need less time to issue forecasts that are more accurate and less dispersed for firms in the growth stage. Further analyses reveal that the higher analyst following for firms in the introduction and decline stage is concentrated in firms whose future survival is less certain, providing additional evidence that analysts respond to the varying need for their services in the introduction, growth, and decline stage. The main results are robust to the use of different life cycle proxies.
DOES CHANGING ACCOUNTING STANDARDS AFFECT DIVIDEND POLICY?
HARAKEH, MOSTAFA
LEE, EDWARD; WALKER, MARTIN
Category: FR = Financial Reporting
This study explores the impact of International Financial Reporting Standards (IFRS) mandatory adoption on aspects of dividend policy in Western Europe. We select the United Kingdom as a representative of common-law countries and France as a representative of code-law countries. These two countries are highly comparable economically, which allows us to implement a difference-in-differences methodology. The genesis of our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason behind corporate underinvestment and cash over-retention (Myers and Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among code-law firms through enhancing the corporate financial information environment and reducing asymmetric information. Improvements to the information environment reduce firms’ concerns about their ability to raise external funds and this in turn makes them more willing to pay dividends. The reduction in information asymmetry helps investors become more confident about using accounting measures in assessing firm financial performance, which causes a significant reduction in dividend value relevance with respect to the market valuation of code-law firms. On the other hand, common-law firms witness no significant change in dividend payouts and a lower reduction in dividend value relevance relative to code-law firms. We contribute to the financial reporting literature through showing some of the effects of an exogenous information shock on dividend policy and dividend value relevance. The main implication from this study is that the introduction of higher quality accounting standards serve to mitigate information asymmetry between managers and investors and, consequently, reduces the frictions affecting corporate financial decisions.
WHEN REVENUES ARE NOT REVENUES: THE INFLUENCE OF MUNICIPAL GOVERNANCE ON REVENUE RECOGNITION WITHIN SWEDISH MUNICIPAL WASTE MANAGEMENT
HARALDSSON, MATTIAS
Category: PSNP = Public Sector & Not-For-Profit
The aim of this paper is to contribute to our understanding of accounting choice in the public sector by exploring to what extent major municipal governance forms and structures influence accounting choice (compliance) in municipal settings. If municipal governance forms and structures influence accounting choice, then understanding these relationships becomes important when discussing heterogeneous financial accounting practice and efficient accounting regulation in the public sector. Empirically, this paper explore accounting choice and compliance regarding revenue recognition within the Swedish municipal solid waste management sector, a sector largely influenced by public sector governance reforms. Overall, this analysis results in a widespread non-compliance and the measures that are supposed to have a strong coercive or normative effect did not positively influence compliance. Instead, the correct way to account for revenues within the municipal waste management sector seems to diffuse more voluntarily through more subtle normative, mimetic and learning processes. The results suggest a lack of institutional framework (legal, guidance, knowledge) to support compliance, but also indicate that the municipal waste management sector might be in an early stage of a learning and diffusion process. The resulting proposition is that, if accounting regulation and enforcement systems are weak then practice diffuse, for instance, through the local interplay of accounting regulation and municipal decisions on governance forms and structures.
IMPACT OF ESG FACTORS ON FIRM RISK IN EUROPE
HARDECK, INGA
HINZE, ANNE-KATHRIN; SASSEN, REMMER
Category: SEE = Social, Environmental & Ethical
A huge body of research has addressed the impact of corporate social performance (CSP) on corporate financial performance. However, prior literature provides only limited evidence of the impact of CSP on firm risk. The aim of this paper is to investigate the impact of CSP operationalized by environmental, social, and governance factors on market-based firm risk in Europe. Three risk measures are analyzed: systematic, idiosyncratic, and total risk. On the basis of a large European panel dataset of 8,752 firm-year observations covering the period 2002–2014, we find that a higher CSP decreases total and idiosyncratic risk. Looking at the three dimensions of CSP, we show that social performance has a significantly negative effect on all three risk measures. Environmental performance generally decreases idiosyncratic risk, whereas total risk and systematic risk are only affected in environmentally sensitive industries. In contrast, we cannot detect a significant effect of corporate governance performance on firm risk. Our findings suggest that a higher CSP and a higher performance regarding the social dimension in particular has the potential to increase firm value through lower firm risk. Overall, our evidence fosters the assumption that there is a business case to be made for corporate social responsibility.
ANALYST TARGET PRICE ACCURACY AND THE INCIDENCE OF CASH FLOW FORECASTS
HASHIM, NOOR
STRONG, NORMAN
Category: FA = Financial Analysis
Research shows that analyst target price accuracy is limited and yet evidence on the factors driving this limited accuracy is inconclusive. Complementing the results of recent studies that show that the increasing incidence of cash flow forecasts in analyst reports has helped mitigate accruals mispricing, we address the question: are analyst target prices more accurate when accompanied by cash flow forecasts than when they are not? Using propensity score matching to control for selection bias, we estimate the effect of disclosing cash flow forecasts on the target price accuracy of US stocks during 2000–2010. The results suggest that target prices are more accurate when analysts also disclose cash flow forecasts. The paper contributes to the continuing debate about the usefulness of analyst target prices as well as the usefulness of analyst cash flow forecasts.
ANALYST COVERAGE: DOES THE LISTING LOCATION REALLY MATTER?
HASSAN, OMAIMA
SKINNER, FRANK
Category: FA = Financial Analysis
Listing location in the UK reflects different eligibility rules concerning market capitalisation, free float and compliance with the UK corporate governance code. This study examines the impact of listing requirements and listing location on the number of analysts following companies listed on the main board (FTSE 350) and the junior market (AIM) using a count panel regression method. We find that listing location really does matter as stocks listed on the main board attract more analysts than can be explained by existing factors, even when we control for listing requirements. We also find that market capitalisation and free float have a more profound impact on the number of analysts following AIM companies than their FTSE350 counterparts. Our results also suggest that pooling the stocks of these two markets can mask significant differences and can result in misleading inferences concerning the determinants of analyst coverage. Key words: Analyst Coverage, Analysts following, Security Analyst, Institutional Investors, FTSE350, AIM JEL: G12; G14; M4; G230, G240, M490
THE ROLE OF CITIZEN PARTICIPATION FOR MUNICIPAL RISK MANAGEMENT – THE CASE OF A GERMAN MUNICIPALITY
HAUSTEIN, ELLEN
LORSON, PETER; WIGGER, CHRISTINA
Category: PSNP = Public Sector & Not-For-Profit
German municipalities are required to report on risks as part of their management commentary accompanying their financial statements. This paper explores the role of citizen participation for municipal risk management. According to the Risk Management Escalator model of the International Risk Governance Council (IRGC 2005), different degrees of stakeholder involvement are necessary depending on the risk characteristics. By drawing on the public risk categorization of Budäus and Hilgers (1999), this paper examines how already existing procedures of citizen participation can be of use for municipal risk management. Thereby this paper draws on a case of a German municipality including 45 interviews with experts from the municipality’s administration and documents of existing procedures of citizen participation. Within the limitations of the study, the contribution of this paper is twofold. First, a combination of public risk categories with the Risk Management Escalator shows for which public risks, citizen participation could be theoretically of relevance. Second, the qualitative findings reveal that institutional, social as well as system risks are addressed by specific types of citizen participation. The paper concludes by indicating a link between municipal risk resilience and citizen commitment.
CORPORATE GOVERNANCE, BLOCK SHAREHOLDINGS AND INFORMATION ASYMMETRY PRE- AND DURING THE FINANCIAL CRISIS: EVIDENCE FROM THE UK
HAWAS, AMIRA
MOUSSA, TANTAWI
Category: GV = Governance
This paper examines the effects of Corporate Governance (CG) and Block Shareholdings on information asymmetry. We also investigate the role of corporate governance in moderating the effect of block shareholdings on information asymmetry. Using a sample of the UK FTSE 350 companies before and during the financial crisis 2007/2008, we find that CG had a negative association with information asymmetry in the pre-crisis period while no evidence of significant relationship is found for the period of the crisis itself. This suggests that CG is an effective tool to reduce information asymmetry in stable economies only but not during the crisis period. Additionally, the results indicate a non-significant association between block shareholdings and information asymmetry in the pre-crisis period. However, a positive statistical association is found between block shareholdings and information asymmetry in the crisis period; both institutional block shareholders and other block shareholders are found to significantly affect information asymmetry. Interestingly, we find that this relationship is not moderated by CG index during crisis period. These results have important implications for policy makers about the improvement needed for CG which will help companies prevent future financial crises. There is a need for more hard work of regulators to focus more directly on CG mechanisms that fail to have an impact on reducing information asymmetry, especially during the crisis period.
THE GOING CONCERN OPINION AND THE ADVERSE CREDIT RATING: AN ANALYSIS OF THEIR RELATIONSHIP
HAY, DAVID
STRICKETT, MATTHEW
Category: AU = Auditing
This paper examines the relationship between going concern opinions issued by the Big 4 audit firms and adverse credit ratings from the two largest credit ratings agencies (CRAs), Standard & Poor’s (S&P) and Moody’s. The paper focuses on audit opinions and credit ratings of firms that later file for bankruptcy. The relationship is examined from both sides. We examine whether credit ratings inform auditors in the making of going-concern (GC) audit opinion decisions, and whether GC opinions have an impact on a firm’s credit ratings. The analysis is undertaken on a sample of firms that filed for bankruptcy between the 1 January 2002 and 31 December 2013 that also had an audit opinion signed during the 12 months before bankruptcy, along with a credit rating issued by either or both, S&P and Moody’s. The results show that the likelihood of an auditor issuing a GC opinion is related to the credit rating issued the month before by both S&P and Moody’s. Results also show that S&P reacted in the month after an auditor issued a GC opinion by downgrading its ratings 68% of the time. However, Moody’s did not react in the same way, downgrading their ratings only 24% of the time. This paper sheds light on the relationship between audit opinions and credit ratings in relation to distressed companies. This is useful to better understand the wider relationship between auditors and credit rating agencies, and to be able to consider the future of these services.
IMPROVING ACCOUNTING ETHICS VIA SELF-COMMAND AND SELF-REGULATION: INSIGHTS FROM MORAL PHILOSOPHY AND BEHAVIOURAL SCIENCE
HAZELTON, JAMES
Category: ED = Accounting Education
Following the admonition by Parker et al. (2011) to focus research on areas that have practical relevance, this paper explores how accountants can improve their moral decision-making by linking Kantian morality with recent findings from behavioural science. Specifically, the paper explores that Kantian notion of self-command (the ability for a person to actually follow their self-legislated moral maxims) and finds a number of areas of intersection with modern psychological research on ethics and self-regulation. Kant’s psychological recommendations for improving self-command (self-awareness, suspension of judgment, alternative habits of imagination and firm resolution) are extended by recent psychological research findings which highlight the importance of attention management, transcendence and lapse management. A number of physiological factors which influence self-regulatory ability (ignored by Kant) are also discussed; namely exercise, sleep, diet and meditation. These findings suggest fruitful new areas of focus for accounting ethics education, regulation and research.
DO VOLUNTARY DISCLOSURES OF PRODUCT AND BUSINESS EXPANSION PLANS IMPACT ANALYST COVERAGE AND FORECASTS?
HE, GUANMING
DAI, DAISY; MARGINSON, DAVID
Category: FA = Financial Analysis
This study investigates whether nonfinancial disclosures of product and business expansion plans affect analyst coverage and forecasts. We find that the level of analyst coverage is positively associated with the incidence of disclosures of product and business expansion plans. We also find that product and business expansion disclosures increase the informativeness of analyst earnings forecasts. We find no evidence that product and business expansion disclosures increase analyst forecast errors. Overall, our study contributes to understanding the role of product and business expansion disclosures in analysts’ forecast behaviours.
AUDIT COMMITTEE ROLES AND RESPONSIBILITIES IN TWO UK PUBLIC SECTOR SETTINGS
HEGAZY, KARIM
HEGAZY, DR. MOHAMED; STAFFORD, DR. ANNE
Category: PSNP = Public Sector & Not-For-Profit
This paper conducts a comparative study by examining the Audit Committee (AC) set-up, roles, responsibilities and developments in two distinct UK public sector settings namely Foundation Trusts (FTs) and Local Authorities (LAs). The paper is exploratory and explanatory in nature and uses a qualitative case study approach based on semi-structured interviews with AC chairs, external and internal auditors, finance directors coupled with meeting observations and documentation review. The study finds that public sector ACs have a large and diverse role which extends beyond challenging/monitoring responsibilities. Influenced by the New Public Management ideology the AC has developed more rapidly in FTs due to imposed regulation contrasting with the slower progress in LAs due to its still voluntary adoption. Nevertheless, in both environments there is a developing understanding and growing competence within the AC in terms of their assurance role encapsulated by the idea of having a finger on the pulse rather than a finger in the pie. The study demonstrates that using institutional theory to study public sector ACs is insufficient and incomplete. The study recognizes that there is a need to ensure ACs are appropriate to their institutional setting and organizational context. Most AC studies have focused on private sector contexts. This paper explores the phenomenon in a different organizational context namely as a public sector comparative case study.
THE EFFECT OF AUDIT FIRM INDUSTRY SPECIALIZATION ON EARNINGS, AUDIT QUALITY AND REPORTING: A PRACTICAL INVESTIGATION
HEGAZY, MOHAMED
HAMDY, RASHA
Category: AU = Auditing
This paper aims at investigating the effect of industry specialization on the audit quality and earnings quality. It examines the relation between industry specialization and earnings quality, financial reporting quality, and audit quality. The research posits that industry specialization constrains earnings management. In addition, it hypothesized a positive relationship between industry specialization and financial reporting quality. An experiment was conducted in an audit firm with international affiliation in Egypt to test the research hypotheses. The results indicate that there is no significant difference between industry specialist auditors and non-specialists in constraining earnings management. In addition, findings support that financial reporting quality was significantly higher when specialists conducted the audit. The results provide empirical evidence consistent with the hypothesis that auditor industry specialization may improve audit quality. Finally, the research provides some evidence that industry specialization enables auditors to realize the amendments in auditing standards better than non-specialists.
INDIVIDUAL (CROWD)INVESTORS AND UNVERIFIABLE DISCLOSURE
HEMAIDAN, NADER
Category: FR = Financial Reporting
This study examines the role of unverifiable disclosures in the scope of investment decisions in the crowdinvesting market. Using proprietary investor-level data from a large German crowdinvesting portal, I investigate how firms’ voluntary and unverifiable disclosures are associated with the investment decisions of individual crowdinvestors. More importantly, I show that this association varies with investors’ level of sophistication, the investment amount and the public availability of financial statement information. My findings suggest that institutional investors are more likely to invest in firms that provide more ‘hard’ disclosures (i.e., projected financial statements), while retail investors’ decisions are associated with comparably ‘soft’ information (i.e., the length of the pitch videos). In an additional analysis, I find evidence consistent with unverifiable financial disclo-sures being more important for crowdinvestors’ decision-making if historical financial statement information is unavailable. My findings further indicate that the relevance of firms’ disclosures for institutional investors’ investment decisions varies predictably with the investment amount.
EXPERIMENTAL EVIDENCE ON EXTERNAL AUDITORS’ RELIANCE ON THE WORK OF INTERNAL AUDIT
HENRIZI, PHILIPP
QUICK, REINER
Category: AU = Auditing
With the revised version of ISA 610 (revised 2013) external auditors now face requirements and guidance addressing their responsibilities when relying on the internal audit function (IAF). The reliance decision of an external auditor has important economic consequences and implications for the efficiency and effectiveness of the overall audit. Using an experimental design, we explore how external auditors’ reliance decisions on the IAF are affected by varying levels of environmental factors, like client business risk, effectiveness of the internal control system, and quality of the corporate governance. Furthermore, the experiences of external auditors in collaborating with an IAF are taken into consideration. The results indicate main effects for each factor and a two-way interaction between the effectiveness of the internal control system and the quality of the corporate governance. Specifically, a strong internal control system can compensate weaknesses in the corporate governance with respect to the confidence of external auditors in internal audit. Also, the type of audit procedure influences the willingness of auditors to rely on the IAF. Moreover, past experiences of external auditors with an IAF have a significant impact on their reliance decision. Overall, findings suggest that organizations can foster internal-external auditor coordination by enhancing corporate governance effectiveness and strengthening the internal control system.
SUBJECTIVE PERFORMANCE EVALUATION: THE ROLE OF INFORMATION ACCURACY AND ACCOUNTABILITY
HERMANS, TIM
COOLS, MARTINE; VAN DEN ABBEELE, ALEXANDRA
Category: MA = Management Accounting
This paper examines the impact of performance information accuracy and the opportunity to provide a written justification for the bonus allocation (accountability) on the performance evaluation’s centrality bias. We conduct a 2*2 between subject experiment in which we manipulate performance information accuracy and accountability. Experimental results indicate that accountability acts as a moderating variable leading to less compressed performance ratings when performance information accuracy is high, but has no effect when performance information accuracy is low. Results also show that more accurate performance information leads to less compressed performance ratings and that this relationship is mediated by the managers’ fear for negative reaction of employees to the bonus allocation. More specifically, we find that higher information accuracy makes managers more afraid for negative reactions to the bonus allocation by their employees and this increased fear results in less compressed performance ratings. This is the case because managers take potential reactions of their employees to a larger extent into account when they fear employees’ negative reactions, which in turn leads to more fair and equitable bonus allocations.
THE DETERMINANTS OF FISCAL TRANSPARENCY IN SPANISH LOCAL GOVERNMENTS: SPECIAL REFERENCE TO THE STRUCTURE OF INTERNAL CONTROL SYSTEM
HERNANDEZ, JOAQUIN
GRAS-GIL, ESTER; MORENO-ENGUIX, MARIA DEL ROCIO
Category: PSNP = Public Sector & Not-For-Profit
The application of New Public Governance by many countries has led to the creation of new management systems in public and the development of an effective accounting structure with efficient internal control to guarantee a proper provision of services that meet citizens' requirements. We have focused our paper on Local Government Fiscal Transparency in Spain with an intention to determine the impact of the internal control structure. We consider that the fulfilment of deadlines allows us to measure the Fiscal Transparency in short-term in relation to internal control systems, and a series of financial and non-financial variables that influence the Fiscal Transparency´s situation of these entities. We can conclude that the socio-political variable gives a better explanation of Fiscal Transparency than the financial variable.
THE ROLE OF STRATEGIC ALLIANCES, CORPORATE GOVERNANCE, AND CROSS-FUNCTIONAL NETWORKS IN GHG REDUCTION PERFORMANCE
HERREMANS, IRENE
LU, JING; MAHMOUDIAN, FERESHTEH; NAZARI, JAMAL
Category: SEE = Social, Environmental & Ethical
Using a sample of North American companies reporting to the CDP (formerly Carbon Disclosure Project), we investigate the role of external alliances, corporate governance, and cross-functional networks in fulfilling the companies’ greenhouse gas (GHG) emissions reductions strategy. Because GHG emissions reductions is a fairly new challenge, we surmise that companies that reach out to other organizations through partnerships and alliances and involve multiple functional areas internally will outperform those that address the challenge single-handedly. Under the theoretical framework of resource dependence theory, we posit that organizations under pressure to report and reduce GHG emissions (such as those reporting to the CDP) will create structures, procedures, and activities internally to maintain access to needed resources on which the company is dependent. Our findings suggest that companies achieving the highest performance in GHG emissions reductions are more likely to engage in strategic alliances with organizations external to the company and work together internally to address environmental challenges. They are also more likely to place authority for GHG emissions reductions in the executive team and board members and involve multiple functional areas in teams who address the GHG reductions challenge through different activities.
BONUS PLAN ADOPTION, REGULATION AND MANAGERIAL MYOPIA - EVIDENCE FROM GERMANY
HILLEBRAND, CHRISTA
Category: FR = Financial Reporting
Executive compensation schemes are a powerful tool of corporate governance in order to reduce agency costs by aligning the interests of shareholders and managers. However, the design of compensation contracts is a process that is subject to various influences that shape their effectiveness. In particular, compensation incentives are shaped by firm characteristics, the management team, the economic environment and regulative interventions. This study examines consequences of adopting a certain type of compensation, namely long-term bonus plans, on managerial myopia. In particular, this study compares the level of earnings management of German firms that adopted LTBPs induced by the passage of regulatory requirements (Late Adopters) with firms that voluntary chose to incentivize managers by the means of bonus plans early (Early Adopters). In general, the results indicate that LTBP adopters exhibit less earnings management when compared to non-adopting firms. When comparing Early and Late Adopters, Late Adopters seem to be more myopic with regard to real activities manipulation. Further, LTBP late adoption is associated with higher levels of abnormal management compensation. This indicates that firms signal good governance such that compensation decision are not questioned by the market. The results remain robust when controlling for alternative specifications of managerial myopia and endogeneity issues.
WHAT DRIVES DECISIONS TO DETERMINE MARKETING BUDGETS: WHAT DO WE KNOW AND WHAT DO WE STILL HAVE TO LEARN?
HIMME, ALEXANDER
WAGNER, NILS
Category: MA = Management Accounting
Management accounting and marketing research have extensively analyzed the marketing budgeting process in firms. Empirical studies indicate that the determination of marketing budgets follows a complex decision process which is influenced by a multitude of different factors. Basically, surveys among managers identify simple budgeting methods, such as percentage-of-sales, which are applied for determining the marketing budget. But these methods cannot explain fully the final budget decisions. Instead, one observes a significant impact on marketing budget sizes by multiple factors. Further, we see that most of these factors also impact the choice of the applied budgeting method. In general, the empirical results with regard to marketing budgeting behavior are very fragmented which complicates a total view on what influences the determination of marketing budgets. Therefore, based on a collection of 83 empirical articles from the years 1967 to 2014 this study aggregates the results of the empirical research in this field and suggests empirical generalizations regarding the determinants of marketing budgeting behavior. Specifically, we extract product, firm, market, time, and organizational characteristics and discuss the relationships of these different characteristics with marketing budget method choice and marketing budget size. Finally, based on a critical assessment of the existing body of this stream of literature we provide suggestions for future research.
DID RESTRICTED LABOR SUPPLY DURING THE HOUSING BUBBLE IN THE MID-2000S INDUCE ANTI-STICKY COST BEHAVIOR?
HOFFMANN, KIRA
Category: MA = Management Accounting
Most cross-sectional analyses find SG&A cost stickiness on average. It reflects the effect of labor hoarding (or suboptimal capacity utilization) in the presence of labor adjustment costs when the number of periods with sales increases exceeds the number of periods with sales decreases. This article investigates the implications of upward biased adjustment costs due to limited availability of labor. As a particular suitable setting serves the housing bubble in Denmark during which construction companies had to exert more effort in order to attract and retain employees. Contrary to prevalent predictions, this study shows that SG&A cost anti-stickiness arises even though activity increases on average. Using, multivariate regression analysis in a dynamic model, findings suggest that anti-sticky SG&A cost behavior can be explained by a rise in labor productivity.
TAX PAYMENT DEFAULT PREDICTION USING GENETIC ALGORITHM-BASED VARIABLE SELECTION
HÖGLUND, HENRIK
Category: TX = Taxation
According to the statistics from the Finnish tax authorities, firms in Finland had a total of over 2.7 billion euros in unpaid taxes at the end of year 2013. Considering the economic significance of the unpaid taxes, relatively little research has been done on predicting tax defaulting firms. The purpose of this study is to develop a genetic algorithm-based decision support system for predicting tax payment defaults. The main output of the system is a simple and intuitive linear discriminant analysis model that classifies the examined firms as either defaulting or non-defaulting. The system also provides information about the importance of various variables in predicting a tax default. The dataset consists of Finnish limited liability firms that have defaulted on employer contribution taxes or on value added taxes and the total number of available variables is 72. The results show that variables measuring solvency, liquidity and payment period of trade payables are important variables in predicting tax defaults. The best performing model comprises three non-linearly transformed variables and has a predictive accuracy of 73.8%.
THE EFFECT OF MINIMUM DISCLOSURE REGULATION ON DISCLOSURE QUANTITY
HOMBACH, KATHARINA
BREUER, MATTHIAS; MÜLLER, MAXIMILIAN A
Category: FR = Financial Reporting
We study the effect of minimum disclosure regulation on disclosure quantity. Exploiting minimum disclosure requirements that discontinuously increase in firm size in the European Union, we investigate whether and how regulated disclosure quantities deviate from their counterfactual quantities absent regulation along the firm-size dimension. We infer the counterfactual for the same firms at the same point in time from stakeholders’ demand for firms’ disclosures and validate this counterfactual using alternative voluntary disclosure choices. For a large sample of German private firms, we document two findings: First, regulated disclosure quantities exceed unregulated disclosure quantities for the smallest firms. Second, firms with lower regulatory minimum requirements than similarly sized peers disclose less than they would absent regulation, consistent with strategic withholding of information in situations of differential regulatory requirements. These results provide regulators with a reference point to assess when disclosure regulation affects disclosure quantities most.
USEFULNESS OF RISK INFORMATION - AN EXPERIMENTAL STUDY
HOMÖLLE, SUSANNE
JORDAN, KATHRIN
Category: FR = Financial Reporting
For several years risk reporting of banks has been high on the agenda. Banks must disclose information on their risk exposure to enhance market discipline. As a precondition for this positive effect of risk reporting, the risk information provided by the banks must be useful for the depositors' and other investors' judgments and decisions. In this paper, we analyze whether this is really true. Using an experimental design we show that risk information may influence the individuals' judgments and decisions. We find that positive (negative) risk information lead to more positive (more negative) evaluations. In the case of conspiring risk and financial statement information the judgments and decisions are most pronounced. However, this enhancing effect of risk information is not significant. Considering opposing risk and financial statement information we find that positive (negative) risk information lead to more positive/less negative (more negative/less positive) judgments and decisions. Risk information can even reverse the effect of opposing financial statement information on the indi- viduals' judgment of the banks' risk exposure.
WHAT MAKES SOCIAL ENTREPRENEURS’ CROWDFUNDING CAMPAIGNS SUCCESSFUL? AN EXPERIMENTAL INVESTIGATION OF TWO REPORTING STRATEGIES
HOOS, FLORIAN
Category: SEE = Social, Environmental & Ethical
Social entrepreneurship is a widely recognized phenomenon that comes along with new reporting and value measurement systems. Social entrepreneurs also use new financial markets like crowdfunding to finance their social ventures. Based on a 2x2 between-subjects experimental design in the context of crowdfunding, I examine how impression management strategies and the implementation of a social value measurement system (1) influence crowdinvestors’ funding decision, and (2) their perception of a venture as being social. I find an interaction between impression management and the implementation of a social value measurement system suggesting that a social value measurement system significantly increases the funding amount when impression management is not used. I also find that implementing a social value measurement system significantly increases the perception of a venture as being social. In contrast to studies with professional impact investors (e.g., foundations, philanthropists), I do not find that impression management strategies increase the funding amount nor do they improve the perception of a venture as being social in a crowdfunding context. Those findings suggest that crowdinvestors react differently than professional investors to cues presented in a crowdfunding context, and that social entrepreneurs can make strategic choices between investing in impression management or in a social value measurement system depending on the financial market that they target.
THIRD-PARTY CONSEQUENCES OF SHORT-SELLING THREATS: THE CASE OF AUDITOR BEHAVIOR
HOPE, OLE-KRISTIAN
HU, DANQI; ZHAO, WUYANG
Category: FR = Financial Reporting
Most prior research on short selling focuses on its impact on targeted firms. In contrast, this study examines how short-selling threats affect other market participants, in particular auditors. During 2005-2007, the SEC ordered a pilot program in which one-third of the Russell 3000 index firms were arbitrarily chosen as pilot stocks to be exempted from short-sale price tests. As a result, these pilot stocks faced significantly higher short-selling threats. We use this controlled experiment as our identification strategy and implement a difference-in-differences test to show that auditors react to the threats and charge higher audit fees to the pilot firms. Further, we find that the impact only exists when auditors are concerned with the bankruptcy risk or when managers are less disciplined by short sellers. The results are robust to numerous controls, alternative partition methods, firm fixed-effects estimation, and alternative model specifications. This paper is among the first to document a third-party consequence of short-selling threats and to explore a specific cost of short-selling threats on shareholders (i.e., increased audit fees). In addition, we establish a causal impact of short-selling threats as a determinant of auditor behavior.
1 DOES ENFORCEMENT CHANGE EARNINGS MANAGEMENT BEHAVIOR? EVIDENCE FROM THE EU AFTER MANDATORY IFRS ADOPTION
HOTTMANN, JOHANNES
EBNER, GERMAR; TEUTEBERG, TORBEN; ZÜLCH, HENNING
Category: FR = Financial Reporting
We examine the expected preventive function of enforcement of financial reporting which has been subject to reforms in several EU member states in the years following mandatory IFRS adoption. Specifically, we are interested in the question whether accounting quality – proxied by several earnings management metrics – improved in countries with substantive changes in their enforcement setting. For this reason, we compare the development in earnings management activities for a treatment sample of firms from 7 countries with enforcement changes with two control samples from 13 countries in total that do not exhibit comparable enforcement reforms. In contrast to prior literature, we cannot provide consistent evidence for a decrease in earnings management activities; however, some results indicate less upwards and more downwards earnings management after a strengthening of enforcement, arguably as an overcautious counter reaction of responsible managers. Given the limited numbers of observations, we regard our findings as a preliminary inventory in the attempt of assessing the effectiveness of accounting enforcement in the EU.
AUDIT FIRM OFFICE SIZE AND CLIENT PORTFOLIO MANAGEMENT: THE EFFECT OF SOX 404 AND AS5
HSIEH, YU-TING
CHANG, HSIHUI; LIN, CHAN-JANE
Category: AU = Auditing
Prior studies examining auditors’ client portfolio management decisions primarily focus on the effect of client characteristics and the litigation environment. They seldom address the impact of auditor characteristics other than accounting firm size. However, auditors with different attributes sometimes have different risk tolerances. This study examines whether office size affects their risk tolerance in making client acceptance decisions. Analyzing data on public clients audited by Big 4 audit firms from 2003 to 2011, we find that large Big 4 offices are less likely to accept clients with high audit risk. We further consider the impact of dramatic changes in regulations or standards such as Sarbanes-Oxley Act (SOX) Section 404 and Auditing Standard No. 5 (AS5) on client portfolio management decisions. We find that large offices are less likely to accept risky clients when their bargaining power is relatively high in the post-SOX 404 period (2005-2007) compared to other periods. However, the negative effect of office size on the association between risk consideration and client acceptance becomes weaker when their bargaining power is relatively lower in the post-AS5 period (2008-2011).
CORPORATE SOCIAL RESPONSIBILITY AND CORPORATE DISCLOSURES: AN INVESTIGATION OF INVESTORS’ AND ANALYSTS’ PERCEPTIONS
HSU, AUDREY WEN-HSIN
KOH, KEVIN; LIU, SOPHIA; TONG, YEN H
Category: FR = Financial Reporting
We examine whether investors and analysts consider corporate social responsibility (CSR) when they assess firms’ announcements of earnings and management earnings forecasts. We find that only adverse CSR performance has an effect on investors’ assessments of these corporate disclosures. In contrast, we find both positive and adverse CSR performance affect analysts’ forecast revisions in response to firms’ disclosures. We also find firms with adverse CSR performance are found to exhibit lower disclosure quality, earnings persistence, and earnings growth. However, we do not find that firms with positive CSR performance exhibit higher levels of these measures. This asymmetric result is consistent with the assessment of investors, but not of analysts, of the effect of CSR performance on corporate disclosures. Overall, our results suggest that investors and analysts consider firm CSR performance when assessing the information in earnings-related corporate disclosures.
TRUST AND CONTRACTING
HUANG, STERLING
HILARY, GILLES
Category: GV = Governance
Prior research has shown that trust has a positive effect on the economic welfare of nations. We investigate this result by analyzing the effect of endowed trust on agency problems within organizations. We find that firms located in U.S. counties where trust is more prevalent suffer less from agency problems and display higher profitability and higher valuation. In addition, these firms utilize lower power compensation schemes and are less likely to fire their CEOs, while they take a harsher view of ethical breaches. Overall, our results suggest that trust is an effective way of mitigating moral hazard problems.
ACCOUNTING RESTATEMENTS AND CORPORATE CASH POLICY
HUANG, YUAN
CHEN, HUILI; CHEN, ZHIHONG; DHALIWAL, DAN
Category: FR = Financial Reporting
Using a difference-in-differences approach, we find that firms’ cash holdings significantly increase after announcements of irregularity-related restatements. The increase is more pronounced for firms with a higher precautionary saving demand. The irregularity firms significantly reduce investment and external financing after the restatements. When they fall short of cash reserves, they significantly increase cash savings after the restatements but do not change payout. In contrast, when they have excessive cash, there is weak evidence that they appear to reduce cash savings and increase payout after the restatements. Finally, we find that the market value of cash holdings increases after the restatements. Overall, our results suggest that the firms increase cash holdings after the restatements because cash reserves become more valuable in safeguarding against future shortfalls of internal funds. Our study contributes to the literature on the effect of financial reporting credibility on corporate real decisions.
THE INFLUENCE OF AUDIT FIRM PUBLISHED GUIDANCE ON CLIENT IFRS FINANCIAL STATEMENTS
HUGHES, SUSAN
HODGDON, CHRISTOPHER; VANZO, BRIDGET
Category: FR = Financial Reporting
The 2005 EU adoption of International Financial Reporting Standards required public companies to develop new reporting models that appropriately presented the primary financial statements and required narrative disclosures. Illustrative or Model IFRS Financial Statements (IFS) developed by each of the Big-4 audit firms were widely available in both print and online formats during this period. Limited prior research investigates the influence of these publications that provide sample IFRS financial statements and narrative disclosures for a hypothetical company. In this study, we focus on the 2006 financial statements of 103 IFRS reporting manufacturing companies audited by one of the Big-4 firms. We compare the content of client financial statements with the content of the audit firm’s IFS. We focus on the order of the financial statements, the headings used to highlight introductory notes, client inclusion of specific IFS narrative phrases, and the length of specific significant accounting policy and note disclosures. We find statistically significant auditor IFS influence on the financial statement presentation order, the use and content of headings, and the word content and length immediately following the shift to IFRS. Our findings provide insights into how companies develop their financial statements and may help inform the numerous standard setters, regulators and organizations that are currently working to improve financial statement disclosure effectiveness.
DOES AUDIT IMPROVE THE CREDIBILITY OF ACCOUNTING QUALITY
HUGUET, DAVID
GANDÍA, JUAN L.; HUGUET, DAVID
Category: AU = Auditing
Previous literature on accounting quality and auditing has shown that they are negatively related with the cost of debt. However, they have not examined if there is combined effect between both variables. We hypothesize that audits improve the credibility of accounting quality, and thus its effect on the cost of debt is strengthen when companies are audited. Using a sample of Spanish SMEs, we find that accounting quality and auditing are negatively related to the cost of debt. Furthermore, when consider the combined effects of both, the effect of accounting quality is more pronounced. These results suggest that audits increase the credibility of accounting quality.
VOLUNTARY STANDARDS VERSUS MANDATORY REGULATIONS – WHAT WORKS BEST FOR CORPORATE SUSTAINABILITY DISCLOSURE?
HUMMEL, KATRIN
FESTL-PELL, DIANA
Category: SEE = Social, Environmental & Ethical
This study investigates the effect of mandatory sustainability disclosure regulations on the sustainability disclosure level of firms by exploiting the fact that mandatory sustainability disclosure regulations differ across European countries. We are particularly interested in how the interaction between mandatory disclosure regulations and the adherence of firms to voluntary standards affects the sustainability disclosure of firms. Our research design includes panel regressions for a sample of large European firms and a difference-in-differences analysis for UK firms and matched sample firms before and after the introduction of mandatory sustainability disclosure regulations in the UK. The results of regression analyses reveal a positive relationship between adherence to voluntary standards and sustainability disclosure as well as between mandatory sustainability disclosure regulations and sustainability disclosure. Furthermore, the interaction between adherence to voluntary standards and mandatory sustainability disclosure regulations is negatively associated with the sustainability disclosure levels of firms, thus indicating that the effect of mandatory disclosure regulations is less pronounced among firms that adhere to voluntary standards. We obtain similar results from the difference-in-differences analysis, but the substitutive effect of mandatory regulations in the treatment group relative to the control group is not significant.
INCENTIVES AND CONTRACTIBILITY IN DELEGATED DECISION MAKING
HUNG, CHUNG-YU
Category: MA = Management Accounting
This study examines how different forms of incentives are associated with contractible versus non-contractible performance in a used-car loan setting, where the agents (i.e., local units) are endowed with the power to assess the borrower’s credit risk, and the quality of their corresponding decisions depends on the trade-off between contractible errors of keeping risky loans and non-contractible errors of forgoing promising loans. The empirical design exploits the setting’s hybrid organizational structure (i.e., the co-existence of company outlets and franchisees) to measure explicit incentives and implicit incentives distinguished by the ownership of the list of borrowers. The empirical evidence shows that franchisees with stronger implicit incentives are associated with a lower interest rate, a lower likelihood of borrower withdrawals, and a higher probability of default than company outlets motivated by stronger explicit incentives. In addition, the interest rate is more predictive of borrowers’ default likelihood in franchisees than in company outlets. These combined findings are consistent with the prediction that implicit incentives are associated with better non-contractible performance but with worse contractible performance than explicit incentives.
SHADOWS IN THE SUN: CRASH RISK BEHIND EARNINGS TRANSPARENCY
HUNG, SHENGMIN
QIAO, ZHENG
Category: FR = Financial Reporting
Corporate transparency is multi-dimensional, including but not limited to earnings transparency. Prior studies suggest that earnings and non-earnings information can be complementary to each other (Landholm, 1988). Dominant explanatory power from earnings may well imply the inadequacy of non-earnings information disclosure, especially when insiders are motivated to exploit their information advantage. Conditional on higher insider trading profit, we uncover a positive relation between the firm-specific earnings transparency measure (ET) in Barth et al. (2013) and crash risk. In addition, the above relation is more pronounced with respect to selling and profitable insider transactions. Consistent with the information complementary hypothesis, we also find the positive relation between ET and crash risk conditional on larger analyst forecast error or higher R&D expenditure. Overall, we demonstrate a potential dark side of high earnings explanatory power on returns, conditional on higher likelihood of managers withholding non-earnings information.
IS THE STRENGTH OF THE MANAGEMENT FORECAST ARGUMENT ASSOCIATED WITH FORECAST ACCURACY? – EVIDENCE FROM EUROPEAN FINANCIAL REPORTS
HURSTI, KRISTIAN JUHANA
Category: FA = Financial Analysis
Building on the Claim-Data-Warrant model of argumentation by Stephen E. Toulmin (1958/2003), this paper investigates whether the argumentative strength (Warrant) of management forecasts is related to forecast accuracy, and more specifically, whether it is the most important determinant among the three elements. It adds to Trueman’s (1986) signaling theory by arguing that managers do not signal their ability to predict changes in the outlook only by deciding to release a forecast and its type (Claim) but also by deciding to reference specific type of information (Data) to provide a solid forecast argument (Warrant). Using a sample of 517 Revenue, Earnings and Profit margin forecasts by European listed companies this paper documents a positive relationship between the strength of the forecast argument and accuracy. Interaction tests indicate that supporting Revenue forecasts (C) with internal actions (D) increases accuracy expectancy by 7.7 times when the argument is strong (W). Tests combining the Toulmin components show that when management explains negative changes (C) with external factors (D), accuracy likelihood increases 21-fold for strong arguments (W). The findings suggest that as the locus of the forecast argument the Warrant is the most important signal of managerial ability among the three elements making up the textual forecast.
TAX AVOIDANCE THROUGH ADVANCE TAX RULINGS - EVIDENCE FROM THE LUXLEAKS FIRMS
HÜSECKEN, BIRGIT
OVERESCH, MICHAEL
Category: TX = Taxation
Our empirical study tests the effect of advance tax rulings on the tax avoidance of multinational firms. In 2014, the International Consortium of Investigative Journalists published confidential documents that identify hundreds of firms worldwide that had benefited from advance tax rulings in the tax haven Luxembourg. We apply a difference-in-differences approach and find that after engaging in an advance tax ruling, firms have lower effective tax rates compared to non-ruling firms. The results are robust even if we mitigate a potential self-selection bias via propensity score matching. Consequently, this study gives evidence for tax avoidance through a newly made public, legally-assured tax shelter.
CREDIBILITY OF FINANCIAL REPORTING COMMUNICATION (FINANCIAL ANALYSTS’ PERSPECTIVE)
HUSSIEN, MOSTAFA
MOUSSA, DR TANTAWY
Category: FR = Financial Reporting
This study explores the importance role of credibility in financial reporting communication. It mainly concerns with how the credibility of financial reporting communication (CFRC) is perceived by the receiver i.e. financial analysts in Egyptian capital market (ECM) and investigates the consequences of concerning with the CFRC. The study mainly focuses on exploring non-financial factors since their impact on credibility perceptions of financial analysts has not been sufficiently discussed in the financial reporting literature. The lack of previous empirical research on the role of receivers’ perceptions of credibility in capital market communications suggests the choice of an interpretative perspective. The benefit of an interpretative perspective is that it helps to enrich the understanding of complex, ambiguous, and paradoxical phenomena (Lewis and Grimes, 1999). The study applies abduction as a research approach in which the researcher starts with initial framework based on literature or specific theory then the framework will be modified based on the analysis of the collected data. The initial credibility theoretical framework is based on the Yale approach for source credibility theory and credibility assessment framework presented by Hilligoss and Rieh (2008). Actually, this framework is modified to be employed in the financial reporting communication. The data is collected through semistructured interviews with twenty financial analysts. The research site is companies registered in the Egyptian Stock Exchange (ESE). The collected data has been summarised by applying the pattern coding technique suggested by Miles and Huberman (1994). To analyse the data, the pattern matching technique suggested by Trochim (1999) has been employed to compare the results of interviews and the patterns or categories from the CFRC’s theoretical framework.
THE EFFECTS OF POLITICALLY CONNECTED OUTSIDE DIRECTORS ON FIRM PERFORMANCE: EVIDENCE FROM KOREAN CHAEBOL FIRMS
HYUN, JEONG-HOON
OH, SEUNGBIN; SHIN, JAE YONG
Category: GV = Governance
While most prior studies on the value of political connections focus on political connections of controlling shareholders and top management, we examine the performance impact of appointing politically connected outside directors (hereafter PCODs) in Korean Chaebol firms. Using manually collected sample of PCODs in Korean Chaebol firms, we find that the number of PCODs is positively correlated with firm performance, and that the value effect of PCODs increases with the importance of internal trade among group affiliates, the existence of inside directorship by controlling shareholders, and potential amount of settlement from pending litigation. We further differentiate among PCODs and find that former government officials as PCODs drive the findings above. On the other hand, we find evidence of weak monitoring ability of PCODs.
INNOVATION ACTIVITIES AND NON/FINANCIAL PERFORMANCE
HYUN, SOONCHUL
Category: FA = Financial Analysis
Previous research has investigated how non-financial performance (NFP) such as product quality or customer satisfaction is related to current and future financial performance (FP). Underlying such studies is an assertion that NFP measures pick up value-relevant information about current activities that affect longer-term FP. In this study, we directly address this fundamental assertion by investigating how current innovation activities are related to FR through NFP. An important concern raised in the literature is that the use of NFP measures for performance evaluation must be guided by a map that links current activities to FP through NFP based on the firm’s strategy. We construct such a map by estimating a structural equation model (SEM) that relates innovation activities to FP through NFP for a large sample of firms following diverse strategies. To see how the map differs across strategies, we interact both the primary links between innovation activities and NFP and the secondary links between NFP and FP with strategy variables. Specifically, we consider four types of innovation activities – new and improved product innovation, and new and improved process innovation – and three NFP variables – product quality, customer satisfaction and productivity. We classify firm strategies as operating excellence, product leadership, hybrid or mixed, and no strategy. We use two FP measures – return on sales and sales growth. Results of estimating the model provide evidence that underscores the importance of strategy for evaluating the information provided by non-financial performance measures.
THE EMPLOYMENT OF THE LEVERS OF CONTROL FRAMEWORK
HYVONEN, TIMO
KARI, KIRSI
Category: MA = Management Accounting
Kirsi Kari, Project Researcher Turku School of Economics, University of Turku, Pori Unit, P.O. Box 170, 28101 Pori, Finland Timo Hyvönen, Professor University of Tampere, School of Management, 33014 University of Tampere, Finland
FINANCIAL REPORTING QUALITY AND CORPORATE FINANCING: EVIDENCE FROM THE FINANCIAL CRISIS
IMPERATORE, CLAUDIA
Category: FR = Financial Reporting
This paper examines how financial reporting quality affects corporate financing when capital supply conditions deteriorate. I use the 2007-2008 financial crisis to compare debt and equity financing of opaque and transparent firms when a negative shock in the supply of capital occurs. In line with the diverse sensitivity to informational problems of debtholders and equity investors, I find that firms with low accounting quality use more debt financing and less equity financing in the aftermath of the crisis. Yet, the effects are weaker if firms utilize arm’s-length debt. In this case, opaque firms report lower debt financing and greater equity financing. Indeed, the higher vulnerability of arm’s length debtholders to informational problems makes them more reluctant to finance opaque firms and the difficulties to obtain debt funds trigger these firms to seek equity as an alternative source of financing. The study provides new empirical evidence on the role of transparency in corporate financing choices by investigating its impact under adverse capital supply conditions. Above all, I documents that the effect of accounting quality on firms’ financing decisions ultimately rests on capital providers’ exposure to informational problems and demand for accounting information.
FINANCIAL REPORTING DIFFERENCES AROUND THE WORLD: WHAT MATTERS?
ISIDRO, HELENA
NANDA, DHANANJAY; WYSOCKI, PETER
Category: FR = Financial Reporting
The international accounting literature identifies a multitude of country attributes that appear to explain financial reporting differences around the world. We show that these country attributes are highly correlated and that 4 underlying factors explain most of the variation in both these attributes and reporting diversity across countries. Individual country attributes provide no explanatory power for reporting outcomes beyond the 4 underlying factors. Given the high causal density of country attributes, current methods and findings cannot isolate the true determinants of international reporting diversity. We suggest new empirical regularities and methodologies that may help future research better explain international reporting diversity
ON VALIDATING EARLY-STAGE PERFORMANCE MEASUREMENT MODELS: AN INTERVENTIONIST STUDY
ISLAM, SYRUS
Category: MA = Management Accounting
Without validating the performance measurement model (PMM), it cannot be ascertained whether the PMM has been designed appropriately. However, empirical research on validating PMMs is remarkably scant. It is also little known whether and how to validate early-stage PMMs – those that are followed for a shorter period of time, say, around two years and are yet to be fully operational. Drawing on the work of Malina, Nørreklit, and Selto (2007) and Huelsbeck, Merchant, and Sandino (2011), this study employs the constructive research approach – a strong form of interventionist research – and reports the development and application of an innovative tool, the PMM Validation Tool (PMMVT), to systematically validate early-stage PMMs. This study shows that validation of early-stage PMMs is particularly beneficial, since organizations get an opportunity to check their overall PMM’s accuracy at an early stage, instead of wasting resources to pursue wrong purposes. The findings also suggest that finality and logical relations, as opposed to cause-and-effect relations, may dominate in most PMMs, especially in the service-oriented organizations. Overall, this study adds insights to the PMM design literature and to the nascent literature on the underlying relations in PMMs and (early-stage) PMMs validation. This study also has both proven and potential practical contributions.
WHAT MOTIVATES EU FIRMS TO DISCLOSE GREENHOUSE GAS EMISSIONS: EVIDENCE FROM ITALIAN COMPANIES
JAGGI, BIKKI
ALLINI, ALESSANDRA ; MACCHIONI, RICCARDO; ZAGARIA, CLAUDIA
Category: FR = Financial Reporting
In this paper, we investigate what motivates Italian listed firms to voluntarily disclose GHG (carbon) information. In particular, we evaluate the role of environmental committees established by firms on a voluntary basis in disclosing carbon information within the three-dimentional framework of the stakeholders’ theory developed by Ullman (1985). Our results show that disclosure of carbon information is strongly influenced by environmental committees established voluntarily by Italian firms, as recommended by EU regulators. Additionally, carbon disclosures are also influenced by the level of institutional shareholdings and firms’ belonging to the polluting industries as defined in the EU ETS program. The results also indicate that creditors’ power, reflected by the debt-equity ratio, and managerial strategic posture in terms of independent corporate boards may have some influence under certain circumstances. The results, however, do not show any significant impact of firm’s economic performance on disclosure of carbon information.
AUDITOR DECISIONS DURING EVENT LOG BUILDING FOR PROCESS MINING – A FIRST EXPLORATORY STUDY
JANS, MIEKE
Category: AU = Auditing
This study reports on a survey in the field of audit process mining. Some studies already reported on the possible added value of process mining for the profession of auditing. This paper is a first exploration on the first step of such process mining projects in an auditing context: building the structure of an event log. The event log is the data that is used as input for a process mining analysis, in a specified format. Preparing the data, that stems from ERP systems, in this particular format, requires some decision making. This study aims to gain insights in these decisions, made by process mining auditors. This is valuable to gain a better understanding about, because these decisions have an impact on the tests that can be run in the next phase. The applied research methodology is a combination of action based research and a survey with experts.
ANALYST TAX EXPERTISE
JANSSEN, WIM
FELLEG, RÉKA
Category: FA = Financial Analysis
We examine whether some financial analysts are tax experts, and whether these tax experts issue better earnings forecasts. We find evidence that some analysts have more tax expertise than others: there exists cross-sectional variation in analyst ETR forecasting performance and this performance is persistent over time. We then show that tax expert analysts have lower absolute earnings forecast errors relative to other analysts, for both EPS and pre-tax earnings. Our main contribution to the literature is that we provide evidence that analyst tax expertise creates knowledge spillover effects on overall analyst business expertise.
CONSTRUCTING AUDIT SOCIETY IN THE VIRTUAL WORLD: THE CASE OF THE ONLINE REVIEWER
JEACLE, INGRID
Category: IC = Interdisciplinary/Critical
Purpose Online user reviews have increasingly become a popular means by which the lay person can both procure advice and offer personal opinions. Amazon, the electronic retail giant, is a prominent example of a site which hosts such user generated content; the opinions of its repository of reviewers have become an important source of assurance provision. This paper suggests that Amazon provides an example of how audit logics have entered new spaces. In Amazon, we witness the construction of auditability in the virtual world. This may explain the popularity and authority seemingly enjoyed by user reviews. The paper uses the methodological approach of netnography (Kozinets, 2002). This new methodology has emerged in order to undertake ethnographic research within virtual communities. Applying this methodology to the case of Amazon involved becoming familiar with the operational features of the site and analysing its textual discourse. The paper identifies in Amazon, Power’s (1996) three examples of how auditability is invoked: through rhetorics of measurability, auditable systems of control, and reliance on experts. The paper therefore argues that online user reviews are reflective of the extension of audit society into the virtual world.
RECOGNITION AND DISCLOSURE OF INTANGIBLE ASSETS – A REVIEW AND FRAMEWORK
JENY-CAZAVAN, ANNE
MOLDOVAN, RUCSANDRA
Category: FR = Financial Reporting
We review over one hundred recent empirical archival papers on internally-developed intangible assets. The knowledge economy based primarily on intangibles and intellectual capital demands a re-examination of the accounting treatment for intangibles. We use a two-dimensional matrix framework to organize our review: the first dimension is the recognition of intangible-related amounts, either in the balance sheet or the income statement, versus disclosure of such information in the notes to financial statements or other corporate documents; the actors that are part of the financial reporting environment represent the second dimension. This framework allows us to point out numerous avenues for future research in this area.
THE USE OF GREENHOUSE GAS EMISSIONS REPORTING TO COMPARE ENVIRONMENTAL PERFORMANCE. GREENHOUSE GAS EMISSIONS DATA AND MEASURES REVISITED
JERMAN, LAMBERT
LABELLE, RÉAL; WEGENER, MATTHEW
Category: SEE = Social, Environmental & Ethical
According to standard setters, comparability and commensurability (Espeland and Stevens, 1998) are considered as two key properties of environmental performance reporting, i.e., the economic calculations used to help cope with sustainability issues. These two properties and the process to achieve them are often taken for granted in practice and research which deserves further investigation. This is particularly true in the case of Greenhouse Gas (GHG) emissions which have been described as one of the main culprits responsible for global warming (Bebbington and Larrinaga-Gonzalez, 2008) and used in a variety of influential studies assessing corporate environmental performance. This paper revisits the use of GHG data in measuring environmental performance. Through a case study of a major oil and gas firm, and a comparability test of the GHG emissions reported by several oil and gas facilities, we provide evidence of a lack of comparability and commensurability in the GHG emissions reported. This raises concerns about the quality of GHG data used for societal and research purposes. Such an environmental accounting may fail to work as a commensuration process. It raises questions about the ability of GHG reporting frameworks to internalize sustainability issues and support the economic calculations required for inter and intra corporation comparisons. We conclude researchers and practitioners should exercise caution using GHG data, and that much more attention needs to be devoted to using GHG data to assess corporate environmental performance.
THE EFFECTS OF CSR REPORTING FRAMEWORKS AND FINANCIAL CONDITIONS ON MANAGERS’ WILLINGNESS TO INVEST IN CSR
JERMIAS, JOHNNY
CHEN, YASHENG; NAZARI, JAMAL
Category: SEE = Social, Environmental & Ethical
Previous studies on Corporate Social Responsibility (CSR) have focused on the impacts of CSR disclosure on the decision making of external users of CSR information. This study contributes to the literature through its focus on how CSR disclosure impacts on the decision making of internal users of this information. Specifically, we investigated the impacts of CSR reporting frameworks and companies’ financial conditions on managers’ willingness to invest in a CSR project. Our findings supported our hypothesis that managers are significantly more willing to invest in a CSR project when their companies can disclose their CSR activities using a standalone CSR reporting framework. We also found that an integrated reporting framework did not incrementally affect managers’ willingness to invest in a CSR project relative to the financial statement disclosure framework. Moreover, we found that companies' financial conditions did not affect the likelihood of managers investing in a CSR project. Our findings extend legitimacy theory by suggesting that the means of legitimation, via different reporting frameworks, have varying impacts on managers’ behavior. This study contributes to the literature on the impacts of various reporting mechanisms on internal decision making.
THE EFFECT OF INTERNATIONAL DIVERSIFICATION ON COST STICKINESS: EVIDENCE FROM KOREA
JI, GAYOUNG
PAIK, TAE-YOUNG
Category: MA = Management Accounting
This paper investigates whether and how corporate international diversification has effects on the cost stickiness. International diversification could be defined by the expansion into new overseas markets that are less exploited and have growth opportunities. Since the reliance of Korean firms on foreign sales is deepening, it is important to provide more complete evidence on the effects of the corporate international diversification. Therefore, we examine the impacts of corporate international diversification on cost behavior using a sample of Korean firms during the period of 2000-2014. The primary finding is that corporate international diversification lessens the magnitude of cost stickiness. Further, their relationship is more pronounced for the firms with incentives for upward earnings management and lower growth opportunities. Overall, the findings of this study contribute to a better understanding of the influence of corporate international diversification, especially in respect of cost behavior. And it shows an importance of the disclosure practice on business segment and offers the need to improve business segment disclosure.
IS EXPERIENCE A TREASURE? – THE EFFECT OF TENURE ON SUBJECTIVE COMPENSATION
JIANG, NAN
BOUWENS, JAN
Category: MA = Management Accounting
This study attempts to shed light on the use of subjective performance evaluation and compensation in an organization. In this study, we have access to the performance measure data and compensation system information of a Dutch consulting firm. We find that the firm tends to pay a larger amount of subjective compensation to seasoned employees, while the predictability of subjective compensation to measureable performance is less prominent for a more experienced employee compared to that of a less experienced one. We attribute this finding to the fact that senior employees are rewarded for performance that is not captured in bonus formula. These collective findings suggest that firms may treasure a senior employee’s ‘softer’ capability by paying a larger amount of ex post adjusted compensation.
FIRM LIFE CYCLE AND FINANCIAL REPORTING COMPARABILITY
JO, EUN HYE
CHOI, KWAN; MOON, HAEWON
Category: FA = Financial Analysis
This paper investigates whether there is a difference in financial statement comparability depending on the life cycle of firms. Prior research reports that firms in different life cycle stages differ in their earnings attributes and financial reporting behavior, thereby suggesting that the firm life cycle can be an important factor affecting financial statement comparability. This paper uses 3,314,469 firm pairs as sample observations over the period of 1992 to 2012. Using comparability measures from De Franco et al.(2011) and Francis et al.(2014), we find two firms included in the same life cycle have higher comparable earnings than two firms in a different life cycle. We also find that firms-pairs that have switched from different (same) life cycles to the same (different) life cycles, they have higher (lower) comparable earnings. These results suggest that the external factor, firm life cycle, plays an information role in determining comparability.
THE BUSINESS CASE FOR CULTURAL AND GENDER DIVERSITY ON CORPORATE BOARDS
JOHL, SHIREENJIT
CHAPPLE, LARELLE (ELLIE)
Category: GV = Governance
Many corporate governance codes around the world recommend corporate board diversity, although most of the empirical work on boardroom diversity has mainly focused on gender diversity. Less is known about the benefits of other forms of diversity such as ethnic or cultural origin of board members. This study mounts a business case for boardroom diversity by examining the impact of culture / ethnic and gender diversity on a specific firm outcome, namely financial reporting (absolute abnormal accruals). Utilizing a sample of 5,464 Australian Stock Exchange (ASX) listed firm year observations covering a period from 2004 to 2013, we find culture diversity is positively associated with absolute abnormal accruals whilst gender diverse boards exhibit lower absolute abnormal accruals suggesting higher financial reporting quality. We also test the combined effects of both culture and gender diversity and our findings show that the combined culture and gender diversity lowers income-increasing abnormal accruals suggesting that boards with the combined characteristics exhibit lower income increasing earnings management which in turn implies better reporting discipline by managers. Finally in our additional analyses we also interact board independence with culture diversity and gender diversity and find that as board independence, culture and gender diversity increases, the absolute value of abnormal accruals lowers.
HOW DOES THE COMMUNICATION OF MEASUREMENT UNCERTAINTY BY AUDITORS AND MANAGERS INFLUENCE NONPROFESSIONAL INVESTORS’ JUDGMENTS?
JOHNSTONE, KARLA
DENNIS, SEAN; GRIFFIN, JEREMY
Category: AU = Auditing
Financial statement users call for more information about how auditors evaluate estimates. Because users encounter auditor-provided information alongside management-provided information about the same estimates, we examine the value relevance of management and auditor communications jointly. We also examine whether the presentation format of auditor communications (i.e., narrative versus visual identification of reported amounts) influences how nonprofessional investors use information about material measurement uncertainty. We find nonprofessional investors treat best-practice management disclosures and fully-narrative auditor communications as substitutes in their valuation judgments. However, consistent with market signaling theory, when auditors visually identify amounts on the face of the financial statements, investors assess Price-Earnings multiples higher when best-practice management disclosures are present than absent. While information about the audit is value-relevant, investors do not weight this information when it is presented in a fully-narrative format. Our findings suggest visual linkages between the audit report and recognized amounts promote best-practice disclosures by management.
USING THE ‘OUTSIDE VIEW’ TO PUT BOLD FORECASTS IN CONTEXT: THE CASE OF CONSENSUS SALES GROWTH FORECASTS
JOOS, PETER
Category: FA = Financial Analysis
This paper studies the relation between behavioral mechanisms of forecasting and forecast properties. It examines the argument by Kahneman and Lovallo (1993) that over-reliance on the setting-specific ‘inside view’ leads to bold, deficient forecasts because forecasters ignore ‘outside-view’ information about the forecast setting in a broader context. Focusing on consensus sales growth forecasts that appear bold from a mean-reversion perspective (the relevant ‘outside view’), the paper reports three findings: 1) ‘outside view’ and specific setting variables both drive the frequency of bold forecasts; 2) bold forecasts exhibit stronger bias (i.e., overshooting), but only high bold forecasts exhibit lower accuracy; 3) the degree of mean-reversion in the forecast setting strengthens the relation between bold forecasts and both bias and accuracy. The findings support calls for the adoption of a combined inside and outside view to forecasting in different decision contexts.
DEPOSITORS' PERCEPTION AND PROCESSING OF RISK INFORMATION - AN EXPLORATORY STUDY
JORDAN, KATHRIN
Category: FR = Financial Reporting
In recent years risk disclosure of banks has received notable attention in legislation as well as in academic research. The purpose is to provide information to external stakeholders to support them in their judgment and decision-making. The paper presents an exploratory study to depict depositors' perception and processing of published risk information of a German savings bank. With the help of the thinking-aloud method and a post hoc examination it is shown how much information content is perceived, what the readers thoughts are on that information, and how much and which information is stored in memory for a final assessment. The risk report includes much more information about the risk management system than about the bank's risk situation. The perceived information during the reading process broadly coincide with the structure of the report. However, the post hoc examination shows that statements of risk exposure are more relevant for the judgments and decisions of the interviewees. In addition, the participants criticize the report as too long, complicated, and strenuous to read. Hence, the problem of an information overload must be assumed.
THE DESIGN AND USE OF CONTROLS IN FAMILY SMES: A MULTI-THEORY PERSPECTIVE
JORISSEN, ANN
LAVEREN, EDDY; MANEEMAI, PARICHART; VOORDECKERS, WIM
Category: MA = Management Accounting
MCS in family firms are traditionally studied from an agency perspective, which assumes that these firms do not need controls. By combining agency insights with perspectives from the SEW and trust literature and by considering different dimensions of family involvement , we find that the level of family involvement in management has a direct limited significant relationship with MCS, whereas the level of family involvement in ownership has an indirect but much wider significant influence on a firm’s MCS. Family’s noneconomic objectives significantly influence planning controls, reward controls, administrative controls, performance measurement practices and the use of that control information.
CONTROL, TEMPORARY ORGANISATIONS AND THE ACCOUNTING COMPLEX: EVIDENCE FROM RECORD PRODUCTION PROJECTS DURING THE 1960S
JUBB, DARREN
JACKSON, WILLIAM; PAISEY, NICK
Category: HI = History
This paper aims to extend historical accounting research into the realm of popular music. The focus is the decade of the 1960s, a celebrated period where music became firmly intertwined, both culturally and commercially, within the very fabric of British society. During this period, important changes were occurring within the music industry in general, and the recording industry in particular, as the permanent structures within which record production projects were organised fell away to be replaced by more flexible, temporary organisational structures. The aim of the current study is to examine the role of accounting in organising and controlling record production projects during the 1960s. In doing so, the idea of the accounting complex, a combination of accounting's territorialising, mediating, adjudicating and subjectivising roles, is presented as the means by which record companies retained control of the record production process during this period. The study uses a combination of primary and secondary sources. Much of the work on record production is well established in the historical literature and the paper therefore draws on these sources in order to establish the role of accounting control in record production. Primary sources were drawn from nine interviews conducted with personnel who were active in the British recording industry during the latter half of the 1960s, ranging from record producers and engineers to record company management.
IS ADOPTION OF IFRS GOOD FOR MNCS?
KAI, HISAO
Category: FR = Financial Reporting
MNCs must respond to the changing business environment. MNCs must tackle to rebuild not only the financial reporting system but also the management system. To what extent MNC should change the management system and incorporate the IFRS into the organization is important. But, analytical research about this topic is rare. This paper has contributed to this topic. I show two models. One is the local model that the head corporation admits that each company uses its own accounting system. The other is the global model that the head corporation develops and requires the uniform accounting system through the organization as a whole. The two models are based on the LEN framework. I find the following. First, for the two models, the risk-preference plays a key role. If the agents are risk-neutral, the optimal contract attains the first-best. Second, the parameter like dividends payout ratio affects the optimal actions in the local model, but does not affect in the global model. Third, if the use of the parent performance measure is pro- hibitively costly in the contract with the subsidiary manager, the parameter like dividends payout ratio affects the net firm value. Fourth, the difference of the GAAPs may increase or decrease the optimal net firm value in the local model and whether adopting the globally uniform accounting system increases the net firm value is not clear.
PERFORMANCE MEASUREMENT IN UNIVERSITIES – DILEMMAS AND RECONCILIATIONS
KALLIO, KIRSI-MARI
KUOPPAKANGAS, PÄIVIKKI
Category: PSNP = Public Sector & Not-For-Profit
New Public Management (NPM) reforms have led to numerous transformations in the public sector including higher education organizations, and universities are increasingly competing with each other with different performance criteria. In this study, we concentrate on the contradicting goals resulting from the universities’ performance measurement (PM) systems. The study is based on thematic interviews of the administrative managers of twelve university departments in Finland. From the interviews, different colliding managerial goals arose experienced by the university departments. We call these colliding goals dilemmas. In our data analysis, three core dilemma pairs were identified, which are: performance measurement versus the nature of the work carried out in universities, the idea of rewarding good performance versus efficient use of scarce economic resources, performance in teaching versus performance in research. In our analysis we suggest reconciliations to the dilemmas; all of the suggested reconciliations arose from the ways in which the different case departments have dealt with the conflicting interests. Consequently, some of the university departments in our study had solved the tensions of contradicting goals better than others, and thus the departments could possibly learn from one another. This study contributes to the existing research on the performance management of higher education, bringing in the dilemma theory to illuminate the found contradictions.
CEO PERSONAL AND CORPORATE TAX BEHAVIOR CONSISTENCY
KALLUNKI, JUHA-PEKKA
HJELSTRÖM, TOMAS; NILSSON, HENRIK; TYLAITE, MILDA
Category: TX = Taxation
We analyze unique data on the CEOs’ personal tax declarations obtained from the Swedish Tax Agency to investigate whether the CEOs’ personal normal and extreme tax behavior are associated with corporate tax outcomes. First, we demonstrate that personal tax behavior is related to broader individual risk preferences and ethical values, financial ability, and awareness for tax planning opportunities and risks. We next show that normal personal tax behavior is associated with corporate tax outcomes across the whole spectrum of corporate tax behavior, while extreme personal tax behavior is only associated with the extreme ends of corporate tax behavior. Finally, we provide evidence that the association between personal and corporate tax behavior is the result of discretionary CEO impact rather than personal and corporate tax behavior matching. We contribute to the taxation literature by documenting robust personal and corporate tax behavior consistency and by constructing a broad personal tax behavior measure that directly captures tax-related personal decisions.
VOLUNTARY ADOPTION OF IFRS BY UK UNLISTED FIRMS AND INVESTMENT DECISIONS AT THE FIRM- AND GROUP- LEVEL
KALOGIROU, FANI
ANDRÉ, PAUL
Category: FR = Financial Reporting
We examine the determinants and consequences of IFRS adoption by unlisted UK firms. A lot of unlisted firms are part of large conglomerate groups. For these firms, decisions about reporting practices are made at the group level (Beuselinck et al., 2014) and therefore one should expect the economic consequences of those to decisions to occur at both the firm and the group level. We test this hypothesis by examining the IFRS adoption effect on the investment efficiency of subsidiaries and group-level portfolio and financing restructuring. Our results suggest that the identity and characteristics of controlling shareholders are, indeed, an important determinant of the decision to voluntary adopt IFRS. We also find that IFRS adoption increases investment efficiency at the subsidiary level and is positively related to the probability of equity issuance at the group level. However, while large groups adopt IFRS to increase transparency and avoid takeovers, small groups appear to adopt IFRS as part of their expansion strategy.
SOCIAL CAPITAL AND BANK ACCOUNTING TRANSPARENCY
KANAGARETNAM, KIRIDARAN
JIN, JUSTIN; LOBO, GERALD
Category: FR = Financial Reporting
Using a sample of public and private banks and a county-level index for social capital, we study how social capital relates to accounting transparency. In a region with high social capital, individuals have a greater propensity to honor an obligation and there is greater mutual trust within a much denser network that deters opportunistic/self-serving actions such as misrepresentation of accounting numbers and taking excessive risk for personal gain (Jha and Chen 2015). Consistent with expectations, our analysis indicates that social capital is positively associated with accounting transparency (proxied by accounting restatements and income-increasing earnings management) and this relationship is stronger for small, unaudited private banks. Additionally, we document that social capital is negatively associated with bank risk taking in the 2000-2006 pre-financial crisis period. We also find that banks in low social capital counties that are likely to engage in higher risk taking and have lower financial reporting transparency experienced more bank failures and bank trouble during the 2007-2009 financial crisis.
COUNTRY-LEVEL TRANSPARENCY AND COUNTRY-SPECIFIC RISKS: EVIDENCE FROM UK FTSE LISTED FIRMS
KANG, HELEN
GRAY, SIDNEY
Category: FR = Financial Reporting
Corporate transparency on a country-by-country basis provides more accurate insights into a firm’s international activities and important country-specific risks. We investigate the country-level transparency behaviour of UK listed firms. We test the hypothesis that firms are less likely to engage in disclosure on a country-by-country basis if their principal subsidiaries are operating in countries with high levels of business, economic, and political risks given the potential for closer stakeholder scrutiny and negative impact on capital market perceptions of risk and corporate value. We find, as expected, a significant negative relationship between the level of country-specific risks and country-level transparency.
DOES THE LEAD AUDITOR’S TRAIT SELF-CONTROL MATTER?
KARJALAINEN, JUKKA
S. SOFLA, AMIN; ZERNI, MIKKO
Category: AU = Auditing
This study takes the first non-experimental step towards understanding the role of one central personality trait – self-control – in the auditing context. We combine survey and archival data to examine whether and how individual auditors’ level of self-control is related to audit quality, generated audit revenue, and compensation. Our empirical evidence suggests that trait self-control is predictive of audit quality only for the Big 4 auditors, implying that the lead auditors in these firms perceive audit quality as one of the firms’ desired outcomes. In addition, we observe that Big 4 lead auditors’ ‘generated audit revenue’ mediates the association between self-control and compensation, meaning that the market (both intra and extra firm) rewards high self-controlled Big 4 auditors by assigning them more cooperating resources (audit revenue). Overall, the findings are consistent with a view that at least two dimensions of performance (i.e., quality and revenue generation) are not homogenous across auditors within the same (tier) audit firm(s) and that the level of auditor self-control is one important determinant explaining these differences. These results further suggest that various mechanisms established to standardize audit product in (Big 4) audit firms cannot supersede lead auditors’ idiosyncratic characteristics such as self-control.
ASYMMETRIC COST BEHAVIOR AND ANALYSTS' EARNINGS FORECASTS REVISITED: EVIDENCE FROM A NEW FIRM-YEAR MEASURE OF COST STICKINESS
KASPEREIT, THOMAS
LOPATTA, KERSTIN
Category: MA = Management Accounting
This study introduces a new firm-year measure of cost stickiness. This new measure, which is based on cross-sectional regressions of changes in cost on changes in sales, is benchmarked against the quarterly firm-level measure developed in Weiss (2010). The results show that the new measure is subject to fewer data restrictions and therefore results in larger sample sizes. Like the Weiss (2010) measure, the new measure is positively correlated with analysts’ forecast accuracy (higher levels of cost stickiness are associated with larger absolute forecast errors) and increases the effect of earnings surprises on market reactions (lower levels of cost stickiness are associated with stronger market reactions). In line with economic theory (Bhushan, 1989; Das et al., 1998), the new measure exhibits a negative correlation with analyst coverage (higher levels of cost stickiness are associated with higher analyst coverage), indicating that analysts meet the enhanced demand for private information that results from less predictable earnings.
BUDGETING PROCEDURES AND FISCAL STANCE IN OECD COUNTRIES – A COMPARATIVE ANALYSIS AFTER GLOBAL ECONOMIC CRISIS
KASPERSKAYA, YULIA
XIFRE, RAMON
Category: PSNP = Public Sector & Not-For-Profit
Budgetary procedures and institutions are considered to be important for countries fiscal performance. The objective of this paper is to analyze this relationship after global economic crisis for OECD countries paying closer attention to their different fiscal conditions and institutional arrangements. We test whether groups of countries that are fiscally different after the crisis differ in the use of performance budgeting, flexibility mechanisms and medium-term expenditure frameworks. For this purpose we classify OECD countries in five clusters according to the variations, between 2008 and 2014, of debt over GDP, structural balance and primary balance. Our first finding is that there is no monotonic relationship between intensity of use of these three budgeting dimensions and better fiscal performance. Countries showing similar fiscal performance exhibit different scores on budgeting procedures. This leads us to review the experiences of several countries that are fiscally sound. From this analysis we derive a set of factors that may enhance the efficiency of budgetary procedures. Our results are thus aligned with those studies that reject one-size-fits-all approaches and suggest that a given budgetary institution may have different effects in different countries depending on the fiscal, economic, administrative, etc. conditions.
AUDITING PRACTICES OF BRITISH GAS COMPANIES FROM 1812 TO 1830
KASUKABE, MITSUNORI
SAWANOBORI, CHIE
Category: HI = History
The aim of this paper is to examine the auditing practices of British gas companies at the beginning of the 19th century, mainly the Chartered Gas Light and Coke Company (GLCC), which was the first and largest of the gas undertakings worldwide. Gas companies paved the way for the railroads, but their practices have not been sufficiently described. After studying primary source materials from the GLCC, we found that the company created an elaborate accounting system and conducted systematic audits. Our analysis focused on three areas: (1) audit departments, (2) auditors, and (3) audit scope. Our main conclusion is that the GLCC formed a ‘Committee of Accounts, Finance and Audit’, and audited bills and Accounts from the time of its founding but before the start of legally mandated auditing. The company also instituted an internal check system used to manage the operations of the collectors at each office (‘station’). Concurrently, the GLCC may have created a system related to the internal controls used today. While audits were initially completed by directors serving as auditors, non-director auditors originated in 1815. This change may represent the start of auditors as a discrete independent institution. Simultaneously, developments such as an authorised capital reduction that left the GLCC with limited funds may have forced the GLCC to raise more funds to appease its shareholders.
DISCLOSURE INCENTIVES AND DATA AVAILABILITY FOR PRIVATE FIRMS: IMPLICATIONS FOR COMPARISONS OF PUBLIC AND PRIVATE FIRM FINANCIAL REPORTING QUALITY
KAYA, DEVRIMI
BERNARD, DARREN; BURGSTAHLER, DAVID
Category: FR = Financial Reporting
Prior literature provides mixed evidence on differences between the financial reporting quality (FRQ) of public and private firms. We explore the possibility that mixed results may be explained, at least in part, by the joint determination of firm FRQ and private firm decisions to disclose financial information. Using data surrounding a 2006 regulation change that dramatically strengthened enforcement of public disclosure requirements for German private firms, we compare the FRQ of three groups of firms: Private firms that voluntarily disclose financial statement information (“private voluntary” firms), private firms that disclose only due to effective enforcement of mandatory disclosure requirements (“private mandatory” firms), and public firms that are all subject to mandatory disclosure requirements. We find little or no evidence that “private voluntary” firms have different FRQ from public firms. However, we find consistent evidence that “private mandatory” firms have lower FRQ than both public firms and “private voluntary” firms. We also find evidence that the lower FRQ of “private mandatory” firms is largely due to reporting decisions that reduce earnings, consistent with tax minimization incentives. The results demonstrate that because disclosure and FRQ are jointly determined, understanding the effect of disclosure incentives on private firm data availability is critical to interpreting the results of studies that compare public firm and private firm FRQ.
THE USEFULNESS OF FVA FOR FINANCIAL INSTRUMENTS: THE PERSPECTIVE OF FINANCIAL DIRECTORS OF FINANCIAL INSTITUTIONS LISTED IN THE UK
KAZMOUZ, BASSAM
STITTLE, JOHN
Category: FR = Financial Reporting
This paper critically evaluates the usefulness of Fair Value Accounting (FVA) for reporting financial instruments for decision making by investors. The empirical data has been collected using questionnaires, in-depth interviews conducted with financial directors of financial institutions listed in the UK; and comments and responses of these institutions and their representatives on the FVA exposure drafts issued by the International Accounting Standards Board’s (IASB). Relying on the decision-usefulness theory, this paper’s results show different factors which have negative effect on the usefulness of FVA for reporting financial instruments. The differences between the IASB and the US Financial Accounting Standards Board (FASB) over the FVA guidance were found to have significant negative effects on the FVA usefulness. The differences and variations in the nature and outcomes between the adopted FVA models by the financial institutions, and in the level of management judgements and assumptions involved in FVA calculations were also found to have significant negative effects over FVA usefulness. FVA guidance, in particular at Level 3, was found to have a major negative influence over FVA usefulness. However, FVA volatility was found to have a limited negative effect on the usefulness of FVA by financial institutions for investors’ decision-making.
THE IMPACT OF BALANCED SCORECARD EXCELLENCE ON SHAREHOLDER RETURNS
KEIMER, IMKE
BLANKENAGEL, MICHAEL; FRÜH, MICHAEL
Category: MA = Management Accounting
This study investigates the relationship between excellence in Balanced Scorecard (BSC) adoption and shareholder returns within companies from different industries and regions. We identify stock-listed member organizations of the Balanced Scorecard Hall of Fame as excellent BSC adopters and compare their shareholder returns with the performance of matched companies with similar size and industry affiliation. We find strong evidence that BSC companies outperform their matched counterparts in the three-year post adoption period in shareholder returns and in return on assets. However, we find no evidence that BSC adopters manage to maintain their competitive advantage in the long run. Finally, from a market perspective, we show that BSC adopters significantly outperform their respective industry indices in the three years after BSC adoption and in the long run.
REMUNERATION COMMITTEES, SHAREHOLDER DISSENT ON CEO PAY AND THE CEO PAY-PERFORMANCE LINK
KENT, PAMELA
KERCHER, KIM; ROUTLEDGE, JAMES
Category: GV = Governance
Regulators in various jurisdictions recommend or require that companies form a remuneration committee. The rationale is that the committee plays an important advisory and monitoring role on remuneration contracts thereby promoting sufficient and responsible executive pay. This paper examines whether voluntary adoption of the Australian Securities Exchange recommendations for remuneration committee formation and structure is associated with less shareholder dissent with the company’s remuneration arrangements or a stronger CEO pay-performance link. Our study is conducted in a voluntary compliance setting for a sample of smaller Australian listed companies. The results indicate that adoption of committee size and independence recommendations are associated with lower shareholder dissent, and independence is associated with a stronger CEO pay-performance link.
DOES THE DIRECT METHOD PROVIDE MORE VALUE RELEVANT INFORMATION TO MARKET PARTICIPANTS COMPARED TO THE INDIRECT METHOD STATEMENT OF CASH FLOWS?
KENT, RICHARD
BIRT, JACQUELINE
Category: FA = Financial Analysis
We examine International Financial Reporting Standard 7 for Australian listed companies from 2007 to 2014 to assess the influence of disclosing the direct or indirect method statement of cash flows. Evidence suggests that Australian investors are at an information advantage when companies report the direct method statement of cash flows. We find that the market values direct cash flow components beyond aggregate operating cash flow provided in the indirect method. Additionally, we find that reported cash flow components provide a stronger valuation signal than estimated cash flow components. Direct cash flow components are incrementally more useful for companies with positive net income, positive operating cash flow, high growth, high market and industry leverage, and large companies.
EARNINGS MANAGEMENT PRIOR TO CAPITAL INVESTMENT IN FINNISH SMES
KETTUNEN, JUKKA
Category: FR = Financial Reporting
The aim of this study is to investigate whether the financing structure chosen for a capital investment, i.e. investment leverage ratio, is already reflected in the financial statement pre-ceding the year of the investment. Earnings management related to capital investment financing is a narrow body of literature. To the knowledge of the author, there are no previous studies employing investment financing structure as a determinant of accounting choices. The test sample comprised 1159 firm years from Finnish SMEs with investments into property plant and equipment belonging to the larger half of all investments. The main analysis tested by means of OLS, whether the earnings management choices of investors deviated significantly from that of their annual industry average. As a robustness check, the analysis was repeated with two alternative approaches. The results from all the three models are substantially uniform, however only the main analysis indicated statistically significant negative relation between investment leverage ratio and earn-ings management of the previous fiscal year. This result is opposite to previous literature. The main contribution of this study is that it comments the previous findings from a new institu-tional context, which is arguably the main cause of opposite results. All in all, in the context of capital investments, Finnish SMEs appear to prefer building a reputation of credible reporting, and follow pecking order theory in their financing choices.
DID MANDATORY ADOPTION OF IFRS INCREASE LIQUIDITY IN THE CANADIAN STOCK MARKETS?
KHAN, SHAHID
ANDERSON, MARK ; WARSAME, HUSSEIN; WRIGHT, MICHAEL
Category: FR = Financial Reporting
In this study, we investigate whether average liquidity for non-U.S. firms traded on Canadian stock exchanges increased or decreased after mandatory adoption of IFRS in Canada. We consider two competing forces affecting liquidity from IFRS adoption: enhanced comparability of firms within industries that span international boundaries and less tailoring of financial reporting to satisfy local investor needs. We find that liquidity decreased for Canadian and non-U.S. international firms traded on the Canadian exchanges, suggesting that the benefits of global comparability were not sufficient to offset the loss of local investor accommodation. To provide perspective on these results for Canadian exchanges, we also compare liquidity before and after IFRS adoption for firms traded on the U.K. and Australian exchanges. These three countries share the British influence on financial reporting historically and have similar legal and institutional settings. We expect that the benefits of global comparability would be relatively greater for the U.K. exchanges relative to the Canadian and Australian exchanges given the U.K.’s proximity and commerce with other European countries. We find that liquidity increased for the U.K. exchanges but decreased for the Australian exchange, supporting the interpretation of the Canadian findings. We also compare changes in liquidity for the two Canadian exchanges, the more global and senior Toronto Stock Exchange (TSX) and the more local and retailoriented TSX Venture Exchange (TSXV). We find that the decrease in liquidity after IFRS adoption was significantly greater for the TSXV exchange, consistent with the trade-off between global comparability and accommodating local investor needs.
INTERNATIONAL M&A LAWS, MARKET FOR CORPORATE CONTROL, AND ACCOUNTING CONSERVATISM
KHURANA, INDER
WANG, WEI
Category: FR = Financial Reporting
This paper exploits the staggered initiation of merger and acquisition (M&A) laws across countries to examine the effect of an open market for corporate control on accounting conservatism. Using a global sample of firms across 34 countries, we find an increase in accounting conservatism following the enactment of M&A laws. Cross-sectionally, we find that the increase in conservatism is greater in countries with weak institutional infrastructure and in countries where M&A law enactments spur large growth in overall takeover activity. We further find that the effect of M&A laws on conservatism is more pronounced when firms have greater external financing needs and when firms borrow more in the post-enactment period. Overall, our findings highlight the importance of the market for corporate control in shaping financial reporting outcomes.
THE EFFECT OF CSR ON COST ASYMMETRIC BEHAVIOR
KIM, HYUNPYO
KIM, TAEWOO; PAEK, WONSUN
Category: MA = Management Accounting
This study examines the empirical association between corporate social responsibility (CSR) and cost stickiness. Although both CSR and cost stickiness reflect managerial efficiency and opportunism to a certain degree, their relation has not been explored. We find that the degree of SG&A cost stickiness is weakened for CSR firms than for non-CSR firms. This finding suggests that CSR engagement mitigates the effect of agency problem that leads to cost asymmetric behavior.
DOES CEO PAY DISPARITY ENHANCE OR IMPEDE INNOVATION PERFORMANCE?
KIM, JONGHWAN
KOO, KWANGJOO
Category: MA = Management Accounting
This paper examines the association between CEO pay disparity and firm innovation. We discuss three streams of theories to develop hypotheses that may capture the empirical observations about the relationship: CEO entrenchment, tournament, and excess outcome hypotheses. To investigate whether CEO pay disparity enhances or impedes innovation performance, we use CEO pay slice (CPS) and patent citation counts as proxies for CEO pay disparity among the top management team and innovation respectively. Using a two-stage least squares regression approach, we find that patent citations are positively associated with CPS. The finding supports the tournament argument that CEO pay disparity represents the size of the grand prize awarded to the winner of a tournament at the final stage of hierarchical advancement in an organization and increases the organization-wide incentives toward firm performance. We confirm that the results are robust to alternative measures for pay disparity and innovation and subsamples of firms which are more technology-intense and innovation-driven.
NON-EXECUTIVE DIRECTORS ON BOARDS OF PRIVATE FAMILY FIRMS: NAVIGATING ROLE CONFLICTS
KIRWAN, COLLETTE
BRENNAN, NIAMH
Category: GV = Governance
Effective corporate governance relies on establishing and enacting accountability. Prior literature has identified that non-executive directors (NEDs) are critical to achieving accountability in the boardroom. However, in exercising their accountability role, NEDs are potentially exposed to role conflicts. Unresolved role conflicts can negatively impact NEDs’ role effectiveness. In this study we examine how NEDs resolve role conflicts between their monitoring and advisory roles on boards of private family firms. Twenty-four in-depth interviews are conducted with a range of role holders including (i) family-firm directors, (ii) family shareholders and (iii) family-firm professional advisors. We find that family-firm NEDs resolve their monitoring versus advisory role conflicts between family shareholders, managers and the firm by focussing on their guardianship of the firm. Their higher-order duties to look after the best interests of the firm resolve role conflicts arising from their position as agents of family shareholders and advisors of managers. Key words: Non-Executive Directors; Private Family Firms; Role Conflicts
EFFECTS OF THE ADOPTION OF HEDGE ACCOUNTING
KIY, FLORIAN
Category: FR = Financial Reporting
This study examines the effects of the adoption of hedge accounting for non-financial companies. In my analysis I use two market value proxies and employ a propensity-score matching model in attempt to control for different characteristics between non-adopters and adopters of hedge accounting. I observe a significant negative association for the adoption of hedge accounting and market value. This finding suggests that companies who have adopted hedge accounting may deviate from their optimal hedging strategy to meet all requirements and restrictions implemented in SFAS 133 in order to apply hedge accounting and thus decrease firm value. The observed association between hedge accounting and market value is lower for larger non-financial companies, while I do not observe varying effects of the adoption of hedge accounting for companies with different levels of risk exposure.
STRATEGIC DISCLOSURE BEFORE INDEX RECOMPOSITIONS
KLAES, ELISABETH
WERNER, JÖRG; WILK, CHRISTIAN
Category: FR = Financial Reporting
We hypothesize and find that firms increase the disclosure of discretionary news prior to index recompositions. Our evidence shows that firms moving to the Russell 1000 disclose significantly more discretionary news during the ten days leading up to the index recomposition as compared to control groups. As membership in the Russell 1000 is based on a firm’s market capitalization only, we attribute this increase in disclosure activities to firms’ intentions to favorably switch indexes.
ARE UNIVERSAL BANKS MORE RISKY?
KLEYMENOVA, ANYA
Category: GV = Governance
This paper studies whether universal banks exhibit more risky behaviour and require additional governance mechanisms compared to pure-play commercial banks. Using a unique setting of the repeal of the Glass-Steagall Act of 1933 which removed barriers to universal banking in the United States, this paper tests whether commercial banks that become universal exhibit more risky behaviour. This quasi-experimental setting also allows testing the impact of reintroduction of universal banking in the United States on banks’ risk profiles and governance mechanisms. I find no observable difference in risk characteristics between universal and pure-play commercial banks. Furthermore, CEO pay-structure and compensation do not appear to be driven by the choice of the universal banking model. These findings add to the debate on whether universal banks are risky and require different governance mechanisms compared to the pure-play commercial banks.
IMPRESSION MANAGEMENT IN TRANSITION: POLAND
KLIMCZAK, KAROL
FIJAŁKOWSKA, DOMINIKA; KLIMCZAK, KAROL; PAUKA, MAREK
Category: GV = Governance
Motivated by continued interest in the fairness and reliability of financial disclosures, we study the use of impression management in the letters to shareholders of stock-exchange listed companies written in the Polish language. The letters are a succinct form of narrative communication, easily accessible to professionals and individual investors alike, which makes them an important element of the market information environment. However, letters can be used to signal key information regarding the issuing company, or they can be used to obfuscate and bias the information contained in financial statements. We study the letters of Polish companies from 2008 and 2013 to determine how impression management develops over time and to find out what patterns exist in the use of impression management. We find that agency theory explanations dominate, but there is a significant increase in the use of impression management between the years studied.
BIG DATA ANALYTICS INFLUENCE ON EXTERNAL AUDITING: CONTINGENCY THEORY BASED APPROACH
KLOVIENE, LINA
DAGILIENE, LINA
Category: AU = Auditing
Rapid change in present business environment conditions requires agility, flexibility and innovation. The area of accounting and auditing is not an exemption as the importance of using big data analytics in audit is increasing. Big data analytics offers a promising new way to discover new opportunities, is seen as the future of business, a tool to offer clients high-value products and services. The important role played by Big data analytics in auditing is evident, including Big4 companies which are the key players in this innovative practise. The potential of Big data analytics to improve the practice of external auditing is quite significant, but there is a need to discover and analyse factors influencing the usage of Big data analytic in external auditing. To fill this gap, this paper seeks to answer the following research question: what factors do influence the usage of Big data analytics in external auditing? Research contribute to both practitioners and regulators by helping to better understand Big data analytics usage influencing internal and external factors, where audit companies may have difficulty and when audit companies could expect to use it. Secondly, research contribute to the existing literature by providing empirical evidence of Europe, a new and specific context for Big data analytics (as mostly researches are made in US) by indicating insights on which future researches and audit practice can be built.
THE EFFECT OF RELATIVE PERFORMANCE INFORMATION AND OTHER EMPLOYEE BEHAVIOR ON NONCOMPLIANCE
KNAUER, THORSTEN
EWELT-KNAUER, CORINNA; SHARP, DAVID
Category: MA = Management Accounting
This study investigates how relative performance information (RPI) and other employee noncompliant behavior affect an employee’s own noncompliance when employees have individual incentives for noncompliance. We vary the presence of RPI (present vs. absent) and the level of noncompliant behavior of other employees (high vs. low). We find that noncompliance decreases when an employee is exposed to high levels of other employees’ noncompliant behavior ver-sus low levels. We argue that this is because employees wish to distance themselves from others’ noncompliant behavior. Moreover, we provide evidence that the provision of RPI increases noncompliance when an employee is exposed to high levels of other employees’ noncompliant behavior but does not affect noncompliance in the presence of the lowly noncompliant behavior of other employees. We attribute this finding to the group frame created by RPI and its inherent externalities. Overall, our study informs accountants about the effects of RPI, an important performance evaluation system, on the critical aspect of noncompliance.
REGULATORY CAPTURE, NEUTRALITY, OR SELF-INTEREST? THE CASE OF PCAOB INSPECTION FINDINGS
KNECHEL, W. ROBERT
EGE, MATT; LAMOREAUX, PHIL
Category: AU = Auditing
The PCAOB regulates the public company audit industry, enforcing audit quality through inspections of audit firms. We examine whether evidence from interactions between the PCAOB and annually inspected audit firms suggests the PCAOB (1) is captured, acting in a manner beneficial to the audit industry, (2) is neutral, acting for the benefit of the public interest, or (3) is self-serving, acting in a manner that furthers its regulatory interests. Using 10 measures of negative tone in audit firm responses to the PCAOB’s auditor inspection reports, we find that past negative tone within response letters is positively associated with both the likelihood that Part II of a future inspection report will be publically disclosed and the number of future Part I inspection findings. These correlations are consistent with regulatory self-interest in the inspection process rather than regulatory capture or neutrality.
PEER EFFECTS IN SUBJECTIVE PERFORMANCE EVALUATION
KO, TAEHO
CASSAR, GAVIN
Category: MA = Management Accounting
We examine whether and how peer performance affects an agent’s own performance ratings when the performance measure is subjective. We investigate the research question using the unique research setting in which peers are randomly assigned by a third party, thereby reducing the concerns that the agent’s own performance affects peer ratings (reverse and simultaneous causations) and that there are unobserved rater characteristics systematically correlated with ratings (omitted variables). We find the negative peer effects from various model specifications. That is, ratings are negatively affected by peer performance, and strongly so by outlier peer performance. The existence of superior (inferior) peers decreases (increases) the ratings. We find these results from both rater-level and agent-level data. The findings are consistent with the reference-dependence and contrast effect theories, and indicate potentially important biases in the prevalent performance evaluation system.
A THEORY OF POLITICAL CONNECTIONS, CORPORATE GOVERNANCE, AND FINANCIAL REPORTING
KOENIGSGRUBER, ROLAND
Category: FR = Financial Reporting
We present a theory of the interdependence between corporate political connectedness, corporate governance structures and financial reporting. The theory is built on the insight that government fulfills two separate economic roles. On the one hand, it has to power to affect corporate wellbeing via numerous channels, e.g., taxation, regulation, subsidies, etc. On the other hand, it mediates conflicts between corporate actors via, e.g., securities laws, corporate governance rules and financial reporting regulation. Corporate political connections affect both roles simultaneously. They furthermore trigger adjustment processes in the design of optimal corporate governance mechanisms and subsequently influence financial reporting decisions. We incorporate these ideas in a model of financial reporting and identify conditions under which reporting manipulation of politically connected firms will be higher or lower than that of non-connected firms and when endogenously chosen corporate governance will be stricter or less strict. We discuss how our conclusions relate to findings from the empirical literature on the effect of corporate political connections and derive implications for future empirical studies.
DO FOREIGN TAX AUTHORITIES BENEFIT FROM THE U.S. WORLDWIDE TAX SYSTEM?
KOHLHASE, SASKIA
PIERK, JOCHEN
Category: TX = Taxation
This paper empirically investigates whether foreign tax authorities benefit from the U.S. worldwide tax system. In a worldwide tax system firms have to pay taxes on their worldwide income, regardless of their origin. This in turn reduces the incentive of U.S. parent companies to be tax aggressive in their foreign subsidiaries. The rationale behind it is that the U.S. investor has to pay the difference between the effective tax payment abroad and the U.S. statutory tax when profits are repatriated, whereas investors located in territorial tax systems gain the full tax savings from being tax aggressive abroad. Our results show that U.S. subsidiaries have approximately a by 1.2 percentage points higher average GAAP effective tax rate (ETR) compared to firms with foreign investors from countries with a territorial system. This translates into 0.5 percentage point loss in return on equity each year. Thus, U.S. investments into foreign subsidiaries are disadvantaged compared to investments from territorial countries. We contribute to the literature by showing another mechanism apart from profit shifting across countries why U.S. multinational companies have higher GAAP ETRs than multinationals from territorial tax systems. Furthermore, we show that it is the foreign tax authority that benefits from the reduced tax aggressiveness of U.S. foreign subsidiaries since they pay more taxes.
THE INTERPRETATION OF “IN CONTEXT” VERBAL PROBABILITY EXPRESSIONS USED IN IFRS – RESULTS OF EMPIRICAL RESEARCH FROM POLAND
KOLESNIK, KATARZYNA
GIERUSZ, JERZY; KOLESNIK, KATARZYNA; SILSKA-GEMBKA, SYLWIA
Category: FR = Financial Reporting
The objective of this survey is to specify in what way Polish accountants and auditors manage to interpret „in context verbal probability expressions” (VPEs) assorted from IFRS. We analyze whether they have a conservative approach when interpreting these expressions and whether the differences in interpretation depend on the context in which they have been used. Moreover, we verify demographic factors in terms of their influence on the interpretation. For the purpose of our study we distributed a questionnaire and asked a sample of accountants and auditors from Poland to interpret the “in context” VPEs used in IFRS establishing the threshold for recognition of various accounting elements. Our findings provide evidence that the differences in interpretation of “in context” VPEs by Polish accountants and auditors exist. We also provide support for the hypothesis that the level of conservatism shared by Polish accountants and auditors may affect their individual accounting judgement. However, we find no support for hypothesis that demographic characteristics have an implication on these interpretations.
ACCOUNTING PRINCIPLES EDUCATION USING A BOARD GAME
KOO, JEONGHO
LEE, WONG GANG; PAIK, TAE-YOUNG; PARK, YEON-HEE
Category: ED = Accounting Education
This study provides a teaching method for accounting principles using a board game. Many students have negative perception that accounting is very difficult and boring due to the characteristics of its subjects. The purpose of this paper is to introduce a learning method using a board game effective in changing students perceptions of accounting subject more favorably and inducing students to get accounting knowledge more easily. This paper provides the scope of contents of an introductory accounting course which can be covered by a board game. This paper also shows that the basic accounting principles are closely connected to the way of recording the game results on a sheet. Hence, students can understand the basic principles of accounting during the game easily. The survey on the students who used the board game for their accounting principles courses shows that the board game was in fact an entertaining, useful and effective tool for accounting education. It demonstrates that a board game is a useful teaching method for the basic concepts and learning goals of accounting as well as a tool for creating interest and fun to students.
COVERAGE TERMINATION DUE TO RESOURCES CONSTRAINTS: CHEAP TALK OR EUPHEMISM FOR BLEAK BUSINESS PROSPECTS?
KOPITA, ANASTASIA
CHARITOU, ANDREAS; KARAMANOU, IRENE
Category: FA = Financial Analysis
Prior research suggests that due to the incentives they face, analysts are reluctant to voice their negative views on the stocks they cover. Due to this, the SEC in its 2003 amendment to the SRO rulings, introduced a provision requiring analysts to announce the termination of coverage through the issuance of a final research report which should either disclose the analyst’s final rating or explain the reason for the termination. Using a unique hand collected dataset of termination announcements we examine the effectiveness of this rule by focusing our attention to a sample of termination announcements that provide a vague and seemingly information-free justification. By taking into consideration the ex post industry research activity of the investment bank we classify termination announcements under the generic term of “resource reallocation” as endogenous if subsequent to the announcement the coverage of the investment bank’s industry portfolio is either increased or reflects a small and insignificant reduction. We show that the long-run return and financial performance of endogenously terminated firms significantly underperforms that of the exogenous sample. We conclude that analysts exploit the amendment’s provision to terminate coverage on stocks without having to disclose their true and unfavorable expectations rendering, in essence, the regulation that was enacted to combat this tendency, practically ineffective.
SHORT TERM STRATEGIES TO ACHIEVE RECOVERY: THE USE OF EARNINGS AND OPERATIONS MANAGEMENT TO AVOID CREDIT RATING DOWNGRADES
KORCZAK, ADRIANA
HILL, PAULA; WANG, SHUO
Category: FR = Financial Reporting
Firms placed on negative credit watch face the threat of a credit rating downgrade. At the same time they are given the opportunity to put recovery efforts in place to retain their current credit rating. In this paper we test to what extent firms use earnings management and debt burden changes as short-term recovery strategies. We find that both accruals and real earnings management are economically significant tools used by issuers to avoid credit rating downgrades. Further, firms which are downgraded have significantly greater increases in their debt burden during the credit watch period. We find that the performance of confirmed firms does not deteriorate in the first year after the conclusion of the credit watch period whereas downgraded firms significantly underperform in this year. Further, firms downgraded at the end of the credit watch are more likely to be further downgraded in the year following the conclusion of the credit watch. Our results imply that credit rating agencies are not misled by earnings management but rather allow for some discretion in reporting earnings that facilitates the dissemination of private information about future firm performance.
STATE INVESTMENTS AND HUMAN RIGHTS? A CASE STUDY OF THE NORWEGIAN GOVERNMENT PENSION FUND GLOBAL
KREANDER, NIKLAS
MCPHAIL, KEN
Category: SEE = Social, Environmental & Ethical
This paper explores the challenging area of investments and human rights. Specifically we study the investment practices of one of the largest funds in the world, the Norwegian Government Pension Fund Global (Chambers et al., 2012; NBIM, 2013). This Fund has since 2005 included human rights as an ethical criterion in investments (Council on Ethics, 2008; NBIM, 2008). The requirement for nation states to take their human rights responsibilities seriously in all areas of activity has been emphasised by the United Nations Guiding Principles on Business and Human Rights (Human Rights Council, 2011). This paper views human rights issues as an issue based field (Hoffman, 1999) and employs a new model of structuration of issue based fields to develop this in the context of an investment fund (O’Sullivan and O’Dwyer, 2015) Drawing on a series of interviews we analyse the way in which responsibility for human rights has been translated into the practices of the Government Pension Fund Global (Czarniawska and Joerges, 1996). We explore the rationale for these practices and examine some challenging cases in order to analyse to what extent a large fund can incorporate human rights issues in its investment strategy.
THE DARK SIDE OF BUSINESS ETHICS – SHEDDING LIGHT ON FINANCIAL INTEGRITY IN THE PUBLIC PERCEPTION OF CSR
KRETZMANN, CHRISTIAN
ZÜLCH, HENNING
Category: IC = Interdisciplinary/Critical
In the 21st century, corporate duties are no longer reducible to profit maximization or the generation of shareholder value. In fact, corporations are faced with myriad types of stakeholders’ expectations and consequently they are expected to assume the role of a good corporate citizen by engaging in environmental, social, and societal activities while maintaining sound corporate governance. Likewise, corporate social responsibility (CSR) represents a prominent nexus between ethics and finance which is examined within this paper. Using a semi-quantitative analysis, we research the often disregarded issue of financial integrity—defined as the responsibility for conducting honest business and the accountability of its execution beyond compliance—against the backdrop of the perception of CSR by professional versus non-professional appraisers. We find that due to cognitive biases and heuristic practices laymen tend to overrate firms which invest heavily in their CSR image in non-financial categories. Our findings reveal systematic misjudgment which leads us to formulate a revised definition of CSR and give three-fold guidelines for the implementation, assessment, and corporate alignment. The guiding principle may also form the basis for consistent evaluation and ranking schemes to minimize the risk of misplaced corporate incentives and prevent opportunistic actions.
AUDIT MANUALS AND MATERIALITY JUDGMENTS: CONFLICTING INSTITUTIONAL LOGICS IN BIG-FOUR AUDIT FIRMS
KRISTENSEN, RIKKE HOLMSLYKKE
VAN LIEMPD, DENNIS
Category: IC = Interdisciplinary/Critical
The objective of this research is to better understand the role that the audit firm plays through firm manuals when auditors make materiality judgments in the midst of conflicting institutional logics – specifically between profession, market, and corporate logics. The investigation was conducted via a study of the Big-Four audit firm manuals. The main argument in the paper is that the firm sets the stage for auditors’ judgments by making its guidelines in the audit firm manual more reflective of one of the three logics, thereby establishing and helping reproduce certain patterns of order and consistency within the firm. Contrary to prior studies, focusing on a profession and market logic, we find a strong corporate logic, characterized by bureaucracy, emphasizing compliance with rules, regulations, and procedures, thus, devaluating the quintessential characteristics of the profession: professional judgment and skepticism. In addition, where previous research has found Big-Four audit firms to be alike, we find heterogeneity between Big-Four audit firms, regarding their mainly influential institutional logic. Finally, we show how materiality judgments are a complicated task drawing on multiple interacting institutional logics.
MULTI-PERIOD ACCOUNTING CHOICES, AUDITOR'?S LEARNING EFFECTS, AND AUDIT PRICING
KRONENBERGER, SEBASTIAN
Category: AU = Auditing
This paper addresses the interaction between the auditor's effort choice and the client firm's accounting choice in a multi-period model. When considering the fact that accounting choices reverse in the following periods, the auditor's learning, ceteris paribus, induces more conservatism in the initial engagement period, since the firm anticipates the auditor's increased efficiency in the future. The effect spills over and generates new insights in terms of audit pricing phenomena, namely Low Balling and Fee Cutting. I find that the accounting choice does not affect the existence of Low Balling - only the magnitude - but Fee Cutting can only occur when the firm reports conservatively in the initial engagement period. Consequently, reporting overstatements following Fee Cutting are more likely, but they are not attributable to lower audit quality, as commonly suggested; they result from the firm's lower reporting quality. The study helps empiricists to formulate more rigorous hypotheses and highlights the costs of mandatory auditor rotation.
HERITAGE ASSETS IN PRIVATE OWNERSHIP – RECOGNITION AND MEASUREMENT UNDER IFRS
KRUPOVA, LENKA
Category: FR = Financial Reporting
The aim of this paper is to open the discussion targeted on recognition of heritage assets in accounting of private businesses. The paper is focused on entities that carry their business on market principles and prepare their financial statements in accordance with “full” IFRS. Currently, no accounting treatment for heritage assets, works of art and collections exists in IFRS. Consequently, the paper deals with following questions: •How to define heritage assets in the area of private businesses? •Do these objects meet the definition of assets set by IFRS Conceptual Framework? •Provided that heritage objects meet the definition of assets, should they be recognised in entity’s Statement of Financial Position? •Provided that they are recognised in the Statement of Financial Position, how to account for them after their initial recognition? •Can the diction of some existing IFRS standard be used for recognition and measurement of heritage assets? Can an analogy be found in some standard(s)? •Based on recommendation of IASB for situations where no standard or interpretation exists: can most recent pronouncements of other standard-setting bodies that use conceptual framework similar to IFRS be followed in accounting for heritage assets in private businesses? The paper critically analyses the possibilities and limitations of applying the requirements of existing IFRS and offers accounting solutions which could have a value for users in their decision making process.
STYLE OF BUDGET CONTROL AND MOTIVATION IN RESEARCH AND DEVELOPMENT PROJECTS
KRUSE, NINA
Category: MA = Management Accounting
This study investigates two opposing styles of budget control and their effects on team members’ motivation and work outcomes in research and development (R&D) projects. Self-determination theory (SDT) suggests that autonomy support is vital in innovative envi-ronments to improve work outcomes. Drawing on SDT, I argue that R&D team members who experience enabling budget control will internalise project requirements and reach high levels of work outcomes, whereas coercively controlled R&D team members will limit their efforts to meet the basic requirements. I use survey data from 147 R&D team mem-bers of manufacturing companies for the structural equation model analysis. The results show that enabling control is a means to facilitate autonomy support, which is vital to pro-mote autonomous motivation and improve work outcomes, as suggested by SDT. By con-trast, coercive budget control does not affect R&D team members’ motivation and hinders project learning.
BOARD INCENTIVES AND BOARD INDEPENDENCE IN DYNAMIC AGENCY
KUKEC, SANDRA KATARINA
KATOLNIK, SVETLANA; SCHÖNDUBE, JENS ROBERT
Category: GV = Governance
Efficiency of the board structure is usually perceived as linked to a higher degree of monitoring. If monitoring improves performance measurement signals, on which a manager is compensated, it can be considered desirable from the manager's point of view. As a result, having a low degree of board independence (many insiders on the board) may incentivize the board to improve its monitoring technology. However, from a dynamic perspective board monitoring is not always desirable, since it can destroy the ex ante efficient trade-off between risk and incentives under the presence of renegotiation possibility. This provides predictions for an optimal board composition seen from a dynamic perspective.
THE EFFECT OF NATIONAL CULTURE ON THE APPLICATION OF IFRS - EVIDENCE FROM FAIR VALUE MEASUREMENTS
KUMMER, TYGE
SCHMIDT, MARTIN
Category: FR = Financial Reporting
This paper analyses cultural differences in the application of IFRS. Comparability is crucial for financial reporting standards, and especially for a set of standards that is intended to be applied globally. Inconsistent application of IFRS across jurisdictions can substantially impair comparability and can have adverse effects on capital markets. Despite the growing practical relevance of fair value accounting, current cross-cultural research mainly addresses cultural differences in relation to the interpretation of vague terms used in financial reporting standards. The effect of culture on the application of accounting measurement is largely unexploited. We use quantitative data from 316 students (246 in the group comparison) enrolled in accounting and finance courses to explore cultural differences in the application of fair value measurements under IFRS 13 in a scenario focusing on investment property. The results provide evidence to suggest that differences between cultural country clusters exist. These differences seem to be grounded in different value patterns and can be explained partially by cultural dimensions. The findings are of interest to preparers, users and auditors of IFRS financial statements alike by increasing awareness of the interaction between cultural differences and application of IFRS. The findings are also informative to accounting standard-setters themselves, who might consider additional guidance to better cope with this interaction.
DOES EXPECTED LOAN LOSS PROVISIONING IMPROVE INVESTORS’ EVALUATIONS OF BANKS’ LOAN PORTFOLIOS?
KUNZ, ALEXIS H.
STÄHLE, MARTIN
Category: FR = Financial Reporting
We conduct an experiment to investigate how the incurred and the expected loss model (ILM vs. ELM) for loan loss provisioning affect investors’ evaluations when loan fundamentals deteriorate (default risk increases) or improve (loans grow at constant risk). Our main finding is that when loan fundamentals improve, the asymmetrically timely recognition of expected losses (vis-à-vis to gains) under the ELM induces investor evaluations that are opposed to the bank’s enhanced valuation. Supplementary process analyses reveal that investors misattribute (some) expected losses to the bank’s current performance which they then extrapolate to assess the banks’ future prospect. We find no misjudgment effects under the ILM. Our findings provide insight into the cognitive processes that lead investors to incorrectly assess the persistence of asymmetrically timely earnings and they inform regulators, standard setters, and investors on important limitations of the ELM with respect to the decision-usefulness of financial statements.
SOME FINDINGS OF EARLY ACCOUNTING ALLOWING TO KNOW MORE ABOUT ITS HISTORY (BY THE EXAMPLE OF DATINI’S COMPANY IN AVIGNON 1363–1368)
KUTER, MIKHAIL
GURSKAYA, MARINA
Category: HI = History
Today not all the representatives of our profession, who are familiar with double-entry bookkeeping, have an idea about the sources of its origin. Few people know about the early record keeping of single-entry bookkeeping. Account books of the archives of Francesco Datini’s companies in Avignon (1363–1368) make it possible to fill this gap. The paper presents the only example of the use of Ricordanze book for the recording the facts of economic life and the transfer of monetary valuation of their effects to the Ledger. Of particular interest is the Memorial, where the prime records were entered in chronological order, and the information was distributed between the Ledger and the Entrata e Uscita. Often a chronological record turned into the system one immediately in the Memorial. At that technological lines of accounts were formed. Noteworthy is one of the earliest books, intended for cash flow accounting (Entrata e Uscita), dated 1367–1368. The book consists of two parts: inflow and outflow are entered separately. Periodically the totals of the sections are balanced. The total of the Uscita is transferred to the Entrata and entered under the total of the first section. The drawn balance of account is used not only for reconciliation of the balance in cash, but also serves as the first entry of the Entrata section of the new accounting period. In the accounting system of Datini’s early companies, without the use of dual accounts with debit and credit and in the absence o
AACSB’S ACCREDITATION ELIGIBILITY AMENDMENT AND RESEARCH PRODUCTIVITY OF ACCOUNTING FACULTY: A STUDY ON THE PAST DECADE
KWON, CHAD
ZHOU, HAIYAN
Category: ED = Accounting Education
The importance of research productivity has been more emphasized for tenure, promotion, and merit raise processes during recent years than ever. However, to date no study has investigated the influences of stricter tenure and promotion policies on the research productivity of accounting faculty in the past decades. While some studies have investigated the quality of accounting journals (Ballas and Theoharakis, 2003; Reinstein and Calderon, 2006) and the ranking of accounting programs and faculties (Bublitz and Kee, 1984; Chan et al., 2007), few have investigated the impact of research productivity amended by the AACSB accreditation eligibility. We tackle this question by (1) studying the changes in quantity and quality of research outputs from accounting scholars at business schools after the AACSB revision in 2010, (2) comparing the research outputs between doctoral-granting and non-granting institutions after this change, (3) comparing publication quantity between junior and senior researchers, and (4) comparing institutional research productivity between the U.S. and foreign business schools. We expect our research findings will be useful to policy makers, review committees, and faculty in their standard setting, performance evaluating, and scheduling academic activities by providing insights into the differences in the productivity and efficiency across different institutions and faculties as well as their changing trend.
UPDATING ACCOUNTING SYSTEMS: LONG-RUN EVIDENCE FROM THE HEALTHCARE SECTOR
LABRO, EVA
STICE-LAWRENCE, LORIEN
Category: MA = Management Accounting
This paper provides novel evidence on the determinants of and outcomes associated with updates of accounting systems. In particular, we document that the determinants of accounting system updating are not the same as those of initial adoption, the stage in the life cycle of accounting systems that most prior research focuses on. We document that a set of previously unidentified determinants drive the updating decision, such as the way in which hospitals initially adopted their accounting systems, “waves” of updates that are taking place within and across hospitals, and the hospital’s focus on IT. In contrast, determinants that explain accounting system adoption are much less important in explaining updating. Finally, we utilize the unique institutional environment of hospitals to identify an exogenous shock to the demand for costing and budgeting system updates as a result of price transparency initiatives and provide evidence that these updates led to economically significant decreases in operating expenses. This paper uses a novel dataset of accounting systems spanning a period of 24 years for over 3,000 hospitals to examine time-series aspects of accounting system use. Our findings have implications for settings outside of the healthcare sector, but they are also important in their own right given the prominence of healthcare in the economy (18% of U.S. GDP in 2014) and the current public policy crisis concerning rising costs of medical care.
HYBRIDIZATION OF PERFORMANCE MEASUREMENT AND SOCIAL IMPACT ASSESSMENT: A CASE STUDY OF A SOCIAL BUSINESS
LAINE, MATIAS
ANDRÉ, KÉVIN; CHO, CHARLES
Category: SEE = Social, Environmental & Ethical
In this paper we are interested in the challenges related to the measurement and definition of success in social enterprises. In prior literature it has been argued that one of the main features of social enterprises is their hybridity, which implies that they combine two institutional logics, the social and the commercial in their pursuit of both social impact and economic sustainability. This combination creates both tensions and trade-offs, as achieving both social and financial goals may prove complex. Moreover, this may create challenges to the management of the social enterprises, as the fulfillment of the organization’s mission necessitates balancing of the different aims. Accordingly, there is a growing body of research seeking to develop rigorous measurement systems that would suit the specific field of social entrepreneurship. In this paper we present a longitudinal qualitative case study which draws both on a longitudinal action research study and a set of 36 interviews to discuss how the measurement systems used in social enterprises are facing the challenges of a double hybridity. We argue that organizations have to cope not only with the measurement of both social value and economic value, but they also have to deal with the need to internally monitor performance and to prove social impact to external stakeholders. We discuss the possibilities and the limits that relate to achieving productive compromises in respect to this double hybridity.
HUMAN CAPITAL REPORTING AND DISCLOSURE IN THE NORTH-AMERICAN FINANCIAL SERVICES INDUSTRY
LAJILI, KAOUTHAR
LAJILI, KAOUTHAR
Category: MA = Management Accounting
Human capital and resources are highly valuable to modern organizations. Yet, accounting and financial reporting of human capital-related data remains scarce, fragmented, discretionary to a large extent, and lacking a systematic and uniform reporting framework particularly in North America. This paper contributes to the growing literature in strategic human capital and its reporting by examining human resource disclosures in the financial services sector in North America. Human resource performance indicators such as labor productivity and efficiency are computed and human resource disclosure scores are developed to test whether an increase in human resource performance indicators is associated with higher human resource disclosures on one hand, and an increase to firm financial performance, on the other hand. Results indicate that labor costs and marginal productivity are significantly associated with human resource disclosures but only labor costs are significantly related to firm financial performance. More interestingly, these findings show opposite or inverted effects between the US and Canadian samples. Overall, the results suggest that human capital information may be relevant to market participants and that labor market conditions and human capital attributes could have a significant impact on value or rent appropriation between employers and employees.
THE EFFECTS OF CDS TRADING INITIATION ON THE OWNERSHIP STRUCTURE OF SYNDICATED LOANS
LANDSMAN, WAYNE
AMIRAM, DAN; BEAVER, BILL; LANDSMAN, WAYNE; ZHAO, DONNY
Category: FR = Financial Reporting
This study shows that the initiation of CDS trading for an entity’s debt increases the share of loans retained by loan syndicate lead arrangers and the incidence of sole lending loans. Further evidence shows this finding is consistent with CDS initiation reducing the effectiveness of a lead arranger’s stake in the loan to serve as a mechanism to address the adverse selection/moral hazard problem in the syndicated loan market. Additional findings corroborate this interpretation by revealing a moderating effect for firms with greater transparency and for loans originated by a lead arranger with a strong reputation in this market.
PLANETARY BOUNDARIES AND SUSTAINABILITY INDICATORS: A SURVEY OF CORPORATE REPORTING BOUNDARIES
LARRINAGA, CARLOS
ANTONINI, CARLA
Category: SEE = Social, Environmental & Ethical
This paper addresses the definition of organizational and operational boundaries for the elaboration of sustainability indicators at the organizational level. It has been suggested that a mismatch exists between sustainability (planetary) boundaries and businesses (organizational and operational) boundaries that make the usual definition of sustainability indicators and sustainability reporting meaningless. The aim of this study is, on the one hand, to discuss the importance of boundaries in the definition of sustainability indicators and, on the other hand, to study how corporations are considering environmental boundaries in practice in their sustainability reports. For this purposes, the paper discusses a conceptualization of reporting boundaries to explore how entities set their boundaries for the construction of sustainability performance indicators and reports. The paper applies this conceptual framework to a content analysis of a sample of 92 sustainability reports from companies included in the 2012 Financial Times Global 500. Results show a lack of ambition in the practice of setting organizational and operational boundaries. Most reporting entities define organisational boundaries restricted to financial control and most indirect environmental impacts are not reported.
THE ACCOUNTANT’S STEREOTYPE: A PERSONALITY APPROACH
LEÃO, FERNANDA
GOMES, DELFINA
Category: IC = Interdisciplinary/Critical
This study examines the social perception of accountants through a questionnaire administrated to a Portuguese community sample (N=727). It draws on a structural approach, based on the Big Five model of personality. It is carried out a confirmatory factor analysis of the first and second order structures of this model and used the perspectives of Hogan’s socioanalytic theory in order to analyse how accountants are perceived and to what extent the dimensions of their social image conform to the Big Five structure. The findings suggest the existence of a stereotype dominated by features of Conscientiousness which has been associated with Holland’s conventional type comprising core characteristics of the traditional accountant stereotype, which appears to survive until nowadays. This study also highlights social acceptance of accountants as an occupational group recognized as a profession, but deny the possibility of accountants to benefit of the highest levels of social status.
HOW DOES INVESTORS PERCEIVE ‘FRESH LOOK’ VS ‘POOR KNOWLEDGE’? –MANDATORY AUDIT FIRM ROTATION FROM SOUTH KOREA-
LEE, DONGHEUN
KIM, SEON MI; KIM, SOOK MIN; LEE, DONG HEUN; YOO, SEUNG WEON
Category: AU = Auditing
Although the implementation of mandatory audit firm rotation has been globally reopened, little is known about the relation between mandatory audit firm rotation and the perceptions of investors. The prior studies provide indirect evidences of the effects of audit firm tenure on audit quality/audit quality perception under conflicting arguments. We examine how investors perceive the implementation of mandatory audit firm rotation in South Korea. Using a direct setting to examine our research question, we analyze the relation between firms with mandatorily switched audit firm and the implied cost of equity capital from 2006 to 2010. We find that, across all three specifications of the dependent variables (Price Earnings to Growth ratio, Modified Price Earnings to Growth ratio and Gode and Mohanram model), mandatorily switched firms have a significantly negative association with the implied cost of equity capital. These results indicate that investors expect a lower ex-ante return from the firms switching audit firm mandatorily than from other firms. We infer that investors perceive mandatory audit firm rotation provide an environment to qualified audit through enhanced auditor independence and skeptism, the cost of equity capital thus is decreased. We expect that this study contributes to improve understanding of the impact of mandatory audit firm rotation on information risk evaluations.
CORPORATE SOCIAL RESPONSIBILITY AND CEO EQUITY INCENTIVES
LEE, EILEEN CHIA-LING
KAO, WEI-CHUAN; LIAO, CHIH-HSIEN
Category: MA = Management Accounting
This study examines the effect of executive equity-based incentives on corporate social performance. The sample includes U.S. listed companies from 1995 to 2013. We find that the sensitivity of CEO wealth to stock price (namely the delta) has a positive impact on corporate social performance. However, this impact could be a result of a CEO’s overinvestment in corporate social responsibility (CSR) activities or his care for the need of various stakeholders by using arguments of stakeholder theory. To distinguish the difference between the effects of overinvestment hypothesis and the stakeholder theory, we further test whether CSR performance is positively related to CEO excess compensation. We do not find evidence of such a positive association, therefore suggesting that CEOs engage in CSR not for self-dealing but to increase stakeholder interests.
AN AGENCY-BASED PERSPECTIVE ON CO-CEOS ADOPTION: EVIDENCE FROM KOREA
LEE, GUN
KIM, JINBAE
Category: MA = Management Accounting
We examine the adoption of co-CEOs, defined as addition of a new CEO while retaining the current CEO, from the perspective of agency argument. While the co-CEOs structure has advantages, it can be associated with agency costs arising from managerial entrenchment. Using the hand-collected data of Korean firms, we find that, when the firm performance is low, the market reaction to an announcement of co-CEOs adoption is more negative than that of one-to-one CEO replacement. We also find that the pay-performance sensitivity for firms with co-CEOs is lower than the pay-performance sensitivity for firms with sole CEOs. Our results are consistent with the notion that co-CEOs adoption can be used as a tool for job retention by entrenched CEOs.
ASYMMETRIC COST BEHAVIOR: A LIFE CYCLE ANALYSIS
LEE, JOO HYUNG
ANDERSON, MARK
Category: MA = Management Accounting
We apply a life-cycle approach to the study of resource slack revealed by asymmetric cost behavior. Previous organizational literature suggests that slack resources are valuable especially to growth or venture companies. We use an innovative measure of life-cycle based on cash flow patterns that reflect underlying products’ life-cycles (Dickinson, 2011) to classify firms. We employ an empirical model of asymmetric cost behavior model (Anderson et al., 2003) to measure resource slack from a dynamic perspective. We test whether companies classified as introduction stage or growth stage companies retain more slack than mature stage companies in periods when firm sales drop and whether companies classified as decline stage companies retain less slack than mature firms. Our results confirm our predictions for introduction and growth stage companies but we find that decline stage companies also retain more slack than mature firms in revenue-down periods, perhaps due to a survival concern.
THE IMPACT OF COST STICKINESS ON EARNINGS INFORMATIVENESS
LEE, MIN YOUNG
KIM, EUNGGIL; KIM, JINBAE ; LEE, GUN
Category: MA = Management Accounting
This paper examines whether sticky cost behavior reduces the information about future earnings reflected in current stock returns. Despite predicting cost behavior is essential part of earnings prediction (Weiss 2010), the effects of cost stickiness on the information environment are nearly unknown. Thus we investigate whether the FERC which indicates the informativeness of realized earnings about future earnings varies with the degree of cost stickiness. We posit that cost stickiness negatively affects the association between current stock returns and future earnings. Consistent with our hypothesis, we find that firms with greater cost stickiness have lower FERC and this negative effect of current sticky cost behavior on the FERC persist over at least future two-years of aggregation period of earnings. These findings indicate that sticky cost behavior reduces the information of two-year-ahead earnings reflected in current stock price. This implies that investors do not view sticky cost behavior as the rational decision making of managers. We also find that the negative relationship between cost stickiness and the FERC is more pronounced when firms’ asset or employee intensity is low. These results support our main argument that sticky cost behavior exacerbates the informativeness of earnings because firms with low asset or employee intensity bear relatively lower adjustment cost.
THE EFFECTS OF IFRS ADOPTION AND IFRS NON-AUDIT CONSULTING SERVICES ON VALUE RELEVANCE: EVIDENCE FROM KOREA
LEE, WOO JAE
JEONG , SEOK WOO ; CHOI , SEUNG UK
Category: FR = Financial Reporting
Since 2011, listed firms in South Korea are required to prepare their financial statements based on the International Financial Reporting Standards (IFRS). We first examine whether value relevance increased following the adoption of IFRS, by using adjustments as a consequence of restating financial statement in accordance with IFRS in the year 2010. Second, we investigate the effect of IFRS non-audit consulting services on value relevance. We find mixed evidence of an increase in value relevance. Our evidence shows that value relevance, measured by the explanatory power of price model, is higher for IFRS than for GAAP. Specifically, net income is more relevant for IFRS than for GAAP, but book value of equity is not. Also, our evidence indicates that IFRS consulting services have a positive effect on the increasing value relevance of IFRS information solely on net income. We do not find a significant effect of IFRS consulting service on the value relevance of the book value of equity.
CORPORATE SOCIAL RESPONSIBILITY AND OPERATING CASH FLOWS MANAGEMENT
LEE, YONG GYU
KIM, HYUN PYO; KIM, JEONG-BON
Category: SEE = Social, Environmental & Ethical
This study examines whether firms that exhibit corporate social responsibility (CSR) engage in management of cash flows from operations (CFO). Based largely on the methodology of Lee (2012), we find that CSR firms are more likely to manage CFO upward than non-CSR firms, after controlling for the level of earnings. Specifically, CSR firms are more likely to time certain transactions, such as delaying payments to suppliers or accelerating collections from customers, and shift investing cash flows to CFO within the statement of cash flows. While our findings are somewhat contrary to prior evidence (e.g., Kim et al. 2012) suggesting that CSR firms are less likely to manage earnings, they indicate that managers of CSR firms, who are often assumed to be ethical, may exhibit some cross-sectional variation in the quality of financial reports they produce, especially when the incentives to inflate reported CFO are particularly strong.
MANDATORY IFRS ADOPTION: DATABASE COVERAGE AND POTENTIAL SELECTION EFFECTS
LEHMANN, NICO
HITZ, JOERG-MARKUS ; KAUMANNS, SEBASTIAN
Category: FR = Financial Reporting
This paper draws its motivation from an empirical observation: the steady decline in the number of listed firms that adopt IFRS, as reported by a major professional financial database, Thomson Reuters' Worldscope. A close look at the coverage of listed firms by Worldscope for the period between 1995 and 2014 reveals this reduction in the number of listed firms that adopt IFRS in 2005, which turns out particularly strong for European countries which concurrent with IFRS adoption introduced enforcement mechanisms. These findings may owe to coverage effects on behalf of the database provider, macroeconomic developments (e.g., the emergence of private equity markets), but, more importantly, also to regulation related real effects, for example, an effective drain in particular of IFRS and enforcement regulated firms from listed markets. This paper discerns explanations for this empirical phenomenon and documents research design implications for literature on mandatory IFRS adoption. Overall our findings suggest that the database provider's coverage behavior as well as real effects (e.g., driven by firms' delisting and downlisting behavior) induce a correlated omitted variable bias in research on mandatory IFRS adoption.
ECONOMIC IMPORTANCE OF THE CLIENT: WHEN DO SHAREHOLDERS CARE ABOUT AUDITOR INDEPENDENCE?
LEIDNER, JACOB JUSTUS
HÖRNER, SVEN
Category: AU = Auditing
This study examines whether and when shareholders have a negative perception of an auditor's economic dependence on the client. The results of a Big 4-client sample in the U.S. (2010 to 2014) show that the economic importance of the client---measured at the audit-office level---is negatively associated with shareholders' perceptions of external financial reporting quality---measured by the earnings response coefficient and ex ante cost of equity capital---and, therefore, perceived as a threat to auditor independence. Moreover, the study reveals that shareholders primarily regard independence due to client dependence as a problem for firms that are more likely to be in a financially distressed condition. Therefore, this study provides initial evidence that shareholders' perceptions might be conditional on client's circumstances, and this will hopefully encourage future research because little attention has been devoted to the role of a client's circumstances in shareholders' perceptions of audit-related issues.
HOW DO MANAGEMENT CONTROL SYSTEMS AFFECT THE LEGITIMACY OF MANAGEMENT ACCOUNTANTS?
LEMAIRE, CÉLIA
DEMARET, JULIE
Category: MA = Management Accounting
One of the most important tasks assigned to management accountants is the implementation of management control systems (MCS), which play a role in decision making by helping individuals to set goals, monitor results and spot any problems. To achieve this role, management accountants have to be legitimate in the eyes of their interlocutors. Although numerous studies have examined the interrelations between systems and employees, the specific relationship between MCS and those who apply them –namely management accountants – has rarely been looked at in detail. In this study, we focus on the impact of MCS on the legitimacy of management accountants. To explore this phenomenon in depth, we analyzed the discourses of management accountants and some of theirs interlocutors in seven different cases. The study shows that MCS reveal pre-existing natures of legitimacy for management accountants. It underlines the process by which these systems have a real impact on different natures of legitimacy. It confirms that the design or adaptation of a system by a management accountant is not a central factor in the legitimation process. This work contributes to the understanding of the relationship between systems and management accountants, and can be of use to management accountants seeking to obtain legitimacy.
TARGET-SETTING IN CEO BONUS PLANS: EVIDENCE FROM THE COMPENSATION DISCUSSION AND ANALYSIS
LENIHAN, ORLA
BRENNAN, NIAMH M.
Category: GV = Governance
This paper analyzes performance targets in CEO bonus plans. In recent years, CEO compensation research has been surrounded by two competing theories: the optimal contracting theory, which assumes that compensation contracts are designed by boards of directors in order to maximize shareholder value; and the managerial power theory, which assumes that powerful CEOs can extract rents from organizations through their pay packages. The purpose of this paper is to determine which of these two schools of thought best explains target-setting practices in CEO bonus plans. Performance target data is manually obtained from the Compensation Discussion and Analysis section of the proxy statement for a sample of 100 S&P 500 firms. The paper tests the association between CEO power and the use of subjective and easy performance targets, finding no significant relationship. In further support of optimal contracting, the paper finds that firms’ target-setting practices tend to align managerial incentives with firm strategy. These findings are important to investors, who expect bonus plans to be designed in a manner that maximizes shareholder value.
DO AUDITS AND LEVERAGE AFFECT SMES’ FINANCIAL REPORTING QUALITY? EVIDENCE FROM ITALY
LEONI, GIULIA
Category: FR = Financial Reporting
Although recent studies have showed that financial reporting quality in small and medium-sized enterprises (SMEs) is highly rated by their investors and that it can help reduce their debt costs, little is known about the determinants of such quality. This paper aims to extend the research on SME financial reporting quality by exploring how compulsory audits and leverage can affect the quality of SMEs’ financial reports. Through an empirical analysis of financial data from a large sample of Italian SMEs, the study found that financial reporting quality improves in audited SMEs and decreased in highly leveraged SMEs. The paper provides evidence on the implications of compulsory audits and strong debt dependence on SME financial reporting quality and extends the limited knowledge on the determinants of financial reporting quality in SMEs.
PERFECT MATCH? CONSTRUCTION OF MANAGEMENT ACCOUNTANT IN RECRUITMENT PROCESS
LEPISTÖ, LAURI
IHANTOLA, EEVA-MARI
Category: MA = Management Accounting
This study adopts critical perspective to shed light on practices through which management accountant is constructed in recruitment process. By focusing on recruitment processes in workplaces, the study joins the works which have elucidated on the development and maintenance of professionalism in settings of accounting companies. The present study suggests that construction of management accountant is largely a discursive accomplishment in which the technical side of accounting becomes undertaken by the social. Recruitment project appears as normalising force in which successful candidate has to demonstrate specific appearance and display in one’s behaviour to succeed in process. To exemplify the intricacies of socially and organisationally conditioned action, the paper analytically disguises between ideal and appropriate management accountant occurring in talk of people in charge of processes. Theoretically the paper draws from eclectic sources to provide insight on professionalism and professional identities. Our argument draws upon 17 interviews in eight organisations as well as written documents.
NON-GAAP EARNINGS DISCLOSURE IN LOSS FIRMS
LEUNG, EDITH
VEENMAN, DAVID
Category: FR = Financial Reporting
The difficulty of valuing loss firms can trigger a demand for alternative performance metrics. In recent years, it has become common for loss firms to report non-GAAP earnings that exclude routine recurring expenses and many of these firms convert GAAP losses into non-GAAP profits. In this paper, we examine the future performance of such “loss converters”. Using a sample of hand-collected non-GAAP disclosures from firms’ quarterly press releases, we first show that loss converters’ GAAP earnings are insignificantly associated with future cash flows. Decomposing GAAP earnings, however, we find these firms’ non-GAAP earnings are significantly positively associated with future cash flows, while the items excluded from non-GAAP earnings are uninformative for future cash flows. Next, we show that loss converters have significantly stronger future operating cash flows than matched GAAP-only loss firms, do not perform differently from matched profit firms, exhibit higher valuations, and do not experience predictable returns around future earnings announcements. Overall, our findings are consistent with the use of non-GAAP disclosure in loss-converting firms to inform investors and are inconsistent with claims that these firms use non-GAAP disclosures to inflate perceptions of firm performance.
TOP MANAGEMENT TEAM EXPERTISE AND CORPORATE REAL EARNINGS MANAGEMENT ACTIVITIES
LI, CHIHUA
CHEN, TSUNG-KANG; TSENG, YIJEI
Category: FR = Financial Reporting
This study investigates the effects of top management team (TMT) expertise on real earnings management (REM) activities by employing a hand-collected data set of 4,798 Taiwanese listed firms from 2006 to 2010. The empirical results of this study show that the percentages of TMT members possessing master’s degrees and serving in core functional areas negatively relate to REM level, while the percentage of TMT members possessing certified public accountant certificates has the opposite effect. The findings suggest that the education level and core functional expertise of a TMT both enhance firm performance and reduce managers’ incentives to manage earnings. However, TMT accounting expertise reduces the costs of engaging in REM activities, and managers are more likely to use REM to cover their entrenched behavior. We also find that the effect of TMT expertise on REM activities becomes weaker with increasing firm age. Finally, the outcomes of several robustness checks such as suspect-firm analysis and endogeneity tests support our study results.
PROCRASTINATION IN THE ACADEMIC ENVIRONMENT: AN ANALYSIS OF ALUMNI FROM BRAZILIAN POSTGRADUATE PROGRAMS
LIMA, GERLANDO AUGUSTO SAMPAIO FRANCO DE
COLAUTO, ROMUALDO DOUGLAS; CUNHA, JACQUELINE VENEROSO ALVES DA ; DE LUCA, MÁRCIA MARTINS MENDES ; OTT, ERNANI
Category: ED = Accounting Education
Academic procrastination may be defined as the decision to delay tasks until the last acceptable moment. It has been associated with poor academic performance and, at worst, may lead to failure to complete a program. The main objective of this descriptive study was to verify the relation between procrastination and time of completion of Brazilian postgraduate courses in accounting. Information was collected with a questionnaire developed by Lay (1986) containing 20 statements about procrastination scored on a 5-point Likert scale. The sample consisted of 190 alumni from Masterʼs programs at four public universities throughout Brazil. Procrastination was found to be associated with delayed course completion. In the correspondence analysis, “very high procrastination” was associated with dropout, confirming the contribution of procrastination to academic failure. In conclusion, procrastination increases the risk of delayed course completion or dropping out of Brazilian Masterʼs programs in accounting. This not only compromises personal, academic and professional success, but increases public spending on postgraduate education―an unreasonable burden on the budget of a developing nation
ANALYSTS’ MONITORING INCENTIVES ACROSS THE MACRO-ECONOMIC CYCLE
LIN, AN-PING
DHALIWAL, DAN; HILLEGEIST, STEPHEN; WELLMAN, LAURA
Category: GV = Governance
We examine the dynamic relation between earnings management and external monitoring by financial analysts in response to changes in macroeconomic conditions. We predict and find that analysts’ incentives to monitor firms’ earnings management activities vary counter-cyclically. Specifically, we find that analysts are more effective at constraining accruals earnings management during periods of economic contraction. This effect is significantly diminished when firms are more likely to issue equity. Further, we find that only affiliated analysts display differences in monitoring intensity across macroeconomic conditions. Overall, we find the efficacy of analysts as external monitors varies counter-cyclically with economic conditions.
GOVERNMENT ENFORCEMENT AND COST OF CAPITAL: EVIDENCE FROM NONPROFIT ORGANIZATIONS IN CHINA
LIN, DONGJIE
LIN, BIN ; SHU, WEI; ZHENG, YING
Category: PSNP = Public Sector & Not-For-Profit
Using a sample of 6,771 Chinese public charities from 2005 to 2012, we investigate the role of government enforcement on nonprofit organizations’ donation. We present evidence that rating by government authorities are positively related to funds received from donors. Further analyses indicate that the information role of government rating on cost of capital is more significant for non-restricted donations, private fund-raising foundations, and local charities. Overall, our study extends the literature of public enforcement of nonprofit organizations by providing evidence of the effects of government rating on operational efficiency in a government-oriented environment.
DO EQUITY-BASED COMPENSATIONS AFFECT FIRM’S TRADING ACTIVITIES AND EARNINGS MANAGEMENT?
LIN, I-CHENG
WU, MING-CHENG
Category: FA = Financial Analysis
The main purpose of this paper is to examine the incentive effects of equity-based compensations on the influences of firm’s trading behavior. Furthermore, this paper investigates the link between compensation incentives and earnings management because managers tend to increase values of equity-based compensations. The empirical results find that granting stock bonuses causes managers to change their trading behavior and has an effect on the selling of shares. Empirically, this paper concludes that managers with higher stock bonuses are less likely to report negative earnings surprises; while the results show that there is no relation between stock options and trading behavior. Also, managers with stock bonuses and high-valued equity-based compensation use more abnormal accruals to influence earnings reports. Lastly, we find that companies are more likely to have positive abnormal accruals to engage in positive earnings management when managers receive more or higher-valued stock bonuses.
SELECTIVE DISCLOSURE AND THE ROLE OF FORM 8-K IN THE POST-REG FD ERA
LING, ZHEJIA
GLEASON, CRISTI; ZHAO, RONG
Category: FR = Financial Reporting
We investigate whether Form 8-K disclosures mitigate analysts’ information advantage in the presence of initial selective disclosure. Using cross-sectional variation in firms’ social connections with the investment community to identify firms prone to selective disclosure, we show that the precision and the relative amount of analysts’ private information are higher prior to 8-K filings for connected firms, consistent with selective disclosure. More importantly, 8-K filings attenuate the influence of social connections on the quality and quantity of analysts’ private information. Additional analyses reveal that this leveling of the information playing field is concentrated among 8-Ks filed to comply with Reg FD.
THE INFLUENCE OF M&A FEATURES ON DISCLOSURE QUALITY AND COMPLIANCE IN AN IFRS ENVIRONMENT
LIONZO, ANDREA
CORBELLA, SILVANO; FLORIO, CRISTINA
Category: FR = Financial Reporting
Although research widely focused on determinants of overall disclosure quality in financial reports, only a few studies analysed whether the features of a specific transaction influence the related disclosure. This study aims at filling this gap by examining how the specific features of a merger and acquisition (M&A) influence the disclosure provided by the acquirer. The study examines the impact of several M&A features: M&A materiality, dynamism of M&A activity, acquiree’s nationality, goodwill recognition and materiality. Disclosure quality is measured by a dual approach (weighted quality and mere compliance), and different forms of disclosure (overall, mandatory, and voluntary) are investigated. The empirical analysis focuses on M&As carried out in Italy, an IFRS environment characterized by smaller companies and less efficient financial markets compared to the US. Main results show that disclosure quality is positively affected by M&A materiality, while goodwill materiality leads to reduce voluntary disclosures first and to some extent even mandatory disclosures. Mandatory disclosure cannot be taken for granted and appears to be driven by partially different M&A characteristics than voluntary disclosure. Such findings are relevant for investors, as the concealment of M&A economic substance may reduce their ability to evaluate future economic performance; they also call for urgent efforts by standard-setters to constrain managerial opportunism behind disclosure.
A LONGITUDINAL STUDY OF AN ACTIVITY-BASED COSTING SYSTEM IMPLEMENTATION IN A CHINESE MANUFACTURING FIRM
LIU, LANA Y J
PAN, FEI; ZHOU, LIN
Category: MA = Management Accounting
This study reveals long-term success factors of an Activity-Based Costing (ABC) system development and implementation in a large Chinese manufacturing company for a period of 2001 to 2011. Our findings echo some extant work that any IT implementation can indeed help some organisation players (cost accountant in this instance) successfully to seek visibility in the organisation at initial stages of implementation. We reveal that the long-term success of the ABC system and therein visibility of these key players is very malleable, in our case predominantly affected by technological issues and rapid organizational changes at different stages of an organisational life cycle.
NEGATIVE PRESS COVERAGE, LITIGATION RISK, AND AUDIT OPINIONS IN CHINA
LIU, QILIANG
DHALIWAL, DAN S.; XIE, HONG; ZHANG, JIANPING
Category: GV = Governance
Exploiting a legal regime change in China in 2005 that significantly increased auditors’ civil liability, we reexamine why auditors are more likely to issue modified audit opinions(MAOs) to clients who receive negative press coverage before audit report dates. We find that negative press coverage prior to the audit report date significantly increases the probability for auditors to issue MAOs during 2001-2009, consistent with findings using the U.S. data. More importantly, we find that such a positive relation does not exist in the low litigation risk period and is present only in the high litigation risk period. Moreover, first-reported negative press coverage and repeated negative press coverage affects audit opinions differently. While neither affects the probability of MAOs in the low litigation risk period, only first report negative press coverage increases the probability of MAOs in the high litigation risk period. Finally, additional analyses on regulatory sanctions in the year after negative press coverage rule out the possibility that the observed no relation between auditors’ MAOs and negative press coverage in the low litigation risk period is due to slack regulatory sanctions in that period. Taken together, our findings suggest that auditors increase the probability of issuing MAOs to firms receiving negative press coverage to mitigate a perceived increase in litigation risk stemming from negative press coverage in the high litigation risk period.
ACCOUNTING NARRATIVES AND IMPRESSION MANAGEMENT ON SOCIAL MEDIA: A SEMIOTIC INSIGHT
LIU, SIWEN
YANG, DR JESSICA H.
Category: FR = Financial Reporting
Social media has become a prevailing communication mechanism adopted by firms to improve their stakeholder engagement. In this paper, we adopt a three-layer semiotic framework to examine impression management behaviour and the impact that firm performance has upon accounting narratives. We investigate the earnings announcement related disclosure of the largest 62 FTSE companies on Twitter. Our findings show that improving performers use more impression management tactics at the syntactic and semantic levels than declining performers. Empirical evidence supports that firm performance impacts self-serving presentation behaviour in corporate disclosure. Furthermore, we report that there is no significant difference in communicative intention at the pragmatic level. However, our results indicate that improving performers achieve a significantly higher degree of engagement, which might suggest that improving performers adopt more impression management tactics and get better results. Based on this phenomenon, we conclude that more syntactical perception and semantic persuasion may lead to a higher degree of stakeholder engagement.
CORPORATE ORGANIZATIONAL STRUCTURE AND ANALYST FORECAST PROPERTIES
LIU, SOPHIA H.T.
HSU, AUDREY W.H.
Category: FR = Financial Reporting
This study investigates how corporate organizational structure affects analyst forecast behaviors. Using a unique sample of publicly traded Taiwan companies which are required to disclose information on all of their affiliates, we capture the unique feature of organizational structure by measuring the span of investment layers as the number of layers connecting the parent firm and the lowest-tiered subsidiary. We argue that firms with a long span of investment layers, associated with higher information asymmetry and agency costs, are likely to reduce quality of financial reporting and complicate analyst forecast tasks and thus we find that more investment layers adversely affect analyst forecast accuracy and increase forecast dispersion. We also find that the negative (positive) association between the number of layers and analyst forecast accuracy (dispersion) is stronger for firms with higher deviation between voting rights and cash flow rights, consistent with the argument that such deviation further increases information asymmetry and agency costs. Furthermore, we investigate the effect of firm operating subsidiaries in tax haven countries between the number of investment layers and analyst forecast properties. We find that the negative (positive) association between the number of layers and analyst forecast accuracy (dispersion) is stronger for firms with investees in tax haven countries, consistent with the notion that firms maintain opacity to hide the extent of their tax avoidance activities because transparency of aggressive tax avoidance activities may anger citizen groups and customers (e.g., Houlder, 2010), attract criticism from policy makers (e.g., Drucker, 2010), and provoke scrutiny from foreign tax authorities (e.g., Bergin, 2012), which potentially imposes reputational damage on the firm (Graham et al., 2014). Overall, we document that the organizational structure of a parent-subsidiary corporation matters in terms of analyst forecast task, thus indirectly affecting capital markets.
RESPONDING TO THE EU EMISSIONS TRADING SCHEME AND CLIMATE CHANGE ACT: AN EMPIRICAL ANALYSIS OF CORPORATE LONGITUDINAL CARBON DISCLOSURE STRATEGY
LIU, STEPHANIE
YANG, JESSICA
Category: SEE = Social, Environmental & Ethical
This study is motivated by the introduction of mandatory carbon reporting by UK Government under the Companies Act 2006 (Strategic and Directors’ Reports). Before the enactment of this regulation, there are several carbon reporting guidance that aim to improve the reporting of carbon emissions by UK companies such as the Carbon Disclosure Project (CDP), GRI (2013), WBCSD and WRI (2004). This raises the question that why further governmental intervention is initiated in carbon reporting despite of the existing institutionalized reporting guidance. Using a self-constructed disclosure index, this paper attempts to assess the quality of the longitudinal development of corporate carbon emission disclosure.In corresponding to institutional legitimacy theory and strategic legitimacy theory, our analysis reveals the gradual improvement in disclosures over the period, which reflects in the achievement of peak disclosures after the enactment of EU ETS and CCA. Companies with carbon trading account are more responsive to these schemes than those without carbon trading account, while the general disclosure improvement rate is lower.Nevertheless, the quality of the disclosure remains low and stakeholders’ expectation of corporate carbon disclosure is still unmet, which justify further government intervention of mandating carbon reporting.
CFO SOCIAL TIES AND FINANCIAL RESTATEMENTS
LIU, XIAOTAO
KUANG, YU; QIN, BO
Category: FA = Financial Analysis
This study provides initial evidence about the effects of CFO social ties on financial misreporting. Our results demonstrate that CFO social ties with senior executives decrease the likelihood of financial restatements. Additional analyses reveal that CFO ties reduce restatement likelihood regardless of corporate governance monitoring strengths and restatement types. These results are consistent with our conjecture that CFO ties improve information sharing, but do not support the alternative argument that CFO ties increase managerial collusion. In addition, we find that CFO social ties reduce financial restatements only when a CFO is either not among the top five highest paid executives or has a shorter tenure. These findings suggest that CFO social ties with senior executives are especially instrumental when CFO hierarchical influence is weak. Overall, this paper contributes to research in both financial restatements and social ties – by showing whether, why, and how CFO ties affect financial restatements.
SOCIAL TRUST AND AUDITOR REPORTING CONSERVATISM
LIU, XUEJIAO
CHEN, DEQIU; LI, LI; LOBO, GERALD J.
Category: AU = Auditing
We examine the implications of social trust for auditor reporting conservatism. Using a sample of listed companies in China, we find that clients located in high-trust regions are less likely to receive non-clean audit opinions. This negative impact of social trust on auditor reporting conservatism increases (decreases) when the client’s parent firm operates in a region of higher (lower) social trust, suggesting that social trust is contagious from parent firm to subsidiaries in consolidated entities. The impact is also more pronounced when the audit firm is located closer to the client, and when the client is audited by a non-Big 4 rather than a Big 4 audit firm. We also provide evidence that it is client rather than auditor trustworthiness that plays a role on auditor reporting conservatism, auditors charge trustworthy clients lower fees, the negative relation between social trust and modified audit opinions mainly stems from distressed clients with going-concern opinions, and clients from high-trust regions are less likely to manipulate earnings. Overall, our evidence suggests that social trust alleviates auditor concern about client moral hazard.
BUSINESS GROUP AFFILIATION AND EARNINGS QUALITY
LOBO, GERALD
CHITTOOR, RAVEENDRA; DHOLE, SANDIP
Category: FR = Financial Reporting
Business Groups (BG) are a unique organizational form consisting of many legally independent firms tied together by formal and informal ties. While the complexity of the BG structure often creates incentives for BG owners to use their ownership control to divert profits into group firms where their ownership stakes are higher, at the expense of minority shareholders, there are also compelling reputation concerns that potentially make it costly for owners to engage in opportunistic behaviour. Noting the scant research on the broad aspect of earnings quality and important institutional differences between privately held and public firms, we investigate earnings quality of public and private BG firms to that of corresponding stand-alone firms. We find evidence that public BG firms have lower levels of absolute discretionary accruals, higher earnings predictability and lower loss persistence than corresponding stand-alone firms. The results for privately held BG firms are mixed. When we analyze the full sample of firms (combining public and private firms), we find some evidence that BG firms have higher earnings quality than stand-alone firms.
FROM SMALL AUDITOR DISSATISFACTION TO ACTIVE RESISTANCE: A PRACTICE THEORETICAL PERSPECTIVE ON THE “PALACE REVOLT” IN THE GERMAN AUDITING PROFESSION.
LOEHLEIN, LUKAS
GROTTKE, MARKUS; LENZ, HANSRUDI
Category: IC = Interdisciplinary/Critical
For decades the German auditing profession was governed under the relatively sedate supervision of two professional bodies the German Institute of Public Auditors (IDW) and the German Chamber of Public Auditors (WPK), both of whom worked in cooperation with the Federal Ministry responsible for these matters. This state of affairs was transformed, however, after wp.net, a third professional body, was set up in 2005 for small auditors and after it subsequently staged a takeover of the WPK, an event since termed a palace revolt by the media that reported on it. Based on a practice theoretical perspective, we trace the process that led up to these events. We show how the events are related to the differing practices pursued in the working environments of small auditors and large audit firms, and in the profession as a whole, and we demonstrate, moreover, the role played by a range of knowledge claims that were posited in the profession at that time. The most important of these was the successful implementation of the peer review in the German audit profession, which represented the decisive knowledge claim that got the ball rolling. We also discuss some important implications that might follow from the events for small auditors, large auditors, and the auditing profession worldwide.
AN EXPLORATION OF SOCIAL DISCLOSURES AND ITS ACCOUNTABILITY WITHIN THE AUSTRALIAN GAMBLING INDUSTRY
LOH, CHIN MOI
DEEGAN , CRAIG; INGLIS, ROBERT
Category: SEE = Social, Environmental & Ethical
This study explores the social disclosure, specifically responsible gambling and harm miminsation (RGHM) within the Australian gambling industry from 2005 to 2011. In doing so, by adopting the ethical perspective of stakeholder theory, this study seek to gain an understanding of the current disclosure practices, and trends therein, in relation to RGHM issues, and thus provide an understanding of the extent of accountability in the area of RGHM being discharged by gambling companies. This is possible because the authors synthesized an index of potential RGHM disclosures. However, the study’s findings suggest a low level of RGHM information provided by gambling companies and that many RGHM issues are not disclosed within annual reports. It is concludes that the sample companies provide limited insights into the RGHM information to discharge their accountability to stakeholders for problem gambling social issues. This study provide evidence to enhance and support the findings of Loh et al. (2014) and lend support to legitimation motives for Australian gambling companies’ CSD, or more particularly RGHM disclosures, show a lack of accountability from gambling companies.
REAL EARNINGS MANAGEMENT AROUND CEO TURNOVERS
LONT, DAVID
GEERTSEMA, PAUL; LU, HELEN
Category: FR = Financial Reporting
Following a change in CEO, US firms manage earnings downward by adjusting real business activities and accruals. The decision of new-CEO firms to give earnings a “bath” is influenced by CEO compensation, institutional investor concentration, analyst following, capital structure and quarterly earnings pattern. The choice of real versus accrual-based earnings management strategies depends on the firm’s ability to use an accrual-based bath. These earnings “baths” are more pronounced after external CEO successions.
CULTURE DIMENSIONS AND APPLICATION OF IFRSS IN BANKING INDUSTRY: WHAT IS THE IMPACT ON LOAN LOSS PROVISIONS?
LOPES, ANA ISABEL
Category: FR = Financial Reporting
Loan loss provisions (LLP) are used as a proxy for credit risk for a long period of time. Using European and Asian banks, this paper investigates how differences in culture across different countries can be related with LLP based on the Hofstede’s theory. This paper also researches the effect of the use of IFRSs by the banking industry on the amount of LLP recognized in financial statements. Findings suggest that some culture dimensions plays a role when analyzing risk factors, but not in all situations. When scores based on characteristics and behavior attributable to national culture are conflicting [namely, low (high) scores of individualism (uncertainty avoidance) equivalent to low (high) scores of uncertainty avoidance (individualism)], the influence of culture on loan loss provisions is rejected. International Financial Reporting Standards (IFRSs) were also suggested as having an important role, positively increasing the power of national culture to influence the levels of LLP in countries where the scores to culture dimensions are according to the theory, and mitigating that influence when the scores are not consistent.
INFLUENTIAL FACTORS IN THE ACQUISITION OF ETHICAL COMPETENCE IN UNIVERSITY STUDENTS
LÓPEZ PÉREZ, MARIA VICTORIA
GARDE SÁNCHEZ, RAQUEL; RODRÍGUEZ GÓMEZ, SARA
Category: SEE = Social, Environmental & Ethical
There is a growing demands ethical behavior in organizations. There is greater awareness of incorporating ethics into the business studies. The students will be the future leaders of the companies and will face to problems or ethical dilemmas. The aim of this article is to analyze the factors that have influenced the acquisition of skills and ethical knowledge in higher education. In our article we try to contribute and expand the literature studies examining the factors that have an influence in students’ ethical decision making such as contextual factors- education or family traditions and empathy or emotional reactivity- and ethical formation and ethical knowledge on social, economic, environmental and legal aspects that often are developed in enterprises. Our results shows the empathy, the formation and the importance given to the social dimension are significant variables to explain the maiking ethical decisions by students.
THE IMPORTANCE OF CULTURAL FACTORS IN R&D INTENSITY
LORCA, PEDRO
DE ANDRÉS, JAVIER
Category: FA = Financial Analysis
Research and Development (R&D) investments are a key issue for companies. In an increasingly competitive economy R&D can be a source of competitive advantage. Therefore, a profuse research line on the reasons that can motivate firms for R&D investment has been developed. Several theoretical frameworks have been developed: the resource-based theory, the creative destruction model, the domestic competitive pressure model and the exposure to international competition model, among others. However, the culture of the country has not widely used as an explanatory variable. Therefore, in this paper we test to what extent the R&D intensity in European countries is explained by the national dimension, using cultural dimensions. A firm-level study of 6919 observations in 13 European countries has been conducted. Results confirm the influence of culture in R&D intensity.
TRANSFER PRICING AND STRATEGIC AUDIT
LORENZ, JOHANNES
DILLER, MARKUS
Category: TX = Taxation
Transfer pricing is a very active field of research in both economics and accounting. Multinational companies, on the one hand, try to optimize tax effects taking into account agency problems that may arise when transfer prices are used as a means to incentivize subdivisions or managers. Governments, on the other hand, can strategically set transfer price regulations to compete for a common tax base. There is less literature investigating the problem of tax evasion, which occurs if multinational companies set transfer prices that are either higher or lower than appropriate from a regulatory perspective. We propose a game theoretical model where a multinational company and two governments interact with each other. In equilibrium both quantity of production and tax transfer price are determined such as to keep both tax authorities indifferent between auditing and not auditing. Interestingly, we find that profit shifting into the low-tax country can be reduced by increasing the tax rate in the domestic (high-tax-) country or by decreasing the tax rate in the foreign (low-tax-) country.
MANAGER-SPECIFIC LITIGATION RISK AND CORPORATE DISCLOSURE:
LOU, YUN
BOURVEAU, THOMAS; WANG, RENCHENG
Category: FA = Financial Analysis
Using the staggered adoption of universal demand (UD) laws in the United States related to shareholder derivative lawsuits as an exogenous shock to manager-specific litigation risk, we show that litigation risk has a unique effect on corporate disclosure. We find that managers issue more management forecasts after UD laws raise the hurdle of filing derivative lawsuits against them. Furthermore, the effect of UD laws on the frequency of forecasts is more pronounced when managers have flexibility in disclosure policies or weak career concerns, as well as when firms are financially constrained or have strong demand for stock liquidity. Our findings provide causal evidence that managers’ litigation risk matters to corporate disclosure policies.
WHAT DO EMPLOYEES REALLY WANT? PREFERENCE-PERFORMANCE INCONSISTENCIES REGARDING WORK INCENTIVES
LOURENÇO, SOFIA
NIZA, CLÁUDIA
Category: MA = Management Accounting
Employee preferences for work incentives have been extensively examined under the assumption that these preferences provide valuable information for the design of compensation systems. However, the extent to which providing incentives to match these preferences influences actual performance has been overlooked. We use a longitudinal field experiment to examine whether preferences for different incentives influence behavior once the incentive is (or is not) provided. Specifically, we examine ex-post objective performance data according to the ex-ante incentive preferences, collected via a questionnaire in the pre-experimental period. The between-subjects experimental manipulations include one of three incentive motivators: (a) money, (b) feedback and (c) recognition. Our results show several inconsistencies between stated preferences and revealed performance behavior. We find that (1) employees report a significantly higher preference for money and feedback compared to recognition but only money and recognition improve performance with an equivalent effect size; (2) performance is not higher when employees are matched with their preferred incentive, except for feedback; and (3) there is no evidence of a learning effect as the consistency between ex-ante preferences and ex-post performance is not improved with experience.
CORPORATE LOBBYING, RELIGIOSITY AND FIRM RISK TAKING
LOW, YIK PUI
FOO, YEE BOON; GUL, FERDINAND AKHTAR
Category: FA = Financial Analysis
This study examines whether corporate lobbying (CL) is associated with firm risk taking. CL is defined as the company’s total annual lobbying expenses arising from the engagement of internal and external lobbyists while firm risk taking comprises of: (1) standard deviation of firm returns (SDROA); (2) research and development expenses (RD); (3) capital expenditure (CAPEX); and (4) growth (GROWTH). We also consider whether the main association between CL and firm risk taking is conditional on local religiosity since prior studies have shown religiosity matters in various firm outcomes. This study finds that risk taking is positively associated with CL but is weaker when firms are headquartered at strong religious counties. The results therefore suggest that politically active firms are more likely to engage in riskier behavior but local religiosity, as a set of social norms, helps to curb such behavior. The findings remain robust to a battery of other additional tests.
EARNINGS QUALITY AND CROSS LISTING: AN EXAMINATION OF U.S. LISTED CHINESE FIRMS
LU, WEI
LAU, VINCENT
Category: FR = Financial Reporting
ABSTRACT This paper examines the earnings quality of U.S. listed Chinese firms and U.S. domiciled firms in the wake of recent accounting scandals involving Chinese firms listed in the U.S. and the planned suspension of the Chinese affiliates of the Big 4 audit firms by the Securities and Exchange Commission (SEC) following the refusal of the Chinese government to allow the SEC to inspect working papers of Chinese firms listing in the U.S. Using a matched sample of U.S. listed Chinese firms and U.S. domiciled firms for the period from January 2010 to December 2013, we find that U.S. listed Chinese firms are more likely to manage earnings towards small positive targets, exhibit more income smoothing and less timely loss recognition than U.S. domiciled firms. These results support the SEC’s concern that the earnings quality of U.S. listed Chinese firms is lower than that of U.S. domiciled firms.
BOARD DIVERSITY, CAREER CONCERNS, AND CORPORATE ENVIRONMENTAL EXPENDITURES
LU, XIAOYAN
ZHENG, YING
Category: SEE = Social, Environmental & Ethical
Many view that female leaders in business demonstrate a strong orientation toward corporate social responsibility, and board diversity leads to better social practices of firms. To examine such belief and the broader question of female directors’ concerns in their career advancement in emerging markets, we develop a model to test the relationship between board gender diversity and firms’ environmental expenditures in order to understand concerns and behaviour of female directors in terms of firm’s environmental responsibility in China. Our findings demonstrate that female directors are concerned with their gender stereotype in people’s perceptions and exhibit more masculine qualities when holding a position in the board room. This characteristics of female directors is even more observable in big firms. However, no significant difference is found for the same relationship between state-owned companies (SOEs) and non state-owned companies (non-SOEs).
EARNINGS MOMENTUM, ADAPTATION VALUE AND NONLINEARITIES IN THE VALUATION OF CHINESE EQUITY STOCKS
LUBBERINK, MARTIEN
DONG, YIZHE ; MA, DIANDIAN ; TIPPETT, MARK
Category: FA = Financial Analysis
We demonstrate that when the variables comprising a firm’s investment opportunity set evolve in terms of a second order system of stochastic differential equations, then the present value of the cash flows the firm expects to earn will be stated in terms of the levels and the momentum of the affected variables. It is also shown that the market value of a firm’s equity is comprised of the present value of the cash flows it expects to earn from operating under its existing investment opportunity set plus the value of the real options the firm possesses to modify or even completely change its existing investment opportunity set. Our empirical analysis shows that earnings momentum and the adaptation and growth options which are typically available to firms all appear to have a significant impact on the prices of stocks traded on the Shanghai Stock Exchange.
CROSS-JURISDICTIONAL ENFORCEMENT DIFFICULTY AND FINANCIAL REPORTING QUALITY
LUI, DAPHNE
FILIP, ANDREI; HUANG, ZHONGWEI
Category: FR = Financial Reporting
This paper examines whether managers perceive a lower ex-ante cost of opportunistic financial reporting when regulators face difficulties in cross-jurisdictional investigation and legal enforcement against them. Using a sample of quasi-domestic firms that present cross-border enforcement challenges to securities regulators in a strong enforcement regime, we find that they have lower financial reporting quality than both domestic firms in their listing jurisdiction and domestic firms in their country of origin. Specifically, financial reporting quality decreases in a predictable manner with an increase in enforcement difficulties. Further, we show that this lower quality is not a result of pre-listing differences. Finally, investors substantially discount these companies’ earnings surprises in short windows around earnings announcement. Our setting rules out that the findings are driven by other major determinants of financial reporting quality such as legal regime, enforcement regime, accounting standards, ownership type, or culture.
ON THE COSTS AND BENEFITS OF NON-MONOTONE INCENTIVE STRUCTURES
LUKAS, CHRISTIAN
Category: MA = Management Accounting
This paper reports results from an experiment studying contract choices in a dynamic agency model. Principals can choose between a theoretically optimal non-monotone contract and a monotone contract. Agents in general provide more effort if faced with the monotone contract. However, principals who consistently choose the non-monotone contract enjoy the highest payoffs. The principals' strongest motive for the choice is maximization of their own payoffs, yet inequity aversion affects the choice as well. Results suggest that experience with a particular contract influences the agents' assessment of the contract's perceived incentive compatibility. Increasing the stakes does not change behavior.
CULTURE OF WEAK COMPLIANCE AND FINANCIAL REPORTING RISK
LUO, SHUQING
KEDIA, SIMI; RAJGOPAL, SHIVARAM
Category: FR = Financial Reporting
Prior work has under-emphasized the role of deviant organizations (“bad barrels”) in favor of the role of deviant individuals such as senior managers (“bad apples”) in explaining corporate misconduct. We seek to redress that imbalance by investigating whether a weak culture of compliance is associated with financial misreporting risk. We measure weak culture of compliance using firm-level data for the years 1994-2011 covering 22,885 firm-years related to enforcement activities from a comprehensive list of federal government agencies. As predicted, we find a statistical and economically significant association between such a weak compliance culture and a firm’s proclivity to start financial misreporting, proxied as earnings restatements, SEC AAERs, and securities class action lawsuits. Additional analysis suggests that a weak compliance culture is associated with higher equity based compensation for the CEO, a weaker internal control environment and weaker governance, a lower threat of a takeover, a diversified organizational structure, and a higher level of CEO dominance.
TOP MANAGEMENT TEAM COMPENSATION, STRATEGIC POSITIONING, AND FIRMS’ COMPETITIVE EFFECTIVENESS
MA, YAN
ANDERSON , MARK ; ZHAO, RONG
Category: MA = Management Accounting
In this study, we investigate how the compensation structure of the top management team (TMT) affects the firm’s competitive effectiveness under different strategies. We delineate the TMT compensation structure along two dimensions - (1) the size of the CEO pay slice as a tournament incentive that motivates individual effort from each of the CEO's direct reports (the CEO's top team) and (2) the degree of pay dispersion among the CEO's top team that affects incentives for the team to collaborate and coordinate. We adopt an innovative measure of firm competitive effectiveness that uses Data Envelopment Analysis (DEA) to determine a firm's relative efficiency in converting corporate resources into revenues compared to the industry leader (Demerjian, Lev and McVay 2012). Using Miles and Snow's (1978, 2003) organizational strategy typology to classify firms into Prospectors, Defenders and Analyzers, we find that the association between CEO pay slice and competitive effectiveness is more positive for firms following the Prospector strategy than for Analyzers. We also find that higher pay dispersion among the CEO's top team appears to be more harmful for both Prospectors and Defenders than for Analyzers. Our findings highlight the importance of aligning compensation design with the firm’s business strategy.
SOCIAL COMPARISON IN CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE
MADADIAN, OVEIS
AERTS, WALTER; VAN CANEGHEM, TOM
Category: SEE = Social, Environmental & Ethical
In this study we shed light on the process underlying diffusion of firms’ CSR disclosure practices. We propose a framework combining institutional theory and behavioural theory arguments to explain firms’ CSR disclosure decisions. We expect means-ends uncertainty surrounding CSR disclosure to bring firms to use social comparison and align their CSR disclosure decisions with industry peers. Using a multi-country sample of firms over a time period between 2003 and 2013, we document that the likelihood that a firm publishes a CSR report (or adopts the Global Reporting Initiative (GRI) reporting guidelines) is positively associated with the relative number of peer firms within its industry that previously published a CSR report (adopted the GRI). With regard to the extent of CSR disclosure, we document that only firms with a previous CSR transparency level that of their industry, engage in mimetic behaviour as a response to industry-based conformity pressures. This suggests that failure to meet a socially-derived target transparency level gives rise to legitimacy pressures on firms to imitate their industry-peers. Finally, our results document that the mimetic response to conformity pressures in CSR transparency is larger for firms from countries with a lower level of stakeholder orientation and less stakeholder coercion, suggesting that firms’ mimetic response in CSR transparency substitutes for institutionalized forms of stakeholder orientation in such countries.
DYNAMIC INCENTIVES AND THE ADJUSTMENT OF TARGET WEIGHTS UPON TARGET ACHIEVEMENT
MAHLENDORF, MATTHIAS
MARGOLIN, MAXIMILIAN; SCHÄFFER, UTZ
Category: MA = Management Accounting
A considerable amount of literature addresses the optimal weighting of performance measures. While most of this literature deals with the derivation and testing of optimal contracts a rising stream of research draws attention to contracts that deliberately allow employees to extract economic rents with the aim of employee retention and long term motivation. Using a dataset from a panel with around 1,000 participants from the finance function, which contains detailed information on performance targets and incentives we demonstrate a novel mechanism regarding dynamic incentives. We find that companies adjust target weightings in their employees’ contracts favorably for employees depending on target achievement. Specifically we document that (1) target weightings of individual targets are increased for targets on which performance was high in the prior period and this practice is used stronger (2) for employees in senior managerial positions, (3) for employees with longer organizational tenure, and (4) by well-performing companies.
MANDATORY ADOPTION OF IFRS AND ACCOUNTING QUALITY OF LATIN AMERICAN FIRMS
MAK, CHUN YU
DORANTES, CARLOS-ALBERTO ; MOURA, ANDRE
Category: FR = Financial Reporting
This paper investigates whether mandatory adoption of IFRS is associated with higher accounting quality of Latin American firms than that in pre-adoption period. We examine the variation in firms’ incentive and financial reporting behaviors due to three firm characteristics (i) operating performance, (ii) bankruptcy possibility and (iii) the status of listing on U.S. stock exchanges. The results indicate that duration of delay in recognition of bad news in post-adoption period is reduced from eight quarters to four quarters in the pre-adoption period. We also find that firms may write off loss when they experience good news or inflate earnings when they experience bad news. Earnings figures in post-adoption period are more value relevance than those in pre-adoption period. The degree of earnings management via accruals in post-adoption period is lower than that in pre-adoption period. These improvements in accounting quality cannot be found on firms with poor operating performance and high bankruptcy possibility. For firms list on U.S. stock exchanges, the results are inconsistent. We only find evidence of improvement in accounting quality measured by value relevance models. On the other hand, we find positive evidences on firms without listing on U.S. stock exchanges.
DOWNWARD EARNINGS MANAGEMENT THROUGH REAL ACTIVITIES MANIPULATION
MAKAREM, NASER
Category: FR = Financial Reporting
This paper investigates whether firms use real activities manipulation for income-decreasing earnings management. To this end, firms that substantially outperformed their last year performance are compared with the rest of the sample in terms of various measures of real activities manipulation. Using a large sample of US firms for the period 2002-2011, the results indicate that firms with extra earnings by the end of third quarter of fiscal year manipulate their earnings downward by means of real activities including sales, production and discretionary expenses. The results are robust to a number of sensitivity tests.
EXAMINING THE IMPACT OF PLANNING AND CONTROL SOPHISTICATION ON INNOVATION ORIENTATIONS
MALAGUENO, RICARDO
GOMEZ-CONDE, JACOBO; LOPEZ-VALEIRAS, ERNESTO
Category: MA = Management Accounting
Over the last decade, a stream of research in management and accounting has highlighted the relevance of an enabling use of planning and control processes to innovation management. However the potential role of the sophistication of these control processes has received scant attention. Using survey data from 134 top managers from small- to medium-sized enterprises (SMEs) in Spain, we propose that the influences of an enabling use of planning and control processes on innovation orientation vary depending on the level of sophistication of such processes. We find that in non-ambidextrous SMEs the enabling use of sophisticated planning and control processes is positively associated with explorative innovations whereas the enabling use of less sophisticated planning and control processes is positively associated with exploitative innovations. Additionally, our results suggest that the enabling use of less sophisticated planning and control processes only contributes to balance exploitation and exploration in ambidextrous SMEs.
ACCOUNTING FOR CARBON: USING THE CUSUM METHOD TO UNRAVEL ACCOUNTABILITY
MALAMATENIOS, JOHN
HARRIS, PETER; HASLAM, COLIN
Category: SEE = Social, Environmental & Ethical
Motivated by the limited accountability in carbon accounting, where aggregated totals obscure explanations for changes in a reported entity’s emissions, this paper explores the use of a novel statistical approach to highlighting the events and stakeholder interactions driving greenhouse gas emissions. While the end game is improved disclosure reframed within a loose business models framework, we use the Cumulative Sum of Differences (CUSUM) method in a case study of the United Kingdom national carbon footprint to construct an interpretive framework which employs knowledge from a variety of disciplines. This is then used as the basis for the critical evaluation of carbon numbers and narratives issued by reporting entities (Froud et al., 2006) and the exposure of contradictions in accountability. We find that the CUSUM is a powerful interpretive tool, which can be used to identify significant events that are congealed in reported numbers to generate narratives about accountability and sustainability. While this approach uses a relatively straightforward statistical method its interpretation requires knowledge and insight of historic, economic, social, industrial and technological phenomena to frame accountability.
DO HIGHER WAGES PAY FOR THEMSELVES? AN INTRA-FIRM TEST OF THE EFFECT OF WAGES ON EMPLOYEE PERFORMANCE
MANGIN, NICOLAS
HESFORD, JAMES; PIZZINI, MINA
Category: MA = Management Accounting
This field study uses data from 490 hotels in a single lodging chain to investigate questions related to the efficiency-wage hypothesis. 1) Does paying workers higher relative wages ex ante result in better ex post actual performance, motivating workers to exert greater effort or attracting higher quality workers? 2) Is the magnitude of the relation between performance and wages the same when workers are overpaid versus underpaid? 3) Do the benefits of paying higher wages outweigh the costs? The data enable powerful tests of wage-performance relation since exogenous factors that likely affect employee behavior are standardized across hotels. Results suggest that performance (customer satisfaction, revenue and profit) is increasing in the relative wage, and that higher performance is the result, and not the cause, of higher wages. We find the magnitude of the wage performance relation is at least as large for workers who are overpaid compared to those underpaid. Results differ from experimental studies, suggesting overpaid workers don’t rationalize away wage premiums. Lastly, results indicate that wage increases pay for themselves. A $1,000 increase in relative wage increases mean profit by $1,080. We contribute to a series of studies investigating the extent to which wages influence performance (e.g., Levine, 1992; Fehr and Falk, 1999; Hannan, Kagal, and Moser, 2002; Hannan, 2005), and whether the benefit of wage increases justifies their costs (Levin, 1993).
CONSERVATISM AND ENDOGENOUS PREFERENCES: AN EXPERIMENTAL APPROACH
MANTHEI-GEH, CHRISTINA
SCHULTZE, WOLFGANG
Category: FA = Financial Analysis
Recent literature argues 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. Preliminary findings suggest that based on innate loss aversion, individuals show unconscious preferences for conservatism: they experience higher utility from conservatism and value conservatism more highly than neutrality in accounting. We further investigate if individuals also show conscious preferences for conservative vs. neutral accounting by implementing a choice setting. We build on existing literature showing that prior experience or learning can influence individuals’ future judgments. Preliminary results provide evidence that experience and learning effects do not fully mitigate endogenous preferences for conservative accounting. The study contributes to the ongoing discussion on conservatism in accounting by highlighting that disregarding peoples’ endogenous preferences for conservatism can have economic consequences, such as individuals’ lower willingness to pay for neutral accounting.
GETTING IFRS ACCEPTED: THE POWER OF COMMON SENSE
MANTZARI, ELISAVET
GEORGIOU, OMIROS; JACK, LISA
Category: IC = Interdisciplinary/Critical
In this paper we explore the mobilisation of common sense during a financial reporting change in Greece based on semi-structured interviews with local stakeholders. The mandatory adoption of IFRS in national contexts with an accounting tradition that differs from the underlying rationale of IFRS is expected to be met with greater resistance by local stakeholders. Apart from the use of regulatory and coercive means, the IASB need to also convince key users and preparers through ideological means. We find that there is consensus in users’ and preparers’ views about the benefits of IFRS and even though they identify inconsistencies between the accomplishment of the expected benefits and their actual experience, this does not challenge their belief about the necessity and usefulness of IFRS. We argue that key local stakeholders organise their consent on the superiority of IFRS over local accounting standards, drawing on the common sense of modernisation or Europeanisation that is aligned with the rationale and purpose of IFRS. The consensus in support of modernisation is pro-EU policies including neo-liberal economic commitments, anti-statist and in favour of the internationalisation of the economy. Despite the inconsistencies in the application of IFRS and the contradictions in stakeholders’ views about the actual benefits of IFRS, this has not led them to challenge the common sense and hegemonic structures inherent in the domain of accounting and capital markets.
THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE STRUCTURES AND FINANCIAL DISTRESS. A STUDY OF THE BANK POWER IN THE SPANISH CAPITAL MARKET
MANZANEQUE LIZANO, MONTSERRAT
MANGENA, MUSA; PRIEGO, ALBA MARIA
Category: GV = Governance
Prior work has extensively examined the effects of corporate governance structures and financial distress or bankruptcy, but has focused on the Anglo-Saxon countries whose corporate governance system differs from other countries, such as Spain. Further, this prior has not considered the role of bank power on financial distress. Drawing from both the agency and power circulation theories, we extend the literature by examining the impact of bank power and its moderation effects on the relationship between a firm’s governance structures and financial distress. Our empirical results indicate that directors’ share ownership and audit committee size are negatively associated with financial distress likelihood, whilst bank ownership and board size have a positive relation with financial distress. We show that for firms in which banks have considerable power, ownership concentration and CEO/Chair duality have a positive effect, whilst board size and board composition have a negative effect on financial distress. Taken together, our results demonstrate that corporate governance structures matter for firm outcomes, but their effects are dependent on the setting or complexity of the firm. These results have important corporate governance policy and practical implications.
WHO WINS THE DIGITALIZED ECONOMY? ANALYSIS OF CROSS-ATLANTIC ACQUISITIONS
MAO, YAPING
IKÄHEIMO, SEPPO IKÄHEIMO; KUOPPAMÄKI, PETRI
Category: GV = Governance
Abstract We analyze short term wealth effects of acquisition activities in digital economy in different legislative environments. We show that relative size difference between acquirer and target company is positively related to the announcement effect of both acquirer and target but not with total wealth effect. We also show that in fragmented legislative environment, i.e. within EU, announcement returns of target companies and total wealth effects are the lowest whereas cross-Atlantic acquisitions appears to be related to the most positive announcement effects. As a policy implication, EU should harmonize the legislation which currently prevents efficient home markets of digital business.
EXPLORING CALCULATIVE CULTURE IN MANAGEMENT CONTROL SYSTEMS: SCALE AND TYPOLOGY DEVELOPMENT
MARC, MOJCA
PELJHAN, DARJA
Category: MA = Management Accounting
A calculative culture describes managerial predilections towards alternative logics of calculation that ultimately affect the design and use of management control systems (MCS) in companies. It is a mechanism for collective sense-making as it conveys the way in which managers use MCS information provided in their decision-making, therefore it implicitly influences organizational efficiency and effectiveness. The aim of our paper is to investigate if this concept has the potential to become one of contextual variables in management accounting research. We develop and validate the scale for measuring calculative culture in the context of MCS using a mixed methods approach. We use interviews and a cross-sectional survey to collect data on calculative culture, and we run a confirmatory factor analysis (CFA) to empirically test our proposed measuring instrument. Finally, we propose a typology of calculative cultures and analyse it empirically. We find that calculative culture indeed acts besides other contextual variables, such as size, age, or industry, and can be thus used as an additional contextual variable in future studies of MCS design and use.
ACCOUNTING AUDITS: ON FINANCING RISK IN THE PRESENCE OF AGENCY CONFLICTS
MARIANO, BEATRIZ
Category: GV = Governance
This paper examines how accounting audits impact investment decisions in the presence of agency conflicts. Investors choose between a short-term risk-free asset and a long-term risky project. The manager in charge of the latter has incentives to inflate interim payoffs to be able to continue a project that destroys value. An accounting audit mitigates this problem by allowing for intermediate project valuation, and therefore, for investors to cut off financing to such project before it becomes too unprofitable. This reduces initial concerns with agency conflicts, even if the incentives of the manager to inflate payoffs remain unchanged, and boosts investors financing of the risky project. These results are particularly relevant for new and innovative firms.
HOW COSTLY IS THE BANKRUPTCY ADMINISTRATION PROCEDURE IN THE UNITED KINGDOM?
MARQUES, ANA
CORREIA, MARIA
Category: FR = Financial Reporting
We explore a comprehensive hand-collected sample of administration procedures announced in the United Kingdom from 2000 to 2012. We find that only one percent of firms emerge from administration. In fact, the sale of the firm’s assets is often not sufficient to cover the costs of sale and the liquidator’s fee. Following administration, firms may emerge from bankruptcy or be liquidated through a creditor voluntary winding-up (CVW), a court order or a process of dissolution. The size and structure of the firm’s assets are associated with the type and costs of bankruptcy resolution. While on average speedier, dissolution involves higher relative costs than CVW. Administration also imposes costs on directors in the form of disqualification. These costs are on average higher if the firm is liquidated by the court and if there are indicators of conflict of interest between directors and creditors and delays in filings with the Companies House.
THE IMPACT OF BOARD CHARACTERISTICS AND IPO’S QUALITY ON DELISTING RISK: THE FRENCH CASE
MARTINEZ, ISABELLE
NEGRE, EMMANUELLE; NGUYEN, NHU
Category: GV = Governance
This paper examines the association between the probability of delisting for both economic and non-economic reasons and the i) corporate governance of IPO firms, ii) IPO quality, iii) post-IPO managerial ownership retention and iv) earnings management at the time of IPO. The sample consists of 168 IPO firms listed on the French stock exchange between 2000 and 2008. At a minimum of five years after the IPO time, the proportion of delisted firms is about 10.7% (delisting for economic reasons) and 24.4% (delisting for non-economic reasons). Finally, 64.9% of the IPO firms remain listed in 2013. Four main results are highlighted. First, the IPO quality is the most important driving factor of delisting (regardless of their reasons). Second, we find that the probability of delisting for economic reasons is negatively associated with the board size and the underwriter’s reputation. In contrast, an aggressive earnings management at the time of IPO increases the risk of delisting for economic reasons. Third, we find that the probability of delisting for non-economic reasons decreases with the IPO quality as measured by the underwriter’s reputation and the proportion of capital sold by managers. At last, pre-performance and age of IPO firms influence the likelihood to exit the market for both economic and non-economic reasons.
ASSESSMENT OF SKILLS AND ATTITUDES IN TEACHING MANAGEMENT CONTROL WITH PROBLEM-BASED LEARNING
MARTINS, DAIANA
BORINELLI, MÁRCIO ; ESPEJO, MÁRCIA ; FREZATTI, FÁBIO
Category: ED = Accounting Education
This research aimed to identify the relationship among the elements that make up the skills and attitudes assessed by students in a course of Management Control with Problem-Based Learning. The field research occurred in 2013. The data was collected through self and peer assessment. The quantitative data analysis was conducted through descriptive statistics, factor analysis and multiple correspondence analyses. The results show the confirmation that all elements sourced from this pedagogical methodology were developed from the perspective of students and were grouped into three factors, one encompassed the goals of PBL, another the interpersonal and emotional behaviors and the last one the integration of teaching with professional experience. Furthermore, it was possible to identify a strong homogeneity of the sample and the constituent elements of the skills and attitudes that have been empirically analyzed showed a strong association. Therefore, it was found that students in PBL, when they are carrying out academic activities proposed by the method, develop simultaneously the profile of the management accountant.
ACCOUNTABILITY DISCOURSES IN AN ORPHANAGE: A XIX CENTURY ACCOUNTANT’S STORYTELLING
MASIERO, ELEONORA
LAI, ALESSANDRO; STACCHEZZINI, RICCARDO
Category: HI = History
The paper explores the rationales behind a storytelling about the administration of a foundling hospital. Published in 1898, the narration was written by the accountant-director of the institute and narrates the operate of the “House of God” and the Congregation that administered it until 1807. The work of Fowler and Cordery (2015) provides us with three key accountability questions that served to frame an analysis of the accountability discourses. The aim is to inspect how the accountability message and its content had been shaped and constrained by the power relations occurring between the provider and the receiver of the discourses. This paper illustrates the writer’s intent to endorse the hospital by focusing on the efficiency and the compassion as drivers for its administration demonstrating how accountability is mediated by “regimes of truths” (Foucault, 1982), historically contingent mechanisms that lead to “discourses” deemed true in particular times or places. The paper also demonstrates the potential of storytelling as an instrument to convey accountability and to participate in a social discourse eluding censorship and allowing the author to bring his “forbidden speech” (Foucault, 1981) to the attention of the public.
THE OCTOBER 2008 AMENDMENT TO IFRS 7: A BLACK HOLE FOR DISCLOSURE
MASON, STEPHANI
BARR, DERECK
Category: FR = Financial Reporting
We examine the relation between disclosure compliance with the 2008 amendment to IFRS 7 and several monitoring characteristics such as auditor specialization, analyst following, and institutional investors using a sample from the S&P 1200 of firms from 32 developed countries. We hypothesize that specialist auditors, analysts, and institutional investors do not constrain disclosure non-compliance. Additionally, we examine the relationship between disclosure compliance and fair value exposure and find that greater exposure results in greater disclosure compliance. Our results show that reporting practices continue to differ systematically across countries despite the use of a common accounting standard.
AN ATTITUDINAL PERSPECTIVE OF LAUGHLIN COLONIZATION PATHWAY TO ORGANIZATIONAL CHANGE
MASQUEFA, BERTRAND
GALLHOFFER, SONJA; HASLAM, JIM
Category: MA = Management Accounting
The authors develop an “attitudinal” (cognitive) perspective to Laughlin’s colonization pathway to organizational change. In so doing, the notion of resistance to change is re-conceptualized as being one response to change on an attitude continuum - positive, negative or indifference. The authors draw on balance theory (Heider, 1958) to develop an attitudinal perspective of change via triadic arrangements constituted by the change, the change agent and the change recipient. The theorizing developed out of an action research conducted at the R&D site of a multinational company in France during the implementation of an organization-wide performance measurement system. The study adds additional flesh to Laughlin’s skeletal framework by providing insights about how resistance to change (an attitudinal state) unfolds during the colonization process. Moreover, the adoption of an attitude continuum moves from a traditional view of resistance to a multidimensional perspective. The authors found that while a positive attitude is associated with change success, resistance to change can be a constructive process and have enabling properties. However, when a negative attitude is directed towards the change agents (rather than the change itself), the success of the change is uncertain. More importantly, an indifferent attitude (a tacit form of resistance) provided the highest uncertainty as to the success of the change process.
PRO FORMA EARNINGS AND DEBT CONTRACTING
MATHIEU, ROBERT
CHU, LING; MBAGWU, CHIMA; ZHANG, PING
Category: FR = Financial Reporting
Based on the premise that earnings derived using generally accepted accounting principles (GAAP) do not reflect economic earnings, the reporting by firms of alternative (and arguably value-relevant) earnings measures – colloquially known as pro forma earnings – has received support, both from academics and securities regulators. This support, however, is contingent on firms not using pro forma ‘strategically’, that is, in a manner which might potentially mislead financial statement users. In this article we provide evidence that such strategic reporting does exist. However, we provide evidence that where monitoring controls are strong, these controls could increase the perceived credibility of these exclusions. Equally, when firms have future growth prospects, we observe that they use the disclosure of pro forma earnings to communicate their private information. While this result is observed after the introduction of Regulation G, it is not the case before the implementation of the regulation.
EQUILIBRIUM PARTIAL DISCLOSURE IN A STRATEGIC ENTRY MODEL
MATSUI, KENJI
Category: FR = Financial Reporting
This paper investigates optimal ex ante disclosure policy for firms competing in a product market given the threat of entry. We demonstrate that when there are two incumbent firms and one potential entrant, partial disclosure of private information can dominate full disclosure in Cournot competition with cost uncertainty or Bertrand competition with demand uncertainty. Specifically, an ex ante commitment to partial disclosure enables the incumbents to deter entry in equilibrium. Moreover, there are multiple equilibria with respect to the noise of disclosing information, where each incumbent wishes to decrease its own noise but is hopeful the rival incumbent will increase its noise. In this respect, each incumbent has an incentive to "free-ride" on the noise of the disclosure by the rival to deter entry. This result provides an accounting insight that the noise of disclosure that a firm adds to its private information has the characteristic of a public good. Finally, we show the existence of an additional equilibrium in which both incumbents fully disclose information that accommodates entry. The incumbents are trapped in a prisoners' dilemma in this equilibrium because they both can increase their profits through entry deterrence by altering their strategies from full to partial disclosure.
NATIONAL CULTURE, RELIGION AND CROSS-COUNTRY DIFFERENCES IN TRADE CREDIT OF EUROPEAN SMES
MÄTTÖ, MARKUS
NISKANEN, MERVI
Category: FA = Financial Analysis
The aim of this paper is to investigate whether national culture explains previously observed cross-country variation in trade credit. Previous work suggests that national culture may close the gap between behavioral finance and “Law and Finance” in corporate finance. National culture influences on human values and is therefore expected to drive individual behavior. If we presume that people in charge of the company, represent the values of the nation in the country the company operates, we can predict the relationship between the financial decision making of the company and the national culture. Using firm level SME data from 35 European countries, religion and cultural factors from Hofstede and Schwartz, we provide new evidence on the determinants of the cross country variance in trade credit. Our results indicate that religion and national culture are associated with trade credit. We find that the levels of the trade credit are higher in the Catholic countries than in the Protestant ones. We also find that Hofstede’s cultural dimensions power distance and uncertainty avoidance are positively related to trade credit while individualism is negatively related to accounts receivable. Schwartz cultural orientation intellectual autonomy is negatively related to trade credit and conservatism is positively associated with accounts payable. We control countries’ legal and financial environment using 2SLS instrumental variable method and both cultural and religion effect hold. Overall, our findings indicate that religion and the national culture are important determinants of trade credit management.
AUDIT PARTNER TENURE HORIZON AND ITS IMPACT ON AUDIT QUALITY: EVIDENCE FROM A DOUBLE ROTATIONS REGIME IN ITALY
MAZZA, TATIANA
AZZALI, STEFANO; BROOKS, LILY
Category: AU = Auditing
Regulators across the world have used mandatory audit partner rotation and/or mandatory audit firm rotation to enhance audit quality. Italy adopts a six-year (seven-year) partner rotation in 2006 (2010) above its existing nine-year mandatory audit firm rotation since 1975. Despite of regulators’ interest to promote professional skepticism and improve audit quality, frequent partner rotation can introduce horizon problem. We hypothesize that the moral hazard problem may impair audit quality if audit partners expected to audit the clients for only a few years limit their audit investments and shirk audit efforts. We find that clients audited by partners with short horizon deliver lower earnings quality (in terms of discretionary accruals) than clients audited by partners with longer tenure horizon. Our results are robust to alternative measures of audit quality (the propensity of loss avoidance, meet-or-beat earnings targets, and accounting conservatism). Further analysis indicates that audit fees decreases with short tenure horizon. Moreover, we find that the main results are driven by mandatory audit partner rotation regime, rather than by voluntary audit partners rotation regime. The unintended consequences of uncoordinated term limits for partner and audit firm rotation documented in this study provide useful insights for regulators, researchers and professionals in evaluating the rotation strategies in their countries.
THE INFLUENCE OF TRUST ON ANALYSTS' PERCEPTION OF CORPORATE SOCIAL RESPONSIBILITY REPORTS
MAZZI, FRANCESCO
DAL MASO, LORENZO; PAUGAM, LUC
Category: FA = Financial Analysis
We investigate how societal trust affects analysts' perception of corporate social responsibility (CSR) reports through sell-side analysts' stock recommendations. We argue that analysts may be more prone to believe that CSR reports convey true information about firms' CSR performance in high trust countries than in low trust countries. In high trust countries, CSR reports could be seen as a signal that firms are proactively managing social and environmental risks or signaling future profitability. Conversely, in low trust countries CSR reports may have limited credibility for financial analysts who may be more likely to disregard such non-financial information. Drawing from a matched international sample of firms, we document that CSR-report issuers benefit from more favorable analysts' recommendations than non-CSR-report issuers in high trust countries whereas they do not in low trust countries. Further, we show that firms issuing audited CSR reports exhibit more favorable analysts' recommendations than firms issuing unaudited CSR-reports in low trust countries but not in high trust countries. This indicates that audit services are able to add credibility to CSR reports in low trust countries. Our study contributes to the literature on non-financial information, on the importance on informal institutions for economic outcomes and is of interest to regulators regarding the value of CSR reports and audits.
BANK LOAN PRICING AND FUTURE LIABILITIES: A CASE OF ASSET RETIREMENT OBLIGATIONS
MBAGWU, CHIMA
CHU, LING; MATHIEU, ROBERT; MCCONOMY, BRUCE
Category: FR = Financial Reporting
The recent talks between global leaders in Paris concerning the environment have brought to the forefront the need for nations and indeed organizations to be more accountable stewards of the environment. According to article 16 of the Rio declaration, national authorities are enjoined to promote the internalization of environmental costs taking into account the approach that the polluter should, in principle, bear the cost of the pollution, with due regard to the public interest and without distorting international trade and investment. In this paper, we examine whether Asset Retirement Obligations (ARO) are relevant from a loan pricing perspective i.e. do banks consider these liabilities as risk increasing in evaluating companies for the purposes of granting loans. Using a sample of 480 companies that companies that disclosed AROs in the period from 2000 to 2012, we find that AROs are not priced by banks. That is there is no solvency risk with respect to long term obligations. Possible explanations for this finding are that the obligation are seen as long term and may not materialize before the maturity of the loan. Also, as suggested by Moody’s the disclosure of the environmental obligation is less likely to have an impact on credit rating and by extension (our finding) on the interest rate on new loans as there is no requirement that a separate fund be set aside for the obligations.
THE EFFECT OF DIVIDEND IMPUTATION ON CORPORATE TAX AGGRESSIVENESS
MCCLURE, ROSS WILLIAM
GOVENDIR, BRETT; LANIS, ROMAN; WELLS, PETER
Category: TX = Taxation
The Australian dividend imputation system provides incentives for firms to pay the full amount of corporate tax on their income. The Australian Treasury has issued a discussion paper that proposes the abolition of the imputation system. This research examines the effect of the imputation system on the level of tax aggressiveness in Australia. There has been little prior research into this area and the research that has been undertaken has focussed on event studies that are confounded by concurrent reforms and changes to the tax system. This study uses a cross-sectional approach to measure the difference in tax aggressiveness between firms that attach tax credits to their dividends as opposed to firms that do not. Using an array of tax aggressiveness measures, the results indicate that firms that attach tax credits pay between ten and fifteen percent more tax on the same level of earnings. This equates to approximately AUD33.75 million for each firm on average. This study provides support for the continuance of the dividend imputation system in Australia, and as a mechanism to reduce the effects of corporate tax aggressiveness.
STUDENTS’ PERCEPTIONS OF A BLENDED LEARNING APPROACH USED TO TEACH FRAUD DETECTION
MCCORMACK, BERNADETTE
ANDERSON, GLENN ; DE LANGE , PAUL
Category: ED = Accounting Education
The purpose of this study is to investigate student perceptions of an online role play scenario using an “off the shelf” Blackboard Learning Management System (LMS) to teach undergraduate audit students fraud detection. Questionnaire responses from 54 undergraduate auditing students studying at a regional Australian university provide data to develop a model to explain student perception of a blended learning approach used to teach fraud detection. A critical tool is the collaborative discussion space in the LMS where the participants work together as a team to solve the frauds. A survey instrument reveals the extent of students’ perception of the effectiveness of fraud detection knowledge enhancement using a collaborative role-play. After completing the learning activities, participants reported enhanced knowledge and problem solving skills in the fraud domain. A key construct of the framework is that learning objectives involving complex cognitive skills such as fraud detection require methods that promote active learning on the part of participants. The paper adds to the literature on the motivation to use and interactively engage with LMSs by accounting students and introduces a method for educators to teach and for participants to learn fraud detection.
A STRUCTURAL ACCOUNTING FRAMEWORK FOR ESTIMATING THE EXPECTED RATE OF RETURN ON EQUITY
MCLEAY, STUART J.
CHRISTDOULOU, DEMETRIS; CLUBB, COLIN
Category: FA = Financial Analysis
This paper shows how the expected rate of return on equity may be estimated using published accounting results only, based on the information dynamics of reported earnings. As accounting-based valuation models conditional upon financial statement articulation lead to a rank de ficient system of estimating equations, the paper introduces a nonlinear constraint on the articulation that allows the information system simultaneously to produce an estimate for the ERR by iteration, together with predictions for the key clean surplus forecasts of net earnings, net dividend and the book value of equity. The paper provides empirical evidence on the nonlinear relationship between components of the accounting-based ERR and realised stock returns, showing how, for the large majority of fi rms, realised returns revert to the estimated ERR, and also that the time-varying accounting components are related to future realised stock returns.
THE VALUE OF INTEGRATED CORPORATE RISK MANAGEMENT
MCMEEKING, KEVIN
GYOSHEV, STANLEY ; ISIN, ADNAN
Category: FA = Financial Analysis
In this paper we examine market-level assessment of corporate cash and hedging policies. We show that investors perceive cash holdings as the chief component of firm value, in particular for financially constrained firms and for firms with better governance measures. Moreover, we document an economically significant value generation through integrated cash and hedging policies but fail to find direct association between hedging and firm value. We show that i) the economic value of hedging is strongly connected to the firm-level liquidity management strategies and ii) investors perceive corporate cash and hedging policies as complementary tools as part of a long-term firm-wide risk management strategies.
SUSTAINABILITY ACCOUNTING IN PUBLIC SECTOR ORGANIZATIONAL CHANGE PROCESSES
MCNICHOLAS, PATTY
ADAMS, CAROL; MOHD FAHMI, FADZLINA
Category: SEE = Social, Environmental & Ethical
The purpose of this study is to examine in detail how local councils in Malaysia engaged with sustainability practices and the role of sustainability accounting in organizational change processes in the context of this developing nation. The study employed a multiple case study approach in five Malaysian local councils, following the mandatory adoption of a sustainability accounting and reporting system. The case study approach was informed by Laughlin’s (1991b) model and Lewin’s (1947) 3-Step model of change. We found that the enforcement of a new government sustainability accounting and reporting system led to change in all five case studies, with a progressive level of change in two of the case organizations. Specifically, the study found that the new reporting system was used to inform decisions concerning action plans to improve sustainability performance. The study demonstrates the potential performance benefits of integrating sustainability accounting into the organizational performance measurement system in local councils (and the public sector context in general). MURNINet, as a unique mandatory reporting system, is used to improve performance through integration into the organizations’ planning and the decision-making process, thereby putting Malaysia ahead of other countries.
INTERNAL INFORMATION QUALITY AND FIRM INNOVATION
MCPHEE, GREGORY
HUANG, KELLY ; LAO, BRENT
Category: MA = Management Accounting
This study investigates how the quality of information available within the firm affects innovation. While extant research primarily focuses on how corporate governance affects innovation by shaping managerial incentives, little is known about the role of information quality in innovation. We find that firms with higher internal information quality generate more patents and patent citations. Our cross-sectional analysis identifies that the effect of internal information quality on innovation increases with firm uncertainty, measured by operating environment volatility and product development cycle length, and increases with coordination need, measured by geographic dispersion and management team tenure. Overall, our findings suggest that higher quality internal information aids decision making related to uncertain and complex tasks, such as innovation, by reducing information uncertainty and improving employee coordination.
THE INFORMATION RELEVANCE OF PUBLISHED PROPRIETARY TRANSACTIONS – A COMPARATIVE ANALYSIS ON THE GERMAN BOND AND EQUITY MARKET
MEIER, JAN-HENDRIK
MEINZER, CHRISTOPH; ZIMMERMANN, JOCHEN
Category: FR = Financial Reporting
The present study analyses the information relevance of published proprietary transactions by board members for debt and equity investors on the German capital market comparatively. By using the event study methodology, significant capital market reactions can be detected in the bond market as well as in the stock market. Particularly on the bond market, information about purchase transactions of corporate insiders leads to a significant change in the credit spread, which can be seen as a first time empirical evidence of information relevance of disclosed proprietary transactions on the German bond market. Both markets show a corresponding behaviour, so that no shareholder-bondholder conflict can be observed. The temporal adjustment processes of the considered capital markets have a very individual structure, which shows up a divergent degree of information efficiency at both markets. In particular, it should be noted that the bond market reacts significantly later on the new information than the stock market. In the context of insider purchases, abnormal returns measured at the stock market have significant explanatory power of the spread changes in the bond market. The bond market learns from the stock market.
THE INFORMATION CONTENT IN ABNORMAL AUDIT LAG
MEINHOEVEL, MAX
GIVOLY, DAN; NIENHAUS, MARTIN; THOMSEN, MARTIN
Category: FA = Financial Analysis
We exploit the information content in abnormal audit lag to derive a new proxy for accounting quality. To measure abnormal audit lag, we regress audit lag on a number of potential determinants suggested by prior research. The residuals from this regression determine a firm’s abnormal audit lag. To validate that our measure captures accounting quality, we employ several tests. First, we show that abnormal audit lag is a useful predictor for internal control deficiencies and restatements. Second, we develop a trading strategy based on abnormal audit lag that yields statistically and economically significant abnormal returns. Third, we provide evidence that our measure captures different aspects of accounting quality than traditional measures and that abnormal audit lag does not suffer from a strong correlation with innate firm characteristics. Finally, we develop a simplified model to gauge abnormal audit lag, which is similarly powerful, albeit easier to implement by future users of our novel metric.
AUDITOR SWITCHING, COST OF DEBT AND STOCK MARKET REACTION
MEJÍA-LIKOSOVA, MARGARITA
SVANSTRÖM, TOBIAS
Category: AU = Auditing
We measure the impact of the four possible types of auditor switches (i.e. from a Big 4/non-Big 4 to a Big 4/non-Big 4) on the cost of capital (debt and equity) for a sample of Spanish listed companies covering the period 2000-2013. We study the reaction of creditors and the stock market following each type of auditor change. Due to their differences in risk bearing, the two capital sources may perceive the risk of an auditor turnover in different ways. Our results suggest that creditors acknowledge the value of auditor independence and audit quality, reducing the cost of debt for firms with higher auditor rotation and for the ones that change to a Big 4 auditor, and increasing the cost in case of switches between/to non-Big 4 auditors. Contrary to previous empirical evidence, the auditor switches do not seem to signal any information to the market. We suggest the possibility that the Spanish code legal system could explain this result. Our study contributes to the sparse literature on the creditors’ reactions to auditor changes and the impact of auditor changes to the stock market in non-US contexts.
THE ITALIAN BOARD OF STATUTORY AUDITORS: THE HEGEMONIC SURVIVAL OF A UNIQUE ACCOUNTING GOVERNANCE INSTITUTION
MELIS, ANDREA
JONES, MICHAEL
Category: HI = History
This paper examines the nature and functions of the board of statutory auditors since its creation in 1882 until today, by adopting the Marxist paradigm, and in particular the theoretical lenses provided by the Gramsci’s theory of social hegemony, to contextualise them within the social, political and economic development of Italian society. The study reveals that the essence of the board of statutory auditors has changed little over time. There have been some changes but these appear to be more ‘conjunctural’ than ‘organic’ as they do not affect the fundamental existence of the institution, rather they contribute to its survival over time. The survival of the board of statutory auditors as an accounting institution in Italy can be explained more by its social than its accounting function. In Italian society the board of statutory auditors provides a reassurance role. The actual performance of the board of statutory auditors appears to be less important than its existence. Its very existence serves the interest of the ‘historical bloc’ and, at the same time, appears to give some comfort to the non-elite in Italian society that all is as it should be. Only an ‘organic’ change to Italian society seems to be able to threaten its existence.
DISCLOSURE BIAS IN THE TEXTUAL CHARACTERISTICS OF THE LETTERS TO SHAREHOLDERS: EMPIRICAL EVIDENCE FROM FINANCIAL AND NON-FINANCIAL FIRMS
MELLONI, GAIA
FLORIO, CRISTINA
Category: GV = Governance
The importance of the Letter to Shareholders (LS) as a form of corporate communication is well documented in the previous literature. However, existent contributions also suggest that LS are used opportunistically by firms as locus of Impression Management (IM) strategy, possibly because of their voluntary and unregulated nature. The aim of this study is to assess whatever Italian firms use LS to convey a manipulated view of firms’ behaviour, adopting an integrated approach to IM detection. In particular, the paper verifies if unprofitable firms adopt a biased language in the LS manipulating the textual characteristics of these letters, investigating both financial and non-financial firms. A manual content analysis and a multivariate statistical analysis are run analysing the disclosure offered in all the LS made available by Italian listed firms referring to year 2013. The key results show that firms tend to use biased language to obfuscate their weak achievements, thus demonstrating that firms adopt IM in their LS. This result is especially true for non-financial firms, while financial firms seem not to manage textual characteristics of the LS according to the performance achieved. The evidence has relevant implications as we show that LS cannot be considered informative but rather than as a communication strategy to advance corporate image, as well as different industries may be more or less prone to some IM strategies.
TAX AGGRESSIVENESS AND STOCK PRICE CRASH RISK: ROLE OF MANAGERIAL QUALITY
MENG, FANJIE
GARG, MUKESH; LAI, KAREN
Category: FR = Financial Reporting
Using a sample of US firms for the period 1996-2014, this study examines the role of managerial qualtiy on the relationship between tax aggressiveness and stock price crash risk. Consistent with prior studies, this study finds evidence that stock price crash risk is positively associated with tax aggressiveness. Besides, using two proxies of managerial quality: managerial ability and CEO age, this study indicates that high quality managers can weaken the positive relationship between tax aggressiveness and stock price crash risk. The findings supports previous literature, which suggests high quality managers can reduce information asymmetry of the firm and such managers are less likely to engage in opportunisitic behaviours than their couterparts. Morever, this study also find evidence that firms with stronger external monitoring are less likely to have stock price crash risk.
WHAT HAVE WE LEARNED FROM SFAS 123R AND IFRS 2? A REVIEW OF EXTANT EVIDENCE AND FUTURE RESEARCH SUGGESTIONS
MERZ, ALEXANDER
Category: FR = Financial Reporting
The fundamental change in accounting rules for equity-based compensation (EBC) instituted by SFAS 123, SFAS 123r and IFRS 2 has allowed for new insights into a variety of research questions. This paper discusses the empirical evidence generated in the wake of the new regulation and categorizes it into four separate streams, namely research on the economic consequences of accounting, disclosure versus recognition, underreporting of EBC values, and the use of EBC and the effects on managerial behavior. I will also show where research has delivered unanimous findings and where results are contradictory. Based on those insights, recommendations will be made for further research possibilities in the area of equity-based compensation.
HOW MULTIPLE ACCOUNTABILITIES AND MEANS-END DECOUPLING INFLUENCE ROLE AMBIGUITY AND JOB SATISFACTION
METZL, MARIUS
SPECKBACHER, GERHARD
Category: MA = Management Accounting
This paper analyzes the individual level consequences of multiple and potentially conflicting demands for accountability and of the implementation of practices that are perceived as ineffective by organizational actors (means-end decoupling). We propose that organizational members’ responsiveness to multiple stakeholder pressures is associated with the experienced level of uncertainty about the expected job related behavior (role ambiguity). Moreover, we argue that when organizational actors do not see how particular organizational practices are linked with the outcomes that these practices are intended to serve, then this will result in higher role ambiguity and lower job satisfaction. Our study uses the example of higher education institutions to analyze the individual level consequences of means-end decoupling of practices to increase research and teaching performance.
CONTEXTUAL FACTORS AFFECTING CONVERGENCE OF CHINESE GAAP WITH IFRS
MIAO, XINYUN
Category: FR = Financial Reporting
The International Accounting Standards Board (IASB) was established to develop a single set of high-quality financial reporting standards, known as International Financial Reporting Standards (IFRS), and to promote worldwide adoption of IFRS. However, the accounting standards-setter in China has no plans to apply the “direct adoption approach” as suggested by the IASB, which leads to replacing Chinese GAAP with IFRS. Instead, it applies a so-called “convergence approach”, aiming at eliminating differences between Chinese GAAP and IFRS gradually with considerations about particular Chinese contextual factors. Applying the accounting ecology framework developed by Gernon and Wallace (1995), this study provides a holistic and rigorous analysis of the main features of the Chinese contextual factors. Results of this study show that market-based economy development in China such as increase of FDI and Chinese enterprises’ financing in overseas capital markets created the demand for converging Chinese GAAP with IFRS. On the other hand, results of this study show that current Chinese-specific contextual factors such as economic system, organizational structure, professional development, and political system are incompatible with the consistent interpretation and application of IFRS. This study provides deeper understandings concerning the current convergence policy of China by clarifying not only accounting issues but also the effects of contextual factors on accounting practices.
PREDICTING EARLY WARNING SIGNALS OF FINANCIAL DISTRESS: THE ROLE OF ACCOUNTING VOLATILITY MEASURES
MIERSCH, DAVID
KLOBUCNIK, JAN; SIEVERS, SOENKE
Category: FA = Financial Analysis
This study proposes a simple accounting-based framework that allows to assess financial distress up to five years in advance for US listed firms over the period of 1980-2010. We jointly model financial distress by two of its key driving forces, (1) a declining profitability, modeled by independent stochastic processes, and (2) insufficient liquid assets, viewed as a minimum level of operating liquidity. The financial distress model incorporates important underlying (i) time-series (ii) industry-sector (iii) firm-level growth, and (iv) accounting volatility developments. Cross-sectional and longitudinal analyses show improvements in the discriminatory power and demonstrate incremental information content beyond state of the art accounting-based models. For example, we find a 11 percent (4 percent) higher ranking performance documented by the area under the receiver operating characteristic curve (AUROC) relative to the standard Altman’s z-score (Ohlson’s o-score) models. Consequently, this study might provide important ex ante warning signals for investors, regulators and practitioners.
CLUSTERING OF CORPORATE RISK DISCLOSURES UNDER THE POSITIVE ASSURANCE REQUIREMENT OF THE INCUMBENT AUDITOR. FINNISH EVIDENCE AMONG THE BIG 4 AUDITORS.
MIIHKINEN, ANTTI
Category: AU = Auditing
I define clustering of corporate risk disclosures to mean that some client portfolios have abnormally high or low risk disclosure intensity scores. Examining whether this happens in the Finnish stock markets among Big 4 auditors is the purpose of the study. Finland provides a unique setting to study this question because, unlike in the US and other major jurisdictions, in Finland risk reports have to be audited, and hence, the incumbent auditor has to give positive assurance for these reports. I analyze risk reports by Finnish firms listed in the Nasdaq Helsinki by using several measures for risk disclosure intensity which describe different dimensions of the quantity of the provided information. The results suggest that corporate risk disclosures cluster by the incumbent auditor. The clients of Ernest & Young have lower intensity of risk disclosures than the clients of other auditing firms. Especially, the clients of PricewaterhouseCoopers (PWC) and Deloitte have high risk disclosure intensity which also spreads across different risk topics. Finally, I analyze auditor switches and find that those clients who left from the PWC’s client portfolio had lower risk disclose scores than their counterparts. This study contributes to prior literature by shedding light to potential quality differences that may exist in the audit market in respect of auditors’ competence and professional rigor to provide positive assurance of risk reports.
ACCOUNTING AS CATALYST: THE ROLE OF CALCULATIVE PRACTICES IN CREATING AN AUTHENTIC POPULAR CULTURE PRODUCT
MIKES, ANETTE
MORHART, FELICITAS
Category: MA = Management Accounting
This paper examines the role of calculative practices in the creation of the Charlie Chaplin museum, a multiparty cultural project with the mission to ‘bring back’ the great entertainer in an ‘authentic’ and commercially viable way. As with many other cultural organizations, there are multiple parties with competing and even conflicting objectives, leading to disagreement not only about the final objectives but also about the evaluative principles that would guide the parties towards consensus and productive action. Previous research in such settings has commonly portrayed accounting as a mediating practice which helps reconcile the dilemma between commerce and culture. We put forward accounting as a catalyzing—rather than compromising—factor in producing cultural goods. We develop this claim by examining the transformative power of calculative practices during the creation of the Chaplin museum.
DO AN INSIDER’S WEALTH AND INCOME MATTER IN THE DECISION TO ENGAGE IN INSIDER TRADING?
MIKKONEN, JENNI
KALLUNKI, JUHA-PEKKA; NILSSON, HENRIK; PUHAKKA, MIKKO
Category: GV = Governance
We develop a theoretical model for analyzing the role of an insider’s wealth and income level in her decision to engage in informed insider trading. In our model, the insider maximizes her expected utility by trading off the financial gain against the costs of informed insider trading, both of which comprise a fixed component and a variable component related to an insider’s wealth and income level through the volume of insider trading. We test empirically the predictions of our model using large archival data of all insiders in listed firms in Sweden and reported insider trades by these insiders. Consistent with the model, we find that insiders’ willingness to time their selling prior to a drop in stock price significantly decreases with the level of their wealth and income. We also find that less wealthy insiders with lower risk aversion, measured by their prior criminal behavior, are particularly prone to time their selling to avoid losses. These results remain similar after controlling for various insider- and firm-specific determinants of insiders’ trading decisions.
THE EFFECT OF THE LEVEL OF IFRS ADOPTION ON THE ANALYSTS’ FORECAST ERROR IN ASEAN COUNTRIES
MITA, ARIA FARAH
MARSOEM, RAFI A.S.
Category: FR = Financial Reporting
This study aims to examine the effect of the IFRS adoption in reducing the analysts’ forecast error. This study employs listed companies in ASEAN five countries: Indonesia, Malaysia, Philippine, Singapore and Thailand with observation period between 2003 and 2012. Unlike previous studies, this study uses a continuous variable to measure the level of IFRS adoption which is measured at country level. This study includes countries that do not fully adopt the IFRS, partially adopt, make some delays in adoption or some modifications to IFRS. The results show that the level of IFRS adoption has negative effect on the analysts’ forecast error. These results are consistent with proponents for IFRS adoption which argue that the adoption improves the information environment of the analysts.
RISK BASED MANAGEMENT CONTROL MEETS GEOPOLITICS: EXTENDING INSTITUTIONAL LOGICS
MOHAMED METWALLY, ABDELMONEIM BAHY ELDIN
KOMINIS, GEORGIOS; WICKRAMASINGHE, DANTURE
Category: MA = Management Accounting
Enterprise Risk Management (ERM) practices are making changes to management control systems globally. It is said that traditional controls become replaced or hybridized with ERM practices. Such changes signify a shift in controls from a monologic to a heterogenic form. This paper reports on a difference, as monologic forms are protected by geopolitics in place. We draw on institutional logics perspective coupled with sociology of geopolitics to articulate this difference. Our qualitative case study of an Egyptian Insurance firm has brought us evidence
BENFORD'S LAW AND EARNINGS QUALITY: ARE EARNINGS CHARACTERISTICS ASSOCIATED WITH DEVIATIONS FROM THE BENFORD DISTRIBUTION?
MOHRMANN, ULF
LEBERT, SEBASTIAN; STEFANI, ULRIKE
Category: FR = Financial Reporting
Benford’s Law describes the frequency distribution of the numerals in certain sets of numbers. However, there is evidence that firms’ net income deviates from the Benford distribution due to the management’s rounding up, which is characterized by small upward manipulations of the net income to overstep cognitive earnings thresholds. Rounding up results in a frequency of zeros (nines) as second digits of earnings numbers that is higher (lower) than expected if the Benford distribution serves as a benchmark. Because rounding up sometimes requires only non-material increases in earnings, and most firms possess the necessary discretion, beating certain cognitive thresholds could simply be seen as earnings cosmetics. However, we find empirical evidence for a relation between the deviation from the Benford distribution and several characteristics in earnings and auditors. Specifically, the subsamples of firms with a positive net income that maximize their earnings via discretionary accruals, the firms with a lower degree of earnings smoothness, and the firms with an auditor that is not a Big 4 firm and not an industry specialist are most likely to deviate from Benford’s Law. In contrast, we find no rounding-up manipulations in firms with comparably higher earnings quality. Thus, rounding up could be interpreted as an indicator of more severe accounting problems.
STUDENTS’ CHARACTERISTICS, PERFORMANCE AND THE CONTEXT-SPECIFIC CONCEPTIONS OF LEARNING IN CASE-BASED ACCOUNTING HOME ASSIGNMENTS
MOILANEN, SINIKKA
Category: ED = Accounting Education
As an answer to the calls for research on the conceptions of learning among accounting students in different situations and on factors which affect these conceptions, the present study explores the conceptions of learning related to case-based home assignments in a management accounting course. It analyzes the associations between students’ performance, characteristics and the conceptions of learning. The data analyzed consist 1,320 learning diaries of 336 students, which are connected with students’ characteristics and course grades. The results are in line with earlier studies in that most accounting students describe reproductive conceptions of learning. However, instead of only increasing knowledge, case assignments seem to emphasize the application of knowledge to real life. Furthermore, the conception of learning seems to be associated with performance in the course and the age of the student. Since no positive development of the conceptions of learning is visible during the course, the case method as such does not seem to solve the problem of reproductive conceptions. Therefore, the arrangement of case-based teaching needs to be carefully considered and designed.
ASSET SECURITIZATION AND BANK RISK: DO RELIGIOSITY OR OWNERSHIP STRUCTURE MATTER?
MOLLAH, SABUR
ABDELSALAM, OMNEYA ; ELNAHAS, MARWA ; LEVENTIS, STERGIOS ; MOLLAH, SABUR
Category: GV = Governance
We test the impact of religiosity and ownership structure on the risk profile of banks, which issued securitisation. We employ GMM estimation using unique database on asset securitization of 672 commercial banks (4889 year-observations) in 22 countries (from 2003-2012), which have dual banking system. We find that banks with higher securitisation activity have consistently shown a riskier profile by being significantly less adequately capitalised and offering higher ratio of net loans to total assets. Controlling for bank type (Islamic and conventional banks), we find that although Islamic banks, in general, show a conservative approach towards risk by keeping higher reserves and more liquidity, banks involved in new issuance of asset securitization as still exposed to a higher risk profile . Controlling for a country religiosity shows different risk profile of banks in countries with different religiosity thresholds. Controlling for different types of bank ownership highlights an additional exposure to credit risk in addition to capital adequacy and liquidity risks. Our results emphasize the importance of identifying the impact of bank type and the religiosity / culture factors in global banking studies. Our results are of importance to both local and international regulators as well as different stakeholders in banks.
THE ROLE OF PRUDENTIAL SUPERVISORS ON INCOME SMOOTHING OF EUROPEAN BANKS
MORA, ARACELI
PORCUNA, LUIS
Category: FR = Financial Reporting
We investigate the cross-country differences in income smoothing in 125 European banks before and after IFRS adoption (2000-2013) by analyzing the interaction of the power of the national Prudential Supervisors with two non-previously analyzed variables, their independence from their national governments and from the supervised entities. We argue that while previous findings suggest a lower impact of IAS 39 on income smoothing in countries where the power of the national prudential supervisor is higher, these results should be mitigated by the two kinds of independence. Political independence of the Supervisor should constrain political interferences and independence of the supervised entities should constrain the managers´ opportunistic behavior. Our results confirm the lower decrease in income smoothing after IFRS adoption in countries with stricter supervisory systems, but also show that this is mitigated by the political and industry independence of the Supervisor. This is consistent with a positive impact of independence of the Prudential Supervisor on accounting quality. Our results could have potential implications for prudential and accounting rule makers in relation with loan loss provisions and for understanding the importance of the structure of the Single Supervisory Mechanism (SSM) for accounting behavior.
IS THE ACCOUNTING QUALITY AFTER THE MANDATORY ADOPTION OF IFRS A RANDOM WALK?
MORAIS, ANA
DIONÍSIO, ANDREIA; FIALHO SILVA, ANA
Category: FR = Financial Reporting
The adoption of International Financial Reporting Standards (IFRS) by different European countries aims to increase the quality and comparability of financial reporting. However, previous research notices divergent findings and there is no consensus about the really effects of the adoption of IFRS in financial reporting. Therefore, the first objective of this paper is to investigate if the mandatory application of a single set of accounting standards (IFRS) has the same effect on the accounting quality of financial information provided by companies from different countries. The second objective is to identify if the classification of the countries included in the sample is similar to previous classifications in the literature, after the mandatory adoption of the IFRS and based on the accounting quality levels found. Our results suggest that accounting quality of financial information (measured by earnings smoothing and value relevance) varies across 14 European countries. We concluded that the differences in accounting practices that determined previous accounting systems’ classifications do not affect the level of accounting quality of financial information, ie, the differences in accounting practices that determined the classification of accounting systems, before and after the mandatory adoption of IFRS, do not seem to influence the accounting quality of financial information in a similar way.
YOU TOO CAN HAVE A CRITICAL PERSPECTIVE! 25 YEARS OF CRITICAL PERSPECTIVES ON ACCOUNTING
MORALES, JEREMY
SPONEM, SAMUEL
Category: IC = Interdisciplinary/Critical
This paper provides an overview of the emergence of Critical Perspectives on Accounting and of some of its achievements. The journal was originally created to provide a forum to question some of the notions that were systematically taken for granted in accounting practice and research, explore the ideological underpinnings of the discipline and reveal its role in processes of domination and social reproduction. The aim was also to encourage community-building around other important issues such as critical accounting interventions and their potential or ways to bring out more emancipatory perspectives to accounting. Here, we detail three dimensions we consider most representative of critical accounting: promoting a radical reflexivity to challenge mainstream views on accounting, questioning the normative claims of the profession to reveal its role in social reproduction and highlighting the role of accounting in major socio-political trends.
CREDIT FRICTIONS AND INVESTMENT ACTIVITES OF SMES
MÖREC, BARBARA
Category: FA = Financial Analysis
Evidence show firm’s growth is determined by a plethora of factors, most frequently mentioned are size, age, and availability of external finance. The latter is particularly important as investment demand is constrained by the availability of external finance. This paper analyzes how micro, small, medium-sized and large companies are able to adjust their investments to worsened financial conditions (credit crunch), as well as economic conditions (pressures related to net working capital). Analysis is done on the population of companies in Slovenia, Eurozone member with exceptionally impaired access to external financial resources, and above average leveraged corporate sector in the period between 2007 (pre-crisis) and up to 2010 (during crisis) when bank credit growth capsized from strong growth to significant contraction. Robust regression panel data analysis indicates that even though most financially distressed firms are large, Slovenian banks are not able to distinguishing risky from non-risky loans recipients, so they require same risk premium regardless of their financial distress. Furthermore, micro and small firms were virtually cut-off from bank loans and consequently used costly trade credit only (beside internal sources of finance) to finance investments, which resulted in lower investment level in micro and small companies despite of the fact they were less financially distressed compared to large companies.
EVOLUTION OF THE TEXTUAL CHARACTERISTICS IN THE CHAIRMAN’S STATEMENT OF GUINNESS (1948–1996) - AN IMPRESSION MANAGEMENT PERSPECTIVE
MORENO, ALONSO
QUINN, MARTIN
Category: FR = Financial Reporting
If discretionary accounting narratives are used for impression management purposes, the financial reporting quality may be undermined and capital misallocations may result. In this case, the textual characteristics of these narratives can be used with the objective of influencing stakeholders and to blur bad performance. Studies analysing multiple textual characteristics in corporate narratives tend to be focused on different companies in a single year or in two consecutive years. This paper analyses the evolution of multiple textual characteristics in the Chairman’s Statements of Guinness from 1948 to 1996, with the aim of studying if they are influenced by impression management. By using the same company, the possibility that different corporate characteristics between companies affect the results is removed. The findings show less evidence of impression management in the textual characteristics analysed than previous research. Potential reasons are offered to explain this difference.
ARE GOVERNMENTS EFFICIENT IN EXPENDITURE ALLOCATION?
MORENO ENGUIX, MARIA DEL ROCIO
LORENTE BAYONA, LAURA VANESSA
Category: PSNP = Public Sector & Not-For-Profit
This paper designs Public Expenditure Efficiency Indexes (PEEIs), both for general government and for its functions, by using single synthetic indicators, as well as a FDHFree Disposal Hull and DEA-Data. This study also tests the association between public efficiency and other key socioeconomic indicators, such as corruption perceptions, democracy, and population density. The empirical analysis was applied in 2012 for a single cross-section of 35 economies. Results show significant evidence of an association between public efficiency and state of development, democracy and corruption; as well as with population density, especially in Health, Social Protection and Environmental Protection.
QUANTS AND QUALIA IN THE SOCIAL SECTOR: THE IMPACT OF “IMPACT”
MORLEY, JULIA
Category: IC = Interdisciplinary/Critical
This study examines the trend towards the use of social impact reporting and language in social purpose organisations (SPOs). It introduces a new form of decoupling, ‘language-means decoupling’, and makes three empirical contributions. First, it shows that the management of SPO legitimacy for financial stakeholders is central to the adoption of this new practice. Second, interviews with staff at SPOs reveal heterogenous styles of adoption of social impact reporting that are broadly consistent with means-end-decoupling. Third, an analysis of 128 UK SPO websites shows their inclusion of both statistical content (quants) and emotional narratives (qualia). I argue that the arrangement of web content may reflect attempts by SPOs to obscure moral inconsistencies that arise from their need to satisfy multiple stakeholders. Finally, the theoretical contribution of the paper draws on philosophical theories of action. I argue that descriptions by SPOs of their activities matter to their staff. Interviews reveal that some staff at SPOs are likely to be demotivated by an increased use of statistical impact language to describe an SPO’s achievements.
DRESSING FOR THE OCCASION? AUDITOR QUALITY IN THE PRESENCE OF CLIENT CHANGES
MOSER, HENRIK
Category: AU = Auditing
This paper examines the incentives an auditor faces with respect to possible new clients. It extends the model of Hillegeist (1999), who is mainly concerned with potential litigation, by a reputation incentive. This factor induces altered auditor behavior as auditors can use the outcome of their audit as a signal to potential new clients. To analyze the influences, I develop a Sequential Equilibrium considering two auditors who compete for a new client by choosing their quality level for the audit of their respective old client. Following the model, I identify conditions and factors that influence the quality decision as well as the manipulation decision of the old and new clients. Interestingly, there are conditions under which auditors actually lower their quality to increase the likelihood of being hired. This provides opportunities for existing clients to manipulate their reports without being detected. The findings offer additional effects of rotation and expand current analytical audit research by reputational incentives.
THE FUTURE OF 'SERIOUS GAMES' IN HIGHER EDUCATION: DELPHI STUDY ON THE EDUCAT0R’S VISION
MOYA, SOLEDAD
ARACELI, MORA; CALABOR, MARISOL
Category: ED = Accounting Education
The purpose of this study is to highlight the role played by academics in introducing teaching technologies and innovation in accounting education. We put forward the Delphi methodology as a rigorously scientific approach for analysing educators' perceptions of the use of Serious Games (SGs) in the classroom. Educators' contributions based upon this methodology will give us a better grasp of the point of departure and will also help us analyse likely future trends with a view wider application of these tools in university classrooms. The main findings of our study are that: (i) technical knowledge and use of the technology are not barriers to the introduction of these tools in the classroom: (ii) while some investment in resources is needed to facilitate their introduction, using these tools helps educators do their job; (iii) educators need more information on these techniques but above all they need training so that they can grasp how they can be applied to their courses and specific learning objectives.
INVESTOR PERCEPTIONS OF OPTING OUT OF IFRS AND ENFORCEMENT: MARKET REACTIONS TO CHANGES IN DELISTING AND DOWNLISTING REQUIREMENTS
MUELLER-BLOCH, STEPHANIE
Category: FR = Financial Reporting
This paper investigates equity market reactions to changes in requirements for opting out of the EU-regulated market to investigate, how investors perceive cost and benefits of mandatory IFRS reporting and the enforcement mechanism ten years post IFRS adoption. From 2007 to 2013, requirements for opting out of the EU-regulated market were gradually reduced in Germany; effectively allowing opt outs without (minority) shareholders’ consent. In 2015, stricter regulation was implemented, requiring firms to offer compensation to (minority) shareholders. Using event study methodology, I measure market reactions and determinants of market reactions around eleven events that significantly impacted the degree of regulation. I find an overall negative (slightly positive) market reaction to decreases (increases) in opt out requirements. While investors of firms likely to opt out due to low transparency, weak performance, and high ownership concentration value the listing, investors of firms that downlist subsequently or were subject to enforcement action are in favor of the ability to opt out. Taken together, findings indicate that while high barriers are mostly valued by investors, in some cases being able to opt out of IFRS and enforcement might be a rational decision from an investor perspective, despite the perceived benefits of IFRS and enforcement.
PERSONNEL EXPENSES AND FIRM PERFORMANCE IN THE PRODUCT MARKET
MUINO VAZQUEZ, MARIA FLORA
ALVAREZ DOMINGUEZ, AMERICA; RUIZ LAMAS, FERNANDO
Category: SEE = Social, Environmental & Ethical
This paper examines the role played by personnel expenses, taken as an indication of the level of the employees’ welfare, in explaining the behaviour of the firm in the product market. Based on equity and efficiency wage theories, we argue that firms might use the employment policy strategically to gain market share at the expense of their competitors. Using a sample of U.K. firms for the period 1998-2008 we find evidence of a positive association between the cumulative one- to four-years ahead gains in market share and the industry adjusted ratio of personnel expenses to sales. When decomposing the personnel expense into its two main components (i.e., salary per employee and number of employees per sales) we find that the association with future gains in market share is stronger for the staffing level than for the average salary per employee.
ALIGNMENT AND UNIQUENESS OF INTEGRATED REPORTING: A CROSS COUNTRY ANALYSIS
MÜLLER, TOBIAS
BERNDT, THOMAS; WACHIRA, MUMBI
Category: SEE = Social, Environmental & Ethical
This paper is a contribution to extant literature on the emergence and development of integrated reporting. The effects of mandatory regulation governing integrated reporting practices have been examined in prior literature. Thus, we contribute to extant research by comparing the degree of integrated reporting alignment between two countries with different phases reached in the evolution of integrated reports: integrated reporting has been institutionalized in one but not even codified in the other. The paper is structured as follows: (1) The practical concept of integrated reporting is placed within a theoretical context, (2) a score for integrated reporting alignment is developed, (3) unique aspects of integrated reporting are identified and (4) the degree of alignment is compared on a cross-country level between South African and Swiss firms.
MARKET REACTIONS TO STRUCTURAL REFORMS IN THE BANKING SECTOR – A CROSS-COUNTRY EVENT STUDY
MÜNZER, MARGIT
Category: GV = Governance
This paper investigates market reactions to structural reforms in the banking sector. In the aftermath of the financial crisis, structural banking reforms have been implemented in numerous countries in a different manner. Adopting event study methodology, I investigate reactions in stock prices for several sub-events of structural banking reforms in France, Germany, the UK and the US. Results show that the largest abnormal returns in absolute terms occurred in response of unofficial sub-events, e.g. events indicating a dilution of the reform or officials calling for a strengthening of the reform. Official sub-events, such as the announcement of the reform, the publication of the legislative draft and the enactment of the law, lead to minor reactions only. Regarding the cross-national comparison, the most negative cumulated average abnormal return (CAAR) (-2%) was found for the UK reform, one of the strictest structural reforms, whereas the CAAR of the US Volcker Rule which was significantly diluted during the legislative process was the most positive (4%). The effects are more pronounced for systemic banks which are expected to be particularly affected by the reform. Abnormal returns of non-systemic banks are either insignificant or show the same sign as those of systemic banks.
DO ASSET REVALUATIONS SIGNAL FUTURE PERFORMANCE IN PRIVATE FIRMS?
MURA, ALESSANDRO
PIRAS, FABRIZIO; VALENTINČIČ, ALJOŠA
Category: FR = Financial Reporting
This study investigates whether upward (write ups) and downward revaluations (write-offs) of non-financial fixed assets predict future performance of private firms. We show that upward asset revaluations are related to future operating performance depending on the changing net tax benefits they bring to firms. If tax benefits in the form of future tax shields exceed current tax costs in the form of “substitute tax” payable at the time of revaluation, firms revalue assets upward when they forecast positive future taxable income to exploit the net tax benefit. This results in a positive relation between revaluations and future cash flows. The financial reporting process appears as if it is consistent with reporting true firm performance. If current tax costs are low or zero, firms exploit the discretion in revaluations more loosely to achieve also other objectives of financial reporting (e.g., smoothing). This results in a negative relation between upward revaluations and future cash flows. Write-offs are significantly positively related to future operating performance. Though these findings contrast the expected outcome according to accounting standards, they are consistent with the high alignment/tax rate and the non-tax cost and benefits that characterise the setting in which private firms typically operate.
TAX COMPLIANCE WITH STRATEGIC AUDITORS: AN EXPERIMENTAL STUDY
MURAKAMI, YUTARO
TAGUCHI, SATOSHI
Category: TX = Taxation
The purpose of this study is to experimentally investigate an analytical model of tax compliance, assuming a game-theoretic situation between a taxpayer and a tax auditor. Specifically, we focus on the following three research questions. First, would the taxpayer’s behavior change if the tax auditor is a human or a computer, ceteris paribus? Second, how do changes of the tax rate affect the taxpayer’s and auditor’s behavior? Third, what influence does personality have on the tax compliance of taxpayers? The main results of this study are as follows. First, the taxpayer evades less when the tax auditor is a human than when it is a computer. Second, a decrease in the tax rate can increase the taxpayer’s tax compliance behavior. Third, the compliance rate increases among taxpayers who are younger, more trustworthy, and have lower levels of strategic reciprocity.
FAMILY FIRMS AND EARNINGS MANAGEMENT: A META-ANALYSIS
MUTSCHMANN, MARTIN
HASSO, TIM; WAGNER, DOMINIK
Category: GV = Governance
This study explores the relationship between family firm status and earnings management by meta-analyzing 33 primary studies and 227 effect sizes. In doing so we attempt to explain the variation and conflicting findings in prior work. We find that on average the relationship between family firm status and earnings management is close to 0, and thus not economically significant. We also find that much of the variation in prior studies can be explained by their choices in operationalizing family firm status and earnings management, and the institutional setting that the studies drew their sample from.
THE EFFECT OF AUDITOR AND CFO GENDER ON EARNINGS QUALITY: EVIDENCE FROM SWEDEN
NASUTION, DAMAI
JONNERGÅRD, KARIN
Category: AU = Auditing
Literature shows that the impact of gender differences on earnings quality is still questionable. Females are generally perceived as less risk taking, more ethical and more conservative than males. Moreover, the glass-ceiling phenomenon encourages females to put more effort to have some opportunities as males have. These gender differences and the glass ceiling effect may cause a positive association between female auditor and CFO on earnings quality. On the other hand, the structural approach asserts that the gender differences will be overridden once females and males enter a profession or occupation. Responses given by individuals in a profession or occupation environment are not determined by their gender; suggesting there is no association between auditor and CFO gender on earnings quality. The purposes of this study are threefold. First, it examines the two competing approaches in the context of earnings quality by utilising data from Sweden. Specifically, this study investigates the association between auditor gender and a clients’ earnings quality. Second, this study examines the association between CFO gender and a company’s earnings quality. Additionally, this study investigates whether the interaction between an auditor and a CFO that affects a company’s earnings quality is driven by their gender. This study finds support for the structural approach in which there is no association between auditor and CFO gender and companies’ earnings quality. This study also found no evidence for the interaction between an auditor and a CFO that affects earnings quality is driven by their gender. These findings have implications for auditing and accounting study addressing gender issues.
ASSESSING GREENWASHING THROUGH THE COMPLEXITY OF NARRATIVES IN CORPORATE SOCIAL RESPONSIBILITY REPORTS
NAZARI, JAMAL
HRAZDIL, KAREL ; MAHMOUDIAN, FERESHTEH; NAZARI, JAMAL
Category: SEE = Social, Environmental & Ethical
We analyze the relationship between the complexity of CSR disclosure and CSR performance and postulate that less readable and shorter CSR disclosure documents are negatively associated with CSR performance. Utilizing a number of readability and size measures from computational linguistics, we find that firms with increased CRS disclosure and more readable CSR reports experience better CSR performance, including its social and environmental performance dimensions. Our findings suggest that that the length CSR disclosure increases its transparency while using less readable language in the reports increases obfuscation. These results have implications for policy makers and firms, and support ongoing initiatives to promote the use of plain language in public disclosure documents.
DIFFUSION OF EARNINGS MANAGEMENT: A NETWORK ANALYSIS APPROACH
NEGAKIS, CHRISTOS
KOUSENIDIS, DIMITRIOS; LADAS, ANESTIS
Category: FA = Financial Analysis
The present study examines the diffusion in the use of earnings management among firms. Using a sample of US firms, as well as accruals-based and real operations earnings management measures we follow a Granger causality approach in order to assess relations between changes in the earnings management measures among firms of the same industry. Next, based on the results of the Granger Causality tests we form the network and estimate the importance of a target firm in the network using the degree centrality as well as the diffusion of the use of earnings management using the clustering coefficient. The above methodology is based on the view that firms’ accounting decisions may be affected by the accounting decisions taken by their peers in the industry. The results reveal that a number of cost proxies for earnings management used in previous studies are negatively related to the importance of the firm in the network. Moreover, diffusion of earnings management seems to be limited in certain cases by some of these proxies.
WHISTLE-BLOWING: A STUDY OF AUDITORS’ DECISION-MAKING
NGAN, SAI-CHUNG
CHEN, HSINYU
Category: SEE = Social, Environmental & Ethical
The purpose of this study is twofold: (i) to investigate the impact of those variables (individual variables, situational variables, and moral dilemmas) on the auditors’ whistle-blowing decision-making and (ii) to determine what types of ethical issue are faced by the auditors at their workplace. The ethical decision-making model (EDM) adopted in this study hypothesizes that individual variables, situational variables, and moral dilemmas have relationships with the 3-stage of EDM (recognition, judgment, and intention) as constructed by Rest (1986). The results reveal that, individual moral philosophy dimensions had the strongest and most significant relationship with the 3-stage of EDM for the auditors. Moral dimension explained a significant portion of the variance in the auditors’ whistle-blowing decision-making stages. While no significant relationships were found on all situational variables, very few significant results were found on the impact of age, gender, and educational level on EDM stages.
THE CONTAGION OF AGGRESSIVE EARNINGS MANAGEMENT THROUGH BOARD OF DIRECTORS INTERLOCK: THE UK EVIDENCE
NGUYEN, NGUYET
IQBAL, ABDULLAH; SHIWAKOTI, RADHA
Category: GV = Governance
The paper investigates whether aggressive earnings management practices spread across firms sharing interlocked directors. Expanding on the existing literature, the research first of all examines whether aggressive reporting practices, using accruals and real earnings management, spread between UK firms via shared directors. Using a sample of UK data, the research has obtained evidence consistent with aggressive reporting practices spreading one firm to another if the two firms have a common director. In particular, the research finds that being linked with a focal firm within two years after the firm reports too highly inflated earnings via accruals management (cash flow, production cost and discretionary expense management) significantly increases the likelihood of the exposed firm also being aggressive using accruals management (cash flow, production cost and discretionary expense management, respectively). The contagion effect is found to be more pronounced if the interlocked director is a male, older, British and charged with duties which could influence financial reporting.
THE INDIRECT EFFECT OF THE IFRS ADOPTION IN REDUCING THE EARNINGS MANAGEMENT THROUGH THE INCREASE OF ANALYST COVERAGE
NINGRUM, AGUSTIN SETYA
MITA, ARIA FARAH; WARDHANI, RATNA
Category: FR = Financial Reporting
The purpose of this study is to investigate the indirect effect of the IFRS adoption on earnings management through the increase of analyst coverage. The background of this study is that IFRS adoption could increase the number of analysts who follow the companies. The existence of analysts will increase monitoring of companies, which will decrease earnings management practices. This study employs recent survey of the IFRS adoption among jurisdiction (jurisdiction profile) which is published by the IFRS foundation. This study is a cross-country study which employs 3.786 firm years from 30 countries in 2012. The result finds that there is indirect effect of the IFRS adoption on company’s earnings management, through the increase of analyst coverage. This study also confirms that IFRS adoption has negative direct effect on company’s earnings management.
INCENTIVE PROVISION AND OPTIMAL TEAM SIZE FOR DEVELOPMENT PROJECTS
NISCH, MARKUS
DUERR, OLIVER; ROHLFING-BASTIAN, ANNA
Category: MA = Management Accounting
This paper analyzes a three-tier hierarchy Linear-Exponential-Normal (LEN) model consisting of a principal, a manager, and a team of workers to investigate the incentive provision and optimal team size in a setting with uncertain productivity and team synergy effects. Workers are responsible for providing productive effort, whereas the manager performs monitoring and productivity risk-reducing efforts. We find that the incentive provision for productive and monitoring effort take the uncertain productivity into account, whereas the incentive provision for the productivity risk-reducing effort is independent of the risk level. Furthermore, we find that the optimal worker team size depends on environmental factors, specifically, that increasing risk requires smaller teams. Consequently, increasing project risk should be countervailed by downsizing the project instead of managing the risk. The interdependence between team size choice and incentive provision implies that organizational design and incentive design need to be considered in combination.
THE USE OF PARTIAL LEAST SQUARES STRUCTURAL EQUATION MODELLING (PLS-SEM) IN MANAGEMENT ACCOUNTING RESEARCH: DIRECTIONS FOR FUTURE THEORY DEVELOPMENT
NITZL, CHRISTIAN
Category: MA = Management Accounting
In management accounting research, the capabilities of Partial Least Squares Structural Equation Modelling (PLS-SEM) have only partially been utilized. These yet unexploited capabilities of PLS-SEM are a useful tool in the often explorative state of research in management accounting. After reviewing eleven top-ranked management accounting journals through the end of 2013, 37 articles in which PLS-SEM is used are identified. These articles are analysed based on multiple relevant criteria to determine the progress in this research area, including the reasons for using PLS-SEM, the characteristics of the data and the models, and model evaluation and reporting. A special focus is placed on the degree of importance of these analysed criteria for the future development of management accounting research. To ensure continued theoretical development in management accounting, this article also offers recommendations to avoid common pitfalls and provides guidance for the advanced use of PLS-SEM in management accounting research.
THE ROLE OF EARNINGS MANAGEMENT IN AGENCY CONTRACTS
NODA, AKIHIRO
Category: GV = Governance
This study examines why earnings management arises in financial reporting. We focus on the possibility that delegation of earnings management to managers may arise from the managerial contract process. This study presents a model in which a principal offer a contract, which comprises a monitoring mechanism for financial reporting and managerial compensation, to the agent who exerts managerial effort and reports earnings based on private information. An equilibrium analysis shows that the principal may prefer allowing the agent to engage in earnings management to forcing truthful reporting. Delegating reporting discretion allows the agent to communicate private information to the market, which then leads to an increase in market sensitivity. This provides an incentive to the agent to exert more productive effort and thus imposes a larger reporting error cost to the agent. When the principal monitor reports, she benefits from delegating reporting discretion to the manager. Therefore, we conclude that designing managerial incentives encourages earnings management.
SHOULD I STAY OR SHOULD I GO? THE IMPACT OF MARKET COMPETITION AND PRESENCE OF CONTROL SYSTEMS ON LONG TERM CONTRACTING
NOPPE, SHARON
CARDINAELS, EDDY; MASSCHELEIN, STIJN ; VAN DEN ABBEELE, ALEXANDRA
Category: MA = Management Accounting
Intensive cooperation between firms has become central to the strategy of many organizations. Although there is a widespread awareness that it is important to govern these relationships well, little attention has been paid to the initial phases of these relationships. This study uses an experimental buyer-seller market to investigate how the presence (or absence) of control systems and the degree of the market competition between buyers and sellers influences the likelihood of long term contracting. We show that the absence of control and buyer market power (due to an excess of suppliers) leads to a higher likelihood of long term contracting due to reciprocity between partner reselection and the delivered quality by the supplier. When control is absent, this reciprocity is greater under buyer market power then under supplier market power; there is however no difference when control is present. We also demonstrate that partners manage their relationships not only by forming long term relationships, but also by ignoring certain potential partners. Furthermore, additional results reveal that buyers who can exercise control sometimes do not use this power advantage in return for long term relationships and a more balanced profit division between partners. Again, the same pattern is observed: when buyers possess the market power, the likelihood of long term contracting is larger compared to when the suppliers possess the market power.
COMPETITIVE THREATS, INFORMATION ASYMMETRY AND INSIDER TRADING
NOVAK, JIRI
Category: FA = Financial Analysis
We show that intensity of product market competition increases information asymmetry between corporate insiders and outside investors. We measure the strength of competitive threats by text-based proxy of product market fluidity that captures changes in rival firms’ product mix relative to the firm’s product portfolio. We measure insiders’ information advantage by volume and profitability insider trades. We predict and find that in more competitive product markets corporate insiders trade larger volumes and their trading is more profitable than in less competitive markets. The results are stronger before SOX when insider trading regulation was more lax. These findings are consistent with the notion that competition increases ex post performance differences between the winners and losers and so early identification of winners and losers becomes crucial for trading decisions. As insiders have superior insight into a firm’s competitive position their advantage relative to outside investors increases when the outcome of the competitive process turns more uncertain, which gives them better opportunities to trade when the upcoming fortunes are not yet reflected in stock prices.
ON THE INTERDEPENDENCY OF PROFIT-SHIFTING CHANNELS AND THE EFFECTIVENESS OF ANTI-AVOIDANCE LEGISLATION
NUSSER, HANNAH
DUDAR, OLENA; NICOLAY, KATHARINA
Category: TX = Taxation
The issue of base erosion and profit-shifting (BEPS) has been on the international policy agenda for three years now. A key element in the discussion are strategies of multinationals using intra-group interest and royalty payments as well as transfer pricing to reallocate profits within the group in a tax minimizing manner. In recent years, antiavoidance regulations have been introduced to limit these cross-border shifting activities. Existing evidence looks at the effectiveness of these regulations separately. The idea of this paper is to analyse the interdependence between different anti-avoidance regulations in place. Our empirical results confirm existing findings on the tax sensitivity of EBIT and the reduction of this sensitivity due to stricter transfer pricing regulations. In addition our results suggest that the positive impact of transfer pricing regulations is strongly mitigated if strict thin capitalization rules apply.
THE IMPACT OF MANAGEMENT COMPENSATION STRUCTURE ON SAY-ON-PAY VOTES IN THE GERMAN TWO-TIER SYSTEM
OBERMANN, JOERN
Category: GV = Governance
Analysis of the first six years of voluntary Say-on-Pay votes in the German two-tier system suggests that shareholders are in favour of long-term stock and stock option plans but dismiss short-term cash bonus payments. The negative effect of bonus payments on voting results is stronger in cases of simultaneous low voting approval of the supervisory board. This indicates that investors, who are discontent with bonus payments, eventually punish the supervisory board in charge of negotiating the contract. The supervisory board reacts to these cases by reducing bonus payments in the following year, while other compensation types are unaffected. My results show that shareholders assess the entire compensation structure and prefer a particular compensation mix. Moreover, the alignment hypothesis, which values Say-on-Pay as an instrument to connect principals´ and agents´ interests, is supported by the reaction of the supervisory board. Although non-binding, Say-on-Pay votes help to establish compensation schemes which are favoured by shareholders. Thus, this paper contributes further evidence to the usefulness of voluntary and non-binding Say-on-Pay, as well as the interaction of multiple agents, with respect to executive remuneration.
ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) IN A DEVELOPING COUNTRY: EVIDENCE FROM VIETNAM
O'CONNELL, BRENDAN
NGUYEN, LAN; PHAN, DUC; WHEATON, MARK; YAPA, PREM
Category: FR = Financial Reporting
Vietnam is one of few countries still relying on national accounting standards. Drawing on the literature of international accounting convergence models together with the concept of accounting ecology proposed by Gemon and Wallace (1995), this study aims to enhance understanding of the various institutional, government, cultural and organizational factors have combined to explain the lack of adoption of IFRS in Vietnam when compared to other countries of similar socialist background or within the region. The research approach consists of a series of interviews with senior members of the accounting profession, government and commerce. Findings show that factors such as reluctance from government regulator to succeed control over financial reporting, concerns about the potentially adverse impact of ‘fair value’ accounting on the banking sector and an under-developed capital market are all inhibiting progress.
EVIDENCE REGARDING THE INTERNAL CONTROLS OF CHINESE U.S.-LISTED FIRMS
O'CONNOR, NEALE
BAKER, RAYMOND; BIDDLE, GARY; LOWRY, MICHELLE; O'CONNOR, NEALE
Category: AU = Auditing
Insights into internal controls underlying the purportedly weaker financial reporting of Chinese U.S.-listed firms are obtained by comparing Sarbanes-Oxley (SOX) Section 302 and 404 ineffective internal control disclosures (IICs) of Chinese U.S.-listed and U.S. firms. Applying the framework of Ashbaugh-Skaife, Collins and Kinney (2007) and matched sample analyses, we derive four main findings. First, Chinese U.S.-listed firms report significantly more IICs than U.S. domiciled counterparts, and importantly, this result holds for both Chinese firms that list by initial public offering (CIPOs) and by reverse merger (CRMs). Second, CIPOs report significantly fewer IICs than CRMs, thus drawing a salient distinction between them. Third, we find a confirmative reporting response to heightened media and regulatory scrutiny during 2010-2012 that is concentrated largely in CRMs. Fourth, we find that Chinese U.S.-listed firms under-report IICs to a greater degree than U.S. domiciled firms, and that CRMs under-report IICs more than CIPOs. We also provide corroborative descriptive evidence regarding the IIC types and auditors of Chinese U.S.-listed firms. To our knowledge, this is the first study to directly examine and document distinctions in IIC incidence, IIC under-reporting, IIC reporting responses to scrutiny, and IIC types and auditors of this prominent and controversial class of foreign U.S. listers relevant to regulation and prior research..
WHY DID THE ACCOUNTING STANDARDS BOARD OF JAPAN START TO DEVELOP J-GAAPS AT SLOW PACE FOR THE INITIAL FOUR YEARS?
OGATA, KENSUKE
Category: HI = History
The aim of this paper is to make clear the reason why the Accounting Standards Board of Japan (ASBJ) took extremely passive standard setting activities both quantitatively and qualitatively in the first four years, compared to other periods. The argument we developed was based on the strategy-structure-performance paradigm that organizations could change their structure in order to execute specific strategies. Then-ASBJ presumably recognized the high trust from the Financial Services Agency of Japan and the weak supports from the business actors, in accordance with both the facts we confirmed, that is, (a) the avoidance of the initial ASBJ’s setting standards possibly to change the existing practices and (b) the enhanced involvement of business actors in standard setting processes, and the results of discourse analysis we conducted, including (c) the equivalence of J-GAAPs to international standards and (d) the consensus-based standard setting approach in Japan. Under such situation recognition, it is seemed that the ASBJ would attempt to gain the supports from the business actors. The result of organizational structure analysis using social network analysis showed the ASBJ structured the organization to put the representatives from them into core positions by means that they existed in large numbers but specific influential actors were absent. Under that structure, the ASBJ developed the accounting standards which had only minor influences of changes in practices.
CONSTRUCTING THE FAIR VALUE OF NON-FINANCIAL ASSETS - A CASE STUDY
OLIVEIRA, JOAO PEDRO
CHETYRKINA, EKATERINA
Category: IC = Interdisciplinary/Critical
The fair value phenomenon has been transformed into a “quasi-philosophical principle at the center of an accounting reform” (Power, 2010, p. 197). However, while there is much quantitative research on fair value, there is scarce research about how this complex and controversial concept is operationalized, within particular contexts of actual organizations. We analyse the fair value phenomenon through a qualitative approach, by researching an actual process of determining the fair value of non-financial assets at a large Portuguese industrial company. Inspired by Actor-Network Theory (Callon, 1986 and Latour, 1997), the study shows that the fair value recorded in the financial statements is not simply calculated, but is “socially constructed”, based on the value perceptions resulting from an agreement reached during interactions within a complex network of human and non-human actors. These actors, of varying centrality, influence directly or indirectly not only the process of determining the fair value, but also the behaviors of every participant of this complex network. Two different concepts of fair value were being applied, not clearly discernible in financial statements and constructed through two different processes, involving a different set of network actors. By showing that understanding accounting figures requires understanding accounting practices, unfolding through particular organizational arrangements, this study highlights the social nature of accounting figures.
CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE AND THE RECENT GLOBAL FINANCIAL CRISIS: AN INSTITUTIONAL PERSPECTIVE
OLIVEIRA, JONAS
AZEVEDO, GRAÇA; SILVA, MARIA JOSÉ
Category: SEE = Social, Environmental & Ethical
This study analyzes the impact of the recent global financial crisis on CSR disclosure of 30 finance companies from six countries (Canada, UK, France, Italy, Spain, and Portugal), from 2005 to 2011. Drawing on institutional theory, the study attempts to determine whether institutional factors (such as legal systems, banking systems’ robustness and legal enforcement systems) interact with CSR disclosure, in periods of corporate reputation potential losses. Findings show that CSR disclosure increases over the period of the financial crisis and the peak of information was in 2011 (post-crisis). It also reveals that CSR disclosure is different among banks from different countries. But CSR disclosures were not significantly different either among countries with different legal systems or in banking systems’ robustness. Only the robustness of the mechanisms of legal enforcement justifies the differences in the level of CSR disclosures. However, banks in countries with less robust mechanisms of legal enforcement systems were those presenting higher levels of CSR disclosures. This suggests that potential attempts of mimetic isomorphism justify such disclosure patterns. Institutional perspectives on the impact of the financial crisis on CSR disclosures have never been studied hitherto, revealing its primary importance.
OPINION-SHOPPING IN PORTUGUESE COMPANIES
OLIVEIRA SAMAGAIO, ANTONIO CARLOS
CARVALHO, HUGO; GUEDES, MARIA JOAO
Category: AU = Auditing
This study analyzes whether the audit opinion effects the decision of whether or not companies change auditor. Through a sample of 13,359 Portuguese companies, for the period 2011 to 2013, the issuance of an opinion with emphases or a qualified opinion was found to be positively associated with the change of auditor. In the case that the audit report contained a qualified opinion with emphasis, this gave a negative relationship with the change of auditor measure. The results show that there is still a negative association between the change of auditor and the existence of an audit committee, as well as a positive association with the presence of women on the board. Additionally, the presence of women on the board was found to have an influence on some types of audit opinion.
HOW DO AUDIT OFFICES RESPOND TO AUDIT FEE PRESSURE? EVIDENCE OF INCREASED FOCUS ON NONAUDIT SERVICES AND THEIR IMPACT ON AUDIT QUALITY
OMER, THOMAS
BEARDSLEY, ERIK; LASSILA, DENNIS
Category: AU = Auditing
Recent academic research has noted a substantial decline in audit fees beginning in the mid-2000’s (Christensen et al. 2014; Ettredge et al. 2014). We investigate whether audit firms respond to audit fee pressure by increasing their focus on higher margin activities at their audit clients, specifically nonaudit services. We find a significant, positive relation between audit fee pressure and changes in nonaudit services at the audit office level. This relation is predominantly evident among small and mid-sized offices. Importantly, we find that audit fee pressure is positively associated with the rate of client misstatement, but only for offices that appear to increase focus on nonaudit services. Furthermore, increased focus on nonaudit services is associated with the rate of client misstatement, but only in the presence of audit fee pressure. Finally, we provide evidence of a nonlinear relation between the extent of nonaudit services at the audit office level and rate of client misstatement. Overall, our study provides evidence that audit offices’ nonaudit services are another important dimension to include when considering the effects of declining audit fees on the audit profession.
FORMULA APPORTIONMENT OR SEPARATE ACCOUNTING? TAX-INDUCED DISTORTIONS OF MULTINATIONALS' LOCATIONAL INVESTMENT DECISIONS
ORTMANN, REGINA
PUMMERER, ERICH
Category: TX = Taxation
We examine which tax allocation system leads to more severe distortions with respect to locational investment decisions. We consider separate accounting (SA) and formula apportionment (FA). The effects of both systems have been hotly debated in Europe in the past years. The reason is that the EU Member States are striving to implement a common European tax system that would lead to a switch from SA to FA. While existing studies focus primarily on the impact of taxes on locational decisions under either SA or FA, the main innovation of this paper is that it compares both systems with regard to the level of distortions they induce. We compare the optimal pre-tax investment decision with the optimal after-tax investment decision and infer from the difference in the allocation of investment funds which tax allocation system causes more severe distortions. We assume that the multinational group (MNG) has comprehensive book income shifting opportunities under SA. We find that the investment incentives under SA are opposed to those under FA for a profitable investment project. Whereas under SA as much as possible should be invested in a high-tax country, under FA as much as possible should be invested in a low-tax country. The distortions of locational investment decisions tend to be more severe under SA than under FA if a greater share of investment funds is to be invested in a low-tax country from a pre-tax perspective and the investment is profitable.
RECIPROCITY AND HONESTY IN CAPITAL BUDGETING: HOW REPORTING MITIGATES SPITEFUL SABOTAGE OF INVESTMENTS
OSTERMAIER, ANDREAS
BRUNNER, MARKUS
Category: MA = Management Accounting
Capital rationing and reporting are often combined to allocate resources in firms. Trust in managers' honest reports and distrustful control create an interesting tension. How do managers respond to this ambivalence of trust and control? We develop an analytical model to predict, first, that managers reciprocate distrust; they misreport heavily so as to sabotage profitable investments. Second, reporting reduces in turn sabotage because managers are reluctant to lie. Third, honesty spills over, in addition, to inhibit managers' reciprocity. Evidence from a laboratory experiment supports our predictions. Our study ties capital rationing and reporting to the psychological factors of reciprocity and honesty and helps us understand their effects in budgeting. From a managerial viewpoint, the value of reporting, even in combination with capital rationing, may be as interesting to see as how sabotage further exacerbates the underinvestment which is known to arise from capital rationing.
INVESTORS’ PERCEPTIONS OF INTEGRATED REPORTING
OTT, CHRISTIAN
Category: FR = Financial Reporting
Corporate reporting further develops towards integrating separate financial and non-financial reports into a single corporate report. The introduction of the Integrated Reporting (IR) framework represent a major milestone of this development. This study examines the investors’ perceptions of events related to various developments towards IR. Using event study method, I analyze the stock market reaction of European firms to 54 IR-related events. In general, investors react positively to IR-related events. However, investors appear to be skeptical with respect to stronger regulation of IR. I find an incrementally positive stock market reaction for industries and countries with a higher non-financial information quality, consistent with investors expecting net benefits from IR. Moreover, investors of firms domiciled in countries with a higher regulatory quality react more negatively to IR-related events, consistent with investors’ concerns about too much regulation in countries with high regulatory quality and investors’ aspirations of improved reporting in countries with low regulatory quality.
CORPORATE TAXES AND THE LOCATION OF TRADEMARKS
OVERESCH, MICHAEL
HECKEMEYER, JOST; OLLIGS, PIA
Category: TX = Taxation
This study analyzes whether tax incentives play a role in the legal assignment of trademarks registered by U.S. (S&P 500) and European (STOXX 600 Europe) large multinational enterprises for the U.S. market. Our analysis suggests that tax considerations have a limited influence on the location choice. However, if trademarks are assigned to affiliates located neither in a firm’s home country nor the U.S., we find a significant influence of corporate tax rates and U.S. withholding taxes. Using a mixed logit approach, we are able to identify that U.S. firms react more sensitive to a tax rate increase in certain tax havens than European firms.
INCREASES IN ACCOUNTING REGULATION: IS ‘MORE’ ACTUALLY ‘LESS’?
PAANANEN, MARI
IMPINK, JOOST ; RENDERS, ANNELIES
Category: FR = Financial Reporting
Regulators and practitioners have expressed concerns that accounting regulation has become too much and too complex resulting in negative consequences for companies and investors. We investigate whether the introduction of more accounting regulation is associated with more effort to acquire and process financial statements. We create a disclosure index measuring the extent to which companies have adopted a number of accounting standards and regulations. We show that a higher disclosure index is associated with longer 10-Ks, a longer reporting delay and higher audit fees. Adopting more standards is related with fewer analysts following the firm, lower analyst accuracy and a higher dispersion. Finally, even though adopting more standards is associated with more useful information, this only holds for companies with more sophisticated investors. In addition, adopting more disclosure regulation is related with higher bid-ask spreads for companies with less sophisticated investors. Our findings suggest that by introducing more (complex) accounting regulation, regulators have ‘unlevelled the playing field’.
EXPENSE RECOGNITION PATTERNS AND COST STICKINESS
PAEK, WONSUN
FOLSOM, DAVID
Category: MA = Management Accounting
This study examines whether cost stickiness is related to expense recognition patterns. Given incomplete matching between revenues and expenses, current-period expenses include expenses to be recognized either in the previous period or in the subsequent period. Prior studies have examined cost stickiness without explicitly considering the lag or lead relationship between revenues and expenses. We find that cost changes recognized non-contemporaneously (contemporaneously) with current-period sales changes are sticky (anti-sticky). This result extends the cost stickiness literature by bringing to information users’ attention the importance of expense recognition patterns in analyzing asymmetric cost behavior.
ARE DEPRECIATIONS FIXED COSTS? :THEIR VARIABILITY AND STICKINESS IN SHORT AND LONG TERMS
PAIK, TAE YOUNG
JI, GAYOUNG; KO, WAN SUK; LEE, HYOIK; MOON, HAEWON
Category: MA = Management Accounting
The cost structure of variable and fixed costs is an essential concept in cost and management accounting. The typical example of fixed cost in textbooks is depreciation. The purpose of this study is to empirically confirm the cost behavior of depreciation in short and long terms. The elasticity of depreciation on sales change is used to measure its variability in different time horizons. This paper used the depreciations for manufacturing as well as non-manufacturing activities data from the income statements and footnotes to comprehensively analyze depreciation behaviors. The variability of depreciations gets bigger as time horizon gets longer as expected. Depreciations behave like fixed costs with sales change in short term but they show mixed behavior in longer terms. The capital intensity decreases depreciation variability for short-term sales change and increases it for long-term sales change. The capital intensity increases the stickiness of depreciation only in one-year horizon.
THE VALUE RELEVANCE OF THE OPERACIONAL LEASES
PAIS, CLÁUDIO
Category: FR = Financial Reporting
The operational leases are accounted as an expense and not as an asset but there is a proposal by the International Accounting Standards Board (IASB) to accounting the operational leases as a finance lease because IASB believes that that improves the quality and comparability. I test whether the accounting of an operational lease as a finance lease is more value relevant to investors, whether this has changed over time and whether the operating lease liabilities is perceived differently of the operating lease assets by the investor. My results suggest, for the largest European firms, that the investor incorporates the information of operating leases on the share price but I do not conclude that there is a change of this over time, however the operating lease liability is perceived differently of the operating lease asset. These results confirm that the accounting of the operational leases as a finance lease provides information which is much more useful.
DEFINING THE PROFESSIONAL ACCOUNTANT – REFLECTING ON CONTINUING PROFESSIONAL DEVELOPMENT AND THE REDEFINITION OF PROFESSIONALISM
PAISEY, CATRIONA
PAISEY, NICK
Category: ED = Accounting Education
This paper aims to examine the insights that can be gained from a consideration of CPD, specifically focused on the CPD policies of a range of major accountancy professional bodies worldwide, into the definition of a professional accountant. Using the combined theoretical framework of the theories of professions and the educational concept of the reflective practitioner, this paper examines the CPD policies of thirteen leading professional accountancy bodies in order to examine the changing meaning of professionalism implicit in the way these policies negotiate the relationship between continuing competence as a member of a professional body and competence in a professional accountant’s current role. The paper also refers to the continuing professional development policies of three other professions – medicine, law and teaching – in order to identify wider issues and trends. We find that CPD policies display considerable variability in relation to their use of input or output models and the degree of latitude permitted which can be viewed as evidence of the concept of reflection, but also reflects a lack of agreement about the work of an accountant or the domain of accounting. The requirement for CPD to be relevant where relevance is variously defined as relevance to profession or relevance to current role, and the use by some professional accountancy bodies of employer accreditation of CPD shows a blurring of the distinction between professional bodies and employers that impacts on the meaning of professionalism.
DETERMINANTS OF EARNINGS MANAGEMENT ON THE HOTEL INDUSTRY: INTERNATIONAL PERSPECTIVE
PAIVA, INNA
COSTA LOURENÇO , ISABEL
Category: FR = Financial Reporting
This paper explores the determinants of firm and country characteristics in explaining the earnings management in a wide sample of listed firms from the tourism industry in 15 countries over 2007 – 2013. We focus on the level of discretionary accruals as a dimension of earnings management and examine the variables that are potentially associated with the earnings management in hotel firms. The results suggest that firm characteristics are the major determinant of earnings management in the hotel industry around the world. Additionally, our results demonstrated that star rating classification is the determinant of earnings management in high development countries. This paper aims to contribute to knowledge about the tourism industry by examining the determinants of earnings management across a large panel of firms and countries and by focusing on both the characteristics of the firm and its institutional environment.
INVESTIGATION THE RELATIONSHIP BETWEEN CORPORATE SOCIAL RESPONSIBILITY AND EARNINGS MANAGEMENT: EVIDENCE FROM SPAIN
PALACIOS MANZANO, MERCEDES
GRAS GIL, ESTER; HERNANDEZ FERNANDEZ, JOAQUIN
Category: MA = Management Accounting
This article investigates the relationship between Earnings Management and Corporate Social Responsibility. Using panel data methodology for a sample of Spanish non-financial companies between 2005 and 2012, we find a negative impact of corporate social responsibility practices on earnings management. Corporate Social Responsibility is related to ethical and moral issues concerning corporate decision-making. Engaging in socially responsible activities not only improves stakeholder satisfaction, but also has a positive effect on corporate reputation. The results show that corporate social responsibility practices may be an organizational device that leads to more effective use of resources, which then has a negative impact on earnings management practices. The main conclusions of this research can be valuable to companies that implement or intend to implement CSR. CSR is increasingly becoming a part of company discussions worldwide in the quest for greater value and competitiveness.
WHITHER ACCOUNTING RESEARCH? A EUROPEAN VIEW
PALEA, VERA
Category: IC = Interdisciplinary/Critical
“Whither Accounting Research?” is the question raised by Hopwood (2007) in an essay documenting a growing sense of unease about the state and direction of accounting research. A number of critical studies have highlighted a detrimental tendency in academia, that is the excessive spread of performance measurement practices and the ?ow of super?ciality and conformity they consolidate (e.g. Gendron, 2008; Gendron 2015; Parker, 2011; Pelger and Grottke, 2015). Too much intellectual inquiry operates within academic parameters that have limited the development of research relevant to society. The purpose of this paper is to discuss the causes that have led to research stagnation and to propose some remedies with a specific focus on the European Union. In tackling these issues, this paper presents a view of research that is strongly embedded in the social, political and economic context in which accounting operates.
HEALTH TECHNOLOGY BALANCED ASSESSMENT: FRAMEWORK FOR A MULTIDISCIPLINARY EVALUATIVE APPROACH AIMED AT HEALTH POLICY CHOICES
PALOZZI, GABRIELE
CHIRICO, ANTONIO
Category: MA = Management Accounting
Health Technology Assessment (HTA) represents the commonly used multidisciplinary evaluation pathway of technical innovations in the health sector, and is aimed at obtaining the very best achievements among all the possible interventional alternatives. HTA is usually run by clinicians and engineers. Its main limit is regarding the lack of principles which can provide a managerial approach to the managing of a health organization's performance. Accordingly, in this paper it is argued that a comprehensive performance management (PM) framework can help design a multilevel process for the evaluation of health technologies (HTs), which combines financial performance with clinical and ethical perspectives. More precisely, a Balanced Scorecard (BSC) framework will be used as the conceptual foundation for the development of the main argument. As a result, the Health Technology Balanced Assessment (HTBA) conceptual framework is presented and discussed. To this end, the strategic and measurement potentialities of a BSC framework are contrasted with the managerial needs of HTA, by drawing on the existing literature on the theme. Based on different choices for different perspectives and on the definition of appropriate key performance indicators (KPIs) for a structured assessment pathway, HTBA should bring: 1) a reduction in decision makers’ potentially misleading behaviours (related to external influences); and 2) a better multilevel balanced evaluation of HT.
CEO INSIDE DEBT, FIRM RISK AND EARNINGS QUALITY: THE MODERATING ROLE OF ANNUAL BONUS
PAN, HUNGHUA
WANG, TAYCHANG
Category: GV = Governance
CEO inside debt holdings, pension benefits and deferred compensation, are prevalent and significant in CEO compensation. Unsecured and unfunded CEO inside debt holdings enforce CEOs to bear the default risk similar to that faced by outside creditors. Prior literature states that the advantage of inside debt holdings is that they mitigate managerial risk-taking incentives and increase earnings quality. However, it is also important to understand the incentive effects of bonus plans in inside debt holdings because CEO pension benefits often are contingent on bonus plans. Bonus plans induce executives to seek risk and manipulate earnings. After considering the composition of inside debt in which pension benefits are contingent on bonus plans, we find that a negative association between the CEO inside debt holdings and firm risk is reduced. We also find that a positive association between the CEO inside debt holdings and earning quality is also reduced. Taken together, our results suggest that once CEO inside debt holdings are related to bonus plans, the feature of debt-like compensation in inside debt defined by prior literature may disappear.
DOES BAD GOVERNANCE ALSO TRAVEL AROUND THE WORLD? EVIDENCE FROM FOREIGN INSTITUTIONAL INVESTMENT AND STOCK PRICE CRASH RISK
PANG, LEI
BAE, KEE-HONG ; JIANG, LI; KIM, JEONG-BON
Category: GV = Governance
Prior research has suggested that good corporate governance travels around the world, and in particular, foreign institutional investors from strong investor protection countries promote good corporate governance practice in firms they invest. Less clear, however, is whether bad corporate governance travels around the world through foreign institutional investment. We argue that foreign institutions from weak investor protection countries encourage managerial reporting opportunism. We show that this type of foreign institutional investment increases stock price crash risk, which is a key corporate governance outcome of reporting opaqueness or bad news hoarding behavior. Split samples further indicate stronger effects for firms in strong investor protection countries, suggesting that country-level corporate governance is not effective in mitigating the adverse effect of foreign institutional investment.
THE RELATIONSHIP OF PERCENT ACCRUALS WITH FUTURE PROFITABILITY AND STOCK RETURNS
PAPANASTASOPOULOS, GEORGIOS
ARTIKIS, PANAGIOTIS
Category: FA = Financial Analysis
We show a strong negative relation of percent accruals with future profitability and stock returns in the U.K. We find that the accrual effect on stock returns is more pronounced for micro stocks relative to small stocks, while it doesn’t occur across big stocks. Furthermore, we show that the accrual effect on future earnings and stock price performance is stronger across loss firms relative to profit firms. Overall, we conclude that earnings fixation is a key factor in explaining the occurrence of the accrual anomaly, while limits to arbitrage are of great significance in explaining the persistence of the anomaly.
WHO GETS SLAMMED BY HIGH EFFECTIVE MARGINAL TAX RATES IN QUÉBEC?
PAQUETTE, SUZANNE
COULOMBE, DANIEL; GUIMOND, JEAN-FRANÇOIS
Category: TX = Taxation
Prior studies show that taxpayers do not take full advantage of tax savings strategies because they have difficulty in estimating their effective marginal tax rate (MTR). Using Canadian tax return data for the period 1996 to 2000, we find that, approximately 38% of taxpayers have an effective MTR that exceeds the statutory MTR by at least 2.5%. We also find that those most affected by high differentials are in the individual (family) income range $0 to $60,000 ($20,000 to $80,000) with the highest incidence occurring when income is equal to zero ($30,000 and $35,000). Additionally, high differentials are more prevalent for married/common law taxpayers, younger taxpayers, as well as taxpayers with more children. We contribute to the literature as follows. Using actual data provides a more representative distribution of the population. Furthermore, focusing exclusively on pre-retirement taxpayers allows us to highlight those that are most affected by tax provisions and benefit programs, those who may potentially make sub-optimal savings decisions. Our results emphasize the importance of including basic fiscal literacy in the strategy to increase financial literacy. Our results also imply that the conventional advice regarding the choice between saving through a tax prepaid savings account instead of a tax-deferred account is inadequate and requires more nuances. This study has potential implications for taxpayers, financial tax planners, as well as for tax legislators.
REAL REGULATORY CAPITAL MANAGEMENT AND DIVIDEND PAYOUT: EVIDENCE FROM AVAILABLE-FOR-SALE SECURITIES
PARBONETTI, ANTONIO
FABRIZI, MICHELE; IPINO, ELISABETTA; MAGNAN, MICHEL
Category: FR = Financial Reporting
The 2007–2009 financial crisis has re-ignited a long-running debate about the relative merits of historical cost accounting (HCA) or fair value accounting (FVA) as foundations for prudential oversight, including the calculation of regulatory capital. Focusing on available-for-sale securities, which are reported under HCA for regulatory capital purposes but under FVA for financial reporting purposes, we ascertain whether managers engage in real regulatory capital management activities to pay dividends. Using a sample of 5,333 firm-year observations representing 721 unique U.S. banks and bank holding companies between 1998 and 2013, we present evidence that capital regulation based on HCA induces banks to selectively sell assets and realize gains while retaining securities with unrealized losses on the balance sheet (i.e., gains trading). This practice shores up capital and enables banks to pay dividends. We also document that banks experiencing a decrease in regulatory capital and banks with a higher percentage of institutional investors are more prone to engage in gains trading. Finally, our findings suggest that banks that engage more in gains trading try to counterbalance the increased risk by changing their lending behavior and decreasing the riskiness of their trading portfolio.
EXPLORING WHY FIRMS IN BANK-ORIENTED COUNTRIES ENGAGE IN OPERATING LEASES AND THE IMPACT OF INCLUDING THEM IN THE BALANCE SHEET
PARDO, FRANCISCA
GINER, BEGOÑA
Category: FR = Financial Reporting
This paper explores both the reasons for firms to engage in operating leases and the potential impact of a change in the related accounting rules. We focus on the financial constraints that are especially important in bank-oriented countries and the repossession advantage that this type of off-balance financing conveys. Using manually collected operating lease data of Spanish listed firms, we use the constructive capitalization method to measure as-if liabilities. The results confirm that financially constrained firms are more inclined to lease. Consequently, it is argued such firms will be more affected by the proposed accounting change; indeed the inclusion of liabilities in the balance sheet might tighten financial covenants in loan agreements. Not surprisingly, firms are strongly opposed to the accounting change.
A SOCIO-TECHNICAL INTERPRETATION OF AN ACCOUNTING TECHNOLOGY ADOPTION: THE CREST CO CASE OF THE BANK OF ENGLAND
PARISI, CRISTIANA
RAPP, HERMANN
Category: IC = Interdisciplinary/Critical
This paper presents an in-depth case study of CREST, the settlement system created by the Bank of England in the early 1990s. CREST is the innovative accounting technology that allowed the London Stock Exchange to remain competitive by introducing the electronic trading, which replaced the paper based existing technology. Moreover, CREST was successfully implemented after the failure of a previous project: Taurus. Drawing on concepts from Actor-Network Theory (ANT), this study unfolds the reasons for the different fate of the two apparently similar technologies and the role accounting played in the two different cases. For this reason, it investigates the role of social, political and institutional forces in the construction and legitimation of accounting technologies. The empirical case shows how the success of accounting technologies is not solely based upon the rational assessment of core competencies or market opportunities and that it cannot be assumed that certain technologies offer an inherently greater added value than others. This study contributes to the ANT literature in accounting by discussing the different fate of two similar accounting technologies. By considering accounting as an interessment mechanism, and not as an inscription as usual in the accounting literature, this study shows how the sociology of translation can be used as a promising tool to analyse management accounting change.
THE IMPACT OF POLICY UNCERTAINTY ON THE ISSUANCE OF MANAGEMENT FORECASTS
PARK, JONGWON
KWAK, BYUNGJIN; LEE, JAYWON; ZHANG, HUAI
Category: FR = Financial Reporting
This study examines the impact of policy uncertainty on firms’ voluntary disclosure. Ex ante, the direction of the impact is unclear. Using the Economic Policy Uncertainty (EPU) Index developed by Baker et al. (2015) as a proxy for policy uncertainty, we find that firms are more likely to issue management forecasts when they face high policy uncertainty. The effect of policy uncertainty is more pronounced for firms with stronger corporate governance and firms more susceptible to government policies. Our results suggest that policy uncertainty plays an important role in managers’ voluntary disclosure decisions.
EXAMINING MIDDLE MANAGERS MEDIATING ROLE IN MCS IMPLEMENTATION
PÄRL, ÜLLE
KOYTE, RODNEY ; NÄSI, SALME
Category: MA = Management Accounting
MCS is a socially constructed process in which communication between people creates interpretation and, as a result, information, and coordinated actions throughout the organisation. The dialogue between top and ground level looks a main assumption for successful business. To make better strategic decisions and act in a way that is more suitable for the organisational objectives, executives and ground-level employees need a better understanding of the actions and decisions at the other end of the organisational hierarchy. Arguably, the middle managers (MMs) act as determinants in the dialogue between senior and ground level. It is important to understand better the role MMs’ play in the dialogue between senior and ground level in implementing management control systems(MCS) for facilitating organizational changes. Based on this research analysis, we can conclude that to better understand how and why MCS works as it does in a given part of the organization we have to focus on the middle level. The implementation of MCS on operative level or quality of information on senior level depends on middle level and it accentuates the importance of the middle managers mediating role of information-based management of innovative and fast changing environment. The second contribution of this study is its use of an inter-disciplinary approach. This study connects the semiotic and managerial frameworks. The study contributed to communication theory of MCS based on Lotman’s cultural semiotics. The findings of the study extend our understanding of the role of MMs of implementing MCS in creating changes and innovation.
ORGANIZATIONAL LIFE CYCLE AND STRATEGIC MANAGEMENT ACCOUNTING: A TEST OF THE ASYMMETRY OF MISFIT-THEORY
PASCH, TIMUR
VERBEETEN, FRANK H.M.
Category: MA = Management Accounting
This study examines the relationship between organizational life cycle stages and the use of strategic management accounting (SMA) in a sample of 377 firms operating in German-speaking countries. We find that the firms’ use of SMA systematically differs between the stages. In general, young firms at the birth stage start with few SMA-techniques that are used to relatively low intensity, and increase both the number of adopted SMA-techniques and the intensity with which the adopted techniques are used towards later life cycle stages. At the decline stage of the life cycle we observe a sharp drop in SMA-use. Further, drawing on the “asymmetry of misfit”-theory, we investigate the performance consequences of the misfit between the organizational life cycle stage and SMA-use by distinguishing between companies that use too much (“over-fit”) and too little (“under-fit”) SMA, compared to estimated optimal level. Our data shows that for most SMA-techniques there is a negative effect from a less than optimal use, but no effect for the over-use. This result is different for the use of traditional financial management accounting techniques, where any deviation from the optimal profile (“under-fit” or “over-fit”) is associated with lower performance.
ANALYSIS OF GREENHOUSE GAS EMISSIONS DISCLOSURES AND CLIMATE CHANGE RELATED DISCLOSURES IN RUSSIAN CORPORATIONS
PATERSON, AUDREY
HASLAM, JIM; PATERSON, AUDREY; SAGITOVA, ROZA; YONEKURA, AKIRA
Category: SEE = Social, Environmental & Ethical
This paper explores and interprets greenhouse gas (GHG) emissions disclosures and climate change related disclosures by large Russian corporations. This study analyses GHG emissions disclosures by 80 Russian companies. Further, a more in-depth interpretive and qualitative analysis of narrative disclosures concerning climate change is applied to a smaller sample. The phenomena are analysed and understood as having global impacts, whilst embedded in the Russian socio-economic, historical and political context. Consistent with prior international studies, the analysis yields disappointing results: for instance, less than half the companies in the larger sample disclose GHG emissions disclosures while the quality of those disclosures needs to be improved. Nevertheless, the context-specific findings are insightful and may inform future studies. An interesting finding concerns how regulators’ approach to climate change issues is reflected in corporate perception of these problems and disclosure practice. The focus here is a group of large Russian companies, so the findings may not be generally applicable, if they add insight in relation to the particular case, cast light on a specifically under-researched area and indicate general challenges in public policy. The research goes beyond previous studies that explore carbon disclosures by giving serious attention to the (Russian) context specificities in which such disclosure practices are embedded.
THE ASSOCIATION BETWEEN EXPECTED SYNERGIES AND POST-ACQUISITION PERFORMANCE IN CROSS-BORDER MERGERS AND ACQUISITIONS
PAUGAM, LUC
JEANJEAN, THOMAS; LOBO, GERALD; STOLOWY, HERVÉ
Category: FR = Financial Reporting
We investigate if the relation between expected synergies and post-acquisition performance differs between cross-border M&As and domestic M&As. Managers may, on average, fail to accurately estimate synergies resulting from cross-border M&As because of geographical, cultural, and institutional factors, or because of the greater difficulty of forecast integration costs ex post. Alternatively, managers may engage in cross-border deals only if they perceive that they can realistically estimate synergies. We exploit an accounting rule which requires managers to disclose their estimate of expected synergies. This estimate, referred to as “goodwill”, is the excess of the purchase price over the net fair value of acquired assets. Using a sample of M&As completed by US acquirers, we show that, relative to domestic goodwill, cross-border goodwill is positively associated with increasing post-acquisition operating performance, sales growth, and stock returns. In addition, we find that cross-border acquirers are less likely to impair goodwill in the year following the acquisition. We also document that, among cross-border acquirers, firms that complete acquisitions in more culturally and institutionally distant countries relative to the US, exhibit a lower association between expected synergies and change in operating performance and are more likely to impair goodwill. This suggests a greater difficulty to forecast synergies in more distant countries relative to less distant countries.
SAYING MORE WITH LESS? DISCLOSURE CONCISENESS AND COMPLETENESS IN INTEGRATED REPORTS
PEREGO, PAOLO
CAGLIO, ARIELA; MELLONI , GAIA
Category: SEE = Social, Environmental & Ethical
A current debate on financial reporting is that the extent of corporate information disclosed (i.e. quantity) does not necessarily imply a better disclosure (i.e. quality). The International Integrated Reporting Council (IIRC) has recently developed a Framework to overcome this issue. An Integrated Report (IR) intends to provide a “concise” communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over time. At the same time, an inherent tension arises since IR needs be “complete” i.e. including all material matters, both positive and negative. In this paper, first, we assess conciseness and completeness of IR disclosure by drawing on both the IIRC Framework and accounting studies that focus on readability and tone of narrative disclosures. Second, we examine a selection of performance determinants to gain insights into the factors associated with conciseness and completeness of IRs. Our findings, based on a sample of reports from firms involved in the IIRC Pilot Program, suggest that there is a tension in providing corporate reports that are both complete and concise. Overall, our evidence is consistent with the idea that firms that record weak financial achievements adopt different impression management strategies based on both reading ease and thematic manipulation.
ANTECEDENTS OF INTERPERSONAL TRUST IN TAX AUDITS
PETUTSCHNIG, MATTHIAS
ASCHAUER, EWALD
Category: TX = Taxation
Using a survey of 154 tax auditors (civil servants) we study the development of interpersonal trust between tax auditors and taxpayers during the course of a tax audit. Although the concepts of mutual trust, understanding and transparency are centrepieces of so-called enhanced relationship tax-compliance programs that have recently been developed worldwide the issue of interpersonal trust between the involved parties has been neglected by prior research. Drawing on insights from financial auditing research we investigate auditors’ individual trait characteristics, auditee’s behaviour during the conduct of the audit, and the level of conflict. We find that interpersonal trust develops independently from auditor’s professional scepticism, while auditor’s professional identification even promotes interpersonal trust. Further, it shows that also in a tax audit environment auditor’s trust increases with the information quality and less opportunistic behaviour of the auditee, and in a low-conflict relationship. In addition to the theoretical contributions, the findings have practical implications for tax auditors and auditees.
FINANCIAL EXPERT CEOS AND EARNINGS MANAGEMENT AROUND INITIAL PUBLIC OFFERINGS
PHAM, HANG
GOUNOPOULOS, DIMITRIOS
Category: FA = Financial Analysis
We study whether the financial experience of chief executive officers (CEOs) is associated with earnings management around initial public offerings (IPOs). Examining the sample of U.S. initial public offerings (IPOs) from 2003 to 2011, we find that newly listed firms with financial expert CEOs are less likely to engage in earnings management than those with non-financial expert CEOs. We also document that for IPO firms managed by financial expert CEOs the at-issue earnings management is positively associated with future accounting performance and not significantly related to post-issue long-term stock abnormal returns. This indicates that financial expert CEOs tend to be informative in financial reporting in order to allow investors to properly gauge the fair value of the firm. Overall, our findings support the importance of CEO financial experience in the provision of higher quality financial reporting.
THE NATIONAL ACCOUNTING EMISSIONS MULTIPLIERS OF ECONOMIC IMPACTS THE NEW EUROPEAN POLICY: AN APPLICATION FOR CATALONIA
PIE, LAIA
Category: SEE = Social, Environmental & Ethical
At the end of 2008 the European Union signed a climate change agreement and pledged to reduce the Union’s greenhouse gas emissions. One of the measures which was established to reduce emissions, was that the most contaminating sectors, covered under the European Union Emission Trading System (ETS), and those which are not covered, will have to reduce their emissions. The aim of this paper is to analyse the effect that the implementation of the agreement signed by the European Union at the end of 2008 would have on reducing greenhouse gas emissions. Specifically, I will focus on the analysis of the emission multipliers and I will also analyse the impact of a reduction of 10% of emissions in sectors not covered under the ETS and of a reduction of 21% by those that are covered. For this purpose, I consider three possible scenarios: firstly, I will simulate a reduction of emissions of 10% and 21% according to the sector while holding the endogenous income constant; secondly, a reduction of emissions of 10% and 21% with a reduction of endogenous income of 8.6%; thirdly I will apply a reduction of emissions by 10% and 21% with an increase of the endogenous income of 8.6%. Finally, I will analyse the decomposition of the emission multipliers in open effects, own effects and circular effects in order to include the different channels of the process in the generation of emissions of CO2 equivalents. The analytical approach used in this paper gives interesting results that can help to design and implement policies that help to reduce the emisions. The empirical application shall refer to the National Accounting Matrix with Environmental Accounts (NAMEA) for the Catalan economy (2001).
DOES CAPITAL MARKET PRESSURE AND DISCLOSURE REGULATION SHAPE TAX AGGRESSIVENESS?
PIERK, JOCHEN
Category: TX = Taxation
This paper empirically investigates the influence of capital market pressure and disclosure regulation on tax aggressiveness. Prior literature shows that public firms have higher book-tax differences than private firms but fails to answer the question whether this arises from financial accounting incentives of public firms or tax aggressiveness of private firms. Thus, Hanlon and Heitzman (2010) conclude that book-tax differences cannot be used to measure tax aggressiveness when firms have “varying levels of importance on financial accounting earnings”. To disentangle these rationales I make use of the fact that European groups have to prepare two sets of financial reporting. First, the group statement (consolidated) which is used by e.g. capital market participants. And second, the individual statement (unconsolidated). The latter is often explicitly used as a starting point to calculate taxes and is not used to inform capital market participants. I match the individual statement of the parent company with the respective group statement to compute two different tax rates for each company. My findings show that public firms, not private firms, are more tax aggressive. Both the tax rates of group statements and individual statements are lower compared to private firms. When I limit the sample to firms that performed an IPO during the sample period, the findings show that firms become more tax aggressive after the IPO.
A SURVIVAL ANALYSIS FOR EVALUATING THE INFLUENCE OF PASSAGE OF TIME, FINANCIAL CONDITION AND THE GREAT RECESSION IN CONTRACTING OUT PUBLIC SERVICES
PLATA DÍAZ, ANA MARÍA
DE LA HIGUERA-MOLINA, EMILIO; GARRIDO-RODRÍGUEZ, JUAN CARLOS; LÓPEZ-HERNÁNDEZ, ANTONIO MANUEL; PÉREZ-LÓPEZ, GEMMA; ZAFRA-GÓMEZ, JOSÉ LUIS
Category: PSNP = Public Sector & Not-For-Profit
Various studies have analysed the relationship between fiscal stress and contracting out, but have failed to achieve conclusive results. In this paper, we take a broad view of fiscal stress, addressed in terms of financial condition and studied over a lengthy period (2000-2010). The relationship between fiscal stress and contracting out is studied using a dynamic model, based on survival analysis, a methodology that enables us to take into account the effect of time on this relationship. As this study period includes the years of the Great Recession (2008-2010), we also highlight the impact of this event on the fiscal stress-contracting out relation. The results obtained suggest that taking into account the passage of time and conducting a long-term assessment of financial condition enable a more precise understanding of this relation. We also find that the Great Recession reduced the probability of local governments’ contracting out public services.
THE RELATIVE IMPACT OF PROFESSIONAL IDENTITY AND CYNICISM ON AUDITORS’ RESPONSES TO ETHICAL DILEMMAS
PLUMLEE, DAVID
LUIPPOLD , BENJAMIN; PERREAULT, STEPHEN
Category: AU = Auditing
We explore the relationship between auditors’ professional identity and their level of cynicism and test whether both attitudes can jointly affect auditors’ responses to ethical dilemmas. Professional identity represents that extent to which an auditor identifies with the ideals, norms, and values of the auditing profession and has been shown to be positively related to ethical behavior. Cynicism is an attitude which may be formed in response to an auditor’s perceived disconnect between the ideals of the profession and the commercial mindset believed to be held by some practitioners. We predict that, when an auditor faces an ethical dilemma with lower moral intensity (such as underreporting of time), his or her level of cynicism will moderate the effect of professional identity such that those with higher cynicism levels and lower professional identity will exhibit more unethical behavior. In contrast, we predict that for ethical dilemmas with high moral intensity (such as violations of the auditor independence requirement), this moderating effect of cynicism will not occur. The results of an experiment support these predictions. We believe these findings have important implications for academics and practitioners concerned with the causes and consequences of dysfunctional auditor behavior.
AUDIT FAILURE: FURTHER EVIDENCE ON AUDITOR’S TENURE AND BARGAINING POWER FROM SANCTIONS RELEASED BY A PUBLIC OVERSIGHT BOARD
PORCUNA, RUBÉN
DE FUENTES, CRISTINA
Category: AU = Auditing
We investigate empirically the impact of auditor’s tenure and bargaining power on the auditor failure. To that end, we collect all auditing enforcement releases which correspond to annual accounts with fiscal years spanning 1999 through 2009. We match every case related to the 245 statutory audits that triggered a sanction with a non-sanctioned statutory audit conducted by the same sanctioned statutory auditor (audit firm or individual auditor). We perform logistic regressions on several models comprising auditee, auditor and engagement characteristics. We document that the likelihood of the auditor being sanctioned increases when clients are facing financial difficulties, but the remaining significant variables depend on whether the statutory auditor is an audit firm or an individual auditor. The probability that the individual statutory auditor will be sanctioned is positively influenced by the number of years by which the audit engagement exceeds the minimum legally required for the auditor’s rotation (3 years). Contrary to legislative fears, the bargaining power of the audit firm is positively associated with auditing enforcement releases, with a plausible explanation being that audit firms are more concerned with a loss of reputation that could triggers large scandals than with the public disclosure of a small clients’ audit failure.
DOES IFRS ADOPTION AFFECT THE USE OF COMPARABLE METHODS?
PORETTI, CÉDRIC
SCHATT, ALAIN
Category: FA = Financial Analysis
In takeover bids, acquirers often use two comparable methods to evaluate the target: the comparable companies method (CCM), and the comparable transactions method (CCM). This article analyzes how IFRS adoption has affected the use of comparable methods, the selection of peers (number of peers and localization of peers) and, ultimately, the fundamental value of the target obtained by these methods. The analysis of 330 targets’ evaluations in France and Switzerland, over the period 1999 to 2014, highlights three main findings. First, IFRS adoption has not significantly affected the use of comparable methods by French acquirers, the selection of peers, but it has decreased very slightly the fundamental value of the targets. Second, previous results do not reflect the incentives of acquirers to manipulate targets’ evaluations, because similar results are highlighted for French independent experts who disclose fairness opinions. Third, the choices of Swiss independent experts differ significantly from the practices of their French counterparts. These differences are, however, the result of the difference in size of the two stock markets, and not of the adoption of IFRS by the targets. Overall, our results show that the evaluation of takeover bids’ targets with comparable methods, in France and Switzerland, has not really been affected by the adoption of IFRS.
INTEGRATING RISK INTO CONTROL SYSTEM DESIGN
POSCH, ARTHUR
Category: MA = Management Accounting
In this paper I theoretically and empirically demonstrate that risk-based results controls and risk-based information sharing are of complementary nature. Moreover, I show that this complementarity is dependent on the extent to which a company follows a risky investment strategy. Companies are confronted with the classical control dilemma of choosing the right balance between flexibility and control. On the one hand they need to tighten the reins, control employees and ensure goal attainment but on the other hand they also need to make sure that employees still have enough leeway to search for innovative solutions and emerging opportunities. This trade-off can be illustrated in the context of risk-based results controls. While focusing excessively on the use of risk-based results controls might lead to a loss of creativity and innovation, no use of risk-based results controls might cause excessive employee risk-taking that comes at the firm’s expense. Companies can alleviate the negative consequences of risk-based results controls by encouraging risk-related information exchange between top management and employees. Risk-based results controls and risk-based information sharing are thus of complementary nature. In a second step I show that the proposed complementarity is a positive function of the degree to which a company follows a risky investment strategy. Thus, I establish risky investment strategy as variable that drives the interdependence between risk-based controls.
DETERMINANTS OF NON-PROFIT REPORTING AND MONITORING
POTTER, BRAD
CAREY, PETER; CASSAR, GAVIN; TANEWSKI, GEORGE
Category: PSNP = Public Sector & Not-For-Profit
This study investigates the determinants of reporting and monitoring quality of non-profit organizations. We develop arguments and empirically test the impact of different stakeholder groups and non-profit characteristics on various attributes of reporting and monitoring using a random sample of 901 non-profit annual lodgements. We find non-profits that undertake action or responsibility related to government function have higher quality reporting and monitoring. Conversely, we find that non-profit entities that have members whom are captive, due to a limited ability or higher costs to leave the non-profit, have lower quality reporting and monitoring. Overall, this research contributes to the scholarly and regulatory debate on organizational monitoring by considering demand and supply forces of reporting and monitoring quality in a setting where the mechanisms vary beyond the more commonly studied for-profit firm setting.
ALLOWING SHAREHOLDERS TO VOTE ON EXECUTIVE REMUNERATION: LESSONS FROM THE GERMAN VOLUNTARY SAY-ON-PAY REGIME
POWELL, DANIEL
RAPP, MARC STEFFEN
Category: GV = Governance
Since August 2009, German legislation allows for voluntary Say on Pay Votes (SoPV) during Annual General Meetings (AGMs). We examine 1,168 AGMs of all German listed firms with more than 10,000 agenda items over the period 2010 – 2013 and find that in the first four years of the voluntary say on pay regime every second firm in our sample has opted for having a SoPV. The propensity for such a vote increases with firm size, abnormal executive compensation and free float of shares. Indeed, smaller firms with concentrated ownership do not only have a lower propensity for a SoPV, but also show a higher propensity to opt for only limited disclosure of executive compensation. Approval rates of SoPVs are lower than the approval rate for the average AGM agenda item and this effect is stronger with (i) widely held firms as well as with (ii) firms with abnormal executive compensation. Additionally, SoPVs actually can increase AGM partic-ipation; however, this result is particularly encountered at widely held firms. Finally, we find that subsequent to a SoPV firms increase stock-based incentives. Overall, our results are consistent with the view that (i) boards use voluntary SoPV to gain legitimation for executive remuneration policies in firms with low ownership concentration where (small) shareholders might consider executive compensation a part of the agency problem and (ii) (small) shareholders considers SoPV as a possibility to actively influence corporate decisions.
COST STICKINESS OF FAMILY FIRMS: A SOCIOEMOTIONAL WEALTH PERSPECTIVE
PRABOWO, RONNY
HOOGHIEMSTRA, REGGY; VAN VEEN-DIRKS, PAULA
Category: MA = Management Accounting
In this study, we investigate whether family firms exhibit a higher degree of SG&A cost stickiness than non-family firms. Next, we examine whether the implications of SG&A cost stickiness for one-year-ahead earnings differ between these two types of firms. We argue that family firms are less inclined to reduce costs when sales decrease because of the desire to preserve their socioemotional wealth, an objective which seems to lead to a higher degree of cost stickiness. Furthermore, family firms’ current SG&A cost stickiness can be considered as a negative indicator of their subsequent earnings because it is likely that family firms will continue reducing less costs even when costs decrease in the subsequent period. Family firms’ current cost stickiness also does not necessarily imply to unused capacity that is useful when the subsequent sales increase. Data on 2,000 largest US firms from 2001-2010 reveal that family firms exhibit a greater degree of SG&A cost stickiness. We also find that family firms’ current SG&A cost stickiness is associated with poorer one-year-ahead earnings change.
RISK RELEVANCE OF VOLUNTARY CARBON EMISSION DISCLOSURES
PRAKASH, RACHNA
MATSUMURA, ELLA MAE; VERA-MUÑOZ, SANDRA
Category: SEE = Social, Environmental & Ethical
We study the association between voluntary disclosures of carbon emissions and two components of firm value: cost of equity capital and cost of debt. Our inquiry is important because stakeholders are increasingly concerned about the impact of climate-change risks on firm valuation. Yet, with little regulatory pressure for public companies to disclose these risks, such disclosure is largely voluntary. We predict that, other things equal, disclosing (vs. non-disclosing) carbon emissions is associated with both a lower cost of equity capital and a lower cost of debt. We use carbon disclosure choices of S&P 500 firms for years 2006-2008 from CDP. Because firms choose whether to disclose their emissions, we control for self-selection bias using propensity score matching to match disclosing and non-disclosing firms. We construct a composite implied cost of equity capital using the median of four measures used in the accounting and finance literatures. Our doubly robust regression results show that the cost of equity of disclosing firms is 21.6 basis points lower than the cost of equity of non-disclosing firms. Further, using secondary bond market trading data we find that the cost of debt of disclosing firms is 89 basis points lower than the cost of debt of non-disclosing firms. Our results are consistent with the argument that the capital markets price climate change-related risks by imputing a higher penalty for firms that do not disclose their carbon emissions.
DO ONLINE SOCIAL NETWORKS MATTER FOR FINANCIAL MARKETS?
PRICE, RICHARD
CRAWFORD, STEVE; GRAY, WES; JOHNSON, BRYAN
Category: FA = Financial Analysis
SumZero is an online social networking site dedicated to the buy-side analyst community. We analyze this unique social network and the role it plays in generating and assessing investment recommendations. We also explore how the network influences price discovery. Within the network, we find robust evidence that an analyst’s structural position matters; recommendations issued by better-connected analysts not only receive more ratings, but also receive higher ratings. Outside the network, we find that the generally significant returns to the recommendations issued by SumZero analysts are not associated with the structure of the network. Our results document that social networking technologies influence investor perceptions within the network. However, these perceptions do not appear to influence portfolio selection and asset pricing.
THE FORCED ADOPTION OF IFRS BY CZECH PRIVATE COMPANIES: ASSESSMENT OF ITS IMPACT ON INTEGRATION OF FINANCIAL AND MANAGEMENT ACCOUNTING
PROCHAZKA, DAVID
Category: IS = Information Systems
The paper assesses how the mutual relationship of financial and management accounting systems has changed after the IFRS adoption. In particular, we focus on specifics of private companies under foreign control in a transition country. The paper contributes to our knowledge on the economic consequences of IFRS adoption by analysing a specific group of companies. The forced IFRS adopters are such private (non-listed) companies that (a) are forced to adopt IFRS (because their parent prepares IFRS consolidated statements) and simultaneously (b) are not permitted by regulatory framework of a given jurisdiction to apply IFRS in their individual financial statements on voluntary basis. Our results, based on questionnaire survey, show that forced IFRS adopters steadily integrate the IFRS principles into management accounting subsystem. There are three compounding determinants behind this process: (a) low-quality of Czech GAAP (subordinated to taxation rules); (b) cost savings; (c) performance measurement of subsidiaries by parents based on IFRS results.
ACCOUNTING INFORMATION AND CORPORATE RISK-TAKING
PROTT, MARTIN
ERNSTBERGER, JUERGEN
Category: FR = Financial Reporting
We examine how accounting information influences corporate risk-taking. More relevant or more reliable accounting information allow stakeholders to more closely monitor operational actions undertaken by managers which might affect their corporate risk-taking behavior. We test this prediction by orchestrating the mandatory IFRS adoption and mandatory changes into the enforcement of accounting standards as exogenous shocks to firms’ information environment. In difference in-differences analyses we find that after these changes in the information environment corporate risk-taking significantly decreased. In additional tests we find that changes in corporate risk-taking are rather attributable to changes in the enforcement than to the mandatory IFRS adoption. We contribute to the literature on consequences of changes in the firms’ information environment and to the literature on real effects of accounting information on corporate decisions by documenting their influence on corporate risk-taking.
THE MULTIDIMENSIONAL NATURE OF INFORMATION EXCHANGE IN THE BOARDROOM
PUGLIESE, AMEDEO
BEZEMER, PIETER-JAN; NICHOLSON, GAVIN
Category: GV = Governance
Information exchange is a key mechanism underlying a board’s work. Research emphasizes the need to reduce asymmetries between executive and non-executive directors and ensure decisions heavily influenced from managerial self-interest. Similarly, the nature of the board’s work (e.g. few meetings each year for a limited amount of time) raises biases and process losses that become more detrimental with poor information exchange. We videotaped three board meetings at two organizations and interviewed their directors to provide an in-depth examination of boardroom information exchange. This study uncovers some of the mechanisms underlying boardroom information exchange that were not evident in prior literature due to the difficulties in accessing the boardroom. First, we document recurrent communication patterns associated with superior information exchange. These patterns reveal that high quality information exchange requires boards’ engagement in both information acquisition and information processing phases. Board work requires both the reduction of asymmetries (e.g. information acquisition) as well as boardroom challenge, advice and integration of ideas (information processing). We highlight that these board-level mechanisms involve both executive and non-executive directors across the range of information provision and information processing behaviors.
THE PREDICTIVE ABILITY OF CAPITALIZED EXPLORATION AND EVALUATION EXPENDITURE UNDER IFRS 6
PÜNDRICH, GABRIEL
FEIGIN, ALEXEY ; FERGUSON, ANDREW
Category: FR = Financial Reporting
Few studies in the accounting literature examine the value relevance of capitalized intangibles (Aboody and Lev, 1998). This study examines the predictive ability of capitalized exploration and evaluation expenditure under IFRS 6. From an accounting perspective under IAS 6 pre-production exploration and evaluation expenditure can be capitalized if two conditions are met. Firstly, if there is a valid exploration licence over the property. This is typically a given, with the exception of prospects located in areas subject to repatriation risk or where some form of project ownership disputation is taking place. Secondly, if exploration effort in the project is ongoing. The setting we consider is Australian mining development stage entities (MDSEs), an ideal environment to consider the predictive ability of IFRS 6 owing to the pre-disposition of Australian MDSEs to capitalize exploration expenditure. Controlling for gradations of resource information, we find the long-term price is determined by capitalized exploration expenditure, the signal of future project prospectivity using an Ohlson (1995) model approach. This suggests choices to capitalize exploration and evaluation expenditure under IFRS 6 contains significant ‘forward looking’ information, useful in valuing MDSE’s. This finding is of relevance to the ongoing Intangible Assets project being conducted by the IASB on investigative, exploratory and developmental activities.
OUTSIDE DIRECTOR SOCIAL NETWORK CENTRALITY AND TURNOVER BEFORE PERFORMANCE CRASHES: A FRIEND IN NEED?
QU, TIANSHU
LI, SETH; YU, JULIA
Category: GV = Governance
This paper documents an unintended consequence of information sharing between corporate executives and outside directors through social connections. We find that outside directors that are more closely connected with managers are more likely to leave the firms before performance crashes compared to their less connected peers. This finding is consistent with outside directors exploiting their private information to protect their own reputation. The association between network centrality and the likelihood of departure is weaker (stronger) when the costs of leaving (staying) are higher for the outside director, consistent with outside directors trading off the future reputational loss from performance crashes against other types of costs of giving up the current board position.
A RECONSIDERATION OF EARNINGS MANAGEMENT IN THE YEARS LEADING UP TO SOX: A STUDY OF SEC INITIATIVES STARTING IN THE LATE 1990S
RAI, ATUL
KERSTEIN, JOSEPH
Category: FR = Financial Reporting
Prior literature has suggested that earnings management was getting progressively worse prior to Sarbanes Oxley Act 2002 (henceforth SOX) but then improved afterwards. Yet, surprisingly there was evidence—albeit mixed—that earnings management was declining during the so-called ‘scandals period’ (i.e., the middle of 2001 to the passage of SOX). In this work, we examine whether strong initiatives taken against earnings management by the SEC starting in 1999 were effective. These initiatives, including SAB 99 (i.e., addressing the misuse of quantitative materiality thresholds for the purpose of managing small amounts of earnings), followed a major speech by the then SEC Chairman Arthur Levitt in the latter part of 1998 that promised a crackdown against earnings management. We find evidence that managerial attempts to exploit the interim reporting rules (i.e., by underestimating expenses in the first three quarters) started declining in 1999soon after the SEC crackdown. These practices reached a low point in 2002 after which time they stabilized. We also find evidence of declines in earnings management to avoid small negative EPS and small negative un-deflated earnings starting in 1999 that continued until after SOX. Thus, our results suggest that there were improvements in earnings management taking place pre-SOX that coincided with initiatives by the SEC around 1999. An implication of our work is that SOX was not the only turning point and catalyst for improvements in earnings management as suggested in prior literature.
DETERMINANTS OF BUDGET IMPLEMENTATION: EVIDENCE FROM LOCAL GOVERNMENTS IN INDONESIA
RAKHMAN, FUAD
Category: PSNP = Public Sector & Not-For-Profit
This study investigates the determinants of the extent of budget implementation among local governments in Indonesia. I examine variables such as the managerial factors, the institutional factors, and the budget structures which potentially affect budget implementation. Using the data from 1,151 local governments' financial reports from 2008 through 2011, I find that budget implementation is affected by mayors' term, age, and tenure. Budget implementation tends to be lower when the mayor of the local government is in his/her second term, is over 60 years old, and is in the early years of his/her five-year tenure. I also find that larger sized local governments and those in metropolitan areas tend to have lower implementation. Finally, budget implementation is lower when the local governments have a high proportion of capital expenditure in their budget.
STRATEGIC USEFULNESS OF IGNORANCE: INCREMENTAL INCOME SMOOTHING VIA RETAINED INTEREST OF SECURITIZED LOANS
RANASINGHE, THARINDRA
KILIC, EMRE; LOBO, GERALD; RANASINGHE, THARINDRA; YI, LIN
Category: FR = Financial Reporting
Bank managers possess less information about loans subjected to securitization due to reduced efforts in both ex-ante screening and ex-post monitoring of securitized loans. As auditors are aware of this limitation, managers potentially obtain more wiggle room with respect to making loan loss provisions (LLP) for retained seller’s interest of securitized loans (SIL). In this study, we investigate whether bank managers strategically exploit this wiggle room arising due to their own information limitations to achieve earnings management objectives. Consistent with our conjecture, we find that managers’ use of LLP for income smoothing is greater when the bank holds SIL and is increasing in the ratio of SIL to total loans. Further tests reveal that the incremental use of the SIL’s LLP for income smoothing is lower for public banks presumably because they face greater external capital market scrutiny than private banks. We also find that SIL is particularly useful for income smoothing in the fourth quarter, when greater auditor scrutiny makes it more difficult to manage earnings via LLP of non-securitized loans. Our results are robust to a battery of sensitivity tests aimed at alleviating concerns over alternative explanations and endogeneity issues.
ANALYSTS’ STRATEGIC USE OF ACCRUAL COMPONENTS
RAONIC, IVANA
SAHIN, ALI
Category: FR = Financial Reporting
In this paper we examine analysts’ strategic use of information in accruals’ components. Specifically, we investigate whether analysts’ optimism with respect to operating accruals triggers incentives to strategically infuse financial accruals with pessimism to offset the overoptimistic error. We extend the work by Bradshaw et al. (2001) and Drake and Myers (2011) by using total instead of working capital accruals and by breaking total accruals into components with varying degrees of reliability using the approach from Richardson et al. (2005). Our analysis reveals that the negative relation between operating accrual components and forecast errors, i.e., analysts’ optimism is a function of a reliability level of a particular component, rather than its magnitude. The results from our main tests also show that operating accrual-related optimism is offset by financial accrual-related pessimism, and in the aggregate the forecast errors associated with total accruals are statistically zero. This finding suggests that analysts understand the accrual information, and use this information strategically in their earnings forecasts. Our findings also indicate that the relations between forecast errors and accrual components are moderated by firm specific unconditional and conditional reporting conservatism.
CORPORATE TAX AGGRESSIVENESS AND CASH DISTRIBUTIONS TO SHAREHOLDERS
RASHID, HARUN
ANDERSON, MARK; RASHID, HARUN; WARSAME, HUSSEIN
Category: TX = Taxation
In this study we examine how cash distributions to shareholders affect tax aggressiveness. Cash distributions such as dividend payment and share repurchase (REPO) reduce firms’ free cash flow (FCF) whereas tax aggressiveness increases FCF. A dividend policy may play a monitoring role in reducing (FCF) related agency problems and thereby induce managers to look for additional sources of FCF in order to maintain desired level of FCF for new investments, future dividend payments or for any managerial opportunistic reasons. As a result, dividend payment may lead to tax aggressiveness. Managers do not encounter as much pressure from shareholders for share repurchase as they do for dividend payment. Thus, there may not be any significant positive relation between share repurchase and tax aggressiveness. Based on a large sample we find that high dividend-paying firms are more likely to be tax aggressive. However, when firms have substantial free cash flow they are less likely to be tax aggressive. We also find that in the presence of CEO power over the board the tax aggressiveness associated with dividends diminishes. As for share repurchase, we do not find any consistent evidence that share repurchase induces aggressive tax planning. Our findings are consistent with the argument that dividend policy plays a monitoring role and induces managers to carry out risky firm actions.
ACCOUNTING LESSONS FROM A MEDIEVAL WOMAN: THE WRITING OF CHRISTINE DE PISAN
READ, ANDREW
MILEY, FRANCES
Category: HI = History
Extant research in accounting history has viewed double-entry bookkeeping as a development of single-entry bookkeeping, also known as charge and discharge accounting, that was either prompted by the rise of mercantilism or capitalism. This has led to historical research in accounting that seeks to uncover early examples of the purposes ascribed to double-entry booking in examples of early financial accounts were prepared using single-entry bookkeeping. This research seeks to enhance our understanding of accounting by using the writing of Christine de Pisan, a medieval Italian-French writer, on the nature and purpose of single-entry bookkeeping to demonstrate that single-entry bookkeeping is not a simpler or earlier version of double-entry bookkeeping but a separate approach to bookkeeping which should be considered in its own right. We turn to philosophy of science and draw an analogy using Lakatos’ methodology of scientific research programmes to understand why single-entry and double-entry bookkeeping co-existed for many centuries and why double-entry bookkeeping became dominant.
CONSISTENCY IN GUIDANCE CHARACTERISTICS
REDIGOLO, GIULIA
BOZZOLAN, SAVERIO
Category: FR = Financial Reporting
This paper examines whether US firms engage in consistent disclosure patterns of earnings guidance characteristics and which factors most likely explain the phenomenon. Using a comprehensive sample of earnings guidance hand-collected from the original text of company press releases, we classify an earnings guidance as being consistent in relation to the persistence of three main characteristics: precision, disaggregation, and presence of additional soft disclosure. We find significant cross-sectional variation in consistency according to this definition, and that both CEO experience and earnings uncertainty are determinants of consistent guidance policies. Along this line we extend recent studies examining firms that stop providing earnings guidance and show that changes in guidance patterns may not necessarily relate to the interruption of guidance, instead could be analyzed at a finer level.
FAIR VALUE MEASUREMENTS, INFORMATION RISK, LIQUIDITY AND FIRM VALUE
REID, JOSEPH
Category: FR = Financial Reporting
This study examines whether the implementation of FASB Accounting Standards Codification on Fair Value Measurements (ASC 820-10) impacts information risk, liquidity and firm value. ASC 820-10 was designed and implemented under the premise it would improve financial reporting quality and comparability of fair value measurements in financial reports by requiring firms to disclose activity within and between fair value measurement levels. Increased disclosure that reduces information asymmetry (risk) will increase financial statement readability and increase liquidity. If the disclosed information lacks precision, the value of the information is discounted and its effect on investor perception becomes ambiguous. This study examines 10-K and 10-Q filings of firms with level 2(3) fair value activity from 2007 through 2012.Initial results reveal ASC 820-10 did decrease liquidity and firm value for firms with material transfers furthermore some investors and analysts assign value to financial statement information based on relevancy and understandability. Taken together these results signal to standard setters the increased mandatory disclosures around the measurement of unobservable inputs (level 3 securities) are value relevant and economically significant. This study extends the literature on the relation between fair value relevance, information asymmetry and information precision and contributes to the debate on the efficacy of unobservable units in fair value measurements.
INTEGRATED REPORTING AND ASSURANCE OF SUSTAINABILITY INFORMATION: AN EXPERIMENTAL STUDY ON PROFESSIONAL INVESTORS’ INFORMATION PROCESSING
REIMSBACH, DANIEL
GÜRTÜRK, ANIL; HAHN, RUEDIGER
Category: SEE = Social, Environmental & Ethical
Sustainability-related non-financial information is increasingly deemed value relevant. Against this background, two recent trends in non-financial reporting are frequently discussed: integrated reporting and assurance of sustainability information. Using an established framework of information acquisition, evaluation, and weighting, this experimental study investigates whether professional investors’ information processing is influenced by the (integrated or separate) reporting format and by external assurance of the respective sustainability information. The results indicate that, while the integration of sustainability and financial information increases professional investors’ potential access to sustainability information, it does not translate into improved acquisition of this type of information. However, in the case of non-assured sustainability information, integrated reporting positively affects professional investors’ evaluation of a firm’s sustainability performance. The weighting of sustainability information is predominantly influenced by the existence of external assurance. Overall, our findings shed critical light on the feasibility of the objectives of integrated reporting advocated by the International Integrated Reporting Council (IIRC) and underline the important role of assurance in the context of voluntary disclosure. This, however, is not without risk, because the procedure of sustainability-related assurance and its content is still developing.
THE IMPACT OF CORPORATE TAX AVOIDANCE ON ANALYST COVERAGE AND FORECASTS
REN, MENGBING
HE, GUANMING; TAFFLER, RICHARD
Category: TX = Taxation
This study investigates the impact of corporate tax avoidance on analyst coverage and forecasts. Prior literature provides mixed evidence on whether firms undertaking aggressive financial reporting are more or less tax aggressive. We reconcile the conflicting evidence by contending that the lead-lag association between tax avoidance and earnings management is positive whereas the contemporaneous relation between the two is negative. As such, tax avoidance is arguably associated with a high level of earnings management over a time-series. It is believed that analyst earnings forecasts are based on the trend record of a firm’s historical information. Thus, tax avoidance obfuscates the information used for analyst forecasts, making accurate forecasting difficult for analysts. Accordingly, we hypothesize that analyst coverage is negatively associated with corporate tax avoidance. Our results confirm this conjecture, and are robust to the use of a firm-fixed effect model and of a natural experiment to control for potential endogeneity. Additional analysis reveals that (i) analyst coverage is negatively related to tax risk, and that (ii) tax avoidance increases analyst forecast bias. Overall, our study advances the understanding of the negative consequence of corporate from the analysts’ perspectives, and should be of interest to regulators and authorities who are charged with regulating corporate taxation and disclosure transparency.
FIRM LIFE CYCLE, HETEROGENEITY IN INVESTOR BELIEFS, AND STOCK PRICE CRASH RISK
RENDERS, ANNELIES
HAMERS, LARS; VORST, PATRICK
Category: FA = Financial Analysis
In this study, we examine the relation between firm life cycle and stock price crash risk. Investigating a sample of 62,004 firm-year observations over the period 1990-2013, we find that firms are more crash-prone during the introduction and growth stages of their life cycle. These results are consistent with the argumentation that heterogeneity in investor beliefs about firm fundamental values is highest during these stages. Such heterogeneity may arise as a consequence of the relatively large impact of future growth opportunities, compared to a firm’s assets in place, on firm value during these stages. Our finding that the increased crash risk in the introduction and growth stage is more pronounced for firms that derive more of their value from future growth opportunities provides further evidence in line with our argumentation. Finally, we find that crash risk is higher for growth firms that have the highest performance in the current fiscal year, consistent with some investors being too optimistic about the future performance of these firms. We contribute to the literature by incorporating an inherent but yet dynamic firm characteristic, firm life cycle, into the prediction model of firm specific crash risk. We believe these findings are of interest to managers, regulators and investors concerned with the identification of firm-specific (tail) risk.
THE ROLE OF IMITATION IN TRUST FORMATION AND PARTNER SELECTION IN INTERFIRM RELATIONSHIPS.
REUSEN, EVELIEN
STOUTHUYSEN, KRISTOF
Category: MA = Management Accounting
The aim of this study is to investigate the role of imitation in trust formation and partner selection in interfirm relationships. We experimentally examine how information from other firms’ experiences may shape the trust that buyer managers have in a potential supplier firm, and how this trust affects the manager’s subsequent selection decisions. The results reveal different effects on two trust dimensions. The results specifically show that simply knowing other firms that trusted the supplier, without any information about the outcomes, is sufficient for the buyer manager’s level of competence trust, but not of goodwill trust, in the supplier to increase. In addition, we find that even buyer managers who have the opportunity to learn from their own firm’s experiences, are inclined to look at others when making trust judgments about the supplier. As expected, our results also indicate that higher levels of trust, in turn, increase the likelihood of the supplier being selected. Overall, our findings provide strong support for imitation effects, and suggest that managers may come to trust and select a certain partner, just because they see others do.
VOLUNTARY EXTERNAL ASSURANCE OF CORPORATE SOCIAL RESPONSIBILITY REPORTS AND THE DOW JONES SUSTAINABILITY INDEX MEMBERSHIP: INTERNATIONAL EVIDENCE
RICHARDSON, GORDON
CLARKSON, PETER M.; LI, YUE; RICHARDSON, GORDON; TSANG, ALBERT
Category: SEE = Social, Environmental & Ethical
This study examines the extent to which firms committing to better corporate social responsibility (CSR) performance are more likely to issue standalone CSR reports, to engage a third party for assurance of CSR reports, and to choose an accounting firm to provide CSR report assurance. Our evidence suggests that while a firm’s CSR commitment has a positive relation with both CSR report issuance and CSR assurance decision, we find no evidence that CSR commitment is positively associated with the propensity of choosing an accounting firm to serve as the assurer. We further examine whether the issuance of standalone CSR reports, the external assurance of CSR disclosure and the type of CSR report assurers affect the firm’s inclusion in the Dow Jones Sustainability Indices (DJSI) and the investment decision of socially responsible investors (SRI) after controlling for firms’ CSR performance. Consistent with the signaling role of CSR assurance, we find that having CSR disclosure assured increases the likelihood of being included in the DJSI and attracts more SRI. However we do not find that the type of assurer matters.
EFFECTS OF INTELLECTUAL CAPITAL DISCLOSURE – A STRUCTURED LITERATURE REVIEW AND META-ANALYSIS
RIEG, ROBERT
VANINI, UTE
Category: FR = Financial Reporting
Today, intellectual capital (IC) is seen as an important driver of value and performance of firms. Hence, they disclose information IC to investors and other stakeholders. Plenty of studies discuss influence factors on IC disclosure and analyse various effects of IC disclosure. However, scholars and practitioners are left on their own to discern the relative importance of effects, to recognise what is and what is not researched as well as to understand current research results. This paper uses a structured literature review to provide researchers with a picture of extant research areas concerning the effects of voluntary IC disclosure and quantitatively cumulates existing evidence on effect sizes via meta-analysis. It also outlines possibilities for future research. In total we find a positive effect of voluntary IC disclosure on market-based and firm-based outcomes. However, many studies suffer from weak theoretical underpinning and statistical deficiencies. Our results document the usefulness of the recently criticized content analysis in measuring IC disclosure. It also underlines the benefits of voluntary IC disclosure for firms. To advance scholarly research we suggest developing standardized scales and procedures to measure voluntary IC disclosure and improving statistical practice towards larger samples and focusing on effect sizes and confidence intervals. Then, future empirical evidence for IC disclosure will be more reliable and valid and hence, more convincing.
PUBLIC DISCLOSURE AND DEPOSITORY GOVERNANCE: EVIDENCE FROM GERMANY
RIEPE, JAN
FOOS, DANIEL
Category: FR = Financial Reporting
We exploit the private reporting to the regulatory authorities around a disclosure reform in Germany to assess the impact of banks’ public disclosure on the discretionary reporting behavior. Until the end of 2006, banks in Germany only disclosed a single compensatory item including the loan loss provisions, net charge-offs, and value changes of securities which serve as the liquidity reserve. Acknowledging their importance, the regulator required private reporting of these items. We document an opportunistic off-setting of the loan loss provision and the gains and losses of the liquidity reserve in the pre-disclosure period. In the post-disclosure period, we observe more asymmetric off-setting of liquidity reserve’s gains compared to liquidity reserve’s losses which is consistent with accounting conservatism. Relying on geographical differences in the strength of depository governance, we can attribute these positive effects to regions with stronger depository governance. We further document an increase in the informativeness of loan loss provisions for future non-performing loans in the post-disclosure period. Overall, results underpin the importance of detailed public disclosure for depository governance.
ENGAGEMENT TO MITIGATE CLIMATE CHANGE: AN EXPERIMENT WITH FTSE 250
RODIONOVA, TATIANA
Category: GV = Governance
This study offers new insights into the impact of private engagement from institutional investors on companies’ strategies to mitigate the impact on climate change. While institutional investors have long been encouraged to participate in governance of the firms, it remains unclear whether their engagement makes a significant difference to the climate change-related practices. The study addresses this question by using a unique three-year real-life experiment structured as a randomised controlled trial. The experiment was conducted in 2012-2015 when a UK institutional investor engaged with a randomly assigned group of FTSE 250 companies from its investment portfolio who had low carbon performance grades as assessed by the CDP (formerly Carbon Disclosure Project). The investor prompted companies to increase their CDP performance scores to a specified level. A randomly assigned control group did not receive any contact. The initial results show that, overall, companies which received engagement were more likely to improve their CDP disclosure score and particularly more likely to increase their performance grade. Further, the findings suggest that engagement was effective in stimulating previously non-responsive firms to start reporting to CDP and provide information to obtain a performance grade. This study therefore contributes to our understanding of the role institutional investors can play in tackling climate change but also highlights the challenges of the engagement.
THE IMPACT OF CREATIVITY AND INFORMATION LOAD ON ESCALATION OF COMMITMENT IN IT PROJECTS
ROETZEL, PETER G.
Category: IS = Information Systems
This experimental study analyzes how two key factors, creativity and information load, influence decision making in escalation situations in which decision makers reinvest additional resources in a losing course of action even when information indicates that the IT project is performing poorly and should be discontinued. In situations in which escalation of commitment can occur, creativity and information load are relevant for decision making for two reasons. First, in escalation situations in which decision makers receive negative feedback, information load exacerbates the tendency to escalate commitment by increasing self-justification tendencies. Second, creativity moderates the positive impact of information load on self-justification tendencies: the higher the level of creativity, the lower the impact of information load on self-justification. Surprisingly, highly creative decision makers do not escalate commitment when facing negative consequences, while less creative decision makers show tendencies toward escalation of commitment. Moreover, the findings indicate that information load positively influences resource allocation, even when an escalation tendency is absent. Thus, information load can lead to a decision to continue a losing course of action, which can be mistaken for escalation of commitment.
DO MANAGEMENT CONTROL SYSTEMS HELP TO COUNTERACT DEFENSIVE ROUTINES?
ROJAS, PATRICIO
Category: MA = Management Accounting
This study explores the extent to which management control systems can counteract the negative effects that defensive routines have on organizational capabilities and performance. Analysis of data from a survey of 184 top managers in the public sector indicates that unaddressed defensive routines can seriously impair organizational capabilities, while management control systems can be used to counteract their negative effects. Management control systems can unfetter organizational potential by counteracting the limitations and anti-learning barriers that defensive routines impose on organizations. The interactive use of MCS directly ameliorates the effects of defensive routines, whereas beliefs systems work at a higher level, facilitating behaviors that act against defensive routines. These results are consistent with recent research showing that unlearning processes can be purposely managed, and that organizations can unlearn routines that are damaging through double-loop learning approaches, such as those facilitated by the interactive use of MCS.
RETURNS ON CORPORATE LOBBYING AND POLITICAL CONTRIBUTIONS
ROMERO, JORGE
Category: IC = Interdisciplinary/Critical
In this paper I look at the impact of lobbying and political contributions on taxes avoided by publicly traded corporations. Previous research provides mixed conclusions about this effect. Looking at political contributions and lobbying contributions simultaneously displays the larger picture because political contributions are directed towards politicians that are currently in governmental positions, while lobbying contributions are directed towards an issue or a cause and not necessarily directed towards politicians in governmental positions. Based on the data, I find that lobbying expenditures and political contributions both lead to lower future taxes, but those political contributions are more effective in reducing taxes paid from what would be expected given the federal statutory rate.
DO FIRMS TRY TO FOOL BANKS WHEN THEY APPLY FOR NEW LOANS?
ROSATI, PIERANGELO
PALUMBO, RICCARDO
Category: FR = Financial Reporting
In this paper we investigate the impact of bank debt on firms’ earnings management. Relying on a sample of 5,988 Italian SMEs and adopting a new metrics for bank debt, we show that, although the bank monitoring is still effective, firms engage in income-increasing earnings management to obtain larger financing. We also provide evidence supporting the informative view of earnings management, as we find that among the firms applying bank financing, distressed ones engage in earnings management more than non-distressed ones. and that such effect is stronger than the one associated with new bank debt.
ACCOUNTING MEASUREMENT OF CARBON CREDITS IN BRAZIL, CHINA AND INDIA
ROSSATO DE SOUZA, VALDIVA
ANTONIO DA SILVA SUZART, JANILSON; DE SOUZA RIBEIRO, MAISA; MARTINS, ELISEU
Category: SEE = Social, Environmental & Ethical
This paper proposed a model of accounting measurement at fair value to the Certified Emission Reductions (CERs) generated by Brazilian, Chinese and Indian companies to enable to recognition of assets arising from the implementation of projects Clean Development Mechanisms (CDM) during the period from 2005 to 2012. The proposal allows adoption of this measurement form from the time of register effectuation of CDM projects in the Executive Council of the United Nations Framework Conference on Climate Change (UNFCCC) and the classification as intangible assets developed internally by the host entities of projects in contrast to Equity until the moment of its realization. The fair values of Emissions Reductions (ERs) from 31 Brazilian CDM projects, 379 Chinese and 318 Indians were simulated on the value of equity of 15 Brazilian companies, 56 Chinese and 183 Indian with support of the Wilcoxon test. The results provided evidence that the fair value measurement of CER, and its recognition as an intangible asset, could have represented a positive impact on the group balance sheet accounts of the participating research companies. The empirical applicability of the ‘Accounting Measurement Model of CERs’ made it possible to carry out assessments of this asset as a heritage item capable of generating positive economic effects on equity of entities located in developing countries.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) REPORTING – THROUGH THE CHINESE ‘LENSES’
ROWE, ANNA LEE
YU, SHENGLI
Category: SEE = Social, Environmental & Ethical
This engagement-based paper in understanding Environmental, Social and Governance (ESG) reporting by enterprises is aimed at exploring the complexity and emerging phenomenon within the Chinese context. As one of the few initiatives to explore senior managers’ perceptions toward ESG in China utilizing qualitative methodology, this study seeks to bridge the gap of existing ESG research, which is dominated by quantitative research and studies in developed ‘western’ countries. It adds to the sparse literature pertaining to rich ‘emic’ data in the field. In addressing this, semi-structured in-depth interviews were conducted with senior managers from 21 companies in various industries in China. An inquiry paradigm utilising constructivist ontology and interpretivist epistemology was required in understanding the normative assumptions underpinning ESG reporting in China through the lenses of the participants. This study provides emerging themes that appear to highlight five main motivating drivers and six major barriers that impede ESG reporting in China. This study is significant to ESG practice in China with both theoretical and practical implications. It contributes to the body of knowledge in the use of systems-oriented theories. Its findings are helpful in refining recommendations to aid regulators and companies in identifying strategies likely to yield improved ESG reporting for economies with similar context to China.
ENFORCEMENT AND INFORMATION RISK: THE ROLE OF THE INSTITUTIONAL ENVIRONMENT
RUFFING-STRAUBE, PATRICIA
Category: FR = Financial Reporting
This paper studies the effect of a stricter enforcement of accounting standards on information risk across different institutional environments. I model the interplay of accounting standards, enforcement and other elements of the institutional environment by their effect on earnings management. Earnings management can take the form of earnings manipulation or the form of managerial discretion exercised to increase the likelihood of a truthful earnings report. The effect of these two types of earnings management on information risk is derived in a rational expectations equilibrium. The results show that information risk does not decrease with a stronger enforcement in every institutional environment. Rather, environments that encourage managerial judgment in financial reporting may not benefit from a stronger enforcement, because this reduces the scope for discretionary behavior by the manager and therefore also the precision of the reported signal. Nevertheless, information risk decreases with a stronger enforcement in environments where earnings manipulation is more likely to happen, for instance, because of more conservative accounting standards. Hence, my model suggests a careful consideration of the interplay of accounting standards, institutional factors and enforcement before deciding on a change in enforcement. These results support the notion of the complementary nature of different elements of the institutional environments and their need to fit together.
DOES GENDER DIVERSITY ENHANCE CAPITAL MARKET PERFORMANCE?
RUPERTUS, HENDRIK
LOY, THOMAS R.
Category: FA = Financial Analysis
This study examines if gender diversity on boards of directors affects a firm’s capital market performance. Appointing women to the board of directors is an endogenous firm choice. Therefore, compared to previous studies, we explicitly address this endogeneity problem by using the propensity score matching and endogenous switching methods. Our results indicate that there is no significant difference in capital market performance between comparable groups of firms, one of which exhibits less, the other comparatively more, female board repre-sentation. Furthermore, we provide evidence that there is no significant effect on the predict-ability of a firm’s share price. In summary, it seems that well-governed firms exhibit similar capital market performance and valuations, regardless of their top executives’ gender.
IMPACT OF VALUATION APPROACH ON PRIVATE COMPANY APPRAISAL IN ARBITRATION PROCEEDINGS
SAASTAMOINEN, JANI
SAVOLAINEN, HANNA
Category: FA = Financial Analysis
This paper studies the impact of valuation approach on appraisal of private companies. While appraisal outcomes in dissenting shareholder litigation cases have been studied empirically in the context of public companies (Chen et al. 2010), similar cases concerning private firms are not understood yet. We addresses this gap in the literature by exploring applied valuation approaches and resulting fair value estimates presented in the Finnish arbitration tribunal between 1998 and 2014. A comprehensive hand-collected data set is analyzed with proportions test and regression analysis. Our findings suggest that the choice of valuation methodology depends on how the appraiser’s incentives align with characteristics of the chosen approach. More precisely, the empirical evidence points toward the redeemer attempting to exploit asymmetric information in his/her estimate of fair price by applying the valuation approach that has the greatest potential to underestimate the true value. Moreover, our results indicate that valuation method agreement affects the outcome of the appraisal process. This contradicts earlier findings (Chen 2010) and may result from differences in the availability of information relevant to business valuation between public and private companies.
WHY DON’T FIRMS CLAIM THEIR TAX REFUNDS? EVIDENCE FROM PRIVATE DEBT CONTRACTS
SAAVEDRA, DANIEL
Category: TX = Taxation
A puzzle in the literature is why a large fraction of firms eligible for income tax refunds not file claims for such refunds on a timely basis. I hypothesize that firms with private information about higher future profitability and seeking debt financing forgo immediate use of provisions that allow the carryback of net operating losses as signaling device to separate from firms with lower future profitability that are otherwise similar. Firms expecting lower profitability are deterred from mimicking because carrying net operating losses forward is less valuable to them. Consistent with this hypothesis, firms that do not file claims for refunds on a timely basis display higher future profitability and receive lower debt financing costs than firms that file when they first become eligible. These results are stronger when the level of information asymmetry about the borrower’s type is greater. This study is the first to use a signaling story to explain the low take-up rate of tax refunds. As a result, it informs academics and fiscal policy makers who seek to understand how tax policies affect real decisions.
MOTIVATIONS OF FIRMS FOR (NON)ADDRESSING THE ISSUE OF CLIMATE CHANGE: THE CASE OF RUSSIA
SAGITOVA, ROZA
HASLAM, JIM; PATERSON, AUDREY
Category: SEE = Social, Environmental & Ethical
The paper is a response to a call by Rankin et al. (2011) to explore motivations of companies for (non)addressing climate change issues and (non)disclosure of information related to the climate change through the lens of institutional theory. The analysis is based on the Russian context. This paper employs semi-structured interviews of 15 managers and accountants from different industries. Key findings suggest that the main motivation behind the current climate change activities are compliance with generally accepted business rules by matured companies. The paper explores motivations for climate change related (non)activities and their disclosures in a transitional economy.
TRANSFER PRICING OF INTANGIBLE ASSETS: BUSINESS INCENTIVES AND TAX PLANNING
SAHAY, SAVITA
Category: MA = Management Accounting
This paper develops a theoretical model for international transfer pricing of intangible intellectual property (IP) in a decentralized and diversified multi-­‐ product, multinational corporation (MNC). The MNC has two divisions: one in a high tax jurisdiction and another in a low tax jurisdiction (or tax haven). It invests in IP that can be used to produce multiple goods and that can easily be transferred from the high tax to the low tax jurisdiction. According to the stereotype perception of an MNC, it would like to shift its income by transferring the IP at the lowest possible transfer price. However, this study shows that if the IP is beneficial to both divisions, then tax minimization need not produce an optimal outcome for the firm. In particular, this tax minimization strategy might backfire if the high tax division suffers from a loss of demand due to the high cost that he is asked to bear. The study attempts to answer two interesting questions: Firstly, are companies more likely to shift income because they have more income shifting opportunities? Secondly, do the incentives for income shifting distort real decisions regarding level of investment, volume of trade and cost allocation in these companies? The analysis shows that when the firm produces multiple goods using the IP, the optimal transfer price to a foreign subsidiary is higher than that which minimizes tax payments for the company. I provide an explicit formula for the optimal transfer price in terms of the model’s exogenous parameters and show that it is decreasing in the tax rate differential between the two countries but increasing in the competitiveness of the domestic market.
AUDIT QUALITY AND CLIENTS' BUSINESS RISK: EVIDENCE FROM SMALL- AND MEDIUM-SIZED FIRMS IN JAPAN
SAKAI, AYAMI
Category: AU = Auditing
This study focuses on small- and medium-sized audit firms in Japan, who consider the problem of audit quality very important. Defining audit firms that have received the recommendation of administrative sanctions and/or other measures from the Certified Public Accountants and Auditing Oversight Board (CPAAOB) as lower-quality, this study investigates the relationship between the audit quality of audit firms and the clients’ business risk. Using return on assets (ROA), o-score, and going concern (GC) for the proxy variables of the clients’ business risk, this study demonstrates that clients of audit firms with low audit quality tend to have high business risk. Additionally, it is found that audit firms with low audit quality tend to have large audit teams, which include a large number of certified public accountants (CPAs).
THE PRIVATE FINANCE INITIATIVE IN THE NATIONAL HEALTH SERVICE – THE CASE OF A SICK HOSPITAL
SALIFU, EKILILU
KHADAROO, IQBAL; STITTLE, JOHN
Category: PSNP = Public Sector & Not-For-Profit
The number of operational projects procured through the Private Finance Initiative (PFI) in UK has grown considerably in recent years. However, fewer studies have sought to evaluate the projects’ operations in terms of their delivery of value for money (VfM). This paper evaluates the operations of a PFI project in a UK National Health Service Trust its delivery of VfM. It employs a combination of documentary analysis and interviews to construct an account for the Trust’s procurement of their PFI project as well as to assess the delivery of VfM in their project. The paper finds that while VfM is cited as the professed motive for the use of PFI, the case studied herein was not procured on the basis of VfM delivery, but rather for the fulfilment of other institutional objectives. In terms of the delivery of VfM, the paper finds that limiting the evaluation of VfM to the achievement of procurement intentions alone does not present an adequate basis for the evaluation of VfM delivery. While this project largely meets its procurement anticipations and could be said to be delivering VfM within that limited confines, a consideration of the impacts of the project and its operation would suggest otherwise. While the paper evaluates the operations of the project as not delivering VfM entirely, it does not recommend a PFI buyout. Instead it recommends an improvement in the contract management to secure better delivery of VfM.
CORPORATE GOVERNANCE REFORMS AND INTERNAL CONTROL QUALITY IN EGYPT: DO AUDIT QUALITY AND OWNERSHIP STRUCTURE MATTER?
SAMAHA, KHALED
KHLIF, HICHEM; SAMAHA, KHALED
Category: GV = Governance
This paper examines the association between corporate governance reforms and internal control quality in the Egyptian setting. It also explores how the level of ownership dispersion and audit quality moderate the above relationship. To get relevant information about internal control quality in Egypt, we conduct a survey among external auditors using an internal control checklist. Results show that audit committee activity has a significant positive effect on internal control quality. In addition, Big 4 auditors contribute significantly to the improvement of the internal control quality in the Egyptian setting. Finally, audit quality moderates the association between audit committee activity, board size, CEO duality and internal control quality, while ownership dispersion affects the relationship between board size, board independence, CEO duality and internal control quality. Our results demonstrate that audit environment and ownership structure influence the effect of governance attributes on internal control quality. These findings may have policy implications for Egyptian standard-setters with respect to the development of internal auditing standards.
DO AUDITORS STRIVE TO IMPROVE AUDIT QUALITY AFTER SANCTIONS? EVIDENCE FROM AN EMERGING MARKET
SAMI, HEIBATOLLAH
FANG, JUNXIONG; ZHOU, HAIYAN
Category: AU = Auditing
In this paper, we examine whether CPA firms take measures to improve their audit quality when their reputations are in danger subsequent to disciplinary actions by the government regulatory agencies in China. Compared with a control group of the CPA firms that do not suffer a reputation crisis, we find that the CPA firms with shredded reputation, in general, have lower audit quality prior to the publicized accounting scandals and relevant disciplinary actions. This suggests that lower audit quality leading to audit failures publicized in accounting scandals are not limited to the specific engagements but exist in all the engagements of the CPA firm. We also find that CPA firms with shredded reputation significantly increased their audit quality subsequent to the disciplinary actions, suggesting the efforts that CPA firms make to retain their clients help improve their audit quality in general. Further analyses indicate that sanctioned CPA firms make significant efforts to repair their reputations regardless of whether they are big auditors or small auditors, sanctioned once or multiple times (by various regulatory agencies), sanctioned by the China Securities Regulatory Commission (CSRC), Ministry of Finance (MoF) or General Audit Office (GAO). Consistent with prior research, we find that the CPA firms with shredded reputation experience more client turnover although they do not earn audit fees lower than the control group. However, after these CPA firms with shredded reputations take actions to restore their reputations, this condition is subsequently changed. Among CPA firms with shredded reputations, CPA firms taking actions to improve their audit quality are less likely to be dismissed by their clients and more likely to charge higher audit fees. The results indicate that when CPA firms with shredded reputation take actions to improve their audit quality, clients appear to value their efforts on audit quality improvement.
BETWEEN SUBSTITUTABILITY AND COMPLEMENTARITY, TO BETTER UNDERSTAND THE CONTROL-TRUST RELATIONSHIP IN THE PUBLIC SERVICE DELEGATIONS
SAN MARTINO, LAURENCE
Category: PSNP = Public Sector & Not-For-Profit
The delegation of local public services is highly developed in France. However, this public-private inter-organizational relationship may seem paradoxical and risky. It requires then, the establishment of controls. In this risky context, the concept of trust in the partner may have an important role to play. We concern ourselves in the first part of this communication with the concepts of control and trust as well as their linkage on a theoretical level. In the second part, we present the first results of our qualitative empirical research on the control-trust linkage in the case of delegation of water distribution and sanitation services.
WHY DO NOT ALL FIRMS ENGAGE IN TAX AVOIDANCE?
SANDNER, KAI
JACOB, MARTIN; ROHLFING-BASTIAN, ANNA
Category: TX = Taxation
Empirical evidence suggests substantial cross-firm variation in the extent of tax avoidance. However, this variation is not well understood. This paper provides a theoretical background for testing cross-firm differences in tax avoidance. We develop a formal model to analyze the incentives for firms to engage in tax avoidance. The tax avoidance decision is a function of moral hazard, tax planning costs, and pre-tax profit margins. If pre-tax profit margins are low, moral hazard problems drive the tax planning decision. In contrast, in case of high pre-tax profit margins, the tax planning decision is mainly driven by tax planning costs such as reputational costs. One implication of our model is that moral hazard can (partly) explain why some firms do not engage in tax avoidance. If moral hazard problems are severe, tax avoidance is less likely. Our model can be applied to test differences in tax avoidance across firms.
FACTORS ENHANCING THE INTERNAL AUDITING FUNCTION'S ABILITY TO ADD VALUE FOR THE AUDITEES. EVIDENCES FROM ITALIAN COMPANIES
SARENS, GERRIT
BETTI, NATHANAËL; D'ONZA, GIUSEPPE
Category: AU = Auditing
This study examines the relationship between the internal auditing function (IAF) and the auditees with the attempt to identify the factors influencing the IAF's ability to add for them. The analysis is based on the responses of 78 Italian Chief Audit Executives (CAEs) who took part to a survey carried out in 2014. The analysis of the survey's results indicate three factors which are positively and significantly associated with a transparent, collaborative, constructive and partnering relationship between the IAF and the auditees: 1) the integration of the inputs of senior management in the setting up of the audit plans; 2) the use of the IAF as a management training ground and 3) the regular revision of audit methodologies. Moreover the results of the regression analysis indicate there is a negative and significant association between the diversification of the IAF's activities and the ability of the IAF to create a positive collaboration between with the auditees.
FUNDAMENTAL VALUATION IN SIX ASIAN COUNTRIES: ROLE OF EARNINGS, BOOK VALUE, RESIDUAL INCOME, AND DIVIDEND
SAUDAGARAN, SHAHROKH
BOONLERT-U-THAI, KRIENGKRAI ; SEN, PRADYOT
Category: FR = Financial Reporting
This study examines the value relevance of earnings, book value, and dividend for the listed firms in six Asian countries that base their accounting standards on International Financial Reporting Standards (IFRS). We first compare three basic accounting based valuation models: earnings capitalization; book value; and book value plus earnings, and find that the book value plus earnings model (Ohlson model) performs best in all countries. Secondly, we analytically derive an alternative specification of the Ohlson model (called Ohlson with other information) where dividends together with earnings play the role of other information. This specification would be appropriate in countries where there are no reliable sources of “other information” such as analyst forecast that has been used extensively in the literature. We find that this version of Ohlson model performs best. Our finding is in contrast with those of Ashbaugh and Olssson (2002) who find that the earnings capitalization model is the best valuation model for the international firms adopting IFRS. We also use two estimation methods, TS and OLS, and observe that TS estimates provide a more stable and consistent estimates. We create numerical examples to demonstrate that the valuation models apply very consistently to all the six Asian countries regardless of their level of implementation of IFRS. Key Words: valuation relevance; valuation properties; earnings; book value; dividend, TS Method.
COLONIALISM, INSTITUTIONS, AND ACCOUNTING QUALITY AROUND THE WORLD
SCAPIN, MARIANO PABLO
ABUROUS, DINA; GARCIA OSMA, BEATRIZ
Category: FR = Financial Reporting
We provide evidence that investor protection, a commonly used proxy for institutional variation among countries, fails to explain differences in earnings quality in post-colonial countries. Instead, following the institutional economics literature (Acemoglu, Johnson, & Robinson, 2001; Acemoglu, Johnson & Robinson, 2002) we examine the use of exogenous colonial strategies to explain country differences and find evidence that these strategies are institutional features that influence accounting quality. We suggest that this influence works through the incentives of local elitist groups that hold the political and economic power in society. We also examine the possibility that what we observe is the effect of changes in institutions over time but find no such effect. We contribute to the literature by providing evidence that the colonial experience is a key feature relevant to explaining contemporary institutions and consequently accounting quality in a large subset of countries. Furthermore, we provide researchers with instruments to minimize the endogeniety of institutional proxies arising from the likelihood of proxies for both institutions and accounting quality being commonly predetermined.
INSIDER TRADING RESTRICTIONS AND FINANCIAL REPORTING QUALITY
SCARLAT, ELVIRA
GARCIA-OSMA, BEATRIZ; SHIELDS, KARIN
Category: FR = Financial Reporting
We provide evidence that firms enjoy lower levels of earnings management fol- lowing the adoption of insider trading restrictions. We base our measure of insider trading restrictions on the extent to which transactions performed by insiders take place in the allowed trading window, and we develop a methodology to identify the quarter when the firm has adopted the restrictive strategy. We find a significant negative relation between our insider trading restrictions measure and discretionary accruals, even after controlling for previously documented determinants of earnings management.
THE USEFULNESS OF PROFITS FOR INDUSTRY PORTFOLIO ALLOCATION
SCHABERL, PHILIPP
STRAUSS, JACK
Category: FA = Financial Analysis
This paper investigates why operating profit is more useful than net income in forecasting stock returns and future cash flows at the industry level. We apply Ohlson’s (1999) framework that emphasizes three attributes of core earnings: persistence, predictive value, and value relevance. Our paper introduces an extension of the hedge portfolio approach that applies out-of-sample forecasts to evaluate the usefulness of predicted accounting fundamentals in the context of a real-time industry portfolio allocation strategy. The trading strategy based on these forecasts takes long (short) positions in industries with high (low) forecasted accounting fundamentals. Over the sample period 1980.1 to 2013.4, an industry rotation strategy using forecasts of operating profit generates returns that exceed the buy-and-hold benchmark by approximately 7.2% annually, yield an alpha that exceeds 15%, and increase the Sharpe ratio by nearly 25%. These forecasts consistently beat the buy-and-hold benchmark more than 60% of the time. We demonstrate the usefulness of operating profit stems from its high persistence and predictive value. Operating profit is substantially more persistent and forecastable in real time than net income, which contains substantial transitory components. Innovations in operating profit have significantly greater predictive value than net income in forecasting future cash flow.
TERMINAL VALUE FOR FIRMS WITH MULTIPLE BUSINESS UNITS AND HETEROGENEOUS RETURN ON INVESTMENT
SCHÄFER, ULRICH
DIERKES, STEFAN
Category: MA = Management Accounting
Terminal values represent a large portion in the value of firms and hence should be estimated carefully. The literature on corporate valuation provides various approaches to terminal value measurement that aim at a realistic model of firm activities. However, there are only few approaches that explicitly consider a firm with multiple business units that differ in their specific return on investment. The existing approaches frequently lack a sufficient theoretical foundation. They underlie restrictive assumptions regarding payout policy and growth and have insufficiently been related to each other thus far. Based on a set of general assumptions, we illustrate how to measure a firm’s terminal value if corporate investments are made in two business units that differ in their specific return. We discuss the effect of corporate payout policy and highlight special cases that might be particularly relevant from a practical point of view or have been previously proposed in the theoretical literature. We use our general model as a reference to categorize and discuss other models of terminal value that explicitly consider investments in multiple business units.
IS P/E ALWAYS MORE ACCURATE THAN EV/EBITDA?
SCHATT, ALAIN
KANG, JIAN; STARICA, CATALIN
Category: FA = Financial Analysis
We compare the accuracy of firm valuation based on EV/EBITDA, which is a multiple that gained in popularity with the practitioners during the last decade, with that of the traditional multiple P/E. Our detailed analysis of a large sample of US companies, over a period of 45 years, shows that P/E dominates EV/EBITDA. Our finding is robust to the implementation of the valuation method (characteristics and number of peers, aggregation of peer multiples), the type of data in the construction of the multiple (reported numbers or forecasts), the period (recent years or not), the industry type (capital intensive industry or not). However, for companies with low debt, EV/EBITDA dominates P/E, and the difference in accuracy is even larger for firms that report large amount of Non-Operating items or Special items. Overall, we conclude that EV/EBITDA leads to more accurate valuation in some specific cases.
THE INFLUENCE OF CORPORATE SOCIAL RESPONSIBILITY AND BOARD CHARACTERISTICS ON EARNINGS MANAGEMENT - EUROPEAN EVIDENCE
SCHAUPP, DANIEL
Category: FR = Financial Reporting
This paper examines whether firms that act socially responsible engage in a more transparent financial reporting. In particular, the question is whether firms with high corporate social responsibility (CSR) engagement exhibit less earnings management than their socially less responsible counterparts. In addition, CSR emphasizing firms with simultaneous good monitoring are regarded to possess a superior transparent financial reporting. Therefore, the study asks whether firms with high engagement in CSR and higher independence in board characteristics engage in even lower earnings management. The results show that CSR firms are less likely to engage in (1) accrual-based earnings management and (2) real activities based earnings management. Additionally, these firms engage in even lower earnings management, when (1) audit committee, (2) nomination committee, (3) overall board have higher proportions of independent members. These interaction effects are non-linear for (2) and (3). Howev-er, high-incentive situations are detected in which the magnitude of earnings management is high for all firms, independent of CSR engagement. The results are robust to (1) using various models to compute accrual-based and real activities earnings man-agement, (2) using standardised measures for earnings management, (3) using alternative measures for CSR performance re-spectively grouping and (4) applying additional performance control.
RISK-TAKING IN TOURNAMENTS—AN EXPERIMENTAL ANALYSIS
SCHEDLINSKY, IVO
SOMMER, FRIEDRICH; WÖHRMANN, ARNT
Category: MA = Management Accounting
This paper examines risk-taking in tournaments experimentally. More precisely, we investigate two potential drivers of risk-taking in tournaments. The first driver is the proportion of tournament winners, which is a design parameter and therefore endogenous for firms. We find that a lower proportion of winners encourages employees to take more risk. The second potential driver is exogenous. We investigate a behavioral bias of employees working under tournament incentives, that is, reliance on simplified decision rules. Though tournaments require employees to use strategic optimization, that is, considering the behavior of other contestants, and much of the analytical literature builds on this assumption, we find that employees instead rely on simplified decision rules. If a particular strategy appears more attractive based on such simplified decision rules, employees are more likely to choose this strategy even if it implies taking more risk. We also find significant interaction between the proportion of winners and the use of simplified decision rules. Our results confirm that employees reduce risk-taking over time in a setting where each unit of risk is excessive. However, this appears to result from trial-and-error learning rather than understanding the strategic character of tournaments, because, though reduced, the level of risk-taking remains too high.
MANAGEMENT ACCOUNTANTS AND MANAGERS’ DECISION MAKING: THE FIGHT DECISION AGAINST BIASES BASED ON SUPPORT THEORY
SCHERM, ANDREAS CHRISTOPH
HIRSCH, BERNHARD; SOHN, MATTHIAS
Category: MA = Management Accounting
We show the relevance of cognitive biases for management accountants by empirically investigating the very simple and plastic pattern which support theory describes, in a business investment context. Support theory states that individuals tend to give different subjective probabilities to the same event, dependent on its presentation as one compact issue or unpacked into its single components. We conducted an experiment with 249 business professionals and demonstrate that the biases, support theory refers to, also take place in the important and matter-of-fact context of an investment decision. Additionally, we show that a format change in subjective probabilities from percentage values to relative frequencies, significantly improves people’s judgments. However, a bias could still be observed. Furthermore we test whether instructions as an additional measure further improve judgments, which our findings do not support.
CLIMATE RISK DISCLOSURE AND INFORMATION ASYMMETRY – DO PHYSICAL RISKS MATTER?
SCHIEMANN, FRANK
SAKHEL, ALICE; SCHIEMANN, FRANK
Category: SEE = Social, Environmental & Ethical
Investors are becoming increasingly concerned about the negative financial implications of climate change-related impacts on business activities. As a consequence, the number of companies engaging in voluntary environmental disclosure has strongly risen in the last decade. We examine the association between information asymmetry and voluntary disclosure of companies’ exposure to risks emanating from physical effects of climate change. On the theoretical basis of information economics, we posit that the mere decision to voluntarily report these risks is associated with a decrease in information asymmetry among market participants, and that the latter further decreases for higher reported levels of companies’ exposure to physical risks. We also investigate if affiliation to a high or low carbon emitting industry group influences these relationships. We investigate the physical risk reporting behavior of 717 European companies over three years (2011-2013). We find evidence that investors take notice of physical risk information. Further, we show that there is a moderating effect of industry group affiliation, in a way that for high emitting industries higher levels of disclosed physical risk exposure are related to decreased information asymmetry, while the opposite holds for low emitting industries. Thus, we conclude that the direction of the relation between disclosure and information asymmetry is contingent on company characteristics.
BANK RUNS AND ACCOUNTING FOR ILLIQUID BANK ASSETS
SCHILLER, ULF
BÖCKEM, SABINE
Category: FA = Financial Analysis
We investigate the role of mandatory fair-value versus historic-cost reporting in a bank. The bank has invested in long-term financial claims on the yield of specific real assets. It is financed by deposits that can be withdrawn on short notice. Withdrawals must be financed by fire sales on the secondary market where both depositors and the secondary market rely on the bank's accounting report regarding the value of the assets. Due to asset illiquidity, withdrawals are costly and always inefficient. In response to this tension, the bank under-invests. We show that a curbed information pattern, as generated by historic-cost accounting, mitigates under-investment compared to fair-value accounting. However, the bank favors fair-value accounting to historic cost accounting if asset illiquidity is not too severe. Finally, if depositors' ex ante beliefs are too skeptical, investment is impossible under historic-cost accounting and fair-value accounting is the only remaining method.
MULTINATIONALS AND INCOME SHIFTING BY DEBT
SCHINDLER, DIRK
SCHJELDERUP, GUTTORM
Category: TX = Taxation
Existing literature studies debt shifting and transfer pricing separately. In practice, however, the choice of debt-to-asset ratios in affiliates and the interest rate on internal debt are interrelated management decisions that are also mutually affected by government regulation. Therefore, this paper models these strategies as simultaneous decisions made by the management. We find that the tax sensitivity of the corporate tax base depends on whether debt shifting and transfer pricing are cost complements or substitutes. A second result is that stricter regulation of debt shifting and transfer pricing may have the effect of fostering such activities.
INTERIM MANAGEMENT STATEMENTS IN THE EU – A CONCEPT WITH(OUT) A FUTURE?
SCHIRMACHER, HENRIK SVEN ARE
ECKERTH, STEPHANIE; NIENHAUS, MARTIN
Category: FR = Financial Reporting
In 2004, the EU introduced a new vehicle of interim reporting known as Interim Management Statements (IMS) with the objective to harmonize the interim reporting requirements within the EU. In contrast to quarterly financial statements, IMSs are less demanding and lightly regulated because they only require a narrative explanation of the firm’s financial position and performance as well as material events. Given firms’ significant control about the form and content, IMSs provide a very interesting research opportunity in the European context. We analyze whether de jure harmonization actually led to de facto harmonization for five major EU countries. Based on a content analysis, we find a substantial variety in the form and content of IMSs between the different countries. The differences are particularly pronounced with regard to the provision of quantitative information. Moreover, using an event study, we also find differences in the information content of IMSs for investors. Our results also suggest that a higher quality of IMSs is associated with a stronger investor reaction. Thereby we inform supra-national regulators such as the EU about the consequences of vague requirements that leave room for discretion. We also inform preparers of financial information that IMSs can be a vehicle that conveys useful information for investors and the usefulness is increasing with the extent of quantitative information.
DETERMINANTS OF CORPORATE VOTING - EVIDENCE FROM A LARGE SURVEY OF GERMAN RETAIL INVESTORS
SCHMIDT, ANDRÉ
JUNGIUS, TOM
Category: GV = Governance
Although corporate voting is a vital instrument of corporate governance, research on the determinants of voting turnout on an individual level is scarce. This paper sheds first light on corporate voting from an individual investor’s perspective by analyzing a large and unique data set collected from a survey among almost 425,000 German retail investors. The results of this case study give unprecedented insight into determinants influencing private shareholders’ decision to cast their votes and their inclination to participate in annual general meetings. While not solving this puzzle entirely, the results may offer new implications for explaining the voting turnout with regard to retail investors’ demographic and socioeconomic characteristics as well as different investment strategies.
WHY DO FIRMS GO PRIVATE? – DELISTING DETERMINANTS AND MARKET REACTIONS ON THE GERMAN CAPITAL MARKET
SCHNACK, HENNING
HITZ, JOERG-MARKUS
Category: FA = Financial Analysis
This paper exploits the German setting to investigate firm decisions to delist from organized stock markets, i.e. to go private. As recently as 2013, court rulings in Germany substantially lowered the bar for delistings, only to be overturned by recent legislation in 2015, which introduces substantially higher thresholds for termination of a stock market listing. We investigate characteristics of all firms that seized this opportunity to withdraw from the stock market, hence shedding light on the economic determinants that shape delisting incentives, with a particular eye on the cost of IFRS compliance and enforcement. Our findings identify concentrated ownership and low liquidity as important determinants. These findings are in line with small benefits of the listing being outweighed by recurring listing costs. Market reactions to delisting announcements are negative on average, yet with substantial firm-level variation. Our findings identify important factors for the delisting decision, and illustrate that these factors are markedly different from the driving force behind downlistings, for which prior literature identifies costs of IFRS compliance and enforcement to play a major role.
THE COMBINED IMPACT OF ASYMMETRIC TAXATION AND LIMITED LIABILITY ON OPTIMAL COMPENSATION
SCHNEIDER, GEORG
MEISSNER, FABIAN; SCHOLZE, ANDREAS
Category: TX = Taxation
We study a binary principal-agent model featuring two risk-neutral parties, in which the agent is protected by limited liability and his compensation is affected by an asymmetric treatment of gains and losses by the tax authority. The model challenges the common wisdom that the principal is always better off whenever the agent is taxed less aggressively. We argue that it depends crucially on the amount of the agent’s pledgeable assets whether or not a change in the loss tax rate makes the principal better off. If the agent’s pledgeable assets are sufficiently high such that limited liability is not an issue, then an increased loss tax rate leads to a higher tax refund by the tax authority which in turn allows the principal to reduce the cost of compensation without distorting the agent’s incentives to work hard. However, if the agent does not own enough pledgeable assets then the principal prefers asymmetric taxation over symmetric taxation. In particular, we find that there exists a loss tax rate such that the principal’s welfare is maximized, whereby the loss tax rate is strictly lower than the profit tax rate. Based on our findings we predict that—depending on the amount of the agent’s pledgeable assets and the loss tax rate—there is either a positive or a negative correlation between bonuses paid to the agent and the principal’s welfare.
PUBLIC DISCLOSURE OF PROFESSIONAL PERFORMANCE AND THE EFFECT OF BUREAUCRATIC BENCHMARKING INFORMATION
SCHNEIDER, MELANIE LUCIA
MAHLENDORF, MATTHIAS D.; SCHÄFFER, UTZ
Category: MA = Management Accounting
Professionals are often expected to be reluctant with regard to bureaucratic controls because of assumed conflicting values and goals of the organization vis-à-vis the profession. We suggest however, that employed professionals will be more open to consider bureaucratic benchmarking information provided by the administration, if they are aware that their professional performance is low. To test our hypothesis, we rely on a sample of archival public professional performance data for 191 orthopaedics departments of German hospitals matched with survey data on bureaucratic benchmarking information provision to the chief physician of the respective department. Professional performance is publicly disclosed due to regulatory requirements. At the same time, chief physicians typically receive bureaucratic benchmarking information from the administration. We find that more frequent bureaucratic benchmarking information is associated with better professional performance, but only if prior professional performance was low. The results are robust against alternative sets of controls and different model specifications. Our findings contribute to the understanding under which conditions bureaucratic benchmarking information provided to professionals have an effect on their performance.
TIME (IN)CONSISTENCY AND REAL OPTIONS: MUCH ADO ABOUT NOTHING?
SCHOSSER, JOSEF
Category: MA = Management Accounting
If firms have exclusive rights to particular investment projects, they frequently have the opportunity to delay these investments. This paper analyzes the effect of quasi-hyperbolic discounting, i.e. time-inconsistent preferences on the exercise timing of such options to defer an investment. It complements earlier work on this issue produced by Grenadier/Wang (2007, Journal of Financial Economics 84 (1), 2-39) and Quah/Strulovici (2013, Journal of Political Economy 121 (5), 896-939) covering risk aversion and capital market interaction. The results are as follows: In a number of cases, the capital market environment provides for the irrelevance of quasi-hyperbolic discounting. Besides this, a different behavior of time-inconsistent and time-consistent decision makers occurs only for quite specific parameter conditions. In light of experimental evidence for time-inconsistent behavior, this provokes the following question: Is time-inconsistent behavior really driven by quasi-hyperbolic discounting, but rather by more fundamental irrationality (like a violation of no arbitrage restrictions)?
THE IMPACT OF DAMAGE APPORTIONMENT ON ICS EFFECTIVENESS AND FINANCIAL REPORTING ACCURACY
SCHRANK, REINHARD
Category: AU = Auditing
This paper provides a theoretical analysis on how the damage apportionment between the auditor and the client firm in case of an audit failure affects the effectiveness of the internal control system and the accuracy of audited financial statements. To this end, I construct a game-theoretic model in which the client firm invests in internal control system quality and the auditor chooses audit effort. Both actions jointly determine the accuracy of audited financial statements. The analysis reveals that a change of the effective damage apportionment has an ambiguous impact on the effectiveness of internal controls. Furthermore I show that shifting liability towards the client firm decreases the probability of undetected errors in audited financial reports, as long as the damage apportionment is sufficiently uneven. However, for a sufficiently even damage apportionment, a liability shift towards the client firm deteriorates the accuracy of audited financial reports. The analysis reveals that it critically depends on the strength of the auditor's reputational incentives how unevenly the effective liability consequences must be distributed to allow for a positive quality effect of a liability shift.
DOES GOING PRIVATE ADD VALUE THROUGH OPERATING IMPROVEMENTS?
SCHUETT, HARM
AYASH, BRIAN
Category: FA = Financial Analysis
Previous studies documented a large positive effect of private equity ownership on operating performance between 1980 and 1990, while more recent studies such as Guo, Hotchkiss and Song (2011) and Cohn, Mills and Towery (2014) document none or a very modest increase in operating performance. We revisit the evidence on post LBO performance and offer an alternative determinant for the varied and time-inconsistent results found in the literature: The effect of accounting for LBO transactions and its change over time. Using hand-collected financial statements for 183 LBO targets, we illustrate how previously used proxies for operating performance fail to consider all of the accounting changes accompanying these complex transactions. Next, we reproduce the results of previous studies. However, once proxies are modified slightly to account for the LBO process, we find no robust evidence of post-buyout improvements compared to industry peers, regardless of the time period of the study. Finally, we document the change in accounting practices over time and find that it coincides with the decline in operating performance as measured with traditional proxies.
LINKING ENERGY-RELATED STRATEGIC FLEXIBILITY AND ENERGY EFFICIENCY – THE MEDIATING ROLE OF MANAGEMENT CONTROL SYSTEMS CHOICE
SCHULZE, MIKE
HEIDENREICH, SVEN
Category: MA = Management Accounting
A key challenge for many organizations today is to find a reasonable balance between efficiency considerations on the one hand, and the promotion of strategic flexibility on the other. Based on survey data of 236 German manufacturing companies this paper empirically examines the impact of energy-related strategic flexibility characteristics of firms on the design of their management control system (MCS) and their corresponding energy efficiency. Using structural equation modeling, we combine primary data that captures the energy-related strategic flexibility characteristics as well as the design of the MCS with longitudinal secondary data that was used to calculate energy efficiency. The results indicate that the importance of formal as well as informal controls declines in those firms with a high energy-related strategic flexibility. Furthermore, there is in general a positive relation between the use of formal management controls and energy efficiency, whereas the emphasis companies place on informal management controls does not result in a significant effect on energy efficiency. This study contributes to a general understanding of how organizations balance formal and informal controls in the simultaneous pursuit of efficiency and flexibility as well as to the role of contextual and strategic factors on a firm’s MCS in a wider context.
CORPORATE TAX MINIMIZATION AND STOCK PRICE REACTIONS
SCHWÄBE, ALEXANDER
BLAUFUS, KAY; MÖHLMANN, AXEL
Category: TX = Taxation
Tax minimization strategies may lead to significant tax savings, which could, in turn, increase firm value. However, such strategies are also linked with significant costs, such as expected penalties, planning, agency, and reputation costs. The overall impact of firms’ tax minimization strategies on firm value is, therefore, unclear. To investigate whether corporate tax minimization increases firm value, we analyze the stock price reaction to news about corporate tax avoidance or evasion. Our hand-collected dataset includes 140 tax news regarding listed German firms over the period 2003 to 2014. In contrast to previous research, we explicitly distinguish between news about legal tax minimization (tax avoidance) and illegal tax minimization (tax evasion). We show that stock market responses differ significantly with regard to news about legal or illegal activities. While we find negative abnormal returns for tax evasion news, we find positive abnormal returns for tax avoidance news. We do not find any reputation costs of legal tax minimization. By contrast, the positive market reaction to tax avoidance news is associated with firms that have a high reputation risk.
PEER INFLUENCE ON MANAGERIAL HONESTY
SCHWERING, ANJA
Category: MA = Management Accounting
This study examines how different types of peer behavior disclosure influence managerial honesty in a budgeting setting, specifically the difference between anonymous and non-anonymous disclosure. Prior research has provided mixed results regarding the disclosure of peer behavior and focuses exclusively on anonymous disclosure. This study argues that, along with a peer’s behavior, the peer’s identity is almost certainly disclosed. Based on different behavioral theories, honesty is predicted to decrease over time when peer behavior is disclosed and the decrease in honesty is greater when disclosure takes place non-anonymously rather than anonymously. The results of an experimental investigation show that the disclosure of peer behavior indeed decreases honesty over time. This effect is mainly driven by the behavior of female subjects. Male subjects hardly change their behavior when confronted with disclosure. However, there is no difference between anonymous and non-anonymous disclosure for women. With both types of disclosure, women are concerned with distributional fairness issues, peer pressure, and impression management. These results underline the necessity for management accountants to determine the ability of employees to infer the honesty of their peers. In addition, gender effects should be considered when designing a budgeting system.
AUDIT QUALITY CONVERGENCE: A TIME SERIES ANALYSIS
SEAVEY, SCOTT
HOELSCHER, JAMIE
Category: AU = Auditing
Convergence results in the standardization and uniformity of practices and policies. Prior literature finds that convergence of product quality results in firms looking like one another over time. For audit firms, product quality manifests in client financial reporting quality. We examine the variability across firms of client financial reporting quality as the Big 8 consolidates to the Big 4, industry-wide best practices emerge, and regulatory requirements change. We examine time-series data from 1975-2013 and proxy for financial reporting quality (i.e., audit quality) with firm-level average absolute value of abnormal accruals over the absolute value of total accruals. We find that audit quality has converged over time, as the variance of client accruals across Big N firms has declined markedly over the past forty years. We also report that audit quality overall has increased over the same time period, punctuated by short term fluctuations. Finally, we report that exogenous shocks such as the regulatory requirements of Sarbanes-Oxley affect the variance of audit quality, but that the effects are short term in nature.
THE INTERPRETATION OF UNANTICIPATED NEWS ARRIVAL AND ANALYSTS’ SKILL
SEGAL, BENJAMIN
RUBIN, AMIR; SEGAL, DAN
Category: FA = Financial Analysis
Analysts’ functions are divided into discovery and interpretation roles, but separating between the two is non-trivial. We conjecture that analysts’ interpretation skill can be gauged by their forecast revisions following material unanticipated news—in particular following non-earnings 8-K reports, which arrive at the market unexpectedly. We establish that unanticipated 8-Ks are informative for analysts, and find that analysts who are more likely to revise their forecasts following unanticipated 8-Ks provide more timely and accurate forecasts. We document a positive association between analysts’ tendency to react to unanticipated 8-Ks and market reaction to their recommendation changes, suggesting investors prefer these analysts’ opinions.
DO FIDUCIARY DUTIES TO CREDITORS REDUCE DEBT-COVENANT AVOIDANCE?
SEGAL, DAN
LEVI, SHAI; SEGAL, BENJAMIN
Category: GV = Governance
Financial reports should provide useful information to shareholders and creditors. Directors, however, normally owe fiduciary duties to equity holders, not creditors. We examine whether this slant in fiduciary duties affects the likelihood that firms will use financial engineering to circumvent debt covenants. By avoiding debt covenants, firms prevent creditors from taking actions to reduce bankruptcy risk and recover their investment, and allow the firm to continue operating for the benefit of equity holders. We find that firms are more likely to circumvent covenant restrictions when directors owe fiduciary duties only to equity holders than when directors owe fiduciary duties to creditors as well. We also show board quality lowers the probability that firms will avoid covenants, only when directors owe a legal fiduciary duty to creditors. Collectively, our results suggest firms are more likely to structure transactions and circumvent debt covenants when corporate governance is designed to protect equity holders only, and not creditors.
DOES HEDGE ACCOUNTING MATTER FOR THE EUROPEAN BANKING INDUSTRY?
SEITZ, BARBARA
DINH, TAMI
Category: FR = Financial Reporting
While IFRS 9 aims to increase the application of hedge accounting compared to IAS 39, the relevance of disclosed information on hedge accounting for the capital market has not gained much attention yet. This paper provides an in-depth analysis on financial information related to all three types of hedge accounting of European banks from 2005-2014. We further investigate whether hedge accounting contributes to the explanation of their market values. Our results show that the application of hedge accounting as such and selected hedge accounting variables are significantly associated with current market value of equity. This is specifically the case for the notional values and the negative fair values of the hedge accounting instruments. Further analyses reveal that the changes in the standard moderate the association. Finally, a disclosure index indicating the percentage of disclosed information regarding hedge accounting shows a highly significant and positive association with market values, which is even stronger during the years of financial instability. The results of this study are particularly important in view of the IASB’s envisaged increased application of hedge accounting pointing to its relevance for market participants.
ACCOUNTING STANDARDS AND THE ALLOCATION OF PENSION ASSETS
SELLHORN, THORSTEN
BARTHELME, CHRISTIAN
Category: FR = Financial Reporting
This paper examines the effect of a change in accounting standards on a specific type of investment decision: the allocation of pension assets. In particular, we investigate whether the elimination of a volatility-reducing IFRS accounting treatment for pension liabilities (i.e., the ‘corridor method’) reduces the portion of firms’ pension assets invested into equities. We exploit the mandatory introduction of IAS 19R, which mandated immediate recognition of actuarial gains and losses — eliminating the former corridor method, a smoothing device. Under IAS 19R, firms previously smoothing pension-induced balance sheet volatility under the corridor method adopted immediate recognition of actuarial gains and losses in other comprehensive income (i.e., the OCI method). We predict and find that treatment firms affected by mandatory IAS 19R adoption significantly reduce their allocation of pension assets to equities relative to control firms unaffected by IAS 19R. These difference-in-differences results hold under several robustness tests, including propensity-score matching to mitigate any self-selection bias. We interpret these findings as consistent with firms changing their pension plan asset allocations to mitigate an expected increase in pension-induced balance sheet volatility caused by a change in accounting standards. Whereas prior research focuses on earnings volatility concerns, our results suggest concerns about balance sheet volatility, even where earnings are smoothed.
ENVIRONMENTAL AND SOCIAL DISCLOSURES AND FIRM FINANCIAL RISK
SHAUKAT, AMAMA
BENLEMLIH, MOHAMMED; QIU, YAN
Category: SEE = Social, Environmental & Ethical
In this paper we examine the link between a firm’s environmental (E) and social (S) disclosures and measures of its financial risk including total, systematic, and idiosyncratic risk. While we do not find any link between a firm’s E and S disclosures and its systematic risk, we find a negative and significant association between these disclosures and a firm’s total and idiosyncratic risk. These are novel findings and are consistent with the predictions of the resource based view of the firm suggesting that firms which make extensive and objective E and S disclosures build unique reputational and relational capital with its key stakeholders, which in turn reduce the firm’s idiosyncratic risk. These findings are important for all corporate stakeholders including managers, employees, and suppliers who have a significant economic interest in the survival and success of the firm.
DO DIRECTOR NETWORKS MATTER FOR FINANCIAL REPORTING QUALITY? EVIDENCE FROM RESTATEMENTS
SHELLEY, MARJORIE
TICE, FRANCES M.; OMER, THOMAS C.
Category: GV = Governance
This study examines the effect of board of director connectedness on financial reporting quality, specifically the misstatement of annual financial statements. Because restatements are costly, it is important to understand whether firms with well-connected directors benefit from better access to the information exchanged through the director network. We examine multiple dimensions of connectedness and find that, after controlling for operating performance and corporate governance characteristics, firms with well-connected directors are less likely to misstate their annual financial statements, even in the presence of a board connection with another misstating firm. In particular, our results indicate that the negative effect on financial reporting quality of board interlocks to misstating firms can be offset by connections to other well-connected directors, by the speed at which directors can access information and by having directors who increase the likelihood of receiving more complete information through the boardroom network. We conduct several tests to address alternative explanations, as well as hold board composition constant to control for endogeneity, and find similar results. Our findings suggest that corporate boards with better-networked directors are less likely to adopt reporting practices that reduce financial reporting quality.
THE ADOPTION AND IMPLEMENTATION OF IFRS IN RWANDA: THE ROLE OF INSTITUTIONAL INFRASTRUCTURES
SHEMA, JEAN BOSCO
RIMMEL, GUNNAR
Category: FR = Financial Reporting
The adoption and implementation of International Financial Reporting Standards is a phenomena that has attracted the close attention of many researchers. The firm, as a level of analysis, has received the lion’s share in researching about the phenomena. However, the role of institutional infrastructures arrangements is paramount in the adoption and implementation of International Financial Reporting Standards. This study focuses on institutional infrastructures arrangements for the adoption of International Financial Reporting Standards in Rwanda. Precisely, the institutional infrastructures arrangements are assessed regarding their strengths and weaknesses, as well as their potential impact on the adoption process. A content analysis has been applied on major documents related to the institutional infrastructures of International Financial Reporting Standards in Rwanda. The findings reveal that though a headway has been accomplished in setting up different institutional infrastructures some inconsistencies can still be observed and explain the less progress in the adoption and implementation the international standards in Rwanda. The present study also shows implicitly that accounting is a social and orga
WHAT AFFECTS FACTOR LOADING UNCERTAINTY AND EXPECTED RETURNS? THE ROLE OF ACCOUNTING QUALITY
SHI, CHARLES
NI, CHENKAI
Category: FR = Financial Reporting
Despite considerable research on associations between accounting quality and expected returns, much is yet to be learnt about specific mechanisms underlying the associations. Motivated by a recent theoretical work by Armstrong, Banerjee and Corona (2013), who show that a firm’s expected return decreases in investor uncertainty about its factor loadings, we examine how firm-specific information quality affects expected returns through factor loading uncertainty. We document that the quality of accounting information is negatively associated with factor loading uncertainty, and, as a consequence, accounting quality is positively associated with the cross-section of expected returns due primarily to the factor loading uncertainty effect. The findings are robust with respect to alternative measures of accounting quality and various model specifications. Overall, these results improve our understanding of how accounting quality affects stock returns and of the mechanisms underlying the effect.
CEO EXPERTISE AND THE DESIGN OF COMPENSATION CONTRACTS: EVIDENCE FROM GENERALIST VERSUS SPECIALIST CEOS
SHI, WEI
LIU, CHUNBO; WEI , K.C. JOHN
Category: GV = Governance
Generalist CEOs enjoy higher pay compared to specialist CEOs (Custódio et al. 2013). However, little is known about the implication of CEO expertise on how CEOs are paid. We conjecture that due to information asymmetry, generalist CEOs may overstate their ability in contracting with shareholders and, therefore, to design an optimal contract. Therefore, the pay for generalist CEOs is more likely to closely link to firm performance. Our results support this conjecture in that the pay-performance sensitivity (PPS) is higher for generalist than specialist CEOs. The results are robust to a battery of controls. Cross-sectional analysis indicates that the PPS for generalist CEOs is higher when CEOs are younger or in their early years of taking office and if CEOs are more important for firm performance. We also conduct additional analysis to rule out alternative explanations. Collectively, the evidence highlights the implication of CEO expertise in the design of compensation contracts and the learning perspective of CEO expertise (Pan et al. 2015).
CEO AND CFO GENDER, CORPORATE CULTURE AND FIRM-WIDE INSIDER TRADING
SHIELDS, KARIN ELISABETH
CLACHER, IAIN; SCARLAT, ELVIRA
Category: GV = Governance
We investigate insiders’ profitability under female executives using a sample of US firms between 2003 and 2011. Our results suggest a significant decrease in firm wide insider trading profitability following switches from male-to-female CEOs and CFOs. These findings are consistent to different empirical specifications, including difference-in-difference and propensity score matching. This evidence suggests female executives change the corporate culture in their organization via a stronger “tone-at-the-top” that limits insiders’ opportunistic trading.
DISCLOSURE TIMING AND THE MARKET RESPONSE TO FIRST-TIME GOING CONCERN MODIFICATIONS
SHIPMAN, JONATHAN
MYERS, LINDA; SWANQUIST, QUINN; WHITED, ROBERT
Category: AU = Auditing
Auditing standards require the auditor to amend the audit report with a going concern modification (GCM) if there is substantial doubt about the client’s ability to continue as a going concern. Although GCMs are typically characterized as value relevant (DeFond and Zhang 2014), prior research does not investigate whether they provide information beyond that in concurrent disclosures. In this study, we find that a large majority of first-time GCMs between 2004 and 2012 were issued concurrently with earnings announcements (EAs) or other significant management disclosures that typically revealed poor operating performance and often included material information related to future operations. Although we document a negative market reaction (consistent with prior research) and positive abnormal trading volume around the issuance of first-time GCMs, we find little evidence of a market response to first-time GCMs that are not released concurrently with EAs, suggesting that the market reaction is attributable to other information disclosed at the EA date rather than in the GCM. Furthermore, after controlling for the news in EAs, we find no difference in the market response to EAs issued concurrently with GCMs versus EAs issued prior to the GCM. Taken together, our findings suggest that the observed market reaction around GCMs is confounded by management disclosures and we find little evidence that GCMs convey incremental material information to investors.
THE REAL EFFECTS OF LIQUIDITY RISK ON TAKEOVERS
SHYU, HAWFENG
Category: FA = Financial Analysis
This paper identifies a strong effect of liquidity risk on takeover likelihood. Liquidity risk is defined as the innovation of market liquidity on risk premium. In addition, using mutual fund outflows as an instrument for the liquidity shock, this paper separates the anticipating effects from observed liquidity risk and identify the true association between liquidity risk and takeover vulnerability. A one percent point increase in liquidity beta will lead to a statistically significant 0.523 percentage points increase in takeover probability, relative to 0.0048 unconditional takeover probability. The results illustrate the impact of liquidity risk channel on takeovers and imply that financial markets have the real effects related to liquidity risk and takeover threats.
CREATING VALUE FROM SOCIAL MEDIA DATA FOR MANAGEMENT ACCOUNTING PRACTICES
SIDOROVA, YULIA
ARNABOLDI, MICHELA
Category: MA = Management Accounting
Social media diffusion captured both individuals and business world. Numerous organizations adopted social media to communicate and listen to their customers and analyse own performance. However, only few have succeed in creating value and knowledge from this massive unstructured data flow. The management accounting practices challenge for understanding social media data reliability, representativeness and dissemination inside organizations. This study addresses these questions in a holistic way through theoretical lens of Bhimani and Willcocks (2014) to analyse the process of data collection, analysis, dissemination and application for specific accounting activities. The empirical evidence is based on in-depth single case study with the one of the most proactive users of social media – Telecommunication company. This study contributes to the management accounting theory proposing a revised framework for social media data process within organisation, highlighting its particular configuration for knowledge, value creation and alignment with the employees’ perceptions.
COST BEHAVIOR IN THE FIRM LIFE CYCLE—AN EMPIRICAL ANALYSIS
SILGE, LISA
WOEHRMANN, ARNT
Category: MA = Management Accounting
Prior research shows that costs are sticky, that is, costs decrease less when activity falls than they increase when activity rises. This observation is usually referred to as ‘cost stickiness,’ and it indicates that managers often refrain from adapting production capacity to decreasing demand. It is argued that cost stickiness can be both value enhancing and value destroying. Depending on managers’ motives, investor reaction to cost stickiness may vary. We argue that cost stickiness differs by life cycle stage as well as investor reaction. Using a sample of U.S. firms for the period 1990–2014, we investigate cost stickiness in the introduction, growth, mature, shake-out, and decline stages of a firm’s life cycle. Though we find no support that cost stickiness is greater before and lower after the mature stage, we find evidence that decline firms are less likely to have sticky costs. Further, we find that, on average, capital markets evaluate cost stickiness negatively. In addition, we identify life cycle–specific patterns. More precisely, we document that investors react less negatively when costs of growth firms are sticky, but more negatively when decline firms refrain from cutting resources, that is, when they exhibit valuedestroying cost stickiness.
ACCOUNTING CHANGE AND THE BUSINESS LIFE CYCLE: A BRAZILIAN CASE STUDY ANALYSIS
SILVA, ADOLFO
SANCOVSCHI, MOACIR; SANTOS, ARIANE
Category: FR = Financial Reporting
The aim of this paper was to analyze “why”, “when” and “how” voluntary accounting changes occur during the business life cycle (growth and decline phases) of an organization using as reference the Positive Accounting Theory (PAT). The research was conducted using a longitudinal case study approach, from 2006 to 2015, in order to identify visible accounting decisions (Armenic 1992) in recognition, classification and measurement process in annual financial statements reports. The analyzed Company had the incentives to perfom opportunistic accounting choices, such as the ones predicted by the PAT hypothesis and also has experienced several situations in its business life cycle that could have influenced it to perform opportunistic accounting choices. However, there is no evidence that the Company ever made use of oportunistic increasing-income accounting changes to impact their financial debt-covenants and bonus plan, or decreasing-income accounting to avoid governament intervention, as suggested by the PAT hypothesis. We argue that concentrated ownership systems, high level of institutional monitoring and concerns about the company’s reputation (Reputation Hypothesis) should be considered important factors to explain why some companies avoid performing opportunistic accounting choices. Our study extends the literature by providing new additional evidence that companies not perfom opportunistic accounting choices in certain contexts, even when there are incentives to do so.
CAPITALIZATION VS EXPENSING AND THE BEHAVIOR OF R&D EXPENDITURES
SIMPSON, ANA
OSWALD, DENNIS ; ZAROWIN, PAUL
Category: FR = Financial Reporting
We examine the effect of capitalization vs expensing on U. K. firms’ R&D expenditures. Our investigation is motivated by the U.K.’s mandatory switch from U.K. GAAP to IFRS in 2005. Under U.K. GAAP, firms could elect to expense or capitalize development expenditures, but IFRS mandates capitalization. Thus, “capitalizers” maintained their accounting method, while “switchers” were required to change from expensing to capitalization. Using a difference-in-difference design, we examine the effect of the rule change on the amount and riskiness of the two groups’ R&D expenditures. Consistent with arguments that expensing’s deleterious effect on income causes firms to reduce their R&D outlays, we find that switching firms increased their R&D expenditures more than firms that continued to capitalize. However, inconsistent with arguments that the recognition of R&D assets, that might have to be written off, induces less risky behavior, we find no difference in the riskiness of the two groups. Our results attest to the real effects of accounting policy on firms’ R&D investments.
AUDITOR TENURE AND THE LENGTH OF EARNINGS MISSTATEMENT
SINGER, ZVI
ZHANG, JING
Category: AU = Auditing
Auditor tenure has been debated by regulators and academia for many years. While regulators favor imposing limitation to auditor tenure, most academic studies provide evidence of benefits from long client-auditor engagement. In this paper we examine the association between the duration of misstatement and auditor tenure. We find consistent evidence that longer audit firm tenure is associated with longer misstatements and with larger earnings misstatement amounts. On the cross-section we find that the positive association between auditor tenure and the length of the misstatement increases in the extent of the provision of non-audit services, in particular, non-tax-related, and in the complexity of the firm. Our study highlights one detrimental aspect of long auditor tenure, which is the impairment of auditor independence. Our study has implication to regulators who continue to express concern regarding long auditor-client firm engagement.
THE INFORMATIVENESS OF MICRO AND MACRO INFORMATION DURING ECONOMIC CRISIS AND NON-CRISIS PERIODS
SIOUGLE, GEORGIA
DOUKAKIS, LEONIDAS; GHICAS, DIMITRIOS; SOUGIANNIS, THEODORE
Category: FA = Financial Analysis
We investigate whether the informativeness of reported profitability and macroeconomic expectations differs between non-crisis and crisis economic periods by analyzing data for five European Union countries over the period 2005-2011. We find, first, macroeconomic expectations: a) are useful in predicting future profitability only in non-crisis periods, and b) are not useful in predicting stock returns in either period. Second, reported profitability: a) is useful in predicting future profitability in both crisis and non-crisis periods but less so in crisis periods, and b) is useful in predicting returns only in crisis periods. The cash flow component of profitability drives these results while the accrual component appears to be uninformative. Third, expected profitability, implied by the interaction between current profitability and macroeconomic expectations, is informative in predicting future profitability in both crisis and non-crisis periods and is efficiently priced only for high profitability firms during non-crisis periods.
ACQUISITION VALUATION: THE ROLE OF INFORMATION AVAILABILITY AND RIVAL BIDDERS
SMEULDERS, DIETER
DEKKER, HENRI C.; VAN DEN ABBEELE, ALEXANDRA
Category: MA = Management Accounting
This study uses survey data from key decision makers in acquiring firms from Belgium and the Netherlands to test the impact of availability of valuation information in corporate acquisitions. Specifically, we investigate the informational value of rival bidders during the acquisition process. Our data supports the hypothesis of a positive relation between a lack of information on the part of acquiring firm and perceived overpayment for the target company; that is, perceived overpayment increases with the lack of relevant information that managers faced at the time of valuation. In addition, we find that the number of rival bidders for the same target company significantly moderates this effect, such that the influence of a lack of information on perceived overpayment is weakened. This finding indicates that when information on a target company is not readily available to the acquiring firm, bids by other companies may signal their private information about the target, partially substituting for this missing information. These findings suggest that overpayment can not only be prevented when the acquirer possesses better information, but also when the presence of rival bidders in the bidding process provides a signal of their private information about the value of the target.
CHOICES OF FINANCIAL REPORTING REGIMES AND TECHNIQUES AND UNDERLYING DECISION-MAKING PROCESSES: A CASE STUDY ANALYSIS OF A PORT AUTHORITY
SMITH, JULIA
HSU, YU-LIN; REID, GAVIN; SMITH, JULIA
Category: FR = Financial Reporting
This paper examines how financial reporting modes are determined within a company, from the perspective of perceived costs and benefits. The modes investigated include financial reporting regimes (e.g. IFRS, UK GAAP) and the financial reporting techniques which support them (e.g. valuing intangibles and investments, treatment of development costs). A stated preference approach is adopted and applied to a fieldwork analysis of the functioning of a large port authority, which was a member of a group and prepared both consolidated and subsidiary accounts. The analysis is largely qualitative, exploring in-depth such matters as key factors in making choices, the decision-making processes behind choices, and the staging of decisions, but underpinned by a quantitative basis, using a metric for determining net benefits of financial reporting regimes and techniques. Our analysis aims to improve our understanding of a company’s choice processes underlying its financial reporting, including its handling of complexity and uncertainty, and its use of innovations in techniques and organisational forms for decision support.
FACTORS ASSOCIATED WITH INTERNAL AUDIT’S INVOLVEMENT IN ENVIRONMENTAL AND SOCIAL ASSURANCE AND CONSULTING
SOH, DOMINIC
MARTINOV-BENNIE, NONNA
Category: AU = Auditing
While there is growing evidence of internal audit’s expanding role in relation to sustainability matters, there is limited understanding of factors that impact on the extent of internal audit’s involvement in these areas. This study examines the impact of governance factors (audit committee oversight, management support and internal audit interaction with the sustainability committee), internal audit function characteristics (structure and maturity) and sustainability practices (external reporting and assurance) on the extent of internal audit’s involvement in environmental and social assurance and consulting activities. Management support for their involvement in these areas and external reporting of sustainability information are found to be key factors associated with internal audit’s involvement in sustainability assurance and consulting activities. The other factors examined do not apply uniformly across types of internal audit activity (assurance vs. consulting) and sustainability matters (environmental vs. social). This suggests there is a need to take a more nuanced approach to investigating internal audit activities and sustainability assurance practices. The results provide useful insights for stakeholders in promoting internal sustainability assurance and consulting and input on developing combined assurance models for sustainability information.
THE PAST OF ACCOUNTING PROFESSION IN RUSSIA AS A LESSON FOR ITS FUTURE DEVELOPMENT
SOKOLOV, VIATCHESLAV
KARELSKAYA, SVETLANA ; ZUGA, EKATERINA
Category: HI = History
This paper examines reasons underlying the current situation and draws conclusions as to what measures should be taken in Russia and other countries with similar business and social environment to effectively reform the Profession. The establishment of the Russian Institute of Professional Accountants in 1997 did not result in the emergence of a Profession. Professional auditors' organisations were created by instruction from the government and were fully controlled by them. The analysis of the history of Accountants' Professional movement in Russia makes us believe that when reforms are carried out in a professional field, it is important to consider the self-identity of professionals. The lack of developed civil institutions slows down the development of any profession. Professional organisations can achieve success only when they are established by and work together with relevant government authorities. Therefore, Russia and other emerging economies would benefit from a mixed regulation of the Accounting Profession, like the existing in France, while the English accounting model seems less effective.
TONE AT THE TOP, ETHICS, ACCOUNTABILITY AND CONTROL WITHIN EUROPEAN COMPANIES
SOLTANI, BAHRAM
Category: GV = Governance
The paper is primarily interested in disclosure policies of the listed companies in four European countries (France, Germany, the UK, and the Netherlands) regarding several core topics. The study is based on an empirical analysis of the importance of ethics and corporate behavior, shareholders' rights, board composition and independence, board accountability, audit committee and risk management and control, in the annual reports of 120 sample companies in four countries for the period of 2009 and 2010. Overall, despite the concerns raised in the aftermath of the financial crisis, the results of the study reveal that the recent European Commission and national codes and recommendations are still unsatisfactory in several respects. Above all, these codes are strongly oriented towards financial reporting, accounting and auditing issues. This research has several academic and practical contributions, particularly because of multidisciplinary, international features and cross-country analyses used in the paper.
WHAT IS A GOOD RANK? THE EFFORT AND PERFORMANCE EFFECTS OF ADDING PERFORMANCE CATEGORY LABELS TO RELATIVE PERFORMANCE INFORMATION
SOMMER, FRIEDRICH
KNAUER, THORSTEN; WÖHRMANN, ARNT
Category: MA = Management Accounting
Performance evaluation systems where employees are compared to each other based on a relative rank are pervasive in the business world. We focus on those systems in which the ranking position does not affect compensation. While prior research shows that, though unrewarded, relative performance information affects effort and performance, little is known about the qualitative design parameters of such evaluation systems. We present the results of an experimental study that shows how adding performance category labels to ranks (e.g., good ranking position; bad ranking position) affects effort and performance. Based on social comparison theory, status concerns, and regulatory focus theory, we predict and find that adding such labels increases effort and performance. This increase is more pronounced when not only positive labels are added to top ranks (“positive-only labels”), but also negative labels are added to bottom ranks (“combined labels”). The positive effects that result from using combined labels instead of positive-only labels are stronger the greater the proportion of positively labeled ranks.
COLLABORATIVE COST APPROACH: RELATIONSHIP BETWEEN INTER-ORGANIZATIONAL COST MANAGEMENT, TRANSACTION COST AND ALLIANCE RISK MANAGEMENT
SOUZA, RODRIGO
BIDO, DIOGENES; GUERREIRO, REINALDO
Category: MA = Management Accounting
Inter-Organizational Cost Management approach (IOCM) proposes to include suppliers on cost management process, creating a collaborative approach to manage cost in order to enhance efficiency and competitiveness. Nevertheless, this approach might require chances in the organizational governance structure, which could leads to increase Transaction Cost (TC), however, firms adopting IOCM approach could apply Alliance Risk Management framework (ARM) to mitigate risks and uncertainties of collaborative practices. This study proposes an instrument to measure the perceived level of IOCM, TC and ARM, based on a questionnaire answered by 85 Purchase and Supply Managers, working in large manufacturing firms operating in Brazil. Then, the relationship between IOCM, TC and ARM were analyzed by structural equation model. We highlight from the results that adopting IOCM approach reflects on design of cost management approach, people commitment and IT support. In addition, firms adopting an IOCM approach apply more intensively practices related to ARM. Moreover, adopting IOCM approach combined with ARM does not influences perceived TC.
TOWARDS AN ASSESSMENT OF COUNTRY EFFECTS ON IFRS RECOGNITION DECISIONS AND MEASUREMENT ESTIMATIONS
STADLER, CHRISTIAN
NOBES, CHRISTOPHER
Category: FR = Financial Reporting
International differences in IFRS policy choice have been studied by several researchers. There is consensus that a firm’s country is a highly significant influence on policy choice, and that this suggests a constraint on international comparability. Nearly all research has concentrated on issues for which policy choice is clearly allowed by IFRS and for which firm choice is easily visible in annual reports. Authors have suggested that there are likely to be important differences on issues which are more difficult to research. Because of the difficulties, there has been very limited work in this area. However, we propose an approach which can be adopted for several topics and many countries. It uses hand-picked data from published annual reports. We set out proposals in detail, in order to elicit comment. Additionally, we present preliminary results for one of the topics, i.e. impairment reversals. We find significant international differences in impairment reversals.
AMBIGUITY AND INVESTOR DEMAND FOR ACCOUNTING CONSERVATISM
STAEHLE, MARTIN
Category: FR = Financial Reporting
This study suggests that asymmetric preferences for profit and loss explain why investors are willing to anticipate losses but not profits, i.e., their demand for accounting conservatism. I experimentally analyze preferences for identical investments under conservative and neutral accounting and find that demand for conservatism depends on the type of uncertainty about potential investment pay-offs (ambiguity compared to risk) and the investment setting (investment horizon, firm’s current profit level). Due to ambiguity, investors have a stronger (weaker) demand for conservatism when the investment horizon is long (short). Given a short investment horizon, the reduction of demand due to ambiguity is higher when the level of current firm profits is low. Intuitively, investors demand conservatism when they are concerned about potential losses, e.g. when pay-offs from long-term investments are highly ambiguous. I suggest that addressing these concerns with conservative accounting may facilitate investment and reduce risk premiums required by investors.
EXPLORING THE RELATIONSHIPS BETWEEN DIFFERENT TYPES OF PERFORMANCE INFORMATION USE, ORGANIZATIONAL CULTURE AND PERFORMANCE
STECCOLINI, ILEANA
SICILIA, MARIAFRANCESCA
Category: PSNP = Public Sector & Not-For-Profit
The aim of this study is to provide a better understanding on how and to what extent different uses of performance measurement systems impact on organizational culture and performance by analyzing data from a survey of 400 Italian municipal service managers. This paper extends previous public administration literature on performance management in two directions. On the one hand, it provides empirical evidence on the existence and effects of rational, legitimizing and political uses of performance measurement systems, whereby previous literature has tended to emphasize only the rational ones. On the other hand, it provides a relevant building block to our knowledge on the consequences of performance measurement uses, showing that only monitoring uses produce direct effects on performance, while other uses (attention-focusing and legitimizing) may produce such effects only indirectly through organizational culture.
CLASSIFICATION SHIFTING WITH LIMITED DISCRETION AND INHERENT ORDERING
STECHER, JACK
PENNO, MARK
Category: FR = Financial Reporting
We present a model of classification shifting in which a firm uses its discretion over classification to favorably present itself to an investor. The firm does not have discretion over classifying extreme items, and the inherent ordering of the items may also limit discretion while increasing the classification’s informativeness. Furthermore, due to the strategic nature of classification, the convention of aggregating within-category items (i.e., reporting a simple sum) may actually increase the overall informativeness of classification relative to classifications made without the aggregation convention.
DOES SUSTAINABILITY ASSURANCE IMPROVE MANAGERIAL INVESTMENT DECISIONS?
STICH, MICHAEL
STEINMEIER, MARIA
Category: SEE = Social, Environmental & Ethical
This study analyzes whether and how assurance on sustainability reporting--which is future-oriented by nature and thus likely to contain decision useful information about a firm's growth prospects--influences a firm's managerial investment decisions. Using an international sample from 2006 to 2013, we provide evidence that sustainability assurance decreases the external information asymmetry between a firm and its stakeholders, which enables stakeholders to more effectively monitor a firm's management, thus leading to higher investment efficiency. Moreover, our findings suggest that sustainability assurance improves the internal set of information available for managerial decision making, again resulting in higher investment efficiency. Additional analyses reveal that the effect of sustainability assurance on a firm's investment efficiency is more pronounced when the sustainability assurance is provided by a member of the audit profession, when the level of assurance is high, when other governance mechanisms are less mature, and when the reported sustainability performance is high.
THE CONTRIBUTION OF WHISTLEBLOWERS’ STORIES TO THE PERCEPTION OF FAIRNESS IN FINANCIAL MARKETS: A DISCOURSE ANALYSIS
STOLOWY, HERVE
GENDRON, YVES; PAUGAM, LUC
Category: IC = Interdisciplinary/Critical
Drawing on a social constructionist perspective, we aim to develop a better understanding of the ways in which a perception of fairness is constructed in contemporary financial markets. We undertake a critical discourse analysis of seven whistleblowers’ well-publicized stories through books, first-hand and second-hand interviews, websites and videos. Our analysis indicates that these stories collectively contribute to promote the belief that single actors in financial market communities are able to detect economic deviance and try to notify relevant authorities – although such attempts are not always successful to stir and move the authorities. When such difficulties arise, the audiences are nonetheless led to assume that the whistleblower’s attempt to notify others could have been successful if better conditions of receptivity had been established. In addition, ex post, the stories highlight the important role played by several whistleblowers after the scandal broke. Thus, being characterized by strong and powerful metaphors centering on noble values and feelings of resoluteness, the whistleblowers’ stories play an important role as a platform that seeks to secure the perception of fairness in financial markets. However, in so doing, the whistleblowers’ stories paradoxically may deflect attention from the undertaking of examinations that question the overall effectiveness of whistleblowing mechanisms.
IMPLICATIONS OF ANALYSTS’ QUARTERLY EARNINGS FORECASTS FOR THEIR ANNUAL EARNINGS FORECAST ACCURACY AND TIMING
STOLZ, ALEXANDER
Category: FA = Financial Analysis
This study contributes to the existing literature on analysts’ annual earnings forecast accuracy and timing by examining their quarterly forecast behavior and performance. (1) In line with the notion that analysts issuing both annual and quarterly forecasts (“QA”) gain a better understanding of companies’ intra-year earnings processes, I find that annual earnings forecasts of QA are more accurate than those of analysts who only issue annual earnings forecasts (“AA”). Moreover, I show that analysts’ annual forecast accuracy increases in the number of quarters covered as well as their observed interim quarterly forecasting performance. (2) Out-of-sample analyses reveal that analysts’ observed intra-year (quarterly) performance helps to ex-ante identify analysts issuing superior annual earnings forecasts. (3) I find that QA revise their annual earnings forecasts earlier than AA following interim quarterly earnings announcements suggesting that QA incorporate information from quarterly reports faster. Similarly, among QA, analysts with a weak quarterly performance in the preceding quarter revise their annual forecasts earlier indicating that their inaccurate quarterly earnings expectation leads them to quickly adjust their corresponding annual earnings forecast.
DOES LOW EFFICIENCY TURN INTO HIGH RISK? AN EMPIRICAL EXAMINATION OF COOPERATIVE BANKS
STRALLA, MARKUS
REEG, JOHANNES
Category: MA = Management Accounting
We use Granger-causality-techniques in order to evaluate inter-temporal relationships between risk, efficiency and capital. Specifically, we estimate how credit risk, liquidity risk and capital risk are related to bank efficiency. We use two different measures for bank efficiency, namely cost and profit efficiency, since these measures reflect different managerial abilities. One is the ability to manage costs and the other is to maximize profits. Our results mostly apply to current literature in this field since we find that lower cost and profit-efficiency Granger-cause increases in credit risk. At the same time, we identify that credit risk negatively Granger-causes cost and profit-efficiency, hence revealing a bi-directional relationship between these measures. However, results also show a positive relationship between capital and credit risk, thus displaying that moral hazard (due to limited liability and deposit insurance) does not apply to our sample of cooperative banks. These findings may be important to regulators, supervisors and managers in order to identify issues related to prudence regulation and banking strategies respectively.
THE ROLE OF THE MANAGEMENT ACCOUNTANT IN THE FORECASTING PROCESS – DEALING WITH CONFLICTING DEMANDS
STRAUSS, ERIK
GORETZKI, LUKAS; WIEGMANN, LEONA
Category: MA = Management Accounting
Typically, forecasts are deemed to represent the expected performance of an organization in contrast to budgets, which aim to influence employees’ behavior. To reduce the functional bias in decentralized organizations, the existing literature argues for “neutral” persons, such as management accountants, to enhance the forecast performance. However, research shows that business unit management accountants have to balance their local and functional responsibilities, which can be problematic in the context of budgeting and lead to an increased tolerance on data misreporting. Due to the neutral character of forecasts the perceived role conflict of management accountants might differ, and so questions arise as to how management accountants balance their dual responsibilities in the preparation of forecasting information and how this affects the forecasts of a business unit. We problematize the role of the management accountant as a neutral forecasting manager, albeit find that they can have a leading role in the forecast preparation. Because of management accountants’ dual responsibility and their desire to be perceived as “producers of truthful knowledge,” the forecast can become part of a political game. Additionally, we found that management accountants reconcile the different demands by constructing framings that provide an interpretation of the calculated forecasts.
THE INTERPLAY BETWEEN ORGANIZATIONAL SOCIAL CAPITAL AND CLAN CONTROL
STROBELE, ALEXANDER
WENTGES, PAUL
Category: MA = Management Accounting
By now, social capital has emerged into a well-established field of research with a wide range of applications involving many different disciplines. In recent years, there also has been an increasing interest in (intra-) organizational social capital, and the benefits of organizational social capital in areas such as knowledge management or entrepreneurship have been discussed. Few papers, however, have examined how social capital can be managed efficiently. Another almost independent research stream investigates the design of management control systems and, more specifically, the benefits of clan control in organizations. We posit that clan control is an important instrument to build and leverage social capital. Based on survey data from 554 small and medium-sized enterprises (SMEs) in Germany, we find supporting empirical evidence for our hypotheses. In particular, social capital has a strong positive impact on organizational performance and moderates the positive effect of clan control on performance.
OBSERVABILITY OF AUDIT FEES, INITIAL AUDIT FEE DISCOUNTING, AND AUDIT QUALITY
SU, XIJIA
WU, XI
Category: AU = Auditing
By directly comparing proprietarily obtained audit fee and publicly disclosed audit fee in China’s capital market, this study shows that the initial engagement audit fee discounting is significantly reduced once audit fee data are publicly disclosed. We further classify the publicly disclosed fee data into accurate and questionable subsamples by using proprietary audit data. We find that initial audits with a questionable fee disclosure are associated with greater aggregate audit labor usage, but with a significant audit fee discounting, than continuing audits. These firms are also subject to a smaller magnitude of absolute (as well as downward) audit adjustments to pre-audit earnings than continuing audits, which suggests lower quality of audit.
ACCOUNTING AND OTHER TALES FROM CENTRAL AND EASTERN EUROPE
SUDAR, PETAR
Category: HI = History
This article focuses on key developments in accounting in Central and Eastern Europe from the emergence of double entry bookkeeping until the end of the Second World War. The purpose of the article is to enhance the understanding of the origin and nature of accounting in a number of countries in this region. A review of selected works from the developing body of literature on accounting in Central and Eastern Europe has been conducted. The article distinguishes German accounting as the most influential in the development of accounting in the majority of Central and East European countries.
ARE THE MOST CAPABLE AUDITORS IN THE BIG 4 FIRMS?
SUNDGREN, STEFAN
MILLAN-TAPIA, ANA; ORTÍN-ÁNGEL, PEDRO
Category: FR = Financial Reporting
The paper provides evidence and theory on the differences in the decisions of when taking the CPA exam, the performance in the CPA exam and its consequences on compensation between auditors in Big 4 and non- Big 4 firms in Sweden. The key empirical results in the paper are that i) auditors at Big 4 firms are younger when they take the exam, ii) younger auditors and auditors at Big 4 firms perform better in the exam iii) there is a positive association between the results in the CPA exam and wage increases after having received the CPA certification which is stronger at Big 4 firms. This evidence is consistent with a theoretical model where Big 4 audit firms attract the more capable auditors of each cohort, based on the imperfect information about the capabilities of the auditors that they have.
REAL EARNINGS MANAGEMENT IN UK PRIVATE AND PUBLIC FIRMS
SUNDVIK, DENNIS
HAGA, JESPER PER ALEXANDER; HÖGLUND, HENRIK
Category: FA = Financial Analysis
This paper analyses real earnings management among private versus public firms. Using accounting data of British firms, we find that public firms overall engage in more earnings management through real operating activities. Furthermore, when clear incentives to manage earnings in a specific direction are present, such as to beat earnings targets, we also find that public firms manage their earnings in the expected direction more than private firms. Additional tests reveal that higher analyst coverage may mitigate the level of abnormal operating behaviour in certain settings while quality auditing is not a limiting factor. We also find that high managerial ownership among private firms is associated with less real earnings management. Our study contributes to the emerging literature on non-accrual earnings management and to the broader understanding about the private vis-à-vis public firm reporting and operating behaviour.
EDUCATION, EXPERIENCE AND AUDIT EFFORT
SVANSTRÖM, TOBIAS
CHE, LIMEI; LANGLI, JOHN CHRISTIAN
Category: AU = Auditing
This paper examines how audit effort, measured by the number of total audit hours, is associated with lead auditors’ formal education, continuing professional education (CPE) and professional experience. Although considerable evidence is provided in the literature for the determinants of audit fees, our understanding of how audit effort is related to auditors´ attributes is limited. The aim of this paper is to fill this gap. We find evidence to suggest that auditors with a master’s degree exert more effort than those with a bachelor’s degree. We also find a positive relationship between audit effort and the extent of CPE. Auditors who participate more (less) in CPE courses in auditing exert more (less) audit effort. We find the relationship between audit effort and professional experience to be non-linear, in that the least experienced auditors put in the least audit effort, moderately experienced auditors exert the most audit effort, while the most experienced auditors exert less audit effort than moderately experienced auditors, yet more audit effort than the least experienced auditors. This paper contributes to the literature by providing new evidence on how audit effort is related to auditors’ attributes.
STRATEGIC STAKEHOLDER MANAGEMENT AND ITS EFFECTS ON NON-FINANCIAL PERFORMANCE IN NON-PROFIT ORGANIZATIONS – A STUDY ON SWEDISH GOLF CLUBS
SYLVANDER, JOHANNA
LINDBERG, REBECCA; UMANS, TIMURS
Category: PSNP = Public Sector & Not-For-Profit
The study explores how different aspects of strategic stakeholder management affects non-financial performance in non-profit sport organizations. The study firstly identifies three aspects of strategic stakeholder management, namely strategic involvement, commitment and implementation, which are then explored in relation to organizational reputation of Swedish golf clubs. Empirical exploration in the study is based on a survey sent to the chairpersons/board member of all Swedish golf clubs, 454 as of 2013, with response received from 135 chairs/board members. The results of the statistical analysis, indicate that while strategic involvement in stakeholder management has a positive relationship with organizational reputation of the golf clubs, strategic implementation of stakeholder management has a negative relationship with the same non-financial outcome. The study also found that third aspect of stakeholder management, strategic commitment, has no relationship with organizational reputation in these organizations. Presentation of the study concludes with reflection on findings and non-findings, outlines a number of contributions as well as suggest venues for future research.
AUDITOR EXPERTISE AND THE EFFECT OF BANKS' STRESS TEST RESULTS ON AUDIT QUALITY
TAHINAKIS, PANAYIOTIS
KOUSENIDIS, DIMITRIOS; SAMARINAS, MICHALIS
Category: AU = Auditing
The objective of this study is to examine whether audited Eurozone banks change their behavior after failing a stress test exercise and move to industry expert auditors in order to increase the level of quality for the auditing services received. For the analysis performed we use a sample comprised from the listed Eurozone banks participating in the European Banking Authority's (EBA) stress test exercise for a period of six years (2009 - 2014). We employ logistic regression estimation by incorporating auditor expertise, as an audit quality determinant, audit opinion, stress test failure effect and a series of proxies to control for the effect on auditor's expression. The findings suggest that banks alter their behavior after a stress test exercise failure and shift towards auditors specialised in the banking industry, increasing the quality of auditing services received, but only if they operate in a country facing fiscal sustainability issues. This study attempts to provide useful insights to the auditing profession, regulators and standard setters, with respect to audit quality differentiation in a sector that constitutes a crucial component of the modern economic structure.
CONSERVATIVE LOAN LOSS ALLOWANCE AND BANK LENDING
TAKASU, YUSUKE
NAKANO, MAKOTO
Category: FR = Financial Reporting
We study the relationship between the conservativeness of loan loss allowance, defined as accounting behavior that increases loan loss allowance against expected credit losses, and bank lending. From our analysis, we provide the following two new pieces of evidence. First, we find banks with a conservative loan loss allowance tend to provide fewer loans to firms with financing needs when macro-economic conditions measured by the average lending attitude of financial institutions are good. Second, we find those banks are likely to provide more loans when macro-economic conditions are bad. These findings are robust even when we conduct several robustness tests. Our research makes two contributions to prior literatures. First, we test the linkage between a conservative loan loss allowance and lending behavior directly. Although concern that loan loss accounting enhances the positive correlation between banks’ lending behavior and economic cycles is frequently expressed by bank regulators, there is a little empirical evidence from an academic viewpoint. Second, we extend prior literature by studying the Japanese setting. By exploiting the ability to link individual Japanese firms to their individual lenders, we test our hypotheses using a unique dataset containing bank-firm-year observations. This linkage between individual lenders and individual borrowers is critical for understanding how loan loss allowance affects bank lending behavior and the real economy.
THE CAPITAL MARKET CONSEQUENCES OF SHAREHOLDERS WITHHOLDING VOTES FROM BOARD OF DIRECTORS’ ELECTIONS
TANYI, PAUL
SMITH, DAVID
Category: GV = Governance
We examine the capital market consequences of disclosing the proportion of shareholder votes withheld from the election of members of the board of directors. Our findings fill a gap in the shareholder voting rights literature by investigating how this disclosure affects investors’ economic decisions. We show the following: (1) a negative relationship between the proportion of shareholder votes and market reaction to the filing of the Form 8-K filing on director elections outcomes; and (2) a positive association between the proportion of shareholder votes withheld and the cost of equity capital. Our results provide evidence that Form 8-K information about shareholders withholding votes may be associated with negative capital market effects.
ACCOUNTING CONSERVATISM: EXPLORING THE IMPACT OF CHANGES IN INSTITUTIONAL FRAMEWORKS IN FOUR COUNTRIES
TARCA, ANN
HEANEY, RICHARD; MOY, MELISSA
Category: FR = Financial Reporting
This study examines the links between conditional (or earnings) conservatism in financial accounting and changes in institutional frameworks in Australia, France, Japan and the United States of America (US) during the period 1981-2008. Our study identifies changes in specific time periods related to market regulation and financing structure, harmonisation and convergence of accounting standards, and changes in corporate governance. Using the Basu (1997) approach for measuring asymmetric timeliness in the recognition of good and bad news in earnings, we find that incremental bad news timeliness is not present in all four countries by 2008 for non-financial firms (but is present for financial firms in Australia, France and the US) suggesting that although institutional changes may be country specific they can have a common outcome. Incremental bad news timeliness was no longer apparent in US earlier than in the other countries, possibly reflecting the earlier adoption of fair value measurement for financial instruments in this country. Our results suggest that financial accounting outcomes regarding earnings timeliness can become more similar between countries despite entrenched differences in institutional frameworks.
A NEW TOOL FOR FAILURE ANALYSIS IN SMALL FIRMS: FRONTIERS OF FINANCIAL RATIOS BASED ON PERCENTILE DIFFERENCES (PDFR)
TASCON, MARIA T.
CASTAÑO, FRANCISCO J.
Category: FA = Financial Analysis
This paper proposes an innovative methodology to compute scores and distances to failure, specially oriented to SMEs. It is based on statistical differences between the group of failed firms and the population to which the failed firms belong (industry, period, and geographical zone selected). Our results for the selection of the most discriminant variables are consistent with previous literature; and the hit rates of failed and non-failed firms outperform those of the commonly used traditional methodologies. In addition, the proposed methodology allows us to compute distances to failure of both individual firms and groups of firms. Finally, this methodology identifies which ones of the financial drivers used are strengths or weaknesses for the specific firms or group of firms under study, for purposes of a potential reorganization.
CAPITAL INCOME TAXES AND THE EX-DAY PREMIUM - NEW EVIDENCE FROM A CROSS-COUNTRY ANALYSIS
TASSIUS, ALEXANDER
OVERESCH, MICHAEL
Category: TX = Taxation
This paper revisits the influence of capital income taxes on the stock price reduction when a stock goes ex dividend. While previous literature has considered tax reforms in a single capital market, we use a large cross-country sample. Our results provide evidence for a broad set of capital markets and several tax reforms. Our preliminary results suggest that the ex-day price response is significantly smaller than the dividend paid. Moreover, we find weak evidence that the ratio between dividend taxes and capital gains taxes can explain part of the ex-day premium.
THE INFLUENCE OF ACCOUNTING ENFORCEMENT AND BANK REGULATION ON EARNINGS QUALITY OF BANKS: EUROPEAN EVIDENCE
TERZANI, SIMONE
DAL MASO, LORENZO ; KANAGARETNAM, KIRIDARAN; LOBO, GERALD J.
Category: FR = Financial Reporting
We examine the relations between accounting enforcement, bank regulation, and bank earnings quality. Using a sample of European banks representing 18 countries over the 2006-2013 period, we find a consistently significant positive association between accounting enforcement and several earnings quality measures. In addition, in the majority of our tests we find that the positive association between accounting enforcement and bank earnings quality is stronger in countries where bank regulation is weaker. More specifically, accounting enforcement increases earnings persistence and cash flow predictability and enhances the ability of current period’s loan loss provisions to predict next period’s loan charge-offs in countries where the level of bank regulation is below the sample median value. Our findings shed light on the relationship between accounting enforcement and bank regulation and are especially relevant to policy makers in countries with lower levels of bank regulation because accounting enforcement in these countries could play a bigger role in enhancing the quality of bank earnings.
HOW DOES INTERNATIONAL EXPERIENCE LEAD TO HIGHER LEVELS OF CULTURAL INTELLIGENCE? A QUALITATIVE STUDY USING ACCOUNTING ACADEMICS TEACHING TRANSNATIONALLY
THARAPOS, MEREDITH
DELLAPORTAS, STEVEN; O'CONNELL, BRENDAN
Category: ED = Accounting Education
Cultural intelligence (CQ), defined as the ‘capability of an individual to function effectively in situations characterised by cultural diversity’ (Ang and Van Dyne, 2008, p.3), has emerged in business literature as an important factor in effective performance in multicultural settings (Keung and Rockinson-Szapkiw, 2013). CQ is comprised of four interrelated components; metacognitive, cognitive, motivational and behavioural. International experience has been found to be an antecedent of CQ using quantitative methods (Tay et al., 2008; Moon et al., 2012; Tharapos and O’Connell, 2014), yet there is a paucity of knowledge regarding the process of how international experience is translated into higher levels of CQ. This study addressed this issue through the use of qualitative methods based on the performance of accounting academics teaching in an international environment. Overall, the findings indicate strategies informed by cultural knowledge, active participation in the host environment, intrinsic motivation, and the ability to appropriately adjust both verbal and non-verbal behaviour as crucial elements in the development of CQ. This research makes several important contributions to CQ scholarship by being methodologically innovative in supplementing prior quantitative analyses of CQ with qualitative methods. Furthermore, it brings the theoretical framework of CQ into the discipline of accounting where it is surprisingly absent.
DOES THE REPORTING OF KEY AUDIT MATTERS AFFECT THE AUDITOR’S REPORT’S COMMUNICATIVE VALUE? EXPERIMENTAL EVIDENCE FROM INVESTMENT PROFESSIONALS
THEIS, JOCHEN
KOEHLER, ANNETTE; RATZINGER-SAKEL, NICOLE
Category: AU = Auditing
This paper investigates the communication of key audit matters (KAM) in the auditor’s report as required by the new International Standard on Auditing (ISA) 701. We conduct an experiment with investment professionals to test the communicative value of a KAM section relating to goodwill impairment. Our main results show that in the condition in which the KAM wording suggests that already small changes in the key assumptions could eventually lead to a goodwill impairment (referred to as KAM negative), participants assess the economic situation of the company to be significantly better as compared to the condition in which the KAM wording suggests that only large changes in the key assumptions could eventually lead to a goodwill impairment (referred to as KAM positive). We interpret our findings in light of a model of trust and conclude that the specific wording of the KAM section triggers different factors in the model in different ways. Overall, our findings suggest that neither preparers nor audit committees or auditors need to fear that the disclosure of critical entity-related information leads to negative implications; rather, financial statement users value this information positively.
TAX AFFAIRS – NOT WITH YOUR NEIGHBOR
THOMSEN, MARTIN
WATRIN, CHRISTOPH
Category: TX = Taxation
In this study, we investigate where (i.e., the geographic location) firms avoid taxes using a sample of European multinational corporate groups and their subsidiaries (62,615 consolidated firm-years and 238,833 unconsolidated firm-years) from 2006 to 2012. More precisely, while the use of worldwide tax havens to decrease the overall tax burden is well-investigated, there is a paucity of evidence about the role of neighboring countries. Tax planning is not solely implemented via the use of tax havens. Extensive tax planning models, using tax loopholes and/or tax incentives in foreign (non-tax haven) countries with complex group structures and intermediary entities are not uncommon anymore. We examine whether this kind of tax avoidance generally takes place in a firm’s foreign operations, far away from headquarters, or whether it happens closer to home. We find that taxes are avoided less on the consolidated level when the firm has a higher concentration of subsidiaries in neighboring countries. Second, to provide evidence that the measured effect on the consolidated level indeed arises from spatial closeness, we provide evidence that subsidiaries are less used for tax avoidance (i.e. show less tax avoidance in their single financial statements), if an immediate spatial closeness between parent company country and subsidiary country exists.
ACCOUNTING CONVERGENCE AND INVESTMENT HOME BIAS
TIDEMAN, SEBASTIAN ANDREAS
ZIMMERMANN, JOCHEN
Category: FR = Financial Reporting
Investment home bias is a well documented phenomenon. Home bias is rational when institutional settings give rise to opportunity costs, for which differing accounting systems are a major driver. Convergence of accounting systems should therefore lead to increased level in international investments. We test this proposition for Germany and the U.S. with quarterly data from 1991 to 2014. Building on the gravity model previously applied in physics and international trade, we show that accounting convergence has led to higher levels of investments overall and in both countries. We also corroborate that disclosure and enforcement do not operate in isolation but have a mutual effect.
THE IMPACT OF PERSONALITY ON THE ROLE OF MANAGEMENT ACCOUNTANTS: A JOB CRAFTING PERSPECTIVE
TILLEMA, SANDRA
VAN VEEN-DIRKS, PAULA
Category: MA = Management Accounting
This paper investigates how personality influences the way in which management accountants bring their jobs into practice. According to the job crafting literature, individuals can actively influence their jobs by shaping their tasks and their interactions with others. Differences in job crafting behavior may depend on a person’s personality. To investigate job crafting by management accountants and how it is influenced by personality traits, we conducted a survey among management accountants employed at a large Dutch bank. Based on 290 completed questionnaires, we find that management accountants indeed actively craft their jobs, and that they can strengthen their business partner role through job crafting. In addition, we demonstrate that management accountants’ job crafting behavior is influenced by their personality traits. In contrast to what we expected, management accountants high in conscientiousness engage more, rather than less, in business partner-related tasks. However, of all five personality traits included in this study, openness has the most prominent effect on role. Management accountants who are more open to new experiences are more actively engaged in job crafting, also in ways which enhance their business partner role.
DETERMINANTS OF ASSET MISAPPROPRIATION SCHEMES DURATION
TIMOFEYEV, YURIY
Category: IC = Interdisciplinary/Critical
This study applies survival analysis techniques to original Association of Certified Fraud Examiners micro level data based on US victimization survey of asset misappropriation cases. The analysis reveals that not only victim organization’s characteristics and anti-fraud control mechanisms matter in reducing asset misappropriation schemes’ duration, but also behavioral warning signs (fraud red flags) and socio-demographic characteristics of the principal perpetrator and situational determinants. The article also considers the differences between single perpetrator and collusive cases, among organization types as well as small and large firms. In line with the strain and network theories, which suggest that propensity of engagement in fraud depends on pressure of failure to achieve personal goals or social network position respectively, this paper finds that similar holds for fraud duration. An important finding of the study is that only certain behavioral warning signs and anti-fraud control mechanisms are associated with the decrease of scheme duration.
HOW ARE FAIR VALUE IMPAIRMENTS AUDITED? A STUDY OF AUDITORS AND VALUATION SPECIALISTS
TIMOSHENKO, LEV
Category: AU = Auditing
Recent changes in financial reporting regulation effected by the adoption of IFRS in Europe, Australia, and Canada, and SFAS 142 (FASB 2001) and SFAS 157 (FASB 2007 and 2011) in the U.S., significantly increased users’ exposure to fair values. The implementation of the fair value hierarchy, as well as the switch from amortization to impairment testing of goodwill, highlighted problems with auditing highly complex, judgment-dependent and inherently uncertain fair values. There is a concern that such fair values may not always be auditable, and that requiring auditors to provide positive assurance on them may necessitate changes to the financial reporting model. Using the audit of goodwill/cash generating unit (CGU) impairment under IFRS as a specific example, this paper provides experimental evidence about the fair value auditing process which can help to better understand and improve the auditing of complex fair values. The study relies on an analysis of verbal protocols to develop an understanding of how auditors and valuation specialists deal with uncertainties inherent in the task.The process data obtained in this paper can be used to develop decision aids relevant for goodwill impairment and possibly other complex fair value audits.
THE IMPLICATIONS FROM IMPLEMENTING A STRATEGY ALIGNED WITH A COMPANY’S STRATEGIC SUSTAINABILITY CHOICE ON THE PREDICTIVENESS OF FUTURE PERFORMANCE
TIRAS, SAMUEL
COSTA, FABIO; LIU, M.H. CAROL; ROSA, GINA
Category: MA = Management Accounting
We examine the implications of successfully implementing a company’s chosen (high or low) sustainability strategy on the predictiveness of future performance. Successful implementation entails aligning actions with a best fit strategy. We hypothesize that aligned companies would exhibit greater earnings predictiveness than misaligned companies. We test differences in earnings persistence, mapping of accruals, and timely loss recognition (TLR), since these attributes reflect earnings predictiveness. We find that relative to misaligned high companies, aligned companies exhibit higher persistence and stronger mapping for social issues and more TLR for environmental issues. Relative to misaligned low companies, we find for social issues that aligned companies exhibit higher persistence. For environmental issues, we find aligned low companies exhibit higher persistence and stronger mapping than misaligned low companies, but not for aligned high companies; and for TLR, we find aligned high companies, but not aligned low companies, exhibit more timely loss recognition.
THE EVOLUTION OF THE CHART OF ACCOUNTS IN FRENCH-SPEAKING AFRICAN COUNTRIES (1960-2010): A HISTORY OF INTERACTION WITH FRENCH ACCOUNTING STANDARDIZATION
TOURON, PHILIPPE
DEGOS, JEAN-GUY; LEVANT, YVES
Category: HI = History
This article analyzes the institutionalization of the chart of accounts in French-speaking Africa. The methodology is mainly based on oral history, although written sources are also used. The theoretical framework is the mimetic theory developed by René Girard, which is better suited to our context than institutional theory. It contrasts two case studies from two different periods: the design of the OCAM chart of accounts in the 1970s, and the development of the SYSCOA/OHADA charts of accounts during the 1990s. The evidence indicates the importance of key actors, and the significance of interaction between French and African charts of accounts. Finally, the contrasting results of our case studies – failure in the case of the OCAM chart of accounts and relative success for the SYSCOA/OHADA charts of accounts – are explained by the need for educational institutions to support the diffusion of accounting rules.
DO FRIENDLY BOARDS HAVE AN INFLUENCE ON CORPORATE FINANCING POLICY? EVIDENCE FROM FRENCH-LISTED FIRMS
TRABELSI, SAMIR
SANNAJUST, AURELIE; VANAPPELGHEM, CEDRIC
Category: GV = Governance
Our work shows that board friendliness toward the Chief Executive Officer (CEO) increases leverage. This is consistent with Resource Dependence Theory which conceives the board as a strategic interface between the firm and its environment. Complementary tests show that this relation depends on ownership concentration. Firms with higher ownership concentration face an increase in leverage, while firms with lower ownership concentration face a decrease in leverage. Taken together, our results suggest that it is necessary for researchers to have a contingent vision of the effects of board composition on corporate governance.
ARE CONTINGENCIES VS PROVISIONS IN DIFFERENT CULTURES AS EXPECTED OR NOT? EVIDENCE WITH UK AND PORTUGAL
TRABUCHO, PEDRO
LOPES, ANA ISABEL; REIS, LAURA
Category: FR = Financial Reporting
This paper uses culture to explore the extent to which both provisions and contingencies are differently recognized and disclosed by companies of different environments and to examine whether those difference are associated with the market value of those companies. Our results do not confirm the expectation for higher recognition in Portugal or a preference for disclosure in UK as suggested for high secrecy (vs. transparency) and high conservatism (vs. optimism) in countries with high (vs. low) uncertainty avoidance. Furthermore, we find that provisions and contingencies have a negative association with share prices - yet only statistically significant for the later - but when in presence of a risk committee on the board of directors, investors place a similar trust to both recognized and disclosed items assuming less creative accounting practices.
HOW IS AUDIT QUALITY MEASURED IN CURRENT EMPIRICAL RESEARCH? A LITERATURE REVIEW WITH A SPECIAL FOCUS ON ACCRUAL-BASED PROXIES
TREPTOW, INA
Category: AU = Auditing
Audit quality is an important subject but inherently difficult to measure. Frameworks have been developed, which describe influencing factors and consequences of audit quality. Furthermore, the process of measuring audit quality is regularly undertaken in the empirical literature. The purpose of this paper is to analyze a large sample of 143 empirical papers on audit quality. It focused both on the study design the respective papers show (e.g., “How does external rotation affect audit quality?”) and on the proxies that are used to measure “audit quality”. The results are presented in the context of an existing theoretical framework for audit quality. This study thus contributes to the understanding of the possibilities of research into audit quality. First, it shows that “consequences” which result from a certain given audit quality a relatively less well-researched when compared to factors which influence audit quality. Second, it illustrates that accrual-based measures for audit quality are of great importance in analytic accounting research. These accrual-based measures are analyzed in greater detail. Interestingly, this analysis provides evidence that the performance-adjusted (modified) Jones model (Kothari, Leone, & Wasley, 2005, 2005) is used predominantly in current empirical accounting research.
EARNING RESPONSE COEFFICIENT AND A NEW APPROACH TO EVALUATE EARNINGS FORECASTS
TRINH, RUBY CHAU
ASHTON, DAVID
Category: FA = Financial Analysis
Our study investigates the appropriateness of earnings response coefficient (ERC) as a criterion to evaluate earnings forecasts proxies in terms of capturing the market expectation of future earnings. We find that ERC is a function of the correlations between earnings forecasts, market earnings expectation and reported earnings. Hence, a simple ERC comparison might not reveal the best model i.e. caution is needed for this exercise. We, therefore, develops a theoretical framework for comparing analysts’ forecasts and model-based earnings forecasts. This framework studies the correlations of the stock price reactions and the two components of earnings surprises including analysts' earnings surprises and an expected correction for analysts' forecast errors. Equality of these correlation coefficients suggests that the model-based forecasts are sufficient statistic for the market expectation. Empirical tests reveal a model which satisfies this condition.
ACCOUNTING LITERACY AND SELF-EMPLOYMENT: AN EXPLORATORY STUDY
TROMBETTA, MARCO
Category: ED = Accounting Education
The measurement of financial literacy has gained much attention in the recent past. Recent studies have shown that the level of basic financial literacy in the general population around the world is surprisingly low. In this study we investigate the level of financial literacy in a sample of self-employed entrepreneurs in Spain. In order to do accomplish this task we develop a new set of questions related to the financing and the financial reporting of a business. Our results show that also for this Spanish sample the overall level of basic financial literacy is quite low, even if it is slightly better than the one found in previous studies. We do not find significant differences between the level of financial literacy of entrepreneurs and non-entrepreneurs. However we find that serial successful entrepreneurs understand better diversification and the potential danger of uncontrolled growth. Interestingly, lower levels of accounting and finance literacy are found in mature businesses and operating in the primary sector, i.e. more traditional businesses. We interpret this result as an indication of the fact that the Spanish economy may be experiencing a transition phase from a model based on traditional businesses run on more conservative basis to more modern businesses run with a more sophisticated knowledge of financial concepts.
OBJECTIVE V SUBJECTIVE PERFORMANCE MEASURES IN HEALTH CARE
TRUCCO, SARA
DEMARTINI, MARIA CHIARA
Category: MA = Management Accounting
This study aims at analysing the effect of subjective (objective) performance measures on the managerial discretion perceived by healthcare leaders. Empirical findings on a sample of Italian healthcare managers addressed that objective measures are more capable of supporting the managerial perception of discretion, when compared to more subjective measures. These findings extend prior knowledge on a variety of fields. First, the perceived managerial discretion literature, especially in the public sector, is being extended since this paper could identify some antecedents and consequences of perceived managerial discretion, as it was under explored so far. Since the (objective v subjective) nature of performance measures seems to significantly affect healthcare leaders’ perception of discretion, the need to design (or redesign) performance management systems accordingly might enhance the quality of managerial decision-making activity in the public sector. Secondly, this study contributes to the literature on the design and use of performance management systems, since so far there has been no explicit consensus on the nature of which kind (objective v subjective) of measures should be used in the public sector to support managerial decision-making. Thirdly, it explores some of the drivers to enhance the satisfaction with the use of PMS in the health sector.
EARNINGS MANAGEMENT AND ANNUAL REPORT READABILITY: DISCUSSIONS IN THE BUSINESS, MD&A, AND NOTES SECTIONS
TSENG, YI JIE
CHEN, TSUNG-KANG
Category: FR = Financial Reporting
The study examines the determinants of annual report readability from the perspective of earnings management by using American firm annual report data from the year 2003 to 2011. Empirical results show that the level of accrual-based earnings management is significantly and positively related to annual report readability variables, measured by Fog, SMOG, and 10-K document file size. However, real earnings management only positively affects annual report readability variables for the aspect of sales manipulations while has insignificant effects for those of overproduction, and reduction of discretionary expenditures. In addition, for the readability variables of each important item in annual report, this study finds that real earnings management has significant and positive effects on the readability variables of Business section (Item 1). Moreover, the effects of accrual-based earnings management on annual report readability become weaker when firm asset size is larger or economic growth rate is higher. Furthermore, managers care less strategic reporting related to RM on annual report when firm credit risk is higher. Finally, the results are robust when controlling for other determinant variables of annual report readability.
DOES INVESTMENT MYOPIA OF BLOCKHOLDERS IMPEDE CORPORATE INNOVATIVE ACTIVITIES?
TSUI, STEPHANIE
CHANG, CHING-HUNG; KUO, KUEI-CHAO
Category: GV = Governance
In this study, we examine the extent to which institutional investors (II) influence investment decision made by firms. In particular, we examine whether II with investment myopia impede firm’s innovative activities. We find that the transient and quasi-indexer blockholders are prone to deter innovative activities measured by patents and citations. Additionally, we conjecture this effect would be dampened by II with longer horizon because of the potential business relations between II and the targets companies, and we find supporting evidence after dividing II based on the investment horizon. The result suggests that independent and dedicated investors mitigate myopic investment decision made by management due to the influence by II with shorter horizon. Moreover, using natural experiments of decimalization generating exogenous variation in liquidity, we show the negative relation between near-sighted institutional ownership and innovation is more pronounced when liquidity is high.
THE IMPACT OF SOCIAL INFLUENCE PRESSURES, COMMITMENTS, AND CULTURAL VALUES ON JUDGMENTS OF AUDITORS: EVIDENCE FROM JAPAN
TSUNOGAYA, NORIYUKI
CHAND, PARMOD ; SUGAHARA, SATOSHI
Category: IC = Interdisciplinary/Critical
We examine whether obedience and conformity pressures generated by superiors and colleagues within the audit firm cause dysfunctional audit behavior in Japan. We also investigate whether high levels of professional and organizational commitments and certain cultural values of auditors mitigate these pressures. The results indicate that obedience pressure can impair judgments of auditors while conformity pressure does not have a significant influence. The application of a three-dimensional model of commitments and individual cultural values scale reveals that dysfunctional audit behavior can be mitigated by enhancing affective and normative commitments and by addressing high power distance and masculinity characteristics of individual auditors.
TRANSIENT INSTITUTIONAL OWNERSHIP AND MANAGERS’ STRATEGIC DISCLOSURES DECISIONS
TUIJN, MARCEL
PEEK, ERIK
Category: FR = Financial Reporting
This study examines transient investors’ influence on managers’ disclosure decisions, in particular disclosure content and bias. Using a panel dataset of management forecasts, press releases and institutional ownership holdings from 2002 to 2012, we show that managers report more optimistically with high levels of transient institutional ownership. Specifically, managers in firms with high transient institutional ownership issue more positive forecasts, fewer negative forecasts, and more optimistic press releases to the market. Moreover, firms with high transient institutional ownership issue forecasts with a lower accuracy and press releases with a lower readability, which suggests that these disclosures are optimistically biased. In additional analyses, we provide evidence that the observed positive association between optimism and transient institutional ownership is not the result of good stock picking by transient investors. Furthermore, we show that the influence of transient institutional ownership on management forecasts decreases when a firm is being monitored by a blockholder, or has higher analyst following. In addition, an event study of a subsample of transient investors provides additional evidence that effect of transient investors on optimism in voluntary disclosure is a causal relation.
IMPLICATIONS OF TABLET COMPUTING ANNOTATION AND SHARING TECHNOLOGY ON STUDENT LEARNING
TYLER, JONATHAN
DYSON, LAUREL; FRAWLEY, JESSICA; WAKEFIELD, JAMES
Category: ED = Accounting Education
Educational technology has the potential to improve the quality and effectiveness of accounting education. In this study, we examine the implications of tablet computer enabled annotation technology which facilitates greater transparency of students’ work and a more tailored teaching approach by the instructor. Consistent with the recent emergence of this technology, there is limited evidence concerning the implications on student performance. Preliminary observations of the tablet computer enabled annotation technology in our study indicate it facilitates a more student centred approach, encouraging higher rates of homework completion, and greater student engagement and participation. Our examination of the implications on students’ final exam performance indicates contrary effects. There are positive benefits for performance in procedural based questions, while for theoretical questions the reverse is observed. These findings have important implications concerning the application of this technology.
BANKS ACCOUNTING POLICY DECISIONS IN THE BASEL PERIOD: THE CASE OF EUROPEAN UNION DEBT CRISIS
TZOVAS, CHRISTOS
BALLAS, APOSTOLLOS; TZOVAS, CHRISTOS; VASILAKOPOULOS, KONSTANTINOS
Category: FR = Financial Reporting
This paper investigates whether European banks smooth income and regulatory capi-tal ratios through loan loss provisions in the Basel period. Using a sample of 1.064 bank-years observations from 26 European Union countries, we find that banks use loan loss provision in order to smooth income after the adoption of IFRS and the Ba-sel regulatory framework. However, our results do not support the regulatory capital management hypothesis. In addition we find that the risk level and direct market dis-cipline affect bank managers' accounting discretion. On the other hand, we do not find evidence to support the hypothesis that the legal environment plays a substantial role in banks’ accounting policy decisions.
DEVELOPMENT COST CAPITALIZATION IN PRIVATE FIRMS – AN EARNINGS MANAGEMENT TOOL OR REPORTING TRUE FINANCIAL PERFORMANCE?
VALENTINCIC, ALJOSA
Category: FR = Financial Reporting
I study the decision to capitalize the development expenditure of non-large private firms. Despite a number of studies dedicated to R&D capitalization in general (and, separately, to private firms), existing research is almost silent on the role of R&D capitalization in the financial reporting process of private firms. I first attempt to explain the factors that affect the decision to and the magnitude of capitalizing development (the “D” part of R&D) expenditures in private firms. I relate this to typical determinants of R&D-capitalization decision: profitability and change in profitability, losses, leverage and change in leverage, growth as well as factors that increase the demand for reporting true firm performance: ownership complexity and presence of an auditor. I then study the importance of development-cost capitalization for future operating profitability. I find that less profitable, leveraged firms are more likely to have capitalized development costs and that capitalization in the current period is associated negatively with future operating profitability. Collectively, these findings indicate that development cost capitalization is primarily an earnings management tool in the financial reporting process of private firms rather than a credible signal of expected future economic benefits.
PERFORMANCE FEEDBACK AND CHANGES IN FIRMS' SG&A RATIOS
VAN CANEGHEM, TOM
AERTS, WALTER; MADADIAN, OVEIS
Category: FR = Financial Reporting
Using a large sample of U.S. firms over the period 2000 up to 2012, this paper relies on both the behavioral theory of the firm (BTOF) and institutional theory to explain changes in firms’ SG&A ratios (i.e., the ratio of selling, general and administrative expenses over sales). Consistent with BTOF, our results confirm that both historical and social benchmarks significantly affect changes in firms’ SG&A ratios. In addition, and consistent with expectations, the weights assigned to historical and social benchmarks are found to depend on the firm’s life cycle stage. In line with institutional theory, our results indicate that social benchmarks have a significantly stronger effect in benchmark groups characterized by high(er) similarity in terms of SG&A ratios.
DEVELOPING AN ONLINE SOCIAL GAME FOR THE FIRST INTRODUCTORY ACCOUNTING COURSE
VAN DER HEIJDEN, HANS
Category: ED = Accounting Education
The intended contribution of this paper is to review how strategies employed by online social games can help reduce accounting anxiety and improve student performance in the first introductory accounting course for undergraduate students. It also documents the development and evaluation of an online social game specifically designed to implement those strategies. The paper briefly discusses the use of games in accounting education, and some relevant predictors of student detachment, including: accounting anxiety, a perception that accounting is too difficult, and a surface level learning style. A feature description of the online game follows, and the ways in which these features implement strategies to overcome student detachment, including: levels of progressive difficulty, a hint support mechanism, and immediate feedback on double entry practice sets. The paper concludes with the results of a test and evaluation survey, providing insight into which features of the game were thought to have had educational or entertainment value.
MANAGEMENT CONTROL AND MOTIVATION: AN EMPIRICAL ANALYSIS OF THE OBJECT-OF-CONTROL FRAMEWORK
VAN DER KOLK, BEREND
TER BOGT, HENK; VAN VEEN-DIRKS, PAULA
Category: MA = Management Accounting
We explore the relations among four types of management control (MC) elements, and examine their relations with different types of motivation and performance. We draw on self-determination theory to hypothesize that different types of MC lead to different types of employee motivation, which in turn affect performance. We test our predictions using survey responses from employees with non-managerial tasks in 105 similar departments. We operationalized Merchant and Van der Stede's (2007) object-of-control framework, and we analyzed our data using structural equation modeling. We find that intrinsic and extrinsic motivation mediate the relation between MC and performance. Specifically, the evidence suggests that the use of personnel and cultural MC positively associates with employees' intrinsic motivation, and that the use of results controls positively associates with employees' extrinsic motivation. Both intrinsic motivation and extrinsic motivation are positively associated with performance, and we also found a positive direct relation between action controls and performance.
COMPETING LOGICS: CARING AND CORPORATISATION IN THE DEATH CARE INDUSTRY
VAN DER LAAN, SANDRA
MOERMAN, LEE
Category: IC = Interdisciplinary/Critical
Death and funerals are a ritualised component of human existence and, in western societies, has become an industry – the death care industry. This industry bundles three discrete aspects or services, ceremonial, disposal and memorialisation, into one product as a one-stop shop. Combinations and permutations of these three aspects are historically, socially and culturally nuanced. Additionally, the actual dealings with the deceased are not discussed publicly and present an opportunity for commodification or exploitation due to the mystery that surrounds death. Commodification here describes the practice of bundling of services to create a tangible or calculable ‘product’ where it previously was not imagined. This results in the services supplied by the funeral director as an opportunity for exploitation of vulnerable consumers when caring for the deceased. In Australia, the death care industry is becoming increasingly concentrated in the hands of a single corporate entity, InvoCare. As a profit-making entity, the monopolisation of a service or product results in a tension between the marketing discourse of ‘caring’ and the corporate narrative of shareholder value. To explore these competing narratives, we analyse the formal reporting of the listed entity, InvoCare, and the way it represents the services it provides in the face of criticism about the concentration in the industry and predatory business practices driving up the costs of ‘dying’.
AUDIT QUALITY IN THE PRIVATE MARKET SECTOR: EVIDENCE FROM THE U.K.
VAN DER LAAN SMITH, JOYCE
GEIGER, MARSHALL
Category: AU = Auditing
In this paper we examine the influence of non-audit service fees (NAS) on auditor independence in the public and private company audit markets. Our examination of financially distressed companies in the U.K. provides evidence that NAS fees are associated with reduced auditor independence, as measured by auditor’s willingness to render a going concern modified (GCM) audit opinion to a distressed client. Specifically we find a reduced likelihood of a GCM opinion for private company audits performed by both Big 4 and non-Big 4 audit firms, and for public companies audited by non-Big 4 audit firms, but not for public companies audited by Big 4 audit firms. We also find significant reductions in the likelihood of a going-concern modification when NAS fees exceed 70 percent of audit fees regardless of listing status or size of audit firm. Our findings shed additional light on differences in the private and public company markets for audit services, and provide information to regulators and others concerned with the impact of NAS fees on auditor independence in both the public and private company markets, as well as documents differences between the Big 4 and non-Big 4 audit firms operating in those markets.
METACOGNITION, CONCEPTUAL CHANGE, AND COST ACCOUNTING – A PRELIMINARY STUDY
VAN MOURIK, GREG
Category: ED = Accounting Education
This paper explores the role of metacognition in the process of conceptual change in the domain of cost accounting and presents a preliminary method of inferring the extent to which different ways of thinking are employed by students in the different stages of learning. We argue the ‘heat map’ thus produced is potentially very informative about teaching practices and can provide insights as to how teaching practices might be altered in order to better assist students to develop appropriate conceptual change, that is, the acquisition of deep understanding. We illustrate the method by applying it to a sample of data relating to the topic of cost estimation. The understanding of the role of metacognition leads to implications for the teaching of cost accounting and the content of cost accounting text books. These implications are important because deep understanding is necessary if students are to think critically and make good judgements when using cost accounting techniques to solve business problems. Thus this paper responds to calls to better equip accounting students with skills required by the profession (American Institute of Certified Public Accountants [AICPA], 2013; International Accounting Education Standards Board (IAESB), 2014; Pincus, 2012) and for more research on the use and training of metacognition in natural contexts (Davidson & Sternberg, 1998; Veenman, Van Hout-Walters, & Afflerbach, 2006).
THE SORTING EFFECT OF EX POST DISCRETIONARY ADJUSTMENT IN EMPLOYMENT CONTRACTS
VAN PELT, VICTOR
DIERYNCK, BART
Category: MA = Management Accounting
In this study, we develop and test theory regarding the sorting effect of ex post discretionary adjustment. The main hypothesis is that ex post discretionary adjustment facilitates the sorting of individuals into firms following a strategy that matches with the personal preferences of those individuals. We test our hypothesis within the domain of Corporate Social Responsibility (CSR) as it is a strategic construct that has sufficient variation in terms of personal preferences among individuals. The results support the main hypothesis and reveal that individuals with a high (low) CSR preference are more (less) likely to choose a contract containing a CSR performance measure, the CSR contract, over a fixed-pay contract when the CSR contract includes ex post discretionary adjustment. Supplemental analyses show that choosing a CSR contract and having a high CSR preference are both positively related to costly exertion of effort. Lastly, we find that supervisors rely on CSR preference information to determine the size of the adjustment. This paper contributes to existing knowledge about subjective performance evaluation which mainly focuses on the consequences of subjective performance evaluation after the employment contract is accepted. This paper is also relevant for practitioners, because the results provide insights into methods that can be used to attract individuals who are committed to the firm’s strategy.
FLEXIBLE WORK ARRANGEMENTS AND OUTPUT CONTROLS
VAN TRIEST, SANDER
COERS, MICHAEL; GROEN, BIANCA; WTENWEERDE, NEEKE
Category: MA = Management Accounting
We investigate the relationship between the use of flexible work arrangements and management control system design, specifically the importance of output controls. Flexworking reduces the feasibility of monitoring employee behavior. Management control theory suggests that this could be compensated by more emphasis on output controls. We conduct a survey (n=905) among employees of a financial services institution. We find that within the group of employees allowed to flexwork, the amount of flexworking is positively related to the importance of output controls. However, we find that employees who are allowed to flexwork report less emphasis on output controls by their manager relative to those not allowed to flexwork. Furthermore, employees who are allowed to flexwork but choose not to do so report a lower level of output control than employees who are not allowed to flexwork. We conclude that the signal of being allowed to flexwork impacts employees’ perception of the emphasis on output controls, even while the management control logic works among the flexworking employees.
CORPORATE SOCIAL RESPONSIBILITY, PERFORMANCE, AND DISCLOSURE: THE ROLE OF OUTSIDE DIRECTORS
VAQUERO-CACHO, LUIS-ANDRÉS
GARCÍA-SÁNCHEZ, ISABEL-MARÍA; MARTÍNEZ-FERRERO, JENNIFER ; PRADO-LORENZO, JOSÉ-MANUEL
Category: SEE = Social, Environmental & Ethical
The significant growth of information disclosure regarding corporate social responsibility (CSR) has generated favorable and unfavorable reactions concerning the aims pursued by companies in issuing these reports voluntarily. The objective of this paper is to focus on the analysis of these reports to assess whether the information linked with CSR is used by the companies as a tool to achieve legitimacy, manipulating the perception of the reader, or, contrary to this, whether it is used by organizations to describe in detail their policies and activities towards the environment. Differing from previous works and articles, our approach considers that these decisions will be monitored, to a greater extent, by the board of directors, controlling the effect of its main key characteristics, especially the moderating role of outside directors. With the aim of corroborating the theoretical premises of our objectives, we used 5,380 samples from 780 companies – not linked with financial services – from 12 countries during the period 2004 to 2010. The empirical evidence shows that, in accordance with the Disclosure Theory, companies with a better social performance and activities related to the environment are keener to disclose voluntarily more useful and comparable information than other companies, especially companies with more independent boards. This confirms that outside directors act as guarantors of the interests of different stakeholders.
EARNINGS EXPECTATIONS AND THE DISPERSION ANOMALY
VEENMAN, DAVID
VERWIJMEREN, PATRICK
Category: FA = Financial Analysis
Prior research shows that dispersion in analysts’ earnings forecasts is negatively associated with future stock returns. This study examines the role of biased earnings expectations in explaining this phenomenon. We first show that return predictability is concentrated in quarterly earnings announcement months and that within these months, return predictability is significant only around earnings announcements. Next, we show that predictable variation in analyst forecast pessimism explains the bulk of the relation between dispersion and future returns. In additional tests, we find that the return predictability of dispersion in earnings announcement months remains significant in recent years and can be explained by investors’ information acquisition costs. Overall, we conclude that market prices do not fully reflect the conditional probability that firms beat versus miss analyst expectations at subsequent earnings announcements.
MIRROR, MIRROR ON THE WALL. WHO IS THE MOST TENURABLE OF THEM ALL?
VEENSTRA, KEVIN
LIU, YANJU; LU, HAI
Category: SEE = Social, Environmental & Ethical
Using human rater scores to proxy for the attractiveness of tenure-track accounting professors at the top business schools in America, we show that attractiveness plays a significant role in a professor’s success. Specifically, controlling for gender, ethnicity, publication history, work experience, and quality of alma mater, more attractive professors obtain better first school placements post-PhD and obtain tenure in a shorter period of time. The association between attractiveness and success is insignificant for individuals when they are promoted from associate to full professor. Our results show that attractiveness is a strong predictor of social competence which in turn has a meaningful impact on success in academia.
THE MISSING ETHICAL DIMENSION: AN APPLICATION OF TCE TO THE CASE OF THE INQUIRY COMMITTEE INTO THE OIL-FOR-FOOD PROGRAMME SCANDAL
VEIGA, MARIA
MAJOR, MARIA
Category: AU = Auditing
This paper demonstrates that Transaction Cost Economics (TCE) alignment hypothesis did not verify and “probity” hazards – “ethics” – cannot be relieved by governance structures, i.e., incentives in the case of the inquiry into the Oil-For-Food Programme (OFFP) scandal at the United Nations (UN). The inquiry, which contains “sovereign” as well as “quasi-judiciary” transactions’ elements, and though lack the “authority of the sovereign” and the “independence” of the judiciary attributes, did not achieve its stated purposes. We apply Williamson’s TCE theory (1999) and McCloskey’s (2006) “virtues ethics” to the questions: i) has the inquiry worked? ii) has TCE’s discriminating alignment hypothesis been verified in the case of the OFFP scandal inquiry? The longitudinal historical narrative analytical case based research covering more than 20 years of history was developed to address decisions of oversight governance structures at the UN in the context of systemic failures of probity / ethics. The UN took adaptive ex post action and reformed internal oversight governance structures in a movement that might have been devised mainly to help rebuild reputation and secure funding continuation but which intrinsically changed little. We argue that TCE should be modified to include McCloskey’s “virtues ethics” behavioral dimension as a transaction costs’ reduction device and an explanatory framework for bureaucratic ethical failures.
THE EUROPEAN APPORTIONMENT FORMULA: THE ROLE OF INTANGIBLES FOR BELGIUM
VERLEYEN, ISABELLE
COPPENS, CARINE ; ROGGEMAN, ANNELIES; VAN CAUWENBERGE, PHILIPPE
Category: TX = Taxation
A vexed question in the history of a Common Consolidated Corporate Tax Base is whether the apportionment formula (AF) should include intangible assets into its assets factor. The European Commission proposes an AF that only partly and temporarily includes intangible assets. This study provides empirical evidence on the importance for Belgium to include intangible assets into the European AF. Namely, an AF that results in a fair distribution of the consolidated tax base among the different member states, should include factors that represent the profit generating capacity of firms as closely as possible. Our results show that including intangible assets significantly increases the accuracy of the AF to explain the variation in corporate profit.
A HISTORICAL STUDY OF RISK ASSESSMENT AND MANAGEMENT BY THE BRITISH GOVERNMENT: THE CASE OF THE BURMAH OIL COMPANY 1974 OIL TANKER FLEET FINANCIAL CRISIS
VERMA, SHRADDHA
ABDELREHIM, NEVEEN ; LINSLEY, PHILIP
Category: PSNP = Public Sector & Not-For-Profit
Risk management is often viewed as a relatively new phenomena starting in the mid-1980s. The formalisation of risk management activity in the UK public sector can be traced back to the National Audit Office’s report Supporting Innovation: Managing Risk in Government Departments published in 2000; which has led to the HM Treasury Management of risk – principles and concepts ‘Orange Book’ being published in 2001. In addition, there has been increased interest in risk management following the recent financial crisis; one aspect of which concerns government assessment of risk in relation to their bail out of some banks. However, government risk assessment and government financial support for companies is perceived to be important in the national interest whilst not being restricted to the recent financial crisis. This study demonstrates that risk assessment by governments in relation to the corporate sector is not a new phenomenon and pre-dates the 1980s. The paper provides an historical analysis of government risk assessment and risk practices by examining events relating to the Burmah Oil Company (BOC) oil tanker fleet financial crisis of 1974-1975; a crisis which resulted in the Bank of England providing financial support for BOC in 1975. Using government and company archival records, and employing both a political economy perspective and stakeholder theory, this research analyses the reasons for the government supporting BOC in 1975, identifies the key stakeholders involved in the negotiations for financial support for BOC, explores their interactions within the negotiation process and discusses the British Government’s consideration of different types of risks within the process.
FINANCIAL REPORTING QUALITY AND PEER GROUP COMPOSITION
VERRIEST, ARNT
DIERYNCK, BART
Category: FR = Financial Reporting
Firms often compose peer groups to benchmark the compensation package of the CEO and/or to benchmark the performance of the firm as part of a relative performance evaluation. We examine the relationship between financial reporting quality of a potential peer firm and the probability of being included in the peer group of another firm. We hypothesize that firms with weaker financial reporting quality are less likely to be included in the peer group of another firm because of the increased information asymmetry between the potential peer firm and the selecting firm and the potential contagious effects of selecting a firm with weak financial reporting quality. Based on data on compensation and performance peer groups of the S&P 900 firms from 2006 until 2011, we document that firms with weaker financial reporting quality are less likely to be included in the peer groups that are used to benchmark the compensation package of the CEO and/or the performance of the firm. Additional tests suggest that this effect is driven by the increased information asymmetry and the potential contagious effects as developed in our theory.
TAXES AND FIRM SIZE: POLITICAL COST OR POLITICAL POWER? - A META-REGRESSION ANALYSIS
VON HAGEN, DOMINIK
BELZ, THOMAS; STEFFENS, CHRISTIAN
Category: TX = Taxation
This paper provides a quantitative review of the empirical literature on the relation between taxes and firm size. Accounting literature offers two opposing theories on this relation: the political cost theory, which suggests a positive size-tax relation because larger firms have higher degrees of political costs such as public scrutiny, and the political power theory, which suggests a negative size-tax relation because larger firms have more political power that can be used to negotiate their tax burden. Using a unique hand-collected dataset, this paper contributes to the discussion on the size-tax relation in three ways: First, applying meta-regression analysis, we analyze 46 primary studies and provide a consensus estimate on the effect of firm size on the effective tax rate. This analysis is interesting because the empirical results across primary studies are by no means clear-cut and no tendency can be observed towards either the political cost or the political power theory. Generally, our findings confirm the political cost theory. Second, in further analyses on individual elements of political power and political cost, we test for additional explanations on the size-tax relation, such as relative firm size, profit shifting related time trends or Hofstede’s cultural dimensions theory. Third, our analysis reveals factors that are potential sources of variation and biases in previous empirical findings and thus can improve future empirical and analytical models.
THE REAL EFFECTS OF ANALYST FOLLOWING: ANALYST CROSS-COVERAGE AND MERGERS AND ACQUISITIONS
VORST, PATRICK
Category: FA = Financial Analysis
I investigate the impact of analyst cross-coverage on M&A transactions. I find that the probability of an M&A transaction increases when firms have common analysts. Examining short-window deal announcement cumulative abnormal returns (CARs) and long-run abnormal returns, I find that deals with cross-coverage create more value. Moreover, the additional value that is created flows to acquirer shareholders only, making cross-covered deals more profitable from an acquirer’s perspective. Additional tests in which I split the sample based on the level of information asymmetry and the existence of other connections between the acquirer and the target provide further support for the argumentation that information sharing by connected analysts is the driver of these results.
VOLUNTARY DISCLOSURE PRACTICES BY FOUNDING-FAMILY FIRMS
VURAL, DERYA
Category: GV = Governance
Managers use accounting information to minimize information asymmetries with its contracting parties. However, shareholders may have different preferences for accounting information and thus the structure of ownership plays an important role in firms’ voluntary disclosure practices. This paper investigates the effect of founding-family ownership on firms’ voluntary disclosure practices in a Swedish context, which is known for its wide usage of control-enhancing mechanisms. I construct a comprehensive disclosure index and find that founding-family firms provide less disclosure in annual reports than non-founding-family firms do. The finding is consistent with the premise that through their management positions founding-family owners can directly monitor managers and avoid costly public disclosures. I also find that control-enhancing mechanisms and a non-founder blockholder aggravate the negative relationship between founding-family owners and voluntary disclosure.
MUTUAL CALCULATIONS IN CREATING ACCOUNTING MODELS: A DEMONSTRATION OF THE POWER OF MATRIX MATHEMATICS IN ACCOUNTING EDUCATION
VYSOTSKAYA, ANNA
KOLVAKH, OLEG; STONER, GREG
Category: ED = Accounting Education
The aim of this paper is to describe the peculiarities of the teaching approach used in Southern Federal University (SFedU), Russia, to teach accounting via a form of matrix mathematics. It thereby contributes to disseminating the technique of teaching to solve accounting cases using mutual calculations to a worldwide audience. The approach taken in this course provides useful insights for both accounting educators and accounting students by providing an alternative explanation and understanding of the main principles of accounting, and does so using a simple game simulation. This paper provides readers with an awareness of the international environment of the techniques adopted at SFedU in the teaching of accounting, demonstrates that any accounting operation can be represented by matrix equations, and, as a result, aids in the understanding of the processes of recording transactions and the mathematical generation of essential accounting reports. The paper thereby demonstrates the potential value of matrix based approaches to accounting within the accounting educational environment.
THE PRINCIPAL INSTRUCTS INPUT OR THE AGENT SETS INPUT TARGETS: WHICH IS PREFERABLE IN ORGANIZATIONAL CONTROL?
WAKABAYASHI, TOSHIAKI
Category: MA = Management Accounting
A performance evaluation based on verifiable output information is valuable to organizational control, but in practice, the principal often offer the input instruction to the agent (top-down), or makes the agent to set the input target (decentralization). The actual input is usually unverifiable for the principal, so such input based control seems ineffective. However, I examine that not only output evaluation but also input based control can work, when we focus on the agent’s three individual attributes, “attitude toward instructions”, “attitude toward target setting”, and “attitude toward target achievement.” Consequently, the top-down instruction is valuable, because “attitude toward instructions” works substitute for performance evaluation. However, when the principal decentralizes target setting right to the agent, an interaction between output control and input control is different depends on the timing of setting target. Moreover, the preferable regime (top-down or decentralization) for the principal depends on the range of agent’s individual attributes.
THE THEORETICAL FOUNDATION FOR THE BALL-BROWN ANALYSIS AND VALUE RELEVANCE OF ACCRUALS
WANG, PENGGUO
Category: FA = Financial Analysis
In this paper, I establish a theoretical relationship between earnings components and future stock returns. It shows the extent to which the Ball-Brown metric on how shocks to earnings are associated with shocks to stock returns is a sufficient measure of value relevant information in accrual accounting. It also suggests that ‘accrual anomaly’ can be explained rationally. It is accrual and other accounting fundamentals that jointly determine the correlation risk with the market as long as there exists differential persistence between cash flows and accruals. Consequently, the Sloan and similar results should not be interpreted as an accrual-based anomaly, instead they document important evidence of the fair pricing of accruals.
THE CAPITAL BUDGETING PROCESS AND THE ENERGY TRILEMMA.
WARREN, LIZ
JACK, LISA
Category: MA = Management Accounting
Encouraging the right type of investment is essential to the success of any UK energy policy. Suitable investments can maintain low prices, achieve reductions in emissions and keep the lights on. The World Energy Council have identified supply, pricing, and emissions as the three major global energy concerns, known within the industry as the ‘energy trilemma’. This paper explores the use of capital budgeting by companies who are responsible for providing a basic commodity, electricity, within a privatised industry. Investment decisions within the UK are central to solving the energy trilemma. However, the industry is subject to complex regulatory systems, which not only impose price controls on consumers, but also set strict environmental targets for companies. Capital budgeting scenarios need to incorporate the uncertainty arising from the regulatory environment and global fuel prices. Using structuration theory, this paper analyses the purpose of capital budgeting and its role in the ‘energy trilemma’. In particular, Giddens’ (1984) concept of the dialectic of control is useful in understanding how accounting tools can be used by executive managers who whilst dominant in their own organisations, are themselves subordinate to government at European level.
THE IMPACT OF MAGNITUDE AND LIKELIHOOD ON MATERIALITY JUDGEMENTS ABOUT ENVIRONMENTAL AND SOCIAL INFORMATION
WEE, MARVIN
KRUG, LEE; TARCA, ANN
Category: SEE = Social, Environmental & Ethical
Our study examines the determination of materiality in Integrated Reporting (<IR>) from the perspectives of corporate report preparers and company auditors. Using a case study experiment conducted with professional accountants (auditors and business managers), we show that materiality judgements were associated with the magnitude and likelihood of items that could potentially be disclosed. When comparing the effects of magnitude and likelihood levels on accountants’ materiality judgements, we found magnitude dominated likelihood. In addition, information linked to the financial statements was more likely to be considered material compared to items linked to environmental or social matters.
THE EFFECT OF MANDATORY CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE ON TAX AVOIDANCE: A NATURAL QUASI-EXPERIMENT IN CHINA
WEI, JUAN
MO, PHYLLIS
Category: TX = Taxation
Using a mandatory corporate social responsibility (CSR) disclosure as a quasi-experiment, we examine the impact of mandatory CSR disclosure regulation on tax avoidance based on reputation concern in China. Mandatory disclosure regulation requires specific listed firms to disclose CSR report after 2008 and provides an exogenous event for testing the research question. Using a differences-in-differences (DID) research design, we find that mandatory CSR disclosure is positively (negatively) associated with effective tax rate (performance adjusted book-tax difference) during post-mandatory period. These findings indicate that mandatory CSR disclosure regulation has led to a decrease in tax avoidance compared with non-disclosure firms after the regulation. Specifically, we find that the significant negative relation between mandatory CSR disclosure and tax avoidance only exists in firms which are under weak tax enforcement environment. Finally, we provide evidence that firms with mandatory CSR disclosure have worse firm performance in the following year.
THE DETERMINANTS OF CASH HOLDINGS: EVIDENCE FROM META-REGRESSION ANALYSIS
WEIDEMANN, JAN FELIX
Category: GV = Governance
Research on corporate cash holdings is characterized by a diverse set of underlying theories and associated determinants that influence the level of cash. Studies usually focus on individual situations of cash hoarding and it remains difficult to derive general statements from the existing body of research. I tackle this problem by undertaking a meta-regression analysis, which is a quantitative approach to surveying literature, on the results of cash holding research. I am able to identify the general influence of ten, most frequently applied, determinants on the level of cash. After controlling for a potential publication bias, I find cash holdings to decline when total assets, investment activities, net working capital, leverage, cash flow and dividends increase. The corporate cash reserves increase with an increasing market-to-book ratio, R&D expenditures, financial distress and corporate governance quality. Furthermore, I show that the geographic region and environment of information asymmetries a firm is set in affects the association between the determinants and the level of cash. However, regional differences in the effects of determinants are partially as well caused by information asymmetries resulting from distinct regional levels of investor protection and governance quality.
MANAGERIAL EMPIRE BUILDING AND PARTICIPATION IN THE BUDGETING PROCESS
WEISKIRCHNER-MERTEN, KATRIN
Category: MA = Management Accounting
Private information about the expected profitability of an investment project obtained by a manager with empire building tendencies can potentially lead to distorted investment decisions. This paper considers the choice of the level of participation used in the budgeting process in order to take the manager's empire building tendencies into account. The analysis indicates that it highly depends on the firm and market characteristics, whether headquarters prefers no participation (top-down budgeting process), full participation (participative budgeting process) or partial participation of the manager (mixed budgeting process). The model predicts that, compared to companies with severe empire builders, companies with non-severe empire builders use a participative or mixed budgeting process more relative to a top-down process. Interestingly, despite the bad connotation of empire building, the manager's empire building tendencies can positively affect the expected profit of the company. For wide ranges of investment costs, the company can substantially skim the manager's empire benefits by reducing the expected compensation payments. This is the case when the investment costs of the project are high, medium or low and a participative, mixed or top-down budgeting process is used, respectively. Moreover, for medium or high empire building tendencies, the level of participation used in the budgeting process is predicted to be positively associated with the level of investment costs.
THE IMPACT OF SPATIAL DISTANCE AND RISK CATEGORY ON PROBABILITY JUDGMENTS
WEISNER, MARTIN
SUTTON, STEVE
Category: MA = Management Accounting
Recent research suggests that corporate board members would like to receive more information about actual ERM processes and how risk probabilities are estimated. Given calls from both the academic and practice literature, the present study examines how spatial distance from a risk assessment target and risk category affects risk managers’ assessments of the probability that the risk will materialize. Results from an experiment involving 161 risk managers indicate that decision-makers who evaluate a spatially remote object assess the probability that various risk factors will materialize to be lower than those who evaluate a spatially proximate object. Moreover, decision-makers provide lowest probability estimates when assessing non-operational risk factors for a spatially remote object. Additional analyses reveal that risk managers perceive operational risk factors as more likely to occur than strategic risk factors, but not more likely than macroeconomic risk factors. The study has important implications for risk management practice as it demonstrates how the psychological distance associated with various risk categories systematically affects probability judgments. More broadly, the study contributes to the accounting literature by demonstrating how spatial distance affects likelihood judgments in the context of multi-site or multi-national organizations.
OPERATING LEVERAGE AND FUTURE EARNINGS
WEISS, DAN
ABOODY, DAVID; LEVI, SHAI
Category: FA = Financial Analysis
This study examines the impact of operating leverage, defined as the ratio between fixed and variable costs, on future earnings. First, we find that high-operating-leverage has a longer impact on future earnings than low-operating-leverage, primarily because of a slower cost-adjustment process. Second, for firms with high-operating-leverage, a negative revenue shock has a larger negative impact on future earnings than a positive revenue shock. This asymmetric effect of operating leverage on future earnings is mainly driven by a slower cost-adjustment process on the downside than on the upside. Finally, to achieve better incentive alignment, executives in high-operating-leverage firms get more equity-based compensation, to reward them for the heightened volatility and protect them from the greater downside associated with high-operating-leverage.leverageof the firm. Overall, our findings are an important contribution to two streams of studies: operating leverage and cost behavior.
WHEN DO GOVERNANCE MECHANISMS MATTER MOST?
WELLS, KARA
HORSTMEYER, DEREK
Category: GV = Governance
We examine the interaction of internal and external firm-level governance mechanisms with industry-specific economic conditions to assess when they best serve current shareholders. We find that external governance (shareholder rights) is most valuable during industry upturns, with no differential benefit during downturns. For internal governance, we find that small boards are incrementally more valuable during upturns but that this result weakens/reverses during downturns, and inconclusive evidence regarding the state dependent value of institutional ownership. Contributions include showing: governance mechanisms have industry economic state dependent values; small boards may not always be optimal; and managers do not capture these inefficiencies through aggressive policy decisions, nor excessive compensation.
BEYOND IFRS: HOW FIRMS BENEFIT FROM INDUSTRY-SPECIFIC REPORTING GUIDANCE
WIDMER, SEVERIN
HALBERKANN, JÉRÔME
Category: FA = Financial Analysis
This paper examines the capital market effects of standardized voluntary disclosure of industry-specific information in a strong information environment, which is the European real estate sector. We compute three proxies measuring the degree of firm compliance with the best practice recommendations (BPR) of the European Public Real Estate Association (EPRA). We find evidence indicating that higher compliance with EPRA BPR leads to higher liquidity, lower costs of capital, and higher analyst following. We further find that debt offering plans and the proportion of EPRA BPR adopters in the European real estate sector are factors that drive firms’ degree of compliance with EPRA BPR. Our results show that complementary disclosures can induce positive capital market outcomes in environments where IFRS are enforced and where liquidity and analyst following are ex-ante high and costs of capital is ex-ante low.
DISCLOSURE, PATENTS, AND THE DELAY OF INVENTIONS
WIEDMAN, ELYASHIV DAVID
WEKSLER, RAN
Category: IC = Interdisciplinary/Critical
In the past few decades the patent system has been changed in order to stimulate innovation. As a result, today patent protection is strengthened, patents are granted for longer duration, and patent rights are extended to new subjects. Although patents provide incentives to engage in research, there is a social cost arising from the monopolistic power attached to them. In this paper we shed light on an additional social cost of patenting: patents may delay the appearance of inventions. Our model considers situations wherein information disclosure must be done before real action can be taken, i.e., research and development. Examples of such disclosures include MD&A in public financial reports, regulator's approval for experimentation, etc. Specifically, we analyze the behavior of two firms that compete in finding an invention under a patent regime and under a non-patent regime (free imitation). In addition, in order to conduct experimentation, a firm must disclose its private information. We show that under a patent regime one firm delays its disclosure and experimentation and thus inventions are expected to appear later under a patent regime as compared to the case where patents are not granted.
EXPLORING THE ROLES OF VERNACULAR ACCOUNTING SYSTEMS IN THE DEVELOPMENT OF “ENABLING” ACCOUNTING AND CONTROL SYSTEMS
WIEGMANN, LEONA
GORETZKI, LUKAS; STRAUSS, ERIK; WIEGMANN, LEONA
Category: MA = Management Accounting
Integrated accounting and control systems are supposed to facilitate headquarters requirements by enhancing efficiency of processes and replacing local informal accounting systems. To be used effectively, these systems should simultaneously help local actors to carry out their tasks. The literature named these systems “enabling systems”, and it started to investigate their development processes. Studies hereby emphasized the importance of involving users that often use self-developed accounting systems in their routine activities, which hence may be in conflict with integrated accounting systems. Thus, this paper aims to study how existing local accounting systems affect the participative development process of enabling global accounting systems and their design characteristics. Based on a longitudinal case study, we show how user involvement can lead to global accounting systems competing with existing local (vernacular) accounting systems. We identify four roles such systems play in this context and how they affect the development process, namely points of reference, imparting devices, potential defensive resources, and infusions. We discuss the relevance of the four design characteristics in light of different types of accounting and control systems (i.e., with distinct top-down vs. bottom-up characteristics) and we show that the final design based on user involvement can be seen as the result of negotiated compromises that undermine global ideals such as standardization.
THE AUDIT OF DEFERRED TAXES AS A SIGNAL FOR TAX AUDITORS
WIELENBERG, STEFAN
BLAUFUS, KAY; SCHOENDUBE, JENS ROBERT
Category: TX = Taxation
Financial statements of large firms are often audited twice: first by a statutory auditor and second, usually with a time-lag by a tax auditor. Using a tax compliance game with the taxpayer and the tax auditor as strategic players, we study the interaction between these two audits. In particular, we examine how tax compliance is affected by the observability of the statutory auditor's report on deferred taxes. In contrast to intuition, we find that introducing this report as an informative signal does not necessarily increase efficiency. In fact, it may also lead to less tax revenues. This requires low powered incentives for tax auditors and high book-tax conformity. The rationale behind this result is that some taxpayers have an incentive to avoid the signal by understating both financial and tax income as these reports are subject to a lower tax audit probability in equilibrium. By deriving formally the conditions under which the interaction between statutory and tax audit increases tax compliance, we contribute to the ongoing discussion in research and policy on the instruments to combat non-compliance.
MULTIPLICATIVE CROSS SECTION REGRESSION MODELS OF THE RELATION BETWEEN MARKET AND ACCOUNTING VALUES
WILLETT, ROGER
Category: FA = Financial Analysis
Strong cross-section evidence based on the entire Compustat dataset of active 31 December year-end firms from 1960 to 2009 is provided in this paper supporting the theory that the relationship between market and fundamental accounting values is best approximated by a multiplicative rather than an additive form. This gives a simple basis for estimating long-run market returns from ‘levels’ regressions. The theory applies when the accounting variables are negative as well as when they are positive. The data shows that the joint distribution of the magnitudes of book value, earnings and dividends are approximated by a lognormal form. This implies that the market-accounting relation between these variables is multiplicative. Estimates of the long-run market elasticities of book, earnings and dividends are reported and compared to the response coefficients estimated from additive models, showing that multiplicative models are more consistent with accounting arithmetic and financial statement ratios than are additive models.
MANAGEMENT EARNINGS FORECASTS AND THE PRICING OF EARNINGS
WINDISCH, DAVID
BOISITS, ANNA
Category: FA = Financial Analysis
In this paper, we develop a rational expectations model to understand the role of past management earnings forecasts in the capital market's pricing of earnings and empirically test its implications using a large sample of U.S. firms for the period 2002-2012. We analytically show that reported earnings are positively related to stock price, whereas past management earnings forecasts are negatively related to stock price at the earnings announcement date. The latter effect is due to an adjustment and a noise-reduction role of management earnings forecasts, i.e., the market uses these forecasts to adjust for managers' smoothing incentives and to reduce noise related to the uncertainty about managers' objectives with respect to earnings. Furthermore, we show that the positive weight on reported earnings and the negative weight on forecasted earnings vary in manipulation costs, discrepancy costs, the precision of the manager's private information at the forecast date relative to the earnings announcement date, and the quality of the accounting system. The results of our empirical analysis are in line with the main hypothesis and most of the cross-sectional predictions derived from our analytical model.
ACHIEVING TAX CERTAINTY AND AVOIDING TAXES? – EVIDENCE FROM LUXEMBOURG TAX RULINGS
WITTENSTEIN, PATRICK
HARDECK, INGA
Category: TX = Taxation
Using the Luxembourg Leaks database which reveals confidential Luxembourg tax rulings of hundreds of multinational companies from the years 2002 to 2011, this research investigates whether tax rulings in Luxembourg are associated with higher levels of tax avoidance and non-compliance. Our research purpose is twofold. First, we analyze in detail tax law aspects in tax rulings of 152 firms and present essential tax planning structures involved. Our analysis reveals the frequent use of financing structures with hybrid financial instruments and specific repatriation mechanisms that may serve to circumvent withholding taxes on distributions to tax havens. However, some rulings show less tax avoidance potential and seem to be exclusively driven by seeking legal certainty. Second, using a difference-in-differences methodology, we show that ruling firms on average have lower effective tax rates compared to matched control firms according to country, industry, size, and foreign activity. Ruling firms further manage to reduce their tax burden for a short-term period (generally two years) after the ruling. In addition, these firms have a higher probability of engaging in controversies linked to non-compliance and are subject to higher compliance penalties. These results hold under several robustness checks. Our findings suggest that requesting a Luxembourg ruling is on average part of a tax avoidance strategy.
BETTER LATE THAN NEVER!? DISCLOSURE TIMING BEHAVIOR OF GERMAN PRIVATE COMPANIES
WITTMANN, CHRISTIAN
BRAVIDOR, MARCUS
Category: FR = Financial Reporting
In this paper, we analyze the determinants of disclosure timing decisions of private companies. Without capital-market pressure, lower litigation risks and higher relevance of private information channels, private firms face different cost and benefit consideration regarding their disclosure behavior than listed companies. We argue that firms delay the disclosure decision to minimize related costs. Our analysis is based on a hand-collected sample of 720 large private German companies. All firms are subject to the same mandatory disclosure rules, enforcement mechanism and sanctions. Our results show that disclosure delays are particularly pronounced for firms facing higher proprietary costs. Loss-reporting and family-owned firms show longer disclosure delays. In general, firms exhaust the legally permitted time frame. Many companies even accept fines for overrunning the disclosure deadlines. Our results have practical implications as they shed some light on the perception of indirect costs of disclosure by private companies.
ENFORCEMENT OF ACCOUNTING STANDARDS AND CHANGES IN CORPORATE GOVERNANCE
WITZKY, MARCUS
Category: GV = Governance
This paper investigates (1) whether the corporate governance of firms with erroneous financial reporting differs systematically from that of non-error firms and (2) whether error detection is followed by improvements in the corporate governance of error firms. I apply a difference-in-differences approach on a matched sample from Germany. In contrast to the U.S., firms are selected randomly and repeatedly for examination under the German financial reporting enforcement regime. For the error year, I find error firms less likely to be audited by a big-four firm, to have an unqualified auditor’s opinion, and to have an audit committee. They are subject to a more time-consuming auditing process and their supervisory boards have fewer members and committees. In the first full fiscal year after error disclosure, differences between error and control firms are insignificant for the structure of the supervisory board but partly persist with respect to the auditor-client relationship. This may be interpreted as financial reporting enforcement being effective to some extent in preventing potential future errors by triggering improvements in firm-level accounting oversight.
POST EARNINGS ANNOUNCEMENT DRIFT AND UNCERTAINTY AVOIDANCE: A CROSS-CULTURAL PERSPECTIVE
WONG, ANNIE
DETZEN, DOMINIC
Category: FA = Financial Analysis
This study investigates whether differences in cultural values, specifically uncertainty avoidance, affect the post earnings announcement drift (PEAD). Using market data from Belgium, France, Sweden and the United Kingdom in the period 2009-2013, we find that uncertainty avoidance mitigates the initial market reaction for the portfolio comprising the most positive earnings surprises and that the PEAD is significantly stronger in high uncertainty avoidance countries. Subsample analysis shows that this latter finding is also limited to the most positive earnings surprises. Overall, our findings tentatively suggest that investors from high uncertainty avoidance countries wait for information to become more certain before incorporating the signal in the stock price, which results in a lagged reaction.
BUY-SIDE ANALYSTS AND EARNINGS CONFERENCE CALLS
WONG, M.H. FRANCO
JUNG, MICHAEL; ZHANG, FRANK
Category: FA = Financial Analysis
Companies’ earnings conference calls are perceived to be venues for sell-side equity analysts to ask management questions. In this study, we examine another important conference call participant—the buy-side analyst—that has been underexplored in the literature due to data limitations. Using a large sample of transcripts, we identify 4,045 buy-side analysts from 724 institutional investment firms that participated (i.e., asked a question) on 13,373 conference calls to examine the determinants and implications of their participation. Buy-side analysts are more likely to participate when sell-side analyst coverage is low, dispersion in earnings forecasts is high, and when the hosting company reported bad news, consistent with buy-side analysts directly acquiring information when a company’s information environment is poor. Institutional investors trade more of a company’s stock after their buy-side analysts participate on the call, suggesting buy-side analysts update their stock recommendations after a call and their employers act on the updated research. Finally, we find evidence that the buy-side analysts we observe on the calls and the subsequent trading decisions by their employing institutions are reflective of other buy-side analysts and institutions we do not observe, resulting in company-level changes in stock prices, trading volume, institutional ownership, and short interest.
OPERATING CASH FLOW ASYMMETRIC TIMELINESS IN AUSTRALIA
WRIGHT, SUE
LU, MEITING; SHAN, YAOWEN ; YU, YIMENG
Category: FR = Financial Reporting
Operating cash flows (CFO) asymmetric timeliness refers to the extent to which CFO reflect bad news more quickly than good news. We examine the presence and determinants of CFO asymmetric timeliness in Australia, where the reporting requirements of cash flow components, listed company composition and the degree of conservative financial reporting differ substantially from the U.S. Using a sample of Australian firms over 1993-2013, we find evidence of CFO asymmetric timeliness, driven by product pricing strategy and sticky cost behaviour. We do not find overall evidence supporting the life cycle hypothesis. Further analyses suggest that the results are more pronounced for non-mining firms than for mining and resource firms, and there is a life-cycle effect for more mature mining firms.
THE COEXISTENCE AND INTERACTION OF FORMAL AND INFORMAL LENDING IN CHINA -
WU, JUNJIE
Category: IC = Interdisciplinary/Critical
Interest China’s economy is much of the longstanding phenomenal growth. However, more recently there has been growing interest in emerging constraints on and vulnerabilities regarding that growth. A key focus has been concern with issues of shadow banking. This paper looks at one aspect of China’s finance system, which has some crossover with shadow banking: informal lending to SMEs. This lending is characteristically unstable and exhibits a number of features that cannot but constrain SMEs. It explores the issues based on the case of Wenzhou, the most prominent city for SMEs and has recently experienced an informal lending credit crisis.
THE SUBSTITUTION AMONG ALTERNATIVE REAL ACTIVITIES EARNINGS MANAGEMENT MECHANISMS-EVIDENCES FROM QUARTERLY DATA
WU, SHU-LING
WANG, YU-TAN
Category: FR = Financial Reporting
This study examines how managers trade off alternative real activities earnings management mechanisms across four quarters of a year. Using a sample of firms that are suspected to have conducted real activities earnings management, we found that abnormal production costs of these firms are stable across four quarters of a year, but abnormal discretionary expenses are significantly lower in the fourth quarter than those in the other three quarters. The results suggest that overproduction management has constraints resulting from the stickiness of production capacity so firms resort to cutting more discretionary expenditures in the fourth quarter to achieve the earnings target.
EXECUTIVE COMPENSATION DISCLOSURES: TABLE VERSUS FORMULA FORMATS
XIA, YIFEI
HAN, JUN
Category: FR = Financial Reporting
This study investigates how the presentation formats of executive compensation disclosures affect investors’ compensation- and investment-related judgments and decisions. We examine the effect of these formats and their underlying mechanisms by conducting a laboratory experiment. We compare bonus schemes as presented in the table and formula formats and find an interaction effect between presentation format and outcome favorability. When the actual performance beats the performance targets (favorable outcome), investors are more likely to approve bonus awards that are presented in the formula format rather than the table format. However, there is no significant difference in approval rating between the different formats when the performance targets are missed (unfavorable outcome). In addition, we find evidence that the readability and halo effects jointly determine the effect of a presentation format on investors’ judgments. Our study contributes to several research areas including information readability, the halo effect, compensation disclosure and shareholder voting. Our findings also have practical implications for both managers and investors.
TRANSPARENCY AND OVERSEAS DONATION: EVIDENCE FROM CHINESE NOT-FOR-PROFIT FOUNDATIONS
XUE, QINGMEI
LIN, JING
Category: PSNP = Public Sector & Not-For-Profit
Abstract Chinese not-for-profit foundations have been suffering transparency problems in recent years. Previous research generally find positive relationship between the amount of donations and disclosure levels of NPOs. This research investigates how the information disclosure of NPO foundations influence the donations they can get from oversea individual and organizations. Using a sample of top 100 foundations, we test the relation between the lagged transparency level and overseas donations. We use FTI, a transparency index published by Chinese Foundation Center, as our proxy for transparency. The regression results suggest that the higher transparency level, the more donation a foundation could get from overseas. The effect is different between public foundation and nonpublic foundation. It is also different between institutional donation and individual donation. This finding is generally robust to controls for various organization specifications. Our research has implications for foundations who want to attract international donations.
MANAGEMENT CONTROL SYSTEM FUNCTION AND LEADERSHIP STYLE IN R&D PROJECTS
YAMANE, SATOKA
Category: MA = Management Accounting
New product development (NPD) is an important corporate activity because it provides organizations with future business opportunities. Management team faces decisions associated with uncertainties because NPD carries with it several risks regarding aspects of technology, marketing, and finance. To promote an NPD project, provide useful information for the project, and recognize how to control the project are important. Management control system (MCS) plays the role of providing information, evaluating decision-making processes, and altering the actions of project members. Few studies have examined the relationship between MCS and project. Moreover, previous studies on project management for NPD verified technical methods centrally related to planning and executing project. Previous studies did not take in consideration social and behavioral science aspects such as leadership style, motivation, communication, culture, and ethics. However, today, the focus seems to be more on such social and behavioral factors (Hartmann, 2006; Pons, 2008). Current project management practices focus on output control such as targets, appraisal, rewards, and management by objectives; however, human resource management studies recognized these factors as inhibiting innovation. Of great significance is verifying the relationship between leadership style and MCS function. Therefore, I verify how the MCS functions for NPD projects under a transformational leadership style.
IFRS AND PUBLIC ENFORCEMENT, THE POWER OF REGULATIONS AND MANAGERS PERCEPTIONS – A COMPARISON OF ENFORCEMENT FROM TWO PERSPECTIVES
YAMMINE, MIRA
OLIVIER, HENRI
Category: FR = Financial Reporting
The application of a global set of qualitative accounting standards is not sufficient for countries to exhibit high quality financial reporting. Other factors and actions, such as the public enforcement of these standards and the willingness of manages to respect enforcement regulations should be taken into consideration. In this respect, our study makes a comparison between public enforcement of accounting standards seen from two perspectives: public institutional oversight bodies that impose enforcement regulations from one side and managers and preparers of financial statements from the other side. The results show that the perception of strong enforcement of accounting standards by managers has a tendency to decrease their incentives to manage earnings, increasing by that the consistent application of IFRSs.
THE TOOL BECOMES THE MASTER: THE ACCOUNTING INVASION INTO PROFESSIONAL SPACES
YAN, MO
Category: IC = Interdisciplinary/Critical
This study reports on the role of accounting in a case of the unintended invasion of professional spaces. We examine the historical development of a new management accounting system and its gradual rise in overriding professional values. We are interested in answering the question of how can accounting invade other professional spaces, such as those of the scientists’. Institutional logics perspective is adopted as the main theoretical framework to explain the diverse reactions to the system and the unintended disturbance and instability in the organisation. To respond to the field signal, the minority logic (governance logic) holders (accountants) were delegated to translate the governmental aspiration into management techniques. Over time, the initiative evolved into a performance management system comprising a balanced scorecard, a strategy map, an online management system and a new costing/budgeting method. Although promoted as a heuristic management tool symbolising business logic, the performance management system was received and interpreted by organisation members through their extant logics (professional logic). As a result, it was impossible for accounting to be useful in both representation (through providing a new way of viewing the organisation) and in practice (through providing useful information for management). The accounting system which was designed as a tool ended up being the overriding ‘master’ that members of the organisation had to maintain.
THE ROLE OF CONVEX EQUITY INCENTIVES IN MANAGERS’ FORECASTING DECISIONS
YANG, HOLLY
CHO, YOUNG JUN; TSUI, DAVID
Category: FR = Financial Reporting
This paper examines whether managers with more convex equity incentives are more likely to provide voluntary disclosures. We argue that providing voluntary disclosures of forward-looking information exposes managers to potential negative consequences, and thus convex compensation contracts that limit these negative consequences should promote greater disclosure. Using management earnings forecasts as a proxy for voluntary disclosure and the CEO’s portfolio vega to measure the convexity of equity incentives, we find a significantly positive association between managers’ vega and the issuance and frequency of forecasts. Results from cross-sectional tests indicate that this association is weaker for CEOs who consider disclosure less risky (i.e., overconfident and long-tenured CEOs). We also find that this association is stronger when earnings are more unpredictable and when investors are more likely to trade based on these disclosures (i.e., high sales volatility and high transient institutional investor base), and therefore managers are more likely to be concerned about negative investor response to forecasts. Overall, our study suggests that convex compensation contracts increase managers’ tendency to provide voluntary disclosures and help improve incentive alignment between managers and shareholders.
THE COMPLEMENTARITY BETWEEN CSR DISCLOSURES AND THE USE OF CSR-BASED PERFORMANCE MEASURES IN CEO ANNUAL INCENTIVE CONTRACTS
YANG, LU
GRABNER, ISABELLA; RENDERS, ANNELIES
Category: MA = Management Accounting
This paper examines the relationship between CSR disclosures and the use of CSR-linked performance measures in senior executives’ contracts. We argue that CSR disclosures and the use of CSR-linked performance measures are complements. We further argue that the proposed complementarity is not uniform, but varies with the context. In particular, we hypothesize that firms in industries with relatively high competition and firms facing higher credibility issues (i.e., firms in industries that are often blamed to be “green-washing”) show stronger complementarity between the two mechanisms. Using hand-collected data to capture disclosure intensity in CSR reports and the use of CSR-related performance measures in CEO contracts, our results show that CSR disclosures complement the use of CSR-linked performance measures. Further, the results of our contextual analysis show that the complementarity indeed is context-dependent, consistent with our predictions.
THE CONSEQUENCES OF AUDIT FAILURES ON ENGAGEMENT PARTNERS
YANG, ZHIFENG
LI, BING; WU, DONGHUI
Category: AU = Auditing
This study examines the consequences of audit failures on engagement partners in the Chinese market, in which engagement partners are required to identify themselves in audit reports. An audit failure occurs if the engagement partner fails to detect or report a financial fraud discovered by securities regulators and consequently receives a regulatory penalty. We find that audit failures cause engagement partners to sustain economic losses, in that they experience a significant decline in their portfolio of seasoned clients and are less likely to attract IPO clients in the post-sanction period. Since auditors face minimal litigation risk in China, these findings suggest that reputational mechanisms work to discipline partners for providing low-quality audits. We also find evidence that audit partners improve their audit quality subsequent to regulatory sanctions.
THE QUALITATIVE ASPECTS OF THE ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS): EXPERIENCE OF SINGAPORE, MALAYSIA AND INDONESIA
YAPA, PREM
Category: FR = Financial Reporting
This paper aims to examine the socio-economic impacts of the convergence of local accounting standards with IFRS for companies of Singapore, Malaysia and Indonesia. A qualitative methodology comprising a series of one-to-one interviews conducted in the three countries (28 interviews) is used to answer the key questions about the impacts of IFRS. Perspective of new institutional theory is utilised in the analysis. The findings for Singapore reveal a progressive adoption of IFRS since 2005, however the complexity of the principles-based ‘fair value’ requirements of IFRS harmonised into the local standards (as in Malaysia and Indonesia) has impacted confidence. The IFRS costs are a concern as was evidence of an increased momentum of inward foreign investment. Malaysia and Indonesia officially adopted IFRS in 2012. There is a prediction of positive impacts, such as inward investment attraction. There is tension and debate with regards to the accounting standards for financial instruments, real estate and agriculture. There is disquiet in both Malaysia and Indonesia about authorities not taking into account cultural, religious and societal variations around the globe. Indonesia is divided by the sensitive issue of whether IFRS and Shari’a Law principles can be reconciled.
ARE BIG N AND INDUSTRY SPECIALIST PREMIUMS ASSOCIATED WITH THE SIZE AND COMPOSITION OF AUDIT TEAMS?
YAZAWA, KENICHI
HOSSAIN, SAROWAR; MONROE, GARY; YAZAWA, KENICHI
Category: AU = Auditing
Using a unique data set related to audit teams, we investigate the difference in audit fees and audit team compositions between Big N (IS) and non-BIG N (non-IS) auditors. We break the determinants of audit fees into four factors: size of audit team, number of high-ranking auditors in the audit team, dependence of the audit team on other assistants (audit team leverage), and audit fees per person to analyse the source of fee premiums. For Big N auditors we find that (1) Big N audit fees are higher than those of non-Big N firms, (2) Big N audit teams are larger than those of non-Big N firms, (3) the number of high-ranking auditors in a Big N audit team is similar to that of a non-Big N audit team, (4) Big N teams have more audit team leverage, and (5) Big N audit teams have lower audit fees per person than non-Big N firms. As for industry specialist (IS) auditors, we find that (1) IS audit fees are higher than those of non-IS audit teams, (2) the size of an IS audit team is not different from that of a non-IS audit team, (3) IS and non-IS teams have similar audit team leverage, (4) both IS and non-IS teams have a similar number of high-ranking auditors, and (5) IS teams have higher audit fees per person than non-IS teams. These findings provide insight into how Big N (IS) auditors have developed their competence compared to their competitors and earn fee premiums.
THE IMPACT OF PCAOB TYPE OF REGULATIONS ON AUDITORS UNDER DIFFERENT LEGAL SYSTEMS
YE, MINLEI
SIMUNIC, DAN
Category: AU = Auditing
This paper analyzes the impact of PCAOB type of regulatory oversight on audit effort and the audit market under different legal systems. Our analyses suggest that regulatory oversight can improve audit effort, but the improvement of audit effort may impair social surplus if auditing standards are too tough. Moreover, regulatory oversight causes some inefficient or lower ability auditors to exit the market, and allows more medium cost and ability auditors to provide higher audit effort and participate in the market. Additionally, regulatory oversight has differential impact on audit market structure than does a legal system. Our results enhance understanding of the complex relation between regulatory oversight, auditing standards, and audit markets, and provide policy implications for regulators.
THE ASSOCIATION BETWEEN CHANGES IN CORPORATE SOCIAL RESPONSIBILITY PERFORMANCE AND STOCK RETURNS: AN EMPIRICAL EXAMINATION
YEH, SHU
KO, CHUN-YOU; WANG, HSUAN
Category: FA = Financial Analysis
This paper investigates questions relating to the effects of changes in firms’ CSR performance on their shareholders’ value. Following Ball and Brown (1968) information content approach and using data from Kinder, Lydenberg, and Domini & CO. (KLD) to measure firms’ performance, we estimate annual equity return regressions on contemporaneous changes in aggregate CSR, CSR strengths, CSR concerns (coded as negative values) scores for a sample of firms in KLD database from 1991 through 2013. Our empirical results indicate that change in aggregate CSR score has an insignificant positive association with stock returns. The tests conditional on the nature of investment in CSR activities reveal that change in CSR strengths (concerns) score has a significantly negative (positive) association with stock returns. The results of additional tests are consistent with the notion that investors perceive investment in CSR strengths activities might create a conflict between managers and shareholders. These findings suggest investors perceive that managers create value for their shareholders by engaging in CSR activities that address for the violations firms have committed, while managers could destroy value for their shareholders by simply pursuing best CSR practices.
THE IMPACT OF COMMUNITY EXPECTATIONS ON CORPORATE COMMUNITY INVOLVEMENT DISCLOSURES IN THE ANNUAL REPORT OF UK LISTED COMPANIES
YEKINI, KEMI
ADELOPO, ISMAIL
Category: SEE = Social, Environmental & Ethical
This study uses the lens of the media agenda-setting theory to investigate the impacts of community expectations on Corporate Community Involvement disclosures (CCID) in the annual reports of a sample of UK listed companies. Using a balanced panel, the study finds that CCID is inversely related to community expectations even after controlling for the effects of firm-specific characteristics and corporate governance (CG) variables. These findings suggest that firms’ CCID are motivated by factors other than community expectations and support the view that firms carefully calibrate their disclosures for maximum corporate gains and to meet the expectations of their important stakeholders.
AGGREGATE ANALYST RECOMMENDATION RATINGS AND INTERNATIONAL STOCK MARKET RETURNS
YEZEGEL, ARI
Category: FA = Financial Analysis
This study investigates the determinants of aggregate analyst recommendation ratings and tests whether aggregate recommendations predict future market returns. Based on a sample of 59 countries for the period 1993-2013, I find that U.S. macroeconomic conditions, prior market returns and the worldwide average recommendation rating are significantly associated with country-level aggregate recommendations. The results also suggest that aggregate analyst recommendations possess predictive power of future returns in developed markets while they contain no such predictive information in emerging and frontier markets. Interestingly, the U.S. aggregate analyst recommendations have predictive information content for future returns in emerging countries. These results demonstrate the predictive power of aggregate recommendations in the U.S. do not extend beyond that of developed markets while U.S. analysts appear to provide information that is also useful in emerging markets.
FACTORS AFFECTING LEVERAGE DURING A FINANCIAL CRISIS: EVIDENCE FROM TURKEY
YIGIT, FATIH
JERMIAS, JOHNNY
Category: FA = Financial Analysis
The purpose of this study is to investigate the determinants of capital structure over time and the level of leverage before, during and after a financial crisis. Using a sample of publicly traded Turkish firms for the period of 1989 to 2012, we hypothesize and find that firm size and industry median leverage are positively and significantly associated with leverage while profitability and growth opportunities are negatively and significantly associated with leverage. Furthermore, we hypothesize and find that leverage levels are different before, during and after a financial crisis. The results are consistent using both static and dynamic models of leverage. The results suggest that managers need to adjust their leverage during and after a financial crisis to meet their need for debt and equity financing.
THE INFLUENCE OF PARTNERS’ VIEWS ON CHINESE AUDITORS’ PROFESSIONAL SCEPTICISM
YING, SAMMY XIAOYAN
PATEL, CHRIS
Category: AU = Auditing
Professional scepticism (PS) remains one of the most important and underexplored topics in auditing. The objective of this study is to provide empirical evidence on the influence of both known and unknown views of partners on Chinese auditors’ PS judgments. China provides an important and interesting national setting because the collectivist cultural values, which emphasize the importance of submission, obedience and subordination towards superiors, differ significantly from individualistic cultural values in Anglo-American countries. In the Chinese cultural context where subordinates have strong tendency to follow authoritative supervisors’ directions obediently and without question, auditors are likely to be under intense pressure to align their judgments with partners’ views. A between-subjects experiment was conducted with a total of 154 practicing auditors in China. Consistent with prior research from Anglo-American settings, our results show that partners’ known views that reflect high (low) emphasis on PS lead to higher (lower) levels of auditors’ PS. Importantly, we contribute to the literature by providing evidence that unknown views of partners also lead to higher levels of auditors’ PS. Our study also contributes to the literature by measuring the intensity of auditors’ perceived pressure, and empirically examining its influence on auditors’ PS. The results show that when partners’ views reflect high (low) emphasis on PS, auditors perceiving higher pressure from the partners exhibit higher (lower) levels of PS than those perceiving lower pressure. The findings suggest that both known and unknown views of partners, as well as the intensity of auditors’ perceived pressure from partners influence auditors’ PS. Our findings have implications for international convergence of auditing standards, Chinese auditing regulators, and international audit firms either operating in China or employing auditors with Chinese cultural background.
MANAGEMENT EARNINGS FORECASTS: FIRM INCENTIVES AND USER REACTIONS TO LOCATION VERSUS WIDTH NEWS FORECASTS
YOHN, TERI
JENSEN, TYLER; PLUMLEEE, MARLENE
Category: FR = Financial Reporting
Prior research suggests that management earnings forecasts (MEFs) are provided by managers to guide market expectations of future earnings or to communicate uncertainty about the earnings expectation. However, the goals of issuing MEFs are generally considered independently or sequentially, where the manager first chooses to adjust expectations and then chooses the certainty with which to present those expectations. We argue that managers are likely to choose to issue a MEF predominantly to adjust expectations about earnings or predominantly to adjust the uncertainty about the earnings expectation. To provide insight into managers’ selection of the type of MEF to issue, we examine the incentives that drive managers to issue forecasts to adjust earnings expectations (location news) or to issue forecasts to adjust the uncertainty about the earnings expectation (width news). We find that firms with higher analyst following and more unexerciseable executive stock options are more likely to issue location-news MEFs while firms with more research and development activities, greater stock return volatility, and future equity issuances are more likely to issue width-news MEFs. These findings suggest that the managerial incentives and firm characteristics associated with issuing a location-news versus a width-news MEF differ predictably. We also examine the differential reactions by investors and analysts to location news and width news MEFs. We find that investor reactions are more strongly related to location-news MEFs while analyst forecast reactions are greater for width-news MEFs.
BEHIND THE RELATION BETWEEN AGGREGATE EARNINGS CHANGES AND MARKET RISK PREMIUM: EVIDENCE FROM JAPAN
YOSHINAGA, YUTO
Category: FA = Financial Analysis
The purpose of this study is to detect economic backgrounds behind a positive relation between aggregate earnings changes and market risk premium observed by recent studies empirically. Although some recent studies state that this positive relation is not consistent with some finance theories, prior studies do not mention the sufficient reasons why the positive relation can be observed. To fill this gap between empirical results and finance theories, we focus on the role of corporate risk-taking, especially corporate investment. First, we confirm that aggregate earnings changes are positively related with contemporaneous aggregate investment changes. Second, we find that aggregate investment changes have a positive effect on implied market risk premium at the quarter when aggregate investment changes can be calculated from financial statements. These results suggest that aggregate earnings changes affect market risk premium through aggregate investment changes.
PRODUCT MARKET COMPETITION AND FINANCIAL REPORTING QUALITY: INTERNATIONAL EVIDENCE
YOUNG, DANQING
ZOU, HUAN
Category: FR = Financial Reporting
This paper examines the relation between product market competition and financial reporting quality in an international setting. Prior studies argue that product market competition improves financial reporting quality and find supporting empirical evidence using US data. We argue that the direction of the relation between product market competition and financial reporting quality is dependent on the country’s institutional protection of investor rights. We predict that there is a positive association between product market competition and financial reporting quality for countries with strong investor protection but a negative association for countries with weak investor protection. Our results are consistent with the prediction in general. This study extends the literature by showing that the relation between product market competition and financial reporting quality is two-dimensional and dependent on the country’s legal environment of investor protection. It also provides additional evidence on the importance of institutional environment on financial reporting quality.
VOLUNTARY DIRECT METHOD CASH FLOW DISCLOSURE IN THE U.S.: DETERMINANTS AND INCREMENTAL USEFULNESS
YU, CHUAN
SIDHU, BALJIT; YU, CHUAN
Category: FR = Financial Reporting
This study explores the determinants and incremental usefulness of the direct method operating cash flow (CFO) disclosures in a voluntary setting (the U.S.). The net benefits of disclosure choice come into sharp focus in such a setting, permitting a direct study of the attributes of firms most likely to benefit from such disclosures. We first investigate firm-level attributes or economic settings associated with voluntarily adopting firms. Second, we study whether the disclosed components of CFO in this voluntary setting, are incrementally useful beyond the estimated analogues in predicting future CFO and earnings. We further explore whether any incremental usefulness of the disclosed components varies under the different firm level or economic settings identified in the first stage. Our results show that firms are more likely to adopt the direct method when they have higher leverage, lower discretionary accruals, longer operating cycles, less complex business operations, and when they operate in a less competitive market. In addition, we find that the disclosed direct method components of CFO are incrementally more useful in the following settings where firms have higher incentives to adopt the direct method: more volatile life cycle stages, large estimation differences, higher reliance on debt financing, and longer operating cycles.
FUNDAMENTAL ANALYSIS CONDITIONED ON PRIOR PERIOD SALES AND FIRM EFFICIENCY
YU, DONGNING
ANDERSON, MARK
Category: FA = Financial Analysis
Fundamental analysis is a technique that attempts to determine the value of corporate securities by examining key value-drivers such as earnings, growth, and competitive position. It uses information in financial statements to gain insights about a company’s future performance. However, a signal used in fundamental analysis may have different implications for future earnings under different circumstances (Lev & Thiagarajan [1993]). In this study, we distinguish between sales-increasing and sales-decreasing periods of a firm as two different situations for evaluating firm performance. We investigate how the implications of signals used in fundamental analysis differ between sales-increasi