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IMPROVING INFORMATION TRANSPARENCY: DOES BOARD DIVERSITY MATTER?
ABAD, CRISTINA
BRAVO, FRANCISCO; REGUERA-ALVARADO, NURIA
Category: GV = Accounting and Governance
Diversity on boards has gained significant attention from researchers, investors and policy makers, but much controversy remains regarding the economic effects of diversity. The objective of this paper is to analyse how board diversity (gender and ethnicity) affects information transparency through the way that this diversity improves the disclosure of information on risks. The disclosure of this kind of information has become crucial in capital markets over recent years. Results show that board diversity increases information transparency since it specifically improves the disclosure on risks. These findings have direct implications both for companies, in the selection of board members, and for policy-makers, in the establishment of requirements regarding the board composition. Moreover, our evidence demonstrates that the communication of information on risks enhances information transparency, which has direct implications for managers and regulators, who can better understand the value-relevance of risk disclosures.
AUDITOR’S RISK? HAVE AUDITOR’S FAILED TO CONSIDER THE CORPORATE SOCIAL PERFORMANCE?
ABDEL ZAHER, ANGIE
ABDEL-ZAHER, ANGIE ; ABDEL-ZAHER, DINA
Category: AU = Auditing
How well corporations are rated on the different social performance activities play a key role on the perception of the different stakeholders. This paper is one of the early studies that actually tackles the auditor’s assessment of risk by examining whether or not the auditor’s risk encompassed the social performance of their client? We rely on the widely used ratings of the Kinder, Lydenberg, Domini Research & Analytics (KLD) on the different corporate social performance (CSP) and how it influences the audit risk as reflected in the audit fees charged. We find that clients rated high on the KLD concerns (CSPC) have higher statistically significant association with higher audit fees after controlling for the different governance mechanism. In answering the PCAOB call for auditor’s to take precautionary steps when it comes to client’s business risk, we find that auditors have valued the social performance indicators in their audit assessment while not relying on the KLD ratings. This research reflects auditor’s diligence and high skepticism level when it comes to risk assessment.
INFLUENCE OF RELIGIOSITY AND GENDER OF THE INFORMATION SOURCE ON AUDITORS’ JUDGMENTS
ADEEL, NAZIA
MARTINOV-BENNIE, NONNA; PATEL, CHRIS
Category: AU = Auditing
The evaluation of the reliability of audit evidence is a central aspect of auditors’ judgment as the inferential value of the audit evidence is considered in light of its source. Prior research in audit judgment and decision making (JDM) has examined auditors’ source reliability mostly in Anglo-American contexts. Neither the accounting researchers nor the international auditing standard setters have recognized the importance of cultural factors that are likely to influence auditors’ JDM in the backdrop of convergence. This paper contributes to JDM research by investigating the influence of cultural variables namely religiosity and gender of the source of information on auditors’ JDM in Big 4 auditing firms in Pakistan. Religiosity is selected because it provides a sharper insight into auditors’ JDM given its association with increased trust. This study also investigates the impact of gender variable on auditors’ source reliability judgments given prior evidence of differentiated gender roles in Pakistan. This study uses a 2x2 between-subject experimental design, in which religiosity and gender of the source are manipulated. The results suggest that highly religious source of information is perceived by auditors to be more reliable. However, despite the significant impact of religiosity on the auditors’ source reliability judgement, there is no impact on final judgment. Further, our results indicate that gender of the source of information has no effect on auditors’ source reliability judgments. This study provides evidence that religiosity is an important cultural variable and needs to be recognized in the context of Islamic cultures. The results have implications for auditors’ JDM research, global audit quality and governance.
SOCIAL AND PERFORMANCE REPORTING IN LOCAL HEALTHCARE AUTHORITIES: EMPIRICAL EVIDENCE FROM THE ITALIAN CONTEXT
AGOSTINONE, STEFANO
DI SANTO, ERIKA; RAUCCI, DOMENICO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The increasing requests for transparency and control on public expenditures towards Local Healthcare Authorities (LHAs), as well as to the other Italian public administrations, are encouraging these organizations in seeking greater levels of accountability and social consensus. Social report, despite represents an effective instrument of voluntary disclosure to increase legitimation, is still under-used by Italian public organizations. For this reason, the move towards greater levels of accountability was imposed by several regulatory measures, till the D.Lgs 150/2009 that introduced the Performance Report for all Public Administrations and thus also for LHAs. This Report shares with social reporting several information aims, content and the same stakeholder orientation. Moving from these similarities and using a content analysis, our study proposes a grid model to realize a comparative investigation of the content of social and Performance Reports produced by Italian LHAs. The final aim is to identify some perspectives to integrate voluntary and mandatory reporting contents in order to seek ‘substantive’ legitimation approaches. Results, highlighting information areas that LHAs consider relatively most important for their legitimacy purposes and others that present potential information overlaps, opens up to the possibility of developing more effective and efficient integrated model for social and performance reporting.
CEO STOCK OWNERSHIP, OPTION VALUE AND ACCOUNTING FRAUD: AN ANALYSIS OF THE SEC ACCOUNTING AND AUDITING ENFORCEMENT RELEASES
AHN, JAE HWAN
SHAH, ZULFIQAR
Category: FR = Financial Reporting
This study examines whether and how the variations of CEOs’ stock ownership and stock option value affect firms’ fraudulent accounting choices. This paper finds that stocks and options have different non-monotonic effects on accounting fraud propensity. Furthermore, the non-monotonic effects of stock ownership are affected by the change in identity of owner-CEOs from managers to controlling shareholders as their ownership levels increase. This paper also documents that corporate governance contexts affecting CEOs’ perceived marginal costs when they commit accounting fraud moderate their misreporting behaviours. The results highlight that unrestricted stock grants are effective as a CEO incentive policy, at least in reducing CEOs’ fraudulent reporting at the lower level of ownership.
STOCK BASED INCENTIVES FOR EMPLOYEES – THE IMPACT ON EMPLOYEE BEHAVIOR AND THE MODERATING EFFECT OF INSTITUTIONS
AHRENS, CAROLIN
OEHMICHEN, JANA; WOLFF, MICHAEL
Category: MA = Management Accounting
Stock based incentives present one common form of compensation for executives. However, more and more firms are implementing stock based incentives, e.g. employee stock option plans (ESOPs), for employees on all hierarchy levels. We analyze the incentive effect of ESOPs on employee behavior in terms of voluntary employee turnover based on a sample of 317,469 individual decisions. We find evidence that the participation of employees in the offered ESOP is negatively related to voluntary turnover. Furthermore, we find evidence that the negative effect is stronger in institutional settings, where employees are more likely to leave their employer because the risk of changing jobs is generally lower. Our findings suggest that ESOPs indeed have an incentive effect for employees on all hierarchy levels, which differs according to the institutional context.
THE INFLUENCE OF ISLAMIC RELIGIOSITY ON PROFESSIONAL ACCOUNTANTS’ JUDGEMENTS ON GLOBAL CONVERGENCE OF FINANCIAL REPORTING: EVIDENCE FROM BANGLADESH
AHSAN, A F M MAINUL
PATEL, CHRIS
Category: FR = Financial Reporting
This paper contributes to the literature by examining the influence of Islamic religiosity on professional accountants’ judgements on issues related to the global convergence of financial reporting. Islam is an exceedingly rigid and legalistic religion which imposes specific requirements on its devotees as to allow for little flexibility or adjustment to varying cultural conditions. Islam is quite specific and dogmatic in many of its prescriptions and is no doubt more rules-based or prescriptive than most of the world religions. Conversely, the approach adopted by the IASB for developing IFRS is called “substance-over-form” which requires accountants exercising their professional judgments in interpreting and applying IFRS. Given rules-based and prescriptive nature of Islam, it is suggested that professional accountants in Bangladesh who score higher on measures of Islamic religiosity are more likely to be supportive of statutory control, uniformity, conservatism and secrecy, and consequently, will be less likely to be supportive of principles-based financial reporting standards. Our findings support all the four hypotheses which may have some serious implications for the IASB’s goal of achieving global convergence of accounting standards. The findings of this study are of interest to stakeholders at a time when 122 jurisdictions adopted IFRS and standard setters are struggling to improve compliance with those standards.
ACCOUNTABILITY FOR WORKPLACE SAFETY IN THE BANGLADESH READY-MADE GARMENT INDUSTRY
AKBAR, SURAIYAH
DEEGAN, CRAIG; INGLIS, ROB
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Bangladesh, the world’s second largest apparel exporter, has a continuous history of workplace accidents leading up to the Rana Plaza building collapse (2013) which is considered one of the world’s worst industrial disasters. This research examines corporate accountability for workplace safety in the Bangladesh ready-made garment (RMG) industry. The study analyses corporate social disclosure practices of two key parties in the apparel supply chain - multinational apparel buying corporations and Bangladeshi garment manufacturing organisations, for a period surrounding significant industrial disaster. The study reveals global apparel buyers appear to have accepted a reasonably high level of accountability for workplace safety, whereas Bangladeshi garment suppliers demonstrate comparatively limited accountability. The corporate web-site is used by apparel industry organisations as the main media for disclosing workplace safety related information. The study establishes that institutional influences upon the apparel industry following the latest industrial accidents (including legitimacy threats and global stakeholder pressures) have led to greater emphasis on workplace safety in apparel industry disclosures. The research constructs a workplace safety disclosure index for the apparel industry which may be applied to assess disclosure practices within other organisations/countries.
BANK INTERNAL CONTROLS AND CREDIT RISK IN EUROPE: A QUANTITATIVE APPROACH
AKWAA-SEKYI, ELLIS KOFI
GALLIZO, JOSÉ LUIS; MORENO, JORDI
Category: GV = Accounting and Governance
The study investigates whether credit risk can be minimized through internal control mechanisms from European banks perspective. A revised COSO framework is employed to investigate the existence of the agency problem; effectiveness of internal controls and its effect on credit risk. Using panel data of 82 banks within 23 European Union countries from 2008-2014, we find credit risk reducing among banks, effective internal control systems and no evidence of agency problem within these banks. There is significant effect of internal control elements, performance objectives, agency problem, bank and country-specific variables on credit risk. The study supports the use of institutional and agency theories in establishing that effective internal controls minimize bank credit risk. Our study provide academic support for the use of quantitative proxy variables to measure internal controls as equally efficient and more convenient as the use of primary data will do. Bank regulatory bodies should enforce the achievement of internal control objectives and inclusion of specific measures that deal with the agency problem in internal control frameworks in order to reduce bank credit risk. The study has implications for shareholders to use insider ownership to reduce the agency problem which eventually minimize credit risk thereby forestalling possible bank crisis.
DOES THE BOUNDARY SPAN INFLUENCE THE ETHICAL PATHWAYS OF THE CHIEF AUDIT EXECUTIVE DEALING WITH IT RISK AND CYBERSECURITY ISSUES?
AL FAYI, SALEM MESFER
RODGERS, WAYMOND
Category: AU = Auditing
In the last decade, internal audit reporting relationships have attracted a great deal of attention. A number of studies have resulted in disagreements regarding internal audit reporting relationships. In this article, we examine the ethical pathway of the Chief Audit Executives’ (CAEs) reporting relationships with the appropriate authority and the interactions between their perceptions and decision choices. In particular, we explore the interactions between the CAE’s assessment regarding internal audit technical expertise and the activities of internal audit in terms of information technology cybersecurity risk with the extent of using information technology tools and techniques. Ethical pathways are built upon by a simultaneous analysis to examine the relationships among the investigated factors, which provides a better understanding of dealing with information technology cybersecurity risk issues and effective reporting relationships. A world-wide survey administered by the Institute of Internal Auditors Research Foundation is used to conduct our tests. Results indicate that CAEs follow different decision-making pathways depending on the internal audit activities and characteristics. Also, the boundary span of CAEs’ knowledge and regions is proven to be associated with significant difference in CAEs’ ethical pathway.
IFRS EFFECTS ON EUROPEAN FIRMS' ASSET WRITE-OFFS
ALA, ALESSANDRO
LOUCA, CHRISTODOULOS
Category: FR = Financial Reporting
This study investigates the effect of IFRS regulations on asset impairment reporting practice in Europe by contrasting the determinants of asset impairments, before and after the adoption of IFRS asset impairment regulations. Empirical findings reveal a weaker association between asset impairments, either goodwill, or other intangible, or tangible, with economic factors after the adoption of IFRS. Furthermore, the results indicate that after the adoption of managerial reporting incentives/disincentives play a lower role in explaining tangible asset impairments, but play a substantially larger role in explaining discretionary asset impairments such as goodwill or other intangible asset impairments. Finally, the results show a weaker association between asset impairments and country-specific. Overall, the evidence supports the view that the adoption of IAS-36 has not improved the quality of impairment reporting practice in Europe.
THE ASSOCIATION BETWEEN AUDIT FIRM CHARACTERISTICS AND AUDIT QUALITY: A META-ANALYSIS
ALAREENI, BAHAAEDDIN
Category: AU = Auditing
This paper uses Meta-Analysis technique to a set of previous empirical studies to investigate the relation between audit firm characteristics (e.g. audit fees, audit firm size, non-audit services, auditor-client tenure) and audit quality. It also tests if the relationships are moderated by the proxies of audit quality. Hunter et al. (1982) test is used as the Meta-Analysis technique for this study. A total of 51 published papers are gathered from 1992 to 2016. The findings show that there is a significant positive relationship between auditor-client tenure, audit fees and audit quality, whereas non-audit services and audit firm size have a significant negative relationship with the audit quality. Additionally, the findings show that discretionary accruals moderates the association between auditor-client tenure and audit quality. The perceived quality of audit moderates the association between the non-audit services, audit firm size and audit quality. Furthermore, countries classifications (developed and developing countries) moderates the association between non-audit services, audit firm size, audit fees and audit quality. The results help interested parties to better understand the association between audit firm characteristics and audit quality.
SIGNALING THEORY EMBEDDED IN THE THROUGHPUT MODEL TO EXAMINE THE MECHANISM OF HOW EXTERNAL AUDITORS RELY ON INTERNAL AUDIT FUNCTION
ALBAWWAT, IBRAHIM
RODGERS, WAYMOND
Category: AU = Auditing
This study examines the mechanism of how external auditors (EAs) rely on internal audit function (IAF) from a new perspective. We use Signaling Theory embedded in a Throughput Model to trace the sub-processes of different stages of the reliance decision. We consider the last revision made to the International Standard on Auditing 610 (ISA 610) in 2013, the three types of sourcing arrangements for IAF, the incomplete picture presented in the literature of the pre-procedures of reliance on IAF, Signaling Theory, and the Throughput Model to develop a model predicting the nature and extent of EA reliance on IAF in different circumstances. We contribute to the literature by examining the interactions among different factors to better understand the process of making a reliance decision, as well as explaining how EAs incorporate the requirements of ISA 610 in a reliance decision. This study also has practical implications that could be of interest to many different parties, such as professionals connected with the ISA, EAs, IAF and auditees. That is, these parties can influence IAF contributions to the external audit of financial statement thereby increasing its efficiencies. Keywords: ISA 610 (Revised 2013), Reliance Decision, Throughput Model, Signaling Theory
BALANCED SCORECARD IMPLEMENTATION AND ENVIRONMENTAL UNCERTAINTY: THE CONTINGENT FIT AND FINANCIAL PERFORMANCE EFFECTIVENESS – A CASE STUDY IN LIBYA
ALBERGLEY, MOHAMED
YAZDIFAR, HASSAN
Category: MA = Management Accounting
The contingency theory has been widely applied for examining implementations of various management accounting systems (MAS) that best fit the nature of environment and, therefore lead to performance effectiveness. However, Balance Scorecard (BSC) literature has little to say about this concept of fit. This study provides empirical insights on the contingent fit between the high level of environmental uncertainty and the implementation of BSC as a package of components and processes that constitute collectively the full-developed concept of BSC. Using pattern matching technique through applying theory-based analysis strategy; and conducting a case study research in one manufacturing company that operates in high level of environmental uncertainty and experiences a positive financial outcome from its BSC implementation; we found that, the high level of environmental uncertainty determines BSC to be implemented in certain way in order to produce high level of financial performance effectiveness.
THE RELEVANCE OF CUSTOMER SATISFACTION-RELATED INFORMATION FOR CORPORATE FINANCIAL PERFORMANCE
ALBLOWI, KHALED
RODGERS, WAYMOND
Category: FR = Financial Reporting
Experts indicate that, due to the importance of intangibles to investors' judgements, firms are under pressure to evaluate and disclose such assets, and now voluntarily incorporate such information in annual reports. Investors and others are thus overwhelmed by a sea of data in arriving at a better decision. In line with the Throughput Model (Rodgers 1997; Rodgers & Housel 1987), this conceptual paper highlights how a resource-based view of the firm involves various decision-making processes towards a better selection of investment. It discusses a model to capture how investors view customer satisfaction as a key intangible variable influencing financial performance.
THE DIFFUSION OF WESTERN MANAGEMENT ACCOUNTING PRACTICES IN TRANSITIONAL ECONOMIES: A CASE FOR INTERVENTIONIST RESEARCH
ALBU, CATALIN NICOLAE
ALBU, NADIA; GUINEA, FLAVIUS ANDREI ; TSAMENYI, MATHEW
Category: MA = Management Accounting
This paper reports on the results of an interventionist research regarding the introduction of management accounting innovations in a large Romanian construction company. Through the engagement with practitioners we embarked on a joint discovery to design and implement management accounting innovations in the organization. In effect our study answers calls for researchers to engage with practitioners to find solutions to practical problems. The paper reflects on the process and outcome of our engagement in order to illustrate how researchers can contribute to practice. We conclude by suggesting that interventionist research can minimize the failure of Western management accounting innovations in organizations in transitional economies where managers may have not have adequate knowledge of these practices.
ENFORCING AN ENFORCEMENT SYSTEM AND THE CLASH OF CULTURES IN ROMANIA
ALBU, NADIA
ALBU, CATALIN NICOLAE; HOFFMANN, SEBASTIAN
Category: FR = Financial Reporting
The European Union (EU) promulgates that financial reporting enforcement needs to be harmonized in order to strengthen the common (capital) market. As a consequence European legislation requires member states to implement an Anglo-American type of enforcement system to secure a proper and uniform application of International Financial Reporting Standards (IFRS). Cultural theory suggests that accounting institutions are deeply embedded in and shaped by national culture. This paper examines how the adoption of the EU’s IFRS enforcement system works in a cultural setting that is dominated by generally weak enforcement, and which has an accounting legacy of Soviet-communist influence, thus is culturally very different from values promoted by IFRS and the EU. We mobilize documents available in the realm of financial market regulation in Romania and data collected via semi-structured interviews with individuals who are familiar with the Romanian enforcement system. It is suggested that particular cultural characteristics prevent the IFRS enforcement promoted by the EU from being effective, and that the system is opposed, mainly because it is felt to be an unnecessary institution. These findings may raise doubts as to whether a uniform approach to financial reporting enforcement is feasible or even desirable in culturally diverse jurisdictions.
ANALYZING FORCES TO THE FINANCIAL CONTRIBUTION OF LOCAL GOVERNMENTS TO THE SUSTAINABLE DEVELOPMENT
ALCAIDE-MUÑOZ, LAURA
LÓPEZ SUBIRÉS, MARIA DESEADA; NAVARRO GALERA, ANDRÉS ; RODRÍGUEZ BOLÍVAR, MANUEL PEDRO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
In many countries, the economic crisis brought high volumes of deficit and debt in public entities, which jeopardized the ability of governments to continue providing public services and caused considerable imbalances of economic growth in different regions. In this context, from the recognition of the linkage between economic development and efficiency in public management, previous research indicates that local governments are called to play a key role in promoting sustainable development through environment, economic and social policies based on financial sustainability of the public services. This paper aims to identify influencing factors on the financial sustainability of local governments, as an indicator of their capacity to maintain the delivery of public services over time. Based on a sample of 139 Spanish municipalities with large population for the period 2006-2014, our findings reveal the influence of variables such as the unemployment rate by sector, the dependent population, the immigrant population and the level of education of the population, on the financial sustainability in local governments, providing new useful knowledge to managers, policymakers, researchers and others stakeholders interested in the sustainability of public services.
ENHANCING SUSTAINABILITY TRANSPARENCY IN EUROPEAN LOCAL GOVERNMENTS
ALCARAZ QUILES, FRANCISCO JOSÉ
NAVARRO-GALERA, ANDRES; ORTIZ-RODRIGUEZ, DAVID
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
In the current socioeconomic context, the question of local government sustainability transparency is of great interest to managers, policymakers, citizens and other stakeholders, and yet one to which previous research has devoted little specific attention. The aim of this study is to identify factors that can help managers and policymakers improve practices of sustainability information disclosure by European local governments. To do so, an empirical study was conducted of 91 municipalities in nine countries, representing three different administrative cultures. Our analysis of the study results highlights various demographic, socioeconomic, financial and legal factors that may be useful to managers and policymakers in promoting the online provision of sustainability information in Anglo-Saxon, Nordic and Southern European countries.
FRENCH BUDGET ACT (LOLF) INDICATORS UNDER THE SPOTLIGHT OF THE NATIONAL DRAMA CENTERS: A CASE STUDY
ALCOUFFE, SIMON
AMANS, PASCALE; ASSASSI, ISABELLE; ORIOT, FABIENNE
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This article explores the way in which French National Drama Centers (NDCs) perceive a performance measurement system imposed by the public authorities, the "LOLF indicators", ten years after it was first set up. On the basis of the literature, it can assumed that LOLF indicators would be difficult to implement because of the presupposed incompatibility between art and management control, but also because these indicators can be seen as imposed by external stakeholders for accountability purpose. However, based on the case study of one NDC, our results show no objection to measurements and to management control from the interviewees. Still, they point five weaknesses of the LOLF indicators: they are of little use for internal management and generate no feedback from the government, they are decontextualized, unreliable, and inconsistent with the decentralization contract. We draw recommendations related to how these indicators should evolve to overcome these weaknesses and be meaningful for all concerned.
LENDERS’ DISCIPLINE AND TAX AVOIDANCE
ALEXANDER, ANNA
DE VITO, ANTONIO ; PISA, MAGDALENA
Category: TX = Taxation
This paper shows that, if faced with financial frictions on the credit markets, firms with great liquidity needs prefer to regain access to credit markets by reducing their corporate tax avoidance and thus information asymmetries. Our identification strategy is based on estimating the effect of firms’ debt maturity structure on corporate tax avoidance during industry downturns. We rely on the rigidity in the debt maturity to identify our treatment group and run several firm-level regressions in a difference-in-differences setting. We find that firms that engage in aggressive tax planning prefer to forgo the after-tax cash flow benefits of tax avoidance to regain the access to credit markets rather than relying on cash savings from tax avoidance strategies. However, there exists cross-sectional differences across firms depending on their default probability.
THE IMPACT OF CORPORATE GOVERNANCE MECHANISMS ON EARNINGS MANAGEMENT PRACTICES: EVIDENCE FROM JORDAN
AL-HADDAD, LARA
WHITTINGTON, MARK
Category: GV = Accounting and Governance
We investigate the impact of two influential corporate governance mechanisms, namely board characteristics and ownership structure on real and accrual-based earnings management in Jordan.Three types of real earnings management are considered:sales manipulation, overproduction, and the abnormal reduction of discretionary expenses. For accruals management, the abnormal discretionary accrual is considered. While for corporate governance mechanisms; board characteristics are examined by using board independence, board size, and CEO-duality; and ownership structure is examined by using managerial, institutional, foreign and largest shareholder ownership.Using panel data from Jordanian public firms, we find both institutional and managerial ownership constrain the use of real and accrual earnings management.In contrast, both independent directors and largest shareholders are found to exaggerate such practices. We further find that managers use real and accrual earnings management jointly to obtain the greatest effect of earnings reporting.To the best our knowledge, this study is the first to examine the relationship between corporate governance mechanisms and real and accrual-based earnings management in Jordan after the introduction of Jordanian Corporate Governance Code.Thus, our findings have important policy implications for policymakers, regulators, and investors in their attempts to constrain earnings management practices and improve the financial reporting quality in Jordan.
MARKET VALUATION OF SHARE-BASED COMPENSATION EXPENSES: FINANCIAL CRISIS AND LARGE SHAREHOLDERS
ALHAJ ISMAIL, ALAA
ADWAN, SAMI; STITTLE, JOHN
Category: FA = Financial Analysis
This paper extends and develops earlier studies on the market valuation of Share Option Based Compensation (SOBC) expenses. It mainly focuses on examining the impact of the most recent global financial crisis on the market valuation of SOBC expenses for a sample of financial firms listed in the European Economic Area (EEA) and Switzerland over the period 2005-2012. The paper also assesses the extent to which the change in market valuation of SOBC expenses over the financial crisis varies with the ownership by large shareholders in each financial firm. The results indicate that there is a positive association between annual share returns and SOBC expenses as if market participants perceived them as an intangible asset. We also find evidence that this positive valuation is significantly more apparent during the financial crisis. Finally, the positive association between SOBC expenses and annual share returns over the financial crisis is more apparent when there is an increase in the proportion of shares held by large shareholders. The findings are consistent for the whole sample of financial firms and for a sub-sample of banks.
RESTRICTIONS ON MANAGERS’ OUTSIDE EMPLOYMENT OPPORTUNITIES AND ASYMMETRIC DISCLOSURE OF BAD VERSUS GOOD NEWS
ALI, ASHIQ
LI, NINGZHONG; ZHANG, WEINING
Category: GV = Accounting and Governance
This study examines the effect of restrictions on managers’ outside employment opportunities on voluntary corporate disclosure. The recognition of the Inevitable Disclosure Doctrine (IDD) by courts in the U.S. states in which the firms are headquartered place greater restrictions on the managers from joining or forming a rival company. We show that asymmetric withholding of bad news relative to good news increases in firms when their states recognize the IDD. This effect is weaker for firms with greater institutional ownership, analyst following, and board independence, consistent with the managerial opportunism explanation. Furthermore, this effect is stronger for firms closer to financial distress, consistent with managers concerned about losing their jobs increasing the asymmetric withholding of bad news after the recognition of the IDD. Finally, this effect is weaker for high than for medium profitability firms, consistent with well-performing managers seeking promotion elsewhere decreasing the asymmetric withholding of bad news after the recognition of the IDD.
AIS-ETHICS: A CASE ANALYSIS OF AN ATTEMPT TO CREATE A NEW SUBSET OF BUSINESS ETHICS
ALLES, MICHAEL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
In this paper I examine an initiative by researchers in Accounting Information Systems (AIS) to develop a subset of business ethics focused on their field. Their intent is not to simply apply existing ethical concepts to AIS activities, but to establish what I call “AIS-ethics” as a distinct area of practice and research in its own right: playing the same role in AIS, for instance, that Bioethics does in the medical profession. Guragai, Hunt, Neri and Taylor (2015) write that “virtually every aspect of AIS has ethical implications.” Dillard and Yuthas (2002) make a similar all-encompassing claim. To help identify AIS-specific ethical challenges I develop what I call the Locational Map of Ethical Dilemmas, which is a tool to visualize the hypothesis that a necessary condition for individuals to consider that they face a decision with ethical consequences is that they perceive that there is a conflict between their sense of morality and the other sources of guidance relevant to making that decision. Applied to continuous auditing and monitoring—a major focus of AIS practice and research over the last two decades—the Locational Map identifies a series of potential ethical problems arising from the misapplication of the very precise, real-time data that the technology offers. While this paper focuses on AIS, its analysis and the Locational Map are quite generic, and can be applied to the study of any professional area that is attempting to carve out a space in Business Ethics as its own specialty. My analysis examines when creating such a subset is appropriate and helps locate field-specific ethical dilemmas.
HOW DOES LEADERSHIP STYLE INFLUENCE THE USE OF THE MANAGEMENT CONTROL SYSTEM AND TECHNOLOGICAL INNOVATION?
ALSAID, LOAI
ALAWATTAGE, CHANDANA ; MUTIGANDA, JEAN
Category: MA = Management Accounting
Based on transformational and transactional leaderships (Bass, 2008), as well as on Simons’ levers of control framework (1995), this paper explores the leadership style as an antecedent for the definition of use of the management control system (MCS) and the role of its different types of use in technological innovation. The data was collected via an electronic survey, with a sample of 164 companies, and analysed by structural equation modelling. Evidence was found that transformational leadership is an antecedent for the interactive use of MCS and the beliefs system whereas transactional leadership is an antecedent for the diagnostic use of MCS and the boundary system. Findings also indicate that beliefs, interactive and boundary systems positively influenced technological innovation. The hypothesis that the diagnostic system influences technological innovation was not confirmed, suggesting that innovation is not fully integrated to the MCS of the organizations surveyed. This paper extends the knowledge about management control indicating the ways organizations use MCS to promote innovation and to obtain strategic renewal.
CEO COMPENSATION AND SUSTAINABILITY ASSURANCE
AL-SHAER, HABIBA
AL-SHAER, HABIBA ; ZAMAN, MAHBUB
Category: GV = Accounting and Governance
Based on the view that managers need to seek independent assurance of sustainability information to signal credibility and that investors are likely to highly assess independently assured information that is linked to incentive system, this paper examines the impact of sustainability reporting assurance (SRA) on CEO compensation. After controlling for governance mechanisms and firm-specific factors, we find SRA has a positive association with both short term and long term compensation. We also find sustainability committees moderate this relationship and companies, in particular those operating in CSR-sensitive industries, with voluntary SRA reward their CEOs with higher compensation and are also likely to incorporate terms relating to sustainability in compensation plans. Overall, our results suggest that taking into account CEO involvement in sustainable strategies and linking it to their compensation is likely to improve sustainable performance and reduce pressures to maximise short-term performance. Also, the presence of external monitoring mechanisms such as SRA is likely to increase confidence in sustainability reporting, help control CEO’s opportunistic behaviour, and reduce any symbolic action.
THE HIDDEN EFFECTS OF HISTORICAL INFORMATION ON MANAGERIAL HONESTY IN PARTICIPATIVE BUDGETING
ALTENBURGER, MARTIN
Category: MA = Management Accounting
Historical budget information is often provided to managers in the budgeting process. The present paper investigates the influence of this information on manager’s budget reporting honesty in the upcoming periods. This study expects that historical budget information trigger anchoring effects in participative budgeting where a tradeoff between honesty and opportunism exists. According to the anchoring effect, the height of past budgets may influence managers’ budget reporting decisions even if these past budgets are irrelevant for the upcoming periods. The results from a laboratory experiment support this prediction. In particular, when past budgets are low, managers report more honestly than when past budgets are high. Interestingly, if past budgets are low and high, managers report less honestly than with only low past budgets. In this case, one high budget already provides enough self justification for managers to report opportunistically. The findings suggest that organizations may consider these hidden costs and benefits when communicating historical budget information in participative budgeting.
HETEROGENEOUS NARRATIVE CONTENT IN ANNUAL REPORTS PUBLISHED AS PDF FILES: EXTRACTION, CLASSIFICATION AND INCREMENTAL PREDICTIVE ABILITY
ALVES, PAULO
ALVES, PAULO; EL-HAJ, MAHMOUD; RAYSON, PAUL; WALKER, MARTIN; YOUNG, STEVEN
Category: FR = Financial Reporting
We develop, describe and evaluate a web-based software tool for batch extraction and analysis of digital PDF annual report files. The retrieval method retains information on document structure thereby enabling clear delineation between narrative and financial statement components of reports, and between individual sections within the narratives component. Retrieval accuracy exceeds 95% in manual validations and large-sample tests confirm that extracted content varies predictably with economic and regulatory factors. We apply the tool to a comprehensive sample of reports published by U.K. non-financial firms between 2003 and 2014, and examine the incremental predictive power for future earnings of different performance sections from the same report. While performance-related commentaries prepared by management and the independent board chair are individually predictive for future earnings, only chairman-authored content is incrementally informative when considered jointly. Further, management-authored content has lower independent predictive ability when insiders are more optimistic than the board chair. Results support the view that the predictive power of narratives varies with authors’ reporting incentives and that exaggerated optimism in management commentary reflects obfuscation.
TAX RISK AND DIVIDEND PAYOUTS
AMBERGER, HARALD JOHANNES
Category: TX = Taxation
I examine whether and to what extent tax risk affects a firm’s decision to distribute dividends as well as the amount of dividend payouts. Tax risk increases cash-flow uncertainty and impairs the persistence and predictability of after-tax cash flow available for distribution. Based on this argument, I hypothesize and find that firms with greater tax risk exhibit a lower probability of dividend payouts. This effect of tax risk is weaker for firms that distribute dividends based on agency motives and for firms with a lower likelihood of unexpected tax payments. Moreover, I find a negative effect of tax risk on the amount of dividend payouts which is moderated by the costs of dividend reductions. The effect of tax risk is economically meaningful where a one standard deviation higher tax risk is associated with a 3.6% lower probability and a 6.8% lower amount of dividend payouts. Overall, my findings provide evidence for a real effect of tax avoidance and contribute to the understanding of interactions between risky tax avoidance and a firm’s financial ecosystem.
THE INFORMATION CONTENT OF 10-K NARRATIVES: COMPARING MD&A AND FOOTNOTE DISCLOSURES
AMEL-ZADEH, AMIR
FAASSE, JONATHAN
Category: FR = Financial Reporting
This paper examines the textual characteristics of firms’ 10-K filings over a 20 year time period. We find that investors’ reaction to textual characteristics of the MD&A in 10-Ks is much stronger and more timely than their reaction to textual characteristics of the notes to the financial statements. Characteristics of the MD&A and footnotes are also predictive of future returns, volatility, and firm profitability. Particularly, changes in the text of the MD&A and footnotes and differences between the tone of the two sections predict negative future stock returns and operating performance. Our evidence suggests that investors generally underreact to the information in the narrative sections particularly to information in the footnotes compared to the MD&A. We also find suggestive evidence that firms exploit these limits in investors’ information processing through their disclosure choices within 10-K filings.
INDUSTRY EXPERTISE AND THE INFORMATIONAL ADVANTAGES OF MANAGERS AND ANALYSTS
AMIRAM, DAN
ALI, ASHIQ; KALAY, ALON; SADKA, GIL
Category: FR = Financial Reporting
This paper examines whether analysts, who are viewed as industry experts, have industry-level information advantage over managers. We argue that such an advantage is more likely to exist for firms that operate in industries that are characterized by more difficult and uncertain operating environments, especially due to higher sensitivity to external shocks. Using a proprietary database of forward looking, time varying, industry-level characteristics, we find that for firms in such industries analysts provide more accurate forecasts than managers. We further find that managers of firms in such industries provide fewer and less precise forecasts, and these results are more pronounced when analyst following and institutional ownership is high. Finally, the magnitude of analyst forecast revisions following management forecasts is smaller in such industries.
EARNINGS MANAGEMENT AMONG NHS FOUNDATION TRUSTS: A GOOD BEGINNING MAKES A GOOD ENDING?
ANAGNOSTOPOULOU, SERAINA
STAVROPOULOU, CHARITINI
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
In April 2004, the first wave of hospitals in the English National Health Service (NHS) were given Foundation Trust (FT) status, which allowed them greater financial autonomy and freedom. A bit more than a decade later, FTs face unprecedented financial difficulties and huge deficits. This paper aims to explore whether NHS hospitals managed earnings upward prior to applying for FT status, thus presenting an overly positive picture of their financial position. We examine whether prospective FTs used discretionary accruals in order to improve their reported financial performance before achieving FT status, in comparison to trusts that never applied for this status. Our evidence indicates that NHS FTs adjusted discretionary accruals upward for up to two years before applying for FT status, while findings further support the hypothesis that this practice had a negative impact on their future financial performance. Overall, evidence shows that the benefits of FT status gave hospitals applying for the scheme a strong incentive to manage earnings. This was a much stronger incentive than the NHS Trusts’ statutory obligation to break even. In light of the difficult financial situation that NHS FTs currently face, these findings could have significant implications for policy makers and the regulator.
WHEN CAN YOU HAVE YOUR CAKE AND EAT IT? AN EXAMINATION OF TAX AVOIDANCE AND TAX RISK
ANDRIES, KATHLEEN
ALEXANDER, ANNA
Category: TX = Taxation
Our study aims to provide evidence on the determinant of the joint incidence of tax outcomes. We focus on four specific groups of observations, with varying degrees of tax avoidance and tax risk. We use Compustat data to examine the main determinants of belonging to a group that does not trade off tax avoidance and tax risk, and one that does. Using a multinomial logit model we identify that the firms that are experiencing less tax risk are: larger, have fewer sales, but more foreign operations, less volatile earnings and a higher growth potential. When we compare the firms that are seemingly not engaging in tax avoidance (High three year effective tax rates), the determining factors to have predictable tax expenses are: higher sales, less leverage, higher growth potential, lower R&D, more intangibles, fewer losses and specifically more cash flows, higher ROA and lower ROA volatility.
HONESTY IN MANAGERIAL REPORTING: THE IMPACT OF AN ENABLING MANAGEMENT CONTROL SYSTEM AND INFORMAL COST TARGETS
ANG, NICOLE
CHENG, MANDY M.; IZANI, REMIE
Category: MA = Management Accounting
Firms use participative budgeting to encourage managers to reveal private information about their division’s production capabilities, enabling a more efficient allocation of resources (Shields and Shields 1998). However, managers may maximize their self-interest and report dishonestly, and numerous studies have examined ways of encouraging greater honesty. For example, Newman (2014) found that managers reported more honestly when firms communicated a specific preference for the achievement of a moderate cost target, even when the target was informal. Following from Newman (2014), this study experimentally examines the combined impact of informal cost target level (moderate or difficult) and budgeting system (enabling or coercive) on managerial reporting honesty in a participative budgeting setting. We find that managers under an enabling system are significantly more honest in their reports than those under a coercive system. Specifically, managers under an enabling budgeting system accept a communicated cost target more, thereby limiting the amount available for misreporting. This in turn leads to higher levels of reporting honesty. However, different levels of informal cost target (moderate versus difficult) are not found to have an effect on the level of honesty. Overall, these findings imply that a firm’s budgeting system is more important than the communicated level of informal cost target in motivating managerial reporting honesty.
DETERMINANTS OF CASH HOLDINGS IN PRIVATE FIRMS: THE CASE OF SLOVENIAN SMES
ANGELOVSKA, MARIJA
VALENTINČIČ, ALJOŠA
Category: FA = Financial Analysis
This paper examines the determinants of cash holdings in a large sample of Slovenian small and medium sized companies in the period 2006-2013. The empirical results provide support for the transactions and precautionary motive in the cash policies of SMEs, however we find evidence for the speculative motive as well. We find that smaller, exporting and more profitable firms hold more cash. Furthermore, the research reveals that cash flow, net working capital and debt can be considered as cash substitutes. In addition, keeping close relationship with banks reduces agency costs and information asymmetries and leads to lower cash levels. Finally, reported evidence also shows that longer cash conversion cycles and the requirements for mandatory retirement benefit contributions result in higher cash balances. Small empirical support is found for the negative influence of the interest rate level on cash holdings.
THE TRIGGERS AND CONSEQUENCES OF STRESS IN AN AUDIT TEAM
ANNELIN, ALICE
SVANSTRÖM, TOBIAS
Category: AU = Auditing
Previous research has found that audit work can be stressful and that stress can lead to higher employee turnover intentions and lower satisfaction and performance levels. However, little is known about how team stress may influence audit team behaviour and therefore the quality of the audit. We investigated the possible influence of audit team stress on audit team behaviours by conducting interviews with audit teams to better understand how and why audit teams may influence audit quality. Results found that team role stress can influence the Audit Quality Threatening Behaviours, as well as other team behaviours. Furthermore, it was suggested that intrinsic motivations intensify stress if not satisfied or reduce stress if satisfied. Thus, evidence is emerging from recent audit research that nurturing intrinsic motivation of auditors and audit teams is essential to improving audit quality.
THE EFFECT OF MCS DESIGN ON SMES EXPORT PERFORMANCE: A RESOURCE-BASED THEORY
ARAUJO-PINZON, PEDRO
FLÓREZ LÓPEZ , RAQUEL; RAMÓN JERÓNIMO , JUAN MANUEL
Category: MA = Management Accounting
Following the resource-based theory, this research empirically explores the role of MCS design and their interaction in mobilizing intermediaries’ resources to develop export capabilities, influencing export performance in exporter-intermediary relationships. It develops and tests a model based on management accountant’s perceptions about MCS, SME resources and capabilities in order to examine the effect of the combination of SME characteristics and MCS design on export performance. Empirical data were collected using a survey administrated on-line to management accountants in Spanish SMEs which use intermediary to access export markets. As main findings, evidence suggests that social control plays a partially mediating role, acting as a significant intermediate variable between resources (financial) and capabilities (informational) on export performance. Also, MCS design has been found to be affected by export resources: a higher level of committed physical resources leads to establishing higher formal controls; besides, higher financial resources help to establish wider social controls. Customer Relationship Building capability has been identified as key to increase performance; MCS behaviour has a direct effect on such a capability, and also mediates the impact of financial resources to build CRB. Also, scale of operations and experiential resources are key to increase performance; besides, a weak indirect effect of financial resources through MCS social is observed.
BECAUSE CHANGE HAPPENS! ANALYZING THE CHANGE AGENT IN LEGITIMIZING INTEGRATED REPORTING
ARGENTO, DANIELA
CULASSO, FRANCESCA; TRUANT, ELISA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The purpose of this paper is to explore how an individual actor, embodying the role of change agent, legitimizes the implementation of Integrated Reporting. A longitudinal and explanatory case study was realized by focusing on an Italian listed public utility, operating in the electricity sector, which has recently implemented the Integrated Report. Findings were analyzed through the lens of institutional entrepreneurship which is the branch of neo-institutional theory explaining how actors can achieve substantial changes. This paper unveils how a voluntary change (i.e. the adoption of the Integrated Report) can be achieved thorough the legitimizing activities carried out by a sustainability manager, characterized by strong intrinsic engagement, who makes the best use of available resources and intense networking. Findings reveal that a substantial change in organizational structure, processes and thinking can be achieved over time through the perseverance of a change agent who strives to legitimize his individual position, credibility and projects within the organization. Such perseverance can be successful when the change agent uses available resources and networking skills to gain support from various groups with different power balances, and to enable people of different organizational areas to collaborate to the end of preparing the Integrated Report.
A GROWING WEDGE IN DECISION USEFULNESS: THE RISE OF CONCURRENT EARNINGS ANNOUNCEMENTS
ARIF, SALMAN
MARSHALL, NATHAN; SCHROEDER, JOSEPH; YOHN, TERI
Category: FR = Financial Reporting
We show that the conventional disclosure practice of ‘stand-alone’ earnings announcements which pre-empt 10-K filings is steadily disappearing over time. Instead, firms are increasingly holding ‘concurrent’ earnings announcements under which the earnings announcement and the filing of the 10-K occurs on the same day. Importantly for investors, we find that concurrent earnings announcements are less timely and less decision useful than stand-alone earnings announcements. Specifically, we document that relative to stand-alone announcements, concurrent announcements are associated with attenuated market reactions to, and greater anticipation of, earnings news by investors. Finally, we find that firms with greater impediments to producing timely earnings information are more likely to have switched from stand-alone to concurrent announcements. Collectively, we document a distinct divide in the marketplace, with a growing number of firms switching to the less decision useful practice of concurrent earnings announcements.
PUBLIC REVIEW AND INPUT REGARDING GOVERNMENTAL FINANCIAL GUIDELINES: TEXT MINING ANALYSIS OF ONLINE NEWS
ARISANDI, DESI
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
In order to improve the quality of state and local government financial reporting, the Governmental Accounting Standards Board (GASB) publishes standards and guidelines. One of the GASB’s 2014 research agendas was to collect broad user opinions about the governmental standards and their implementation. In support of this objective, this study measures public sentiment of GASB’s drafts and standards by using textual analysis. Text mining provides an alternative approach to the more conventional public data collection methods, such as surveys or questionnaires. This method measures user sentiment from public websites and ascertains opinions regarding specific GASB standards and exposure drafts. Such research can serve to improve the development of government financial standards and provide better insights regarding their implementation. Text mining capabilities can be used for analyses of internet based media such as online news or social media therefore the applicability of this method is quite extensive.
PERFORMANCE INDICATORS DISCLOSURE IN SUSTAINBILITY REPORTS -LESSONS FROM GHANAIAN LARGE MINING COMPANIES
ARTHUR, CLEMENT LAMBOI
WU, JUNJIE; YAGO, MILTON
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study examines the extent of Global Reporting Initiative performance indicators disclosed in Sustainability Reports of mining companies in Ghana to see the content and trend development. Case study approach to 20 reports (in 2008 and 2012) of 10 large scale mining companies in Ghana was used and analysed using content analysis methods. The findings suggest there has been a wider and increasing trend in the disclosure of performance indicators in sustainability report in accordance with Global Reporting Initiative (GRI) guidelines. The findings suggest that mining companies in Ghana have made good progress in voluntary adoption of the GRI guidelines to increase transparency, credibility and comparability in sustainability reporting.
EARNINGS MANAGEMENT USING OCI RECYCLING: AUSTRALIAN EVIDENCE
ARTHUR, NEAL
CLOUT, VICTORIA; WU, AVA; ZHOU, XIAO
Category: FR = Financial Reporting
This study investigates Other Comprehensive Income Recycling (OCIR) as a tool for earnings management. Based on a sample of Australian companies, we find a positive association between OCIR gains and meeting or beating both prior year’s earnings and analysts’ forecasts. Further, we find a positive relationship between financial performance (loss making) and OCIR. In additional analysis we find that, consistent with income smoothing hypothesis, firms with pre-OCIR-managed earnings well above earnings benchmarks use OCIR to reduce earnings. Finally, additional evidence was provided of a significant and positive association between OCIR and discretionary accruals activity, suggesting OCIR and discretionary accruals are complementing rather than competing with each other. Together this evidence indicates that the traditional focus on discretionary accruals and real earnings management through expenditure decisions captures only part of earnings management activity.
THE USE OF A SINGLE BUDGET OR SEPARATE BUDGETS FOR PLANNING AND PERFORMANCE EVALUATION
ARTZ, MARTIN
ARNOLD, MARKUS
Category: MA = Management Accounting
Budgeting has different functions in the firm that are not necessarily congruent with each other but conflict. Specifically, in many firms, budgets are simultaneously set and used for both operative planning and performance evaluation. Although prior literature recommends using different budget levels for different purposes to resolve potential conflicts between these functions, empirical evidence indicates that the majority of firms use a single budget level for planning and performance evaluation. To examine the questions of whether and why firms do so, we identify economic and behavioral costs of using separate budget levels and test our hypotheses using survey data. We find that when deciding about the use of a single versus separate budget levels, firms trade off the costs of incurring higher variances against the costs of preparing a separate budget and reduced credibility of the performance evaluation system. Moreover, we find that using a single budget level for both purposes at the beginning of the year does not signify using a single budget level at the end of the year. Firms seem to respond to the various economic and behavioral costs either at the beginning of the year or, alternatively, in the course of the year and adjust budget levels for planning, performance evaluation, or both accordingly. Our study contributes to the literature by reconciling discrepancies between descriptive empirical practice and recommendations from prior literature.
COMPETENCE TRUST, GOODWILL TRUST AND THE NEGOTIATION POWER IN AUDITING
ASCHAUER, EWALD
FINK, MATTHIAS; MARESCH, DANIELA
Category: AU = Auditing
This paper investigates how competence trust (i.e. trust regarding the ability of the counterpart) and goodwill trust (i.e. trust regarding the benevolence and integrity of the counterpart) affect the probability that the auditor or the CFO acquiesces to the respective negotiation partner’s position in situations of disagreement in the auditing relationship. Based on experimental data collected from 150 auditors and 117 CFOs our results indicate that both auditors and CFOs who take their respective negotiation partner in the audit for highly competent are more likely acquiesce to his or her position in situations of disagreement. Interestingly, goodwill trust appears to be irrelevant for the negotiation outcome. We discuss the implications of our findings for the scientific discourse and audit practice.
THE EFFECT OF BONUS DEFERRAL ON MANAGERS’ SELF-INTEREST: AN EXPERIMENTAL EXAMINATION OF INVESTMENT DECISIONS AND EFFORT PROVISION
ASSEL, MARIA
CHENG, MANDY M. ; DINH, TAMI ; SCHULTZE, WOLFGANG
Category: MA = Management Accounting
We examine the impact of deferred bonus payments, clawbacks and employment horizon on managers’ self-interest in two experiments. Deferred bonus is an important element of a “bonus bank” scheme designed to motivate mangers to act in the best interest of the firm. Consistent with construal level theory from psychology, we find that bonus deferral mitigates managerial self-interest. Bonus deferral increases managers’ willingness to make a bonus-decreasing investment by encouraging managers to place greater importance on advancing their company’s long-term interests and on improving their reputation within the company. These mediation effects are significant only when participants have a short employment horizon. The second experiment examines the combined effect of bonus deferrals and clawbacks on managers’ willingness to exert personally costly effort to advance their company’s interests. We expect to find that bonus deferral mitigates the negative effect of clawback introduction on economic incentives to provide effort by encouraging managers to place greater importance on advancing their company’s interests. Our study contributes to the debate on effective managerial compensation by showing that a simple deferral of bonus payments can reduce the negative consequences of managerial self-interest and opportunism.
ON THE RELATIONSHIP OF STEWARDSHIP AND VALUATION-EMPIRICAL EVIDENCE FROM GERMAN FIRMS
AUST, VIKTORIA
DREFAHL, CHRISTIAN; PELGER, CHRISTOPH
Category: GV = Accounting and Governance
This empirical study examines how the use of accounting information for valuation purposes is related to its use for stewardship (contracting) purposes. While analytical literature based on agency theory has hinted at differences between stewardship and valuation roles of financial reporting, recent empirical studies based on US data suggest a positive association. This paper contributes to the literature by providing first evidence on the relationship between stewardship and valuation for an International Financial Reporting Standards (IFRS) setting. Using management compensation data from German firms between 2006 and 2013, we find a positive empirical association between our proxies of valuation and stewardship in univariate and multivariate settings, the latter including firm and corporate governance factors. Thus, our findings indicate that the use of accounting earnings for the two purposes is positively related which might also be of interest for the ongoing reform of the IASB's conceptual framework project.
VALUATION MODELING IN PERIODS OF ABNORMAL INTEREST RATES
AXEN, MAGNUS
HAMBERG, MATTIAS
Category: FA = Financial Analysis
Abstract To produce congruent value estimates, valuation models need to properly account for costs of capital. Because financial markets are assumed to be efficient, the standard approach is to assume that all future value stems from the company’s activities in less efficient product markets. Technically speaking, we say that the expected value of residual income of debt flows is zero. We observe that central bank attempts to increase domestic investments has led to remarkably low corporate interest rates. At the same time, we observe that financial analysts maintain risk-free interest rates that are higher than the current “risky” interest rates given to companies, and that they use a constant discount rate. Taken together, these empirical observations suggest that companies create or have the opportunity to create substantial value in financial markets. For this unusual situation, we discuss approaches to deal with risk and the central banks’ ongoing market manipulation. In particular, we look at implications on valuation modeling and Valuation as a subject.
DO ACCOUNTING MISSTATEMENTS DAMAGE FIRMS’ REPUTATION AMONG NON-PROFESSIONAL STAKEHOLDERS?
AXJONOW, ANASTASIA
DOWNAR, BENEDIKT ; ERNSTBERGER, JÜRGEN; POTT, CHRISTIANE
Category: GV = Accounting and Governance
This paper examines the impact of accounting misstatements on corporate reputation as perceived by non-professional stakeholders, i.e. (potential) customers, (potential) employees, and the general public. Reputation is often seen as one of the firms’ most important intangible assets, making it especially crucial for companies to maintain or develop a good reputation. Using a reputation index, which tracks the general public’s perceptions of corporate reputation on a daily basis, we find that announcements of accounting misstatements lead to a lower reputation as perceived by non-professional stakeholders. Further, we provide insights on the channels enabling non-professional stakeholders to react to accounting misstatements. We find that announcements of accounting misstatements are accompanied by increased media coverage of misstating firms and a higher media attention of non-professional stakeholders. Focusing on differences between professional and non-professional stakeholders, we find that professional stakeholders react faster and to a greater extent than non-professional stakeholders to announcements of an accounting misstatement.
FURTHER EVIDENCE ON THE MARKET VALUATION OF ENVIRONMENTAL PERFORMANCE
BABOUKARDOS, DIOGENIS
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study attempts to broaden our understanding of the value relevance of environmental performance by providing empirical evidence of the moderating role of financial environmental reporting. Previous studies indicate that environmental performance can be both positively and negatively associated with market value. Such contradictory findings can be attributed to the fact that environmental performance is associated to both future economic benefits and costs. This study suggests that firms with recognized environmental provisions in their balance sheet enable investors to disentangle these opposite effects because environmental-related costs are already recognized and hence better environmental performance can be associated with economic benefits. In addition, recognized environmental provisions signal that a firm can reliably quantify the environmental consequences of its activities in pecuniary terms. If this is the case, investors will reasonably place a positive, significantly higher value on the environmental performance ratings of listed firms with recognized environmental provisions in their balance sheets. Utilizing a sample of 692 firm-year observations of French listed firms and employing a linear price-level model that associates the market value of a firm’s equity with its environmental performance, I provide empirical evidence to corroborate this thesis.
ON THE ROLE OF MEDIA IN CORPORATE REPORTING: NEW EVIDENCES FROM THE SPANISH MARKET
BAFUNDI, ANDREA
TROMBETTA, MARCO
Category: FR = Financial Reporting
Previous literature has shown that both corporate reporting and media play a role in informing investors. However, whether these sources can reduce information asymmetry is still an object of debate. In our study, we attempt to exploit the dynamics between media and corporate reporting to investigate how they interact in reducing uncertainty in the market. To address this topic, we propose a novel measure that captures the intensity of how financial reporting includes information released in the media. We hypothesize that information issued by the company is a function of news. Therefore, financial reporting is partially addressing those arguments in the news that have produced expectations to investors. Our results show that the interaction between media and corporate reporting has an effect on the uncertainly about the company as it is perceived by investors.
ACCOUNTING AND BANKING PRACTICES IN THE FIFTEENTH AND EARLY SIXTEENTH CENTURIES AS ILLUSTRATED BY THE CAREER OF JACOB FUGGER THE RICH
BAKER, CHARLES RICHARD
QUERE, BERTRAND
Category: HI = History
This paper examines business and accounting practices in the 15th and early 16th centuries with a particular emphasis on the career of Jacob II Fugger (“the Rich” (1459-1525). During his career, Jacob Fugger the Rich was engaged in many enterprises, primarily centered on the lending of money to aristocrats and also the Vatican and mining and distribution of Austrian and Hungarian copper and silver. Jacob Fugger the Rich may have learned double entry bookkeeping, banking and commercial law, and financial mathematics, during the years 1473 through 1487 when he resided in the Venetian Republic. Upon his return to South Germany in 1487, he modeled his business practices after those of the Italian city-states. While historical archives of accounting records of the Fugger family firm are rare, this paper seeks to demonstrate that Jacob Fugger the Rich was not only a brilliant banker, but that he was also a knowledgeable practitioner of double entry bookkeeping which he used to combine accounts from thirteen branches of a multi-national business empire, thereby allowing a clear understanding of the financial position and profitability of his international business affairs.
EXPLORING THE RELATIONSHIP BETWEEN CORPORATE SOCIAL RESPONSIBILITY AND EARNINGS MANAGEMENT IN A EUROPEAN CONTEXT
BALLAS, APOSTOLOS
FILIOU, ANASTASIA
Category: GV = Accounting and Governance
The aim of this study is to examine whether European firms which are identified as managing their earnings also engage in corporate social responsibility (CSR) activities. Using panel-data methodology for a sample of European non-financial public and private companies between 2009 and 2014 we find a positive relationship between earnings management and corporate social responsibility. This result is robust for European firms using alternative measures for accruals quality and estimation approaches. Our findings suggest that, reputation concerns and stakeholder satisfaction are likely to drive companies which conduct earnings management to engage in CSR activities.
BOARD DYNAMICS AND FIRM LIFE CYCLE
BALOGH, ATTILA
Category: GV = Accounting and Governance
Using a sample of over 6,000 firm years and 36,000 directorships, we examine whether board composition follows a predictable pattern consistent with firm life-cycle. Our findings build on the established notions on board monitoring and mentoring, and extend the theoretical work by incorporating the life cycle dimension. Our models explain as much as 71% of the variation in board composition and find that early stage, growth, mature and declining firm boards differ significantly. Consistent with the resource dependence theory, we find that mature firms have larger boards and higher expertise diversity, including expertise in non-business fields. Theory also suggests, and we confirm that the agency problem is mitigated by mature firms through the appointment of independent directors and an independent non-executive chair. Collectively, our results suggest that life cycle has a significant impact on board composition.
THE VALUE OF EXTERNAL AUDITS: EVIDENCE FROM VOLUNTARY AUDITS OF HEDGE FUNDS
BAO, DICHU
CHOI, JONG-HAG; KANG, BYOUNG UK; LEE, WOO-JONG
Category: AU = Auditing
We investigate the merit of external audits using a unique set of hedge fund data. Our findings are as follows. We first document that hedge fund characteristics are significantly associated with funds’ decisions to purchase external audits. Controlling for the self-selected feature of external audit choices, we further document that the incidence of return misreporting is significantly lower for hedge funds with external auditors than those without. We also find that managers of audited funds are able to charge higher incentive fees, but not management fees, than those of unaudited funds. Lastly, audited funds are rewarded for good performance with subsequent capital inflows to a greater extent than unaudited funds are. These findings clearly demonstrate the value of external audit in hedge fund market.
DIVERSITY IN PROFESSIONAL TEAMS: STRUCTURING A DIVERSE AUDIT TEAM
BARAC, KARIN
GAMMIE, ELIZABETH ; HOWIESON, BRYAN ; VAN STADEN, MARIANNE
Category: AU = Auditing
There is little research on diversity of teams within a professional domain such as an audit firm. This study sets out to investigate the structure of a diverse audit team for complex multinational audit engagements. Using a qualitative approach, data are gathered in three Commonwealth countries from 84 individuals with an interest in complex multinational audit engagements. The study explores what constitutes a diverse team, its functioning in a cohesive manner as an integrated unit and presents diversity as a complex context-driven construct. It focuses on the informational background attributes of team members. Diversity can manifest on a surface-level and/or a deep-level. Simultaneously or in isolation three types of diversity, namely variety, separation and/or disparity, are identified. Theoretically, the study expands the understanding of the construct “diversity” within teamwork by locating this study in a professional field as opposed to the extant body of knowledge that is dominated by scholars in management, psychology and sociology. The study found that in order to perform the complex task of auditing complex multinational companies, diversity is needed to bring unique perspectives to the table, creating a larger pool of available knowledge, experience and expertise, but that simultaneously coordination challenges emerge. Practically, it presents a framework that can be applied for structuring diverse audit teams for complex multinational clients.
STRATEGY AS PRACTICE FORMATION AND QUALITY MANAGEMENT IN A FAMILY BUSINESS: A QUALITATIVE CASE STUDY
BARBOSA LAVARDA, ROSALIA ALDRACI
GHISI, ALINE CRISTINE; ROZSA-NETO, RUBENS
Category: IC = Interdisciplinary/Critical
This article aimed to analyze how the strategy formation and the strategy as practice happen, considering the figure of the entrepreneur and the management of quality in the process. The theoretical framework was built based on the authors Mintzberg and Waters (1985) and Andersen (2004 , 2013), for the strategy formation; Schatzki (2001, 2002, 2003, 2005, 2006), for the analysis of strategy as practice through the three phenomena understanding, rules and teleoaffective structure; the concepts of the Entrepreneurial School, according to Mintzberg, Ahlstrand, Lampel (2010), the reality of the family company, appointed by Leoni (1991) and Lodi (1993), and the quality management, according to the authors Carpinetti (2009), Curkovic and Pagell (1999). The methodology used was qualitative, with a single case study involving semi-structured interviews with managers and employees, non-participant observation, and a collection of documentary data, enabling a triangulation of the data. The goal of this study was to analyze the strategic modifications made due to the change of management and after the implementation of the quality certification. It has been emphasized the importance of managers and employees in the process of the strategy formation, as well as the strategy as practice in the activities guided by an entrepreneur in search for quality.
MOVING THE CONCEPTUAL FRAMEWORK FORWARD: ACCOUNTING FOR UNCERTAINTY
BARKER, RICHARD
PENMAN, STEPHEN
Category: FR = Financial Reporting
To meet the objectives of financial reporting in the IASB’s Conceptual Framework, the ‘balance-sheet approach’ embraced by the Framework is necessary but not sufficient. Critical, but largely overlooked, is the role of uncertainty, which we argue defines the role of accrual accounting as a distinctive source of information for investors when investment outcomes are uncertain. This role is in some sense paradoxical: on the one hand, uncertainty undermines both the balance sheet (because uncertain assets are unrecognized) and the income statement (because mismatching is unavoidable). However, these inevitable accounting effects can be exploited to provide information about uncertainty, though not by a balance-sheet approach alone. Rather, criteria for balance sheet recognition and measurement, and for income statement presentation, are established by consideration of the impact of uncertainty on matching and mismatching in the income statement. This combination of balance-sheet and income-statement approaches enhances the communication of information to investors under conditions of uncertainty, thereby giving greater clarity and purpose in satisfying the objective of the Framework to provide information about “the amount, timing, and uncertainty of future cash flows”.
JOINT AUDIT – A MEANS TO REDUCE BIAS AND ENHANCE SCEPTICISM IN FINANCIAL STATEMENT AUDITS
BARONE, ELISABETTA
GWILLIAM, DAVID; MARNET, OLIVER
Category: AU = Auditing
Investigations into the 2007-08 global financial crisis discussed joint audit as a potential measure to help address deficiencies in the quality of the audit function. However, adoption of joint audits remains a highly controversial issue, with arguments against their adoption primarily based on concerns about costs and administrative overhead, while arguments in favour emphasising a contribution to audit quality. Meanwhile, empirical findings remain inconclusive to irrefutably support either view. This paper widens the debate by reflecting on audit from a behavioural perspective to allow for a more nuanced picture of potential costs and benefits of joint audit with regard to audit quality. Auditors operate at the centre of a complex interaction between heuristics and biases which tend to negatively affect the quality of judgement and decision-making and the applied level of professional scepticism during the audit process. We suggest that the impact of social and psychological factors on auditor scepticism, independence and competence may be less pronounced under some joint audit arrangements than for a single engagement team. The paper explores theoretical frameworks derived from behavioural research to guide the way for future empirical research that expands and refines our understanding on the potential of joint audit in bias mitigation and the enhancement of professional scepticism as a necessary ingredient to audit quality.
THE MODERATING EFFECT OF SMALL SIGNIFICANT SHAREHOLDERS ON SHAREHOLDER PROTECTION
BARROSO CASADO, RAUL
BEN ALI, CHIRAZ; LESAGE, CEDRIC; OYON, DANIEL
Category: GV = Accounting and Governance
This paper examines through audit fees how ownership structures affect the different agency conflicts. Specifically, we analyze the role of small significant shareholders (between 5% and 15% of voting rights) on the design of corporate governance arrangements given their demand for public information. As auditing is one of the mechanisms that reduces agency problems by providing an equal treatment to all shareholders through timely and relevant information, we expect a moderating effect of significant small shareholders on the relation between blockholding and audit fees in a context of low shareholder protection. Significant small shareholders increase the demand of public information and consequently increase audit fees.We rely on a very detailed dataset to measure ultimate ownership of Swiss public firms in the 2002‒2010 period. Our results show that the presence of small significant shareholders modify the inverted u-shape relation between ownership concentration and audit fees (into a u-shape relation) found in prior studies. We also find that the type of significant small shareholders affect the moderating effect. Only passive shareholders with less direct contact with the management demand better audits and have a moderating effect. Active shareholders such as private equity firms do not affect the inverted u-shape relation. These results contributes to the research on the use of private vs. public information by shareholders.
EVOLUTION IN VALUE RELEVANCE OF ACCOUNTING INFORMATION
BARTH, MARY
LI, KEN; MCCLURE, CHARLES
Category: FR = Financial Reporting
We study the evolution of the value relevance of a set of twelve accounting amounts, using a methodology that automatically incorporates nonlinearities and interactions, and avoids over-fitting encountered by traditional OLS estimation. We find that more accounting amounts become value relevant over time, which is consistent with a more complex relation between equity price and accounting amounts. Operating cash flow, cash holdings, and two New Economy-related accounting amounts—recognized intangible assets and research and development expense—increase in value relevance, and earnings and dividends decrease. We find that the increase in value relevance of accounting amounts other than earnings offsets the decrease in value relevance of earnings, which is consistent with accounting amounts taken together remaining value relevant over time. We also find significant differences in value relevance of individual accounting amounts for subsamples of financial, technology, loss, and profit firms.
PERSONAL CONSEQUENCES OF AUDIT FAILURES
BARTKOWIAK, MARCIN
BARTKOWIAK, MARCIN; DOWNAR, BENEDIKT; ERNSTBERGER, JÜRGEN; KOCH, CHRISTOPHER
Category: AU = Auditing
This paper examines the consequences of audit failures for individual auditors. Specifically, we examine changes in the auditors’ client portfolios, career development and audit quality as a measurement for the learning effect of individual auditors after audit failures (i.e. enforcement errors or type II going-concern errors). Beyond prior literature that examines changes at the audit firm, audit office or individual auditor level following audit failures, we focus on the particular roles (i.e. concurring auditor or lead auditor) of individual auditors involved in audit failures. For our study, we rely on a German setting which allows us to identify the particular role of each individual auditor. To control for contemporaneous changes we use a difference-in-differences as well as a matched sample design. We find a reduction in concurring and lead auditors` client portfolio, a higher rate of termination for concurring auditors and no changes in audit quality following audit failures. Our results for type II going-concern errors are less pronounced compared to enforcement errors.
INTERNAL AUDIT AND AUDITOR SPECIALISATION AND REPORTING IN THE PRESENCE OF NON-AUDIT SERVICES
BASIOUDIS, ILIAS
MOHD KHARUDDIN, KHAIRUL AYUNI
Category: AU = Auditing
We test the impact of non-audit services on auditor’s independence in the presence of two monitoring functions: the internal audit function and auditor industry specialisation. We empirically examine assertions that auditors may act more favourably towards those clients from whom they receive higher non-audit services fees. We examine the audit reports rendered to companies in the UK and the relative magnitude of non-audit fees (and audit fees) paid by such companies to their auditors. We use the audit partner level of analysis in addition to Big-4 firm and national- and office-level and the results indicate that the non-audit services fees are not associated with the issuance of a going-concern audit opinion when industry specialists are involved in the audits, with the exemption of the national industry leaders. The presence of an internal audit function seems to lead to lower likelihood of a going-concern audit opinion being issued.
TAX MIMICKING IN SPANISH MUNICIPALITIES
BASTIDA, FRANCISCO
BENITO, BERNARDINO ; GUILLAMÓN, MARÍA-DOLORES; RÍOS, ANA-MARÍA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper provides a spatial-econometric analysis of the setting of property tax rates by Spanish municipalities. We take the largest sample of Spanish municipalities to date (2,947 municipalities for 2002-2013), with the aim to find evidence of tax mimicking. Our data indicate that in fact there exists tax mimicking: 1 percent higher property tax rate or car tax in neighboring municipalities leads to a 0.03 percent higher tax rate, ceteris paribus. This effect is lower than the usual impact found by the literature on tax mimicking. Besides, we find an opportunistic behavior of incumbents, by lowering property tax and car tax rates in the election year and in the year before election, as a way to signal their competence to voters (yardstick competition). Finally, in agreement with previous literature, right-wing municipal governments set lower tax rates than their left-wing counterparts.
AN INTRA-ORGANISATIONAL TRANSFER PRICING CONUNDRUM: INTER DISTRICT FLOWS BETWEEN DISTRICT HEALTH BOARDS.
BATES, KEN
FOWLER, CAROLYN; VAN KESTEREN, MATTHEW
Category: MA = Management Accounting
This study investigates the use of National Prices (a form of transfer price) within the New Zealand Public Health Sector to facilitate and account for the Inter District Flows of services between District Health Boards (DHBs). A multi-case based method is used to establish how costing systems information is used to calculate these National Prices and how effective Public Health Sector managers perceive the prices to be for the efficient management and reporting of these Inter District Flows. Neoclassical economics based transfer pricing theory is used to interpret the case data. It is found that the National Prices are believed by some managers to be artificially high transfer prices which inflate the reported costs of the Inter District Flows required by DHBs to provide appropriate patient care. Whilst this does not inhibit service accessibility, as patient welfare comes first and cost efficiency second, it may have adverse resource allocation consequences. Despite recognising the inadequacies of National Prices and having the authority, DHBs are reluctant to negotiate alternative transfer prices because of the potential extra costs involved. One solution is the collaborative approach used by three District Health Boards in one region that use all their resources collectively to plan and provide health services to the entire region. The partnership has one bottom-line and this significantly reduces the need for Inter District Flows using National Prices in that region.
ENVIRONMENTAL UNCERTAINTY, ORGANIZATIONAL COMPLEXITY AND CHOICE OF BUDGETING METHODS IN A POST CRISIS ENVIRONMENT
BATT, CATHERINE ELISABET
KARLSSON, THORLÁKUR; MELSTED RÍKHARÐSSON, PÁLL
Category: MA = Management Accounting
This empirical study investigates how organizational complexity and environmental uncertainty affects choice of budgeting methods. This is done to test criticisms that traditional budgeting methods have become unsuitable to complex organizations in uncertain environments. The empirical material is based on a survey of budgeting practices among CFO’s of the 300 largest companies in Iceland in 2014. In all 191 CFOs responded. The sample includes a broad range of ownership structures and industries, which makes the results easier to generalize. A regression analysis was used to analyse the data. The results indicate that contrary to the primarily “Beyond Budgeting” based critique, organizational complexity and environmental uncertainty do not lead to adoption of alternative budgeting practices. On the contrary, these contingencies strengthen the focus on and use of traditional budgeting methods. There are two main limitations to this study. First of all, this questionnaire is part of a larger questionnaire focusing on mapping management accounting practices limiting the number of possible questions about budgeting. Secondly the questionnaire took place in a specific country in a specific cultural environment. This study provides empirical evidence of the impact of environmental uncertainty and organizational complexity on choice budgeting method. It contributes to the management accounting literature by testing the recent critiques of the “Beyond Budgeting” movement.
ACCOUNTING TALK AND EMOTIONS: A STUDY OF THE SENSE MAKING PROCESS OF ACCOUNTS
BAY, CHARLOTTA
CATASÚS, BINO; SUNDSTRÖM, ANDREAS; SVÄRDSTEN, FREDRIK
Category: IC = Interdisciplinary/Critical
This paper is concerned with how people go about when reading and interpreting financial accounts. Even though people’s capacity to understand accounting to a large extent has been taken as given in the accounting research field, some studies have shown that accounting information nor the ability to interpret it, seldom inhibit any universal meaning. Prior research demonstrates how accounting users tend to engage in various kinds of sense making activities, referred to as “accounting talk”, in which cognitive capacities are developed, helping people translating accounting information into local contextualized knowledge. Whereas previous studies of accounting talk have focused on how the individual’s cognitive capability is developed, this paper broadens the analytical scope to include the emotive aspects for making sense of financial accounts. The paper provides a detailed close-up of how the employees interpret and react to financial accounts presented to them during individual pension advisory meetings. The empirical results indicate that emotions play several but different roles in people’s interpretations of financial accounts and should not necessarily be perceived as oppositional to people’s cognitive sense-making ability. In fact, the relation between rational reasoning and emotions should be understood as a symbiotic interdependence.
FRAME CONTESTS ON ACCOUNTING RULES: EVIDENCE FROM THE PUBLIC MEDIA DEBATE ON FAIR VALUE ACCOUNTING
BECKER, KIRSTIN
DASKE, HOLGER; SEXTROH, CHRISTOPH
Category: IC = Interdisciplinary/Critical
We use a sample of 1,654 content-analyzed statements about fair value accounting published in print media during 2007-09 to explain the successful problematization of an accounting issue. Unlike prior accounting studies on lobbying, we understand accounting debates as frame contests, i.e., competitions among problem definitions for decision makers’ acceptance that take place in public arenas. We therefore use news media content to examine theoretically important framing success factors: a frame’s dominance and strength in terms of credibility and relevance. We find that negative frames dominated the fair value debate not because vested interests sponsored most frames, but because seemingly impartial actors supported the financial services industry’s problem definition. Whereas frames in defense of fair value accounting were on average as strong as negative frames, standard setters lacked support from other accounting stakeholders during the crucial stages of the debate. We regard negative frames’ dominance and the (perceived) higher credibility as the main reasons for the successful problematization and politicization of fair value accounting.
AUDIT QUALITY AND ACCESS TO DEBT CAPITAL: A GLOBAL SURVEY OF THE MICROFINANCE INDUSTRY
BEISLAND, LEIF ATLE
MERSLAND, ROY; STRØM, ØYSTEIN
Category: AU = Auditing
The traditional view in audit research has been that high-quality auditors are associated with improved access to funding and lower costs of capital. This paper is motivated by recent research suggesting that the funding benefits of using Big Four auditors may not be as uniform as was previously assumed. We therefore turn to the microfinance industry and apply a unique hand-collected dataset from 59 developing and emerging countries, a population typically not investigated in accounting research, to analyze the relationship between use of Big Four auditors and access to debt capital. We do not find significant relationships between use of Big Four auditors and access to debt capital. Thus, we conclude that one of the main benefits of using Big Four auditors seems not to extend to the poor countries of the world. The paper discusses several causes and indicates possible consequences of the findings.
THE LEVERS OF CONTROL, THEIR ANTECEDENTS AND THEIR CONSEQUENCES: A META-ANALYTICAL EXAMINATION OF MORE THAN 20 YEARS OF RESEARCH
BELLORA-BIENENGRAEBER, LUCIA
DERFUSS, KLAUS; ENDRIKAT, JAN
Category: MA = Management Accounting
Robert Simons’ (1995) levers of control (LoC) framework is one of the most prominent management control system (MCS) frameworks employed in quantitative research during the last two decades. We synthesize the quantitative evidence from 52 independent data sets and thus test the nomological network around the four LoC. Specifically, we investigate (1) differentiation strategy, environmental uncertainty, and size as antecedents of the levers, (2) the levers’ interrelations , and (3) organizational capabilities and organization performance as consequences of the levers. Controlling for statistical artifacts, our results provide strong support for most of the theoretical predictions from the LoC framework, which persists when we control for variables potentially moderating the basic relationships. Besides providing rich managerial implications, our study invites future conceptual and empirical research to further validate and enlarge the nomological network around the LoC.
OUTSIDE WOMEN DIRECTORS AND CORPORATE SOCIAL RESPONSIBILITY
BEL-OMS, INMACULADA
PUCHETA-MARTINEZ, MARIA CONSUELO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper examines how independent and institutional women directors on boards affect Corporate Social Responsibility (hereafter CSR) reporting. We posit that there is a non-linear association, concretely quadratic, between independent and institutional female directors on boards and CSR practices. Our results demonstrate that as the presence of independent and institutional women directors on boards increases, CSR disclosure improves, in line with the monitoring hypothesis, but when their presence on boards reaches a tipping point, CSR reporting reduces, consistent with the collusion hypothesis. Our findings suggest that board structures formed by institutional and independent female directors have effect on CSR reporting, but depending on the proportions of these types of female directors, the repercussion can be positive or negative. Thus, female directors play a relevant role on boards since they may influence CSR decisions.
THE IMPACT OF ACCOUNTING INFORMATION AND ITS QUALITY ON GOVERNMENT FUNDING TO NONPROFIT ORGANIZATIONS
BEN AMAR, WALID
CHEN, QIU; DING, SHUJUN; QUON, TONY
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
We examine and find that governments use accounting information, more specifically program ratios and administrative ratios, differently in the two stages of their funding decisions to nonprofit organizations. In the first stage where governments screen organizations to be funded, they do not focus on program ratios, and nonprofit organizations with higher administrative ratios are more likely to be selected for funding. However, in the second stage where governments allocate money among selected organizations, both accounting ratios do not play a significant role in determining the value of the funding granted. We further find that governments react to low quality ratios by reducing the likelihood of awarding funds in the first stage, but governments do not consider the quality of accounting information in the second stage. Keywords: nonprofit organizations; program ratios; administrative ratios; financial reporting quality; government funding decisions.
TRADING ALIGNMENT AND CORPORATE GOVERNANCE
BENEISH, MESSOD DANIEL
MARSHALL, CASSANDRA
Category: GV = Accounting and Governance
This paper provides evidence that trading alignment within a board of directors predicts the effectiveness with which a board performs its monitoring and advising duties. We define alignment of trading to mean instances where outside directors and the CEO abnormally trade their firm’s shares in the same direction in the prior fiscal year. We find that directors that trade together are less effective monitors as they are more likely to overpay CEOs. We find that directors that trade together appear to be more effective advisors as their firms are more likely to successfully invest in innovation. These results obtain when the trading alignment is selling rather than buying-based. They suggest selling-based trading alignment as an incremental and observable means of assessing the advising and monitoring effectiveness of outside directors.
A CONFIGURATIONAL APPROACH OF ORGANIZATIONAL PERFORMANCE: THE CASE OF FRONT-OFFICE EMPLOYEES IN THE SERVICE SECTOR
BENET, NATHALIE
DEVILLE, AUDE; RAIES, KARINE
Category: MA = Management Accounting
This research relies on complexity theory to analyze in an original way the relationships between decision rights, incentive system, non-financial performance and financial performance. We propose a conceptual model based on a holistic framework which allows considering specific configurations instead of linear relationships. We address the following research question: Which configurations of decision rights and incentive system attributes – and non-financial performance measurement – lead to financial performance? This paper investigates more particularly front-office employees in the service sector. To this end, we use a fuzzy-set qualitative comparative analysis (fsQCA) which is, to our knowledge, a new approach in management control research. The empirical study relates to the French hotel industry (n=64). The findings highlight the influence of the operating context and the importance of the interdependencies between strategic orientations, performance measurement, incentive systems and organizational performance. Findings contribute to both the performance measurement and incentive systems and the service (hospitality) literature and could bring interesting managerial insights to the hotel’s managers.
DOES TRANSPARENCY AFFECT BUDGET DEVIATIONS? AN EMPIRICAL EVIDENCE
BENITO, BERNARDINO
BASTIDA, FRANCISCO; BENITO, BERNARDINO; GUILLAMÓN, MARÍA-DOLORES; RÍOS, ANA-MARÍA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper analyses the impact of financial transparency on fiscal performance. Our sample considers the 100 Spanish largest municipalities for the years 2008, 2009, 2010, 2012 and 2014. The results show that the level of municipal financial transparency influences budget deviations in tax revenues and current expenditures. On the one hand, less transparent municipalities overestimate their revenues, allowing them to provide more public services without an immediate increase in taxes. On the other, these local governments, which are aware of the overestimation of their revenues, may spend less than they budgeted. More transparent municipalities, meanwhile, seem to be more prudent in their revenue estimations, since they underestimate their revenues, meaning they can spend more than projected. Our results also show that the behaviour of politicians is influenced by the phase of the electoral cycle in which they find themselves, with politicians overestimating expenditures in the year before election.
THE ASSOCIATION BETWEEN THE EXPANDED AUDIT REPORT AND INVESTOR UNCERTAINTY
BENS, DANIEL
CHANG, WOO-JIN ; HUANG, STERLING
Category: AU = Auditing
In this paper we examine the perceived usefulness of changes in the form of the external audit report to the equity market utilizing a regulatory change in the UK – the adoption of ISA 700 in 2013 – as a quasi-experiment. ISA 700 requires external auditors to disclose (1) materiality levels; and (2) critical areas of heightened audit risk – referred to as Key Audit Matters (KAMs). We predict that the adoption of this new rule in the UK leads to audit reports that are perceived as more useful by stock market participants. Consistent with our predictions we document declines in the bid-ask spread as well as the dispersion in earnings forecasts by security analysts. These declines occur in the UK firms subject to the new regulation, and obtain when we compare the UK firms to similar US firms via a difference in difference analysis. These declines are greater when (1) materiality levels are set lower; and (2) more KAMs are revealed. In addition, we find that managers change their disclosure pattern depending on the types of risks identified. Tax risks correspond with expanded disclosures, while risks related to asset valuation are followed by less disclosure. Overall, this paper utilizes an exogenous shock in the audit environment to identify a perceived value to the external audit.
AUDIT REGULATION, AUDITOR INDUSTRY EXPERTISE AND EFFECTS ON AUDIT PRICING IN EUROPE
BENSLIMENE, IMEN
Category: AU = Auditing
The diversity of regulations that govern statutory audit in European countries provides the opportunity to analyze how audit regulation affects audit fees. This study is the first to analyze empirically the joint effect of audit regulation and auditor industry expertise on audit fees for the institutional setting of 14 European countries by using a sample of 4293 European firms for the period from 2003 to 2011. We analyze four attributes of audit regulation, namely annual renewal of the mandate, nature of the auditors’ liability, joint audit and restrictions on the provision of non-audit services. The main results show that using an industry specialist auditor results in higher audit fees. Moreover, three regulatory attributes (auditor liability, annual renewal of the mandate, joint audit) play a significant role in determining audit fees. Fees are higher when the auditor's mandate may be renewed each year, and when the auditor's liability is tort. Mandatory joint audit has also a positive impact on audit fees.
ECONOMIC INCENTIVES AND SOCIAL NORMS
BERGER, KRISTINA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
With the help of an analytical model, my paper ties on to existing literature and tries to interrelate findings from sociology, psychology, economics and business. In particular, my analysis builds on the model used by Fischer and Huddart (2008) and provides explicit solutions with respect to how behavior of agents changes when social norms are present. For a given compensation contract, the basic model illustrates that a higher action choice of the other agent inclines an individual to work harder. Comparative statics are presented and show among other things that an increase in an agent’s personal norm as well as an increase in the variable compensation part induces higher effort. In addition, I consider endogenous weights of norm components and depart from the assumption that weights are exogenously given. For this purpose, I introduce weights that are dependent on the action choice of the peer group and find out that previous results do not hold any longer. With the help of numerical examples important features are illustrated.
THE SUBJECTIVE PERFORMANCE EVALUATION EFFECT ON MANAGERIAL INTENTION TO TURNOVER, IDENTIFICATION AND PERFORMANCE
BEROVA ALVES, IRYNA
LOURENÇO, SOFIA
Category: MA = Management Accounting
This study analyzes the relationship between subjective performance evaluation (SPE) and intention to turnover, identification, and performance of managers in SMEs. We argue that this relationship is mediated by managerial perception of feedback quality and trust in supervisor. To test our hypotheses, we collect data via a questionnaire and use structural equation modeling to analyze them. Using data from 663 responses, we find that the use of SPE reduces perceived feedback quality, while perceived feedback quality increases trust in the supervisor. We also find that greater trust in the supervisor enhances managerial performance by increasing identification and reducing intention to turnover.
DOES SAY ON PAY HAVE A DETERRENT EFFECT ON EXECUTIVE COMPENSATION? A CANADIAN STUDY
BERTHELOT, SYLVIE
COULMONT, MICHEL; SERRET, VANESSA
Category: GV = Accounting and Governance
Say on Pay (SOP) gives shareholders the right to vote on executive compensation. Unlike in a number of other countries, SOP is not prescribed by regulation in Canada, although more and more firms are now adopting this practice. The benefits for firms that voluntary implement SOP have been little documented from an empirical perspective, especially with respect to monitoring executive pay. This study addresses this issue, drawing on a sample of 209 Canadian firms listed on the Toronto Stock Exchange (S&P/TSX index). Results suggest that, within the Canadian context at least, the adoption of Say on Pay is related to higher long-term executive compensation. Shareholders’ involvement in this policy does not appear to curb the rise of executive compensation. The study findings also indicate that firms that have adopted SOP post lower revenue growth, stock returns, and Tobin’s Q than firms that have not.
HETEROGENEITY IN TAX RATE ELASTICITIES OF CAPITAL - EVIDENCE FROM LOCAL BUSINESS TAX REFORMS
BETHMANN, INGA
Category: TX = Taxation
This study examines heterogeneity in tax rate elasticities of corporate capital using staggered variation in local business tax rates across German municipalities. The results suggest that a tax rate increase by 1% reduces fixed assets of the average firm by up to 0.97% in the long run. In line with prior literature that suggests higher investment-cash flow sensitivities of firms with financing constraints capital responses to tax rate changes are up to half times larger for financially constrained firms than for unconstrained firms. Moreover, capital responses are about half times larger for firms with fewer tax avoidance possibilities. Finally, I find a weaker relation between taxes and capital for firms that are less likely to bear the economic burden of the tax because they can shift the tax incidence to their stakeholders.
ACCOUNTS MATTER, BUT DOES IT MATTER WHAT COUNTS?
BEUSCH, PETER
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Accounts matter in most domains and this is also true for the area of sustainable development (SD). Accounts, however, matter not only if they are true but maybe even more if they are false or illusory. The aim of this paper is to critically investigate and discuss accounts of SD-reality and summarize this discourse in a theoretical overview. This is a conceptual study that relies on the notion of pragmatic constructivism together with a simplified approach of the triple bottom line (TBL). Different SD-accounts are discussed in relation to four dimensions of reality (facts, possibilities, values and communication). Differences are outlined between financial, environmental and social accounting accounts. External and internal (ope)-rationalizations are illustrated and links to the traditional business-case and the paradoxical case are drawn. The findings demonstrate that different SD accounts matter in different ways and -it matters what gets counted! However, accounts that are supposed to represent large areas as reality and the world, in terms of sustainability metrics/measures can probably never be of the same format and quality without destroying too much of the particular and contextual value they in isolation have. There surely are limits to accountability, accounting, and accounts. It is important to recognize these limits and the important differences in form and content of accounts rather than keeping on standardizing and monetizing them to enable a ‘financialized’ but seemingly useless comparison on a global scale.
CEO CHARACTERISTICS AND PAY: DO CEOS WITH ADVERSE PERSONAL TRAITS NEGOTIATE A HIGHER COMPENSATION?
BEYER, BIANCA
ELSILÄ, ANNA; KALLUNKI, JUHA-PEKKA; NILSSON, HENRIK
Category: GV = Accounting and Governance
In this paper, we use CEOs’ past criminal behavior as a measure of their propensity for risk-taking to examine the unobserved part of manager-fixed effects on executive compensation. Our results of analyzing the panel data of 386 individual CEOs in 223 Swedish listed companies during the period from 1999 through 2013 show that the compensation for criminally convicted CEOs is significantly lower for those CEOs at the lower end of the overconfidence continuum, but significantly higher for those that can be characterized as very overconfident, relative to non-overconfident CEOs. Our contribution to managerial power theory provides evidence on how a higher risk propensity does not necessarily lead to rent extraction, and has further insights on the effect of an individual manager on their own compensation.
PRIVATE CORPORATE REPORTING IN POLAND AND THE BANK LENDING IMPACT ON THE BOOK-TAX CONFORMITY
BIAŁEK-JAWORSKA, ANNA
ZIEMBIŃSKI, MICHAŁ
Category: FR = Financial Reporting
We investigate the influence of debt financing on corporate financial reporting and the impact of bank lending on the book-tax conformity of private companies in Poland,. We find that higher bank and non-bank borrowing is associated with higher book-tax conformity. At the same time, bank-lenders' demand for financial information increases book-tax conformity among borrowers the higher the bank debt is. We confirm that one-book firms that focus on tax regulations have a lower permanent and temporary book-tax differential overall than two-book private companies that provide information both for tax offices (including deferred tax) and other stakeholders' decision making. These lower differences in total (and the related lower informativeness of earnings) are associated with information needs, as family firms have a lower book-tax differential than business groups. Our findings confirm that increasing the role of accounting could improve access to external finance. Monitoring by lenders and debt covenants forces companies to adopt more advanced accounting practices.
THE DETERMINANTS OF INDIVIDUAL AUDITOR COMPENSATION: EVIDENCE FROM THE SMALL AUDIT FIRM MARKET FOR PRIVATE FIRMS
BIANCHI, PIETRO ANDREA
CARRERA, NIEVES; TROMBETTA, MARCO
Category: AU = Auditing
We examine to what extent individual auditor characteristics influence auditors’ compensation in the small audit firm market. Using a sample of Italian individual auditors active in the market for private clients, we show that social capital and human capital are positively associated with compensation. We also find differences in compensation between auditors organized as sole proprietors and auditors organized in partnership. We use auditor fixed effects and instrumental variables procedure to address potential causation issues arising in the formation of auditors’ social capital. We also use propensity-score matching to alleviate the issue of the selection of the organization type chosen by the auditor. Our results improve our understanding of the return of individual attributes that go beyond the certification as a licensed auditor. Results from this study are informative to regulators interested in understanding the importance of disclosing partners’ identities in the audit report.
DO MARKET STRUCTURE MATTER ON AUDIT FEES? A TEST TO DISTINGUISH BETWEEN MARKET POWER AND DIFFERENTIATION
BIEDMA LOPEZ, ESTIBALIZ
RODRÍGUEZ CASTRO, PAULA I.; RUIZ BARBADILLO, EMILIANO
Category: AU = Auditing
This study examines whether the origin of audit fee premiums earned by Multinational Audit Firms in Spain is in the exercise of market power or due to differential reputation attributed to these firms. Using a sample of 1006 observations belonging to 170 Spanish non-financial quoted companies between 2003 and 2010, we find no evidence that the level of market concentration – as a surrogate of the possibility to exert market power – explains higher prices charged by Big audit firms. On the contrary, our results support the hypothesis that it is reputation of quality-differentiated services –measured by market share of different competitors in the audit market- which explains the existence of overprices. These results are robust to a variety of sensitivity checks. Our findings have important implications for regulators and audit market competitors.
WHY DO FIRMS ISSUE HYBRID BONDS?
BIEREY, MARTIN
MUHN, MAXIMILIAN; SCHMIDT, MARTIN
Category: FA = Financial Analysis
Our study examines firms’ motivation to issue an innovative financing instrument. Hybrid bonds have been issued in 17 different countries and became the most relevant class of hybrid securities in these countries. Whether a hybrid bond is classified as equity or debt (i) for tax purposes (ii) by rating agencies and (iii) under accounting standards depends on the chosen hybrid bond structure. Our findings suggest that rated firms exploit this structuring opportunity to issue a security which is associated with (i) tax-deductible interest payments but which (ii) supports the firm’s credit rating. We find that firms tailor their hybrid bond structures to rating agencies’ requirements. After S&P changes its classification methodology, rated firms issue substantially different hybrid bond structures. We also document that firms issue hybrid bonds in quarters when their incentive to manage credit ratings increases. In contrast, we find that rated firms care less about the accounting classification and issue hybrid bonds that are treated as debt under accounting standards in 50% of all cases.
DIFFERENCES IN THE LIKLIHOOD AND MAGNITUDE OF IMPAIRMENTS AND UNREALIZED LOSSES: EVIDENCE FROM THE REAL ESTATE INDUSTRY
BISSESSUR, SANJAY
GONCHAROV, IGOR ; VAN TRIEST, SANDER; WIRTZ, DIETER
Category: FR = Financial Reporting
This paper studies the difference in frequency and magnitude of impairments reported under US GAAP and unrealized losses reported under IFRS. We exploit the real estate industry as a homogenous setting where U.S. and U.K. firms are highly comparable, but have different accounting systems for reporting downward adjustments of expectations of future benefits to perform a direct test of comparison. We employ a difference-in -differencemethodology to infer the effect of the reporting model on the frequency and magnitude of downwards adjustments of expected future cash flows of real estate assets in financial reports. We find that US GAAP firms are less timely in the reporting of impairments than IFRS firms report unrealized losses. We next examine if the impairment or unrealized loss has predictive value for capital market outcomes based on stock prices as well as a new value measure based on regional housing prices to account for mispricing due to market distress in the Financial Crisis> Furthermore we also examine the predictive value for accounting values. We find that there are significant differences in predictive ability of impairments reported under US GAAP and unrealized losses reported under IFRS.. Finally, we provide some evidence that the differences in impairment and unrealized losses are related to accounting procedures, as measured by Big 4 versus non BIG 4 firms.
FINANCIAL STATEMENT COMPARABILITY, READABILITY AND ACCOUNTING FRAUD
BLANCO, BELEN
BLANCO, BELEN; DHOLE, SANDIP
Category: FR = Financial Reporting
This study examines the association between two important characteristics of annual reports – financial statement comparability and readability, and the likelihood of committing accounting fraud. Prior research documents that the likelihood of accounting fraud is negatively associated with the quality of a firm’s information environment. We build on this literature, and show that firms with less comparable and readable financial statements are more likely to commit fraud. We also examine whether managers respond to fraud by improving the quality of information they provide in their annual reports subsequent to accounting fraud, and find that readability and comparability improve four years after fraud.
STRATEGIC DECISION MAKING AND KNOWLEDGE SHARING IN INNOVATION:
BLOMKVIST, MARITA
JOHANSSON, JEANETH; RODGERS, WAYMOND
Category: FR = Financial Reporting
This study focus on knowledge management and entrepreneurs perceptions in terms of knowledge sharing, the entrepreneurs´ use of financial statement information and how these impact on entrepreneurs’ strategic business judgment and decision choice in innovative firms. Using a decision-making process model we test our assumptions regarding different knowledge routines implemented by Gazelle companies compared to non-Gazelle companies in strategic business decision. Combining survey data and financial data from an unique archival database we test our propositions on Swedish privately owned high-growth and non-growth oriented firms. The results from this study implied that Gazelle entrepreneurs are propelled by both traditional financial liquidity information and human expertise of managers and investors compared to non-Gazelle entrepreneurs that are propelled primarily by the expertise of managers and investors.
THE INFLUENCE OF NGOS IN THE ACCOUNTING STANDARD SETTING PROCESS : THE CASE OF EXTRACTIVE ACTIVITIES
BLUM, VERONIQUE
Category: FR = Financial Reporting
When a coalition of NGOs seizes the international accounting standard process, in an initiative seeking to thwart corruption while encouraging transparency in the extractive industries, a novel case in accounting regulation is offered to examination. The narrative of the proposal carried in a Discussion Paper (an accounting standard proposal) outlines a story where the demand for higher accountability is supposed to benefit also to the investor as it reduces risks, especially the one bearing on corporate reputation, as suggested by earlier researches on pollution or corruption. An original combination of qualitative and quantitative methodologies allows the in-depth observation of the 142 comment letters sent to the IASB to reveal original conceptions on the role of accounting standards. NGOs and funds clearly advocate for a broader scope of accounting standards, thus trying to capture the standard setting process as an “infomediary”. Companies involved in extractive activities display more conservative positions on the issue, often in a nuanced opposition with reference to confidentiality or to soft law disclosures. Even inside a given category of respondents – audit firms particularly – there appears to be no consensus on the role of the standard setter.
EARNINGS QUALITY OF PRIVATE AND PUBLIC FIRMS: BUSINESS GROUPS VERSUS STAND-ALONE FIRMS
BONACCHI, MASSIMILIANO
MARRA, ANTONIO; ZAROWIN, PAUL
Category: FA = Financial Analysis
We compare the earnings quality of private and public firms. Prior evidence is mixed and inconclusive as to which is greater. The research question is important, because it examines whether market demand for high quality reporting or managerial opportunism dominates in determining public firms’ quality. We focus on organizational structure, because public and private firms significantly differ along this dimension: public companies are structured as business groups, whereas private firms are business groups or stand-alone entities, and stakeholder demand for earnings quality and tax related incentives for earnings management differs between business groups and stand-alone firms. Based on a comprehensive sample of 11 European Union countries from 2004–2014, we find that public firms have higher earnings quality than private firms overall, but when we compare public and private business groups, private firms are higher. Our results imply that opportunism trumps demand in determining public firms’ earnings quality and reconcile the inconclusive results in the literature, which are driven by not separating stand-alone from business groups in the analysis.
EXECUTIVE CHARACTERISTICS AND ACCOUNTING CHOICES OF BANKS
BOOB, NICOLAS
BISCHOF, JANNIS
Category: FR = Financial Reporting
This study investigates whether top-level executives of banks exert a significant idiosyncratic influence on accounting decisions of banks. Exploiting a banking setting with bank and executive data for twenty-two years, I find that top-level executives account for a significant part of the variation in discretionary loan loss provisioning that is not explained by firm characteristics such as risk culture, litigation risk, or size. I also show that time-invariant executive effects are significantly associated with the education of the individual manager and the labor market conditions at the beginning of an executive’s career. Overall, my results demonstrate that time-invariant manager characteristics significantly influence discretionary loan loss provisions within banks and appear to be more important than time-invariant bank heterogeneities.
AN ANALYSIS OF THE INTELLECTUAL CAPITAL LINK WITH PERFORMANCE USING PUBLICLY AVAILABLE DATA
BORDIANU, ANDREEA
Category: MA = Management Accounting
This paper aims at verifying whether all intellectual capital elements, as measured by using publicly available accounting data, are equally beneficial for a range of traditional performance aspects: economic, financial and market performance. The empirical data were drawn from a panel consisting of 839 United Kingdom companies listed at the London Stock Exchange, from four different industry sectors observed over the eleven-year period from 2001 to 2011. It uses a panel methodology to study the association between all intellectual capital elements and multiple performance aspects. Research results suggest that investment in intellectual capital is partially beneficial for economic performance but less favourable for financial performance and is not statistically significant connected with market performance. Moreover, the results have an alternative explanation in that accounting proxies for intellectual capital might have a limited ability in modelling this resource link with performance due to identity issues. It offers a comprehensive understanding of the connection between all intellectual capital components – human capital, structural capital and relational capital - and multiple performance aspects across a range of industry sectors. It provides evidence on the ability of intellectual capital proxies’ to model the link between intellectual capital and performance. It is part of the investigation into the efficacy of the accounting discipline to capture intellectual capital information.
CLASSIFYING RESTATEMENTS: AN APPLICATION OF MACHINE LEARNING AND TEXTUAL ANALYTICS
BORITZ, J. EFRIM
HAYES, LOUISE
Category: FA = Financial Analysis
Restatements are used for evaluating reporting quality, audit quality and for other evaluative purposes. It is crucial to differentiate between restatements due to unintentional errors and those due to intentional misstatements. These different causes have different implications for financial statement preparers, users, auditors, regulators and researchers as shown by prior research that has used the language in restatement disclosures to classify restatements. Manual content analysis of restatements is tedious, resource consuming and error prone. Using machine learning and a “training set” of 5% of restatements coded as either correcting fraud and irregularities or unintentional error, we constructed a model that classified the remaining 95% of all restatements as either correcting unintentional error or intentional misstatement. Empirical tests of the classified restatements show this classification is more reliable than other commonly used automated methods such as classifying based on restatement direction or magnitude. Our method is automated, does not require a dictionary of words associated with management intent, is easily replicated and scalable and may be used to classify restatements disclosed at the same time as financial results. This study demonstrates that the language in restatement disclosures is a useful indicator of reporting and audit quality.
CORPORATE TAX AVOIDANCE AND IP BOXES
BORNEMANN, TOBIAS
OSSWALD, BENJAMIN
Category: TX = Taxation
We examine whether firms with different levels of tax avoidance are able to reduce their effective tax rates ("ETRs") and increase patenting activities after the introduction of an IP box. We find that domestic firms that are eligible for an IP box are associated with significantly lower ETRs compared to domestic firms that are not eligible. However, we do not find a significant association for multinational firms. Domestic firms with ETR levels below 10% and above 30% prior to the IP box regime are able to reduce their ETRs while multinationals are not. Next, we find evidence that the IP box has an overall positive effect on patenting activities across all R&D-active firms. We contribute to the literature by showing that the impact of output-based tax incentives on R&D activity crucially depends on the level of ETRs and thus often on the ability to exploit other tax avoidance channels.
INTERNAL AUDIT DISCLOSURES AND EXTERNAL AUDITORS’ OPINION: EVIDENCE FROM GREECE
BOSKOU, GEORGIA
SPATHIS, CHARALAMBOS; TSIPOURIDOU, MARIA
Category: AU = Auditing
This study attempts to assess the impact of internal control and audit compliance disclosures, in a “comply-or-explain” corporate governance regime on the type of audit opinion issued by the external auditor (unmodified opinion vs. unmodified with emphasis of matter paragraph). The study also examines if these disclosures affect the number of issues identified in the emphasis of matter paragraph of an unmodified opinion. Disclosures‟ data was obtained and hand-collected from the 2014 annual reports of 173 companies listed in the Athens Stock Exchange (ASE). The results indicate that internal control and audit disclosures in the annual report seem to have an impact on the type of audit opinion issued by the external auditor as well as on the number of issues included in the unmodified opinion with emphasis of matter paragraph.
MANAGERS’ RESPONSES TO POLITICAL COSTS: AN EXAMINATION OF THE RELATIONSHIP BETWEEN NARRATIVE IMPRESSION MANAGEMENT AND EARNINGS MANAGEMENT DURING WORKFORCE REDUCTIONS
BOUTANT, JENNIFER
VERDIER, MARIE-ANNE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We study firm disclosure strategies during workforce reductions. We focus on the extent to which managers manipulate earnings before workforce reduction announcements, and how it may influence (i) the issuance of press releases by firms to announce the operation and (ii) narrative impression management as reflected in justifications of workforce reductions in press releases. Our sample consists of 123 workforce reductions announced by 107 French listed companies between 2007 and 2012. We find that earnings management is not associated with the probability of issuing a press release. However, when a press release is issued, we obtain a negative association between earnings management and narrative impression management, suggesting that these two devices are usually used in a substitutive way to deal with political costs. Moreover, grained-fine additional analyses show that managers engage in strategies mainly carried out through earnings management when their firms belong to sensitive industry and display high level of cash-flows. Their strategies are mainly based on reactive narrative impression management when their firms announce a workforce reduction for the first time during the period studied. Besides, managers use the two devices in a complementary way when the employees affected by the operation are numerous. Overall, our results confirm that both devices are considered as suitable tools by managers to deal with political costs during workforce reductions.
MAKING SUSTAINABILITY THINGS AUDITABLE: TWISTING OLD DANCE MOVES INTO A NEW CHOREOGRAPHY
BOUTEN, LIES
HOOZÉE, SOPHIE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper explores the construction of the sustainability assurance process from the perspective of both Big Four accounting firms and their clients. In particular, we examine how both parties thrive in this new assurance field by co-developing a routine that creates comfort as well as the extent to which the sustainability assurance process may instil organizational change. To gain insight into the construction of the sustainability assurance process, interview data were collected from two auditor-auditee dyads. The findings reveal that the espoused ambitions of the auditor and the auditee regarding the outcome of the sustainability assurance process determine the moves of both partners in the sustainability assurance dance as well as how their moves are bound up in a routine that may foster or stifle organizational change.
HOW DO ANALYSTS PROCESS MANAGERIAL EARNINGS FORECASTS? AN EYE-TRACKING STUDY
BOZZOLAN, SAVERIO
JOOS, PHILIP; RUBALTELLI, ENRICO
Category: FR = Financial Reporting
This study aims to open the black box of analysts’ decision processes by directly studying how analysts focus their attention on particular Management Earnings Forecasts (MEF) features and how this affects their subsequent recommendations. We use a 2x2 between participant experiment based on eye-tracking methodology where we vary the firm’s historical performance and the analyst and market reaction to the MEF. Based on psychological processing theories, we formulate three different hypotheses. We find that when the historical performance is low, participants spend relatively more time looking at financial information (more visual attention during the experiment). Moreover, when the analysts’ and market’s reaction turns from negative to positive, participants are more interested in financial information and less interested in non-financial information (namely the Strategy that the firm has put in place). In addition, we investigate recommendation decision and find that a tabular presentation format of performance targets is associated with a higher recommendation than narrative presentation format. Our study contributes to the long-standing debate on the role of financial and non-financial information in corporate communication with financial markets by showing how participants process information in management earnings forecasts. Our study provides insights to standard setters and policy makers regarding the importance of non-financial information.
EXPLORING THE RELATIONSHIP BETWEEN CORPORATE SUSTAINABILITY PERFORMANCE AND ASSURANCE ON SUSTAINABILITY REPORTS
BRAAM, GEERT
PEETERS, ROY
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
In response to investors and other stakeholders questioning the credibility of the performance information displayed in sustainability reports, companies increasingly have their sustainability reports voluntarily assured by an independent third party. However, voluntary third-party assurance on sustainability reports (CSRA) may vary considerably in terms of the choice of the assurance provider as well as the scope and level of assurance. In this study, the relation between corporate sustainability performance (CSP) and choices related to CSRA is explored. Using a panel data set 4,686 companies in European and North American countries, the results indicate that companies with a superior CSP are more likely to employ third parties to provide assurance on their sustainability reports than companies with an inferior sustainability performance. For the companies that employ third parties to provide assurance, CSP plays a significant role in explaining variation in (a) the choice of the assurance provider for companies headquartered in North America, (b) the scope of assurance for European companies, and (c) the level of assurance for companies from the United Kingdom. The results support the notion that companies with a superior CSP make different choices related to CSRA than companies with an inferior CSP. The results also indicate that country-specific characteristics are important for understanding the variation in choices related to CSRA.
PERFORMANCE MANAGEMENT SYSTEMS: UNFOLDING THE HUMAN FACTOR - A CASE FROM THE ITALIAN PUBLIC SECTOR
BRACCI, ENRICO
INGLIS, ROBERT; MARAN, LAURA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The aim of this study is to examine the institutional context during the emergence of New Public Management (NPM), which created pressure on public sector organisations to implement performance management systems (PMSs), such as the balanced scorecard (BSC). Drawing on Granlund’s framework (2001) and Giddens’ (1979) structuration theory, we engage insights from a longitudinal case study of an Italian local authority to show how managers exercise agency against the required implementation of the BSC. This analysis suggests a re-interpretation of Granlund’s (2001) factors of inertia (human, institutional and economic) in terms of balance among the three factors, and inclusion of a historic and culturally specific perspective. The findings also encourage a broader consideration of the agency of managers in a public entity before the design and enhancement of a NPM tool.
THE PREDICTIVE ABILITY OF DISCONTINUED OPERATIONS UNDER IFRS 5
BRADBURY, MICHAEL
CHAGNAADORJ, OYUNTSEND
Category: FR = Financial Reporting
FRS 5 requires the disaggregation of discontinued operations in the statement of financial performance on the basis that disaggregation enhances the relevance and understandability of financial information. However, no evidence for this assertion was provided in the development of IFRS 5, nor has there been a post-implementation review. We test this assertion by examining various prediction models using Australian data over the period 2006-2011. The results show that disaggregating discontinued operations improves the prediction of future income. Including the line item ‘discontinued operations’, as an independent variable, also improves prediction. However, this improvement is statistical rather than economic (i.e., when immaterial forecast errors are removed from the analysis).
A THEORETICAL FRAMEWORK OF EXTERNAL ACCOUNTING COMMUNICATION: RESEARCH PERSPECTIVES, TRADITIONS, AND THEORIES
BRENNAN, NIAMH M.
BRENNAN, NIAMH M.; MERKL-DAVIES, DORIS M
Category: FR = Financial Reporting
A theoretical framework of external accounting communication is developed in the form of a typology based on perspectives, traditions and theories from the discipline of communication studies is provided. The focus is accounting communication with external audiences via public written documents outside the audited financial statements. The theoretical framework is based on two broad research perspectives on accounting communication: (A) a functionalist-behavioural transmission perspective and (B) a symbolic-interpretive narrative perspective. Eight traditions of communication research are introduced which provide alternative ways of conceptualising accounting communication, namely (1) Mathematical tradition, (2) Socio-psychological tradition, (3) Cybernetic/systems-oriented tradition, (4) Semiotic tradition, (5) Rhetorical tradition, (6) Phenomenological tradition, (7) Socio-cultural tradition, and (8) Critical tradition. Exemplars of each tradition from prior accounting research, to the extent they have been adopted, are discussed. Finally, a typology is developed, which serves as a heuristic device for viewing similarities and differences between research traditions. Research from alternative traditions is encouraged, which explores how organisations and their audiences engage in a dialogue and interactively create, sustain, and manage meaning concerning accounting and accountability issues.
THE EFFECTS OF CORPORATE SOCIAL RESPONSIBILITY AND WRONGDOER RANK ON WHISTLEBLOWING
BRINK, ALISA
ELLER, C. KEVIN; GREEN, KAREN
Category: MA = Management Accounting
This study examines the effects of Corporate Social Responsibility (CSR) and wrongdoer rank on the likelihood of reporting fraud internally vs. externally. Using a 2 x 2 between-subjects experiment with 90 professional accounting managers as participants, we manipulate a hypothetical firm’s CSR status (CSR firm vs. non-CSR firm) and wrongdoer rank within the firm (CFO vs. Senior Accounting Manager). Results indicate that participants in the CSR condition are more likely to report fraud through the internal reporting channel relative to the external reporting channel. Further, results show that internal reporting likelihood is greater when the wrongdoer is the Senior Accounting Manager than when the wrongdoer is the CFO. SEM analysis reveals that affective organizational commitment fully mediates the relation between CSR status and the preference to report internally. These findings contribute to the understanding of how CSR influences fraud reporting and what factors drive employees to report internally vs. externally.
THE EFFECT OF RELATIVE PERFORMANCE INFORMATION ON EXCESSIVE RISK-TAKING
BRÜCK, CHRISTIAN
KNAUER, THORSTEN; MEIER, HARALD
Category: MA = Management Accounting
Relative performance information (RPI) indicates an employee’s performance relative to her peers. Prior research shows that RPI affects performance due to changes in effort. Since performance is regularly a function not only of effort, but also of risk decisions, this study investigates the effects of RPI on excessive risk–taking. Based on social loss aversion, we argue that RPI serves as a framing instrument. As RPI makes an employee’s poor decision transparent, employees take the downside of a social loss into account and thus lower their acceptance of excessive risk–taking. We conduct a laboratory experiment and find, as predicted, that RPI decreases excessive risk–taking. In addition, we find a significant interaction such that excessive risk–taking decreases more over time when RPI is provided. Our results help firms to better understand the benefits and costs of RPI use.
GOING CONCERN OPINION COMPULSORINESS: DOES IT REALLY ENHANCE THE AUDIT REPORT VALUE RELEVANCE? EVIDENCE FROM ITALY.
BRUNELLI, SANDRO
CARLINO, CHIARA; CASTELLANO, ROSELLA; GIOSI, ALESSANDRO
Category: AU = Auditing
The literature related with financial reporting events (such as earnings forecast, annual reports releases, financial plan, takeover, merger announcements etc.) is controversial. The main issue arises to confirm whether and to what extent those events affect stock market returns. As regards to audit reports release and their impact on the stock market, many studies attempted overtime to capture the magnitude of these phenomena. This paper aims at exploring the same phenomenon. We use the Event Study methodology to test whether audit opinions containing going concern (GC) uncertainty and financial distress impact on stock returns of firms listed at the Italian stock exchange, from 2008 to 2014. It is well known that the International Auditing and Assurance Standards Board (IAASB) has revised, among the others, two auditing standards (ISA 570 and ISA 700) according to which the inclusion of Going Concern Opinions (GCOs) becomes mandatory for periods ending on or after December 15, 2016. Our findings are partially in line with previous studies shedding a light on the negative impact of GCOs on stock market returns, signalling a certain degree of value relevance. The main contribution of this study is twofold: first, it can contribute to a fine-tuning action of the auditing standards related to GCOs; secondly, to foster an information dissemination process aimed at improving the investors awareness in using audit reports as a key source for investment process decisions.
LIFE AFTER A SHAREHOLDER PAY “STRIKE”: CONSEQUENCES FOR ASX-LISTED FIRMS
BUGEJA, MARTIN
DA SILVA ROSA, RAYMOND; SHAN, YAOWEN; WALTER, TERRY; YERMACK, DAVID
Category: GV = Accounting and Governance
“Say on pay” legislation has been introduced in several countries but Australia’s version, namely the “two-strikes” rule, is unique in that it empowers shareholders to vote on a board spill if the compensation report of a public company receives 25% or more dissenting votes for two consecutive years. We test the proposition that the “two strikes” rule has increased directors’ accountability beyond executive pay because it has substantially lowered the cost to activists of organizing sufficient votes to threaten managers with a board spill. Consistent with this expectation, we find Australian firms respond to negative say-on-pay votes by curbing excessive CEO pay, reducing the growth rate of pay and changing the pay mix. In addition, the results suggest that the market regards negative SOP votes as a value-destroying signal since there is a negative market reaction, lower valuation and long-run underperformance. We also find an increase in CEO turnover but directors do not seem to bear reputational costs through the loss of outside directorships. The findings provide important insights to investors, company directors and regulators.
ARE SMALL AND MEDIUM FIRMS LESS ENGAGED IN TAX AVOIDANCE ACTIVITIES COMPARED TO OTHER FIRMS: FIRM-LEVEL EVIDENCE FROM BELGIAN TAX RETURN DATA
BUYL, PIETER
DOOLAEGE, ANTOINE; ROGGEMAN, ANNELIES
Category: TX = Taxation
The public debate about the taxation of small and medium enterprises (SME) versus multinational enterprises (MNE) is highly relevant nowadays. We examine the impact of the progressive tax system on the tax burden of Belgian firms. Furthermore, we investigate the impact of international tax planning activities on the effective tax burdens for Belgian SMEs and large firms. Our analysis employs confidential firm-level corporate tax return data and allows us to precisely measure the corporate tax burden of different firm types in Belgium. Our main empirical results indicate that the progressive tax system is a very effective tool to lower the tax burden of firms in Belgium. Furthermore, we find evidence that domestic firms engage less in tax avoidance activities compared to multinationals, and as a result face a higher tax burden. Our results hold for both SMEs and large firms separately, and for SMEs compared to large MNE in Belgium. In our analysis, we control for various fundamental firm characteristics and variables related with statutory tax breaks.
THE ROLE OF OPEN REPOSITORIES IN SCHOLARLY ACCOUNTING COMMUNICATION: THE CASE OF SSRN
CADEZ, SIMON
KASPERSKAYA, YULIA
Category: ED = Accounting Education
The appearance of open access repositories has been changing the nature of scholarly communication in all scientific disciplines including accounting. A particularly interesting object of enquiry are working papers posted on open repositories, as the rationale for posting them is less obvious than the rationale for posting published/accepted papers. The study herein examines the subsequent faith of working papers posted on SSRN and explores the hypothetical signalling potential of open repositories to discern impactful papers to journal constituents. Tracking the publishing success of working papers revealed that about two thirds of them eventually got published in traditional outlets, predominantly academic journals. The examination of the quality profile of final publishing outlets revealed that almost half of them are elite accounting journals. Concerning the signalling potential, paper popularity on SSRN does not affect journal publication success nor the quality profile of journals hosting final publications. It is however a strong predictor of research impact of the final publication.
THE LONG ARM OF THE MEDIA: MEDIA’S EFFECT ON AUDITORS AND FINANCIAL REPORTING QUALITY
CAHAN, STEVEN
CHEN, CHEN; WANG, RENCHENG
Category: AU = Auditing
We extend prior research by examining whether the media has a governance role for firms' financial reporting quality. In this setting, the media creates pressure for managers to refrain from or engage in earning manipulation, suggesting that the media's governance role may be marginal. We posit that media has a disciplining effect on financial reporting quality, but it operates through auditors as greater media visibility exposes the auditors to more litigation and reputation risk if an audit failure were to occur. We first find that audit fees are positively related to the client’s media coverage. Next, we use a path analysis and find that positive association between media coverage and financial reporting quality is fully mediated by audit fees, and become more pronounced for firms with greater pressure to report better performance, consistent with media visibility creating incentives for auditors (rather than clients) to improve financial reporting quality. Further tests using comparative statistics, a quasi-natural experiment, instrumental variables, and discontinuity regression provide further support for causality.
FACTORS AFFECTING PLAGIARISM: THE CASE OF ACCOUNTING LECTURERS
CAHAYA, FITRA ROMAN
SANTOSO, ARI
Category: ED = Accounting Education
This study examines the possible factors affecting plagiarism among accounting lecturers in the Special Region of Yogyakarta, a province in Indonesia. 108 questionnaires were received from respondents and then quantitatively analysed. The multiple regression analysis reveals that orking pressure and unfair competition significantly influence the intention to undertake plagiarism. These results indicate that Fraud Triangle theory partially explains the phenomenon of plagiarism among accounting lecturers. The main implication of this research is that accounting lecturers have overload works in their daily activities so that they do not have enough time to write scientific works professionally. Another implication is the presence of an unfair competition among accounting lecturers so that in order to meet the publication target, plagiarism becomes a way.
ACCRUALS QUALITY: COMPREHENSIVE INCOME AND NET INCOME PERSPECTIVE
CAIO GALDI, FERNANDO
MOTOKI, FABIO ; PINHO, RAFAELA
Category: FR = Financial Reporting
The increase in fair value use in financial reporting results in higher long-term accruals. This paper presents two models to capture accruals’ quality under both a net income and a comprehensive income perspective. We extend Dechow and Dichev’s (2002) model to contemplate long-term accruals instead of only operating (short-term) accruals. In order to validate the models, we apply an empirical measure of aggregate accruals’ quality. We also derive a measure of comprehensive accruals’ quality as the residuals from regressions of comprehensive accrual on past and future operating cash flows, current total cash flow, change in net non-current assets, change in net liabilities and change in other accumulated comprehensive income. Our results suggest that observable firm characteristics, such as net income and aggregate accruals’ volatility can be used as instruments to aggregate accruals quality. Results also indicate that comprehensive income and comprehensive income volatility can be used as instruments to comprehensive accruals quality.
HOW INTERNAL AUDIT IS MAKING RISKS “AUDITABLE”?
CAKAR, COSKUN
GAUTIER, FREDERIC
Category: AU = Auditing
IIA’s professional standards provide authoritative and normative guidance to internal auditors. These standards remind that risk evaluation is the core activity of internal auditors as an answer to the current crisis of confidence. This research provides a qualitative analysis of how audit departments plan their activities in consistency with organizations’ risk mappings as required in their standards. Our conceptual framework is the society of audit of Power who developed the idea that “audit is an active process of making things auditable”. The aim of this research is to analyze more deeply the process of auditability introduced by Power. Our methodology relies upon individual interviews performed with 32 Chief Audit Executives of major French listed companies along with a focus group session. Our results are twofold. First, we demonstrate a gap between the universe of risks represented by the risk mapping and the universe of audit represented by the audit plan. Second, we provide a detailed description of the process by which internal auditors make risks auditable.
A HOLISTIC PERSPECTIVE ON PUBLIC SECTOR MANAGEMENT CONTROL SYSTEMS: WHAT IS THE ROLE FOR PERFORMANCE MEASUREMENT?
CÄKER, MIKAEL
ÅKESSON, JOHAN; SIVERBO, SVEN
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The practice of performance measurement has invaded the management of public sector organizations, followed by many commentators with strong arguments on the pros and cons. We argue that there is a risk that effects of performance measurement in the public sector may be overstated due to a lack of a holistic perspective on management control system. We do a qualitative single case study of a large Swedish municipality, with the aim to increase our understanding of PM in public sector organization from a holistic perspective on management control system. We find that an extensively developed, but ill-functioning performance measurement system have limited impact due to being downplayed by (external) behaviour controls and budget discipline, which fulfils the purpose of informing about what to do and allocate resources. Performance measurement system is found to have a potential role regarding motivation. Risks with performance measurements are identified, connected to low degree of impact in ordinary routines.
WHAT EXPLAINS BANKRUPTCY BETTER, INTERNAL OR EXTERNAL REASONS? EVIDENCE FROM AUDITORS’ REPORTS
CAMACHO-MIÑANO, MARIA DEL MAR
MUÑOZ-IZQUIERDO, NORA; PASCUAL-EZAMA, DAVID; SEGOVIA-VARGAS, MARIA-JESUS
Category: AU = Auditing
The objective of this paper is to analyse the reasons that explain bankruptcy using the content of auditors’ reports with decision trees. Prior literature evidences that there is not theoretical consensus about the causes of firm failure. As the auditing profession provides a means of ensuring that firms report the ‘true and fair view’ of accounting information, thus, we hypothesize that information included inside the auditor’s report should contribute to explain bankruptcy situations. Classifying the comments of auditors’ reports into internal and external causes, from a sample of 808 bankrupt and non-bankrupt non-financial firms for the period 2004-2014, two methodologies of artificial intelligence, C4.5 and PART algorithms, are used. Our results reveal that the content of the auditor’s report signal useful incremental information about firms’ failure. Furthermore, external reasons mentioned in the reports explain failure processes more accurately than internal circumstances, although the best explanatory power is found using a combination of both reasons and accounting data due to the complexity of current firms’ contexts.
LOAN LOSS PROVISIONS IN PUBLICLY QUOTED EUROPEAN BANKS AND AUDITOR INDEPENDENCE
CAMPA, DOMENICO
DONNELLY, RAY
Category: AU = Auditing
The EU commission, citing deficiencies in the financial statements of banks during the financial crisis, has questioned auditor independence in Europe. Others have suggested that incurred loss provisioning under IAS 39 motivated banks to delay in making provisions. We investigate auditor independence by examining the relationship between the financial reporting quality of banks (abnormal loan loss provisions) and unexpected fees paid to the auditor. We find no evidence of a positive relation between unexpected fees and income increasing abnormal loan loss provisions and infer auditor independence is not impaired by the economic bond. Contrary to prior research on EU banks, we provide strong evidence of delayed provisioning during the period of the financial crisis and conclude that this delayed provisioning and not any compromise of auditor independence underlies deficiencies in the quality of the financial statements of EU banks during that period. The results pertaining to auditor independence described above are robust to the financial crisis and to the strength of banking regulation in a country. It is noteworthy that the relative strength of banking regulation impacts on abnormal loan loss provisions up until the financial crisis but not after that crisis.
THE ECONOMIC EFFECTS OF MANDATED ICFR DISCLOSURE IN CHINA: AN INSIDER PERSPECTIVE
CAO, JIAN
BERNILE, GENNARO; LIN, BIN; SHU, WEI
Category: GV = Accounting and Governance
Using a survey of corporate insiders from 1,167 Chinese listed firms, we examine the direct effects of compliance with mandated ICFR disclosure. In contrast with their U.S. counterparts, a vast majority of respondents recognize compliance benefits and perceive these benefits to outweigh the costs. This is despite the fact that the reported compliance costs are comparable to those of U.S. firms. However, the degree to which the firm is susceptible to market forces is a major determinant of the effects of compliance. On the one hand, the reported effects map into measurable real benefits only for non-state owned enterprises. On the other, the reported effects are larger and map into larger real benefits for firms located in provinces with a lower degree of marketization. Overall, the evidence supports the idea that the effectiveness of mandated ICFR disclosure depends crucially on the broader market and institutional environment in which firms operate.
THE INFLUENCE OF CHINA’S INSTITUTIONAL ENVIRONMENT ON IFRS CONVERGENCE AND EARNINGS QUALITY WITH CONDITIONAL HETEROSCEDASTICITY
CAO, JUNE
PATEL, CHRIS; SIU, KEN
Category: FR = Financial Reporting
This paper contributes to the literature on global convergence of international financial reporting standards (IFRSs) by examining the influence of China’s unique institutional environment on earnings quality during the pre-IFRS convergence (2000-2006) and the post-IFRS convergence (2007-2015). By comparing earnings quality of companies listed only in mainland China (A companies) with companies listed in both mainland China and Hong Kong (AH companies), this paper provides new insights into understanding how the stronger versus weaker institutional environment influences IFRS convergence and earnings quality. Another contribution of this paper is to incorporate conditional heteroscedasticity and evidence is provided by statistically testing ARCH/GARCH effects on real accounting data. The main results of our study indicate that it is important to take into account the unique institutional environment of a country as well as conditional heteroscedasticity to examine IFRS convergence and earnings quality. Our findings may be of interest to global standard setters, national regulators, practitioners and academic researchers.
CORPORATE SOCIAL RESPONSIBILITY AND EARNINGS QUALITY IN THE CONTEXT OF CHANGING REGULATORY REGIMES
CAO, ZHANGFAN
REES, WILLIAM; RODIONOVA, TATIANA
Category: FR = Financial Reporting
We examine the relationship of corporate social responsibility (CSR) with accrual-based earnings management, the frequency of reporting small positive earnings and real activities manipulation in the context of changing regulatory regimes. We find firms engaging more in CSR activities are more likely to engage in aggressive accrual-based earnings management but less likely to engage in reporting small positive earnings and real activities manipulation. Therefore, we argue that the opportunistic financial reporting hypothesis and transparent financial reporting hypothesis may not be mutually exclusive as CSR engagement can be a product of various incentives. In the context of the passage of Sarbanes Oxley Act of 2002 (SOX), we find high-CSR firms’ opportunistic financial reporting practices have been effectively constrained by improved regulatory scrutiny. Specifically, high-CSR firms are less likely to engage in accrual-based earnings management in post-SOX period. In all types of real activities manipulation, we do not find evidence of significant shift from accrual-based earnings management to real earnings management in post-SOX period. Different robustness tests and careful considerations of endogeneity confirm our main findings.
EARNINGS MANAGEMENT AND GOVERNMENT ELECTIONS: EVIDENCE FROM MUNICIPALITIES OWNED FIRMS
CAPALBO, FRANCESCO
FRINO, ALEX; MOLLICA, VITO; SMARRA, MARGHERITA; SORRENTINO, MARCO
Category: GV = Accounting and Governance
The purpose of this paper is to investigate whether the perspective of an incoming election is related with a change in the level of earnings management activities in SOE’s. We measure the magnitude of Earnings management of a large sample of Municipalities Owned Entities over a 6 years period that includes two rounds of elections held in the controlling Municipality. To measure earnings management we rely on the work of Stubben (2010) who has developed a model based on the analysis of changes in the value of accounts receivable. We also use as a check method a frequency distribution approach (Burgstahler & Dichev, 1997).We found evidence of an increase in earnings management activity in the last financial statements published before the election to be held in the controlling municipalities. This study is the first to examine the relation between election and earnings management for a sample of European politically connected firms, namely Italian firms. Nonetheless, it suffers from the limitations that it may derive from the peculiarities of a single national environment.This paper, shedding light on the reliability of SOE financial statements over an extremely sensitive time of their life, contributes to (i) improving the integrity of elections; (ii) reducing corruption and inappropriate use of SOEs (IFAC, 2015); (iii) increasing the level of control in «election years», especially in the perspective of consolidation with the controlling public sector entity.
HOW DO FIRMS RESPOND TO PEER DISCLOSURES? EVIDENCE FROM CLINICAL TRIAL DISCLOSURES
CAPKUN, VEDRAN
LOU, YUN; WANG, YIN
Category: FR = Financial Reporting
We study the association of firms’ disclosure decisions with those of their peers. Specifically, using a sample of 5,108 clinical trials over the period of 2007-2014, we examine whether a firms’ decisions to disclose their clinical trial results are related to peer disclosures pertaining to the same medical condition. We find that firms are less likely to disclose its clinical trial results if its peers have already provided similar disclosures. Conditional on disclosing clinical trial results, firms are also less likely to disclose the trial results on time, when peers have provided similar disclosures. Furthermore, the negative relation between firms’ disclosure decisions and those of their peer firms is stronger if peer disclosures have a higher information content; when their results are complete and when their trials are in later clinical phases. Taken together, our results suggest that intra-industry information transfers lower the benefits of own disclosures, which in turn reduces firms’ propensity to disclose similar information.
DO GOOD GOVERNANCE PRINCIPLES RELATE TO QUALITY OF LIFE?
CARCABA GARCIA, ANA
GONZÁLEZ, EDUARDO; VENTURA, JUAN
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper explores the relationship between good governance practices and the quality of life at the municipal level in Spain. Information about the different dimensions of quality of life is combined into a composite indicator for a sample of 393 municipalities in 2011. A benefit of the doubt approach is used to construct the composite indicator using Data Envelopment Analysis. Then three dimensions of good governance are considered: transparency, participation and accountability. The results show a significant positive relationship between quality of life and participation and accountability. However, transparency seems to be unrelated to quality of life.
TARGET AND ACQUIRER BOARD DYNAMICS AS DETERMINANTS OF M&A PERFORMANCE: A SOCIAL IDENTITY PERSPECTIVE
CARDINAELS, EDDY
BRUYNSEELS, LIESBETH; GAEREMYNCK, ANN; VAN PETEGHEM, MATHIJS
Category: GV = Accounting and Governance
M&A activity has sharply increased over the past decades. However, only limited prior research investigates how board members of both acquirer and target firm affect the successful conclusion of an M&A. We aim to fill this gap by examining whether board dynamics of both the target and acquirer individually, as well as the dynamics between both boards, help explain acquisition returns on deal announcement. Building on social identity theory, we argue that an M&A is a setting in which two social identities are salient. Social identification (as proxied by strength of subgroup formation) can enhance the performance of each of the individual boards through e.g. higher cooperation, trust and integration (Evans and Dion 1991). Yet higher social identification may also lead to frictions between groups. When social identities are salient, the situation may evolve to an “us” versus “them” situation between target and acquirer (Nesdale and Mak 2003). We test these predictions on a sample of U.S. M&A deals, and find some evidence that a higher social identification of target and acquirer boards is beneficial towards acquisition returns. Nevertheless, returns are lower for the acquiring firms when, next to a high social identification, there is a large distance between the board members of the acquiring firm and those of the target firm. Understanding board dynamics of acquirer and targets should be of interest to regulators and to companies engaging in M&A activities.
PROBABLE AT FIRST GLANCE, BUT UNLIKELY AT A CLOSER LOOK: THE ROLE OF COGNITIVE REFLECTION ABILITY ON THE ASSESSMENT OF NUMERICAL PROBABILITY THRESHOLDS TO PROBABILITY EXPRESSIONS.
CARDOSO, RICARDO
LEITE, RODRIGO
Category: FR = Financial Reporting
Probability expressions are pervasive in accounting standards. Therefore, assigning numerical probabilistic thresholds to probability expressions is a central and vital task for an accountant aiming to prepare or audit financial reports, because she might decide whether the chance of the occurrence of future cash flows is certain, probable, likely, possible, unlikely or remote. We developed a mathematical model to predict that reflective accountants might assign more conservative numerical probabilistic thresholds than impulsive accountants. Then, we applied a survey to 569 accountants in order to measure their reflective cognitive ability and how they assign numerical probabilistic thresholds to probability expressions related to the recognition of events that increase or decrease an entity’s net asset. Results are consistent with our predictions. However, they are asymmetric: the increase in numerical probabilistic thresholds for probability expressions related to the accounting for events that increase net asset is higher than the decrease related to net asset decreasing probability expressions (4.47% vs. 1.99%). Thus, reflective accountants, compared to their impulsive peers, are much more reluctant to accrue or disclose net asset increasing events than they are prone to accrue or disclose net asset decreasing events. Results are robust when using an alternative measure of cognitive reflection, propensity score matching and a combination of both techniques.
THE “TICK MARK” APPROACH. THE EFFECTS OF THE MISSING DEFINITION OF THE LOCAL GOVERNMENT GROUP.
CARINI, CRISTIAN
ROCCA, LAURA ; TEODORI, CLAUDIO; VENEZIANI, MONICA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The financial crisis, with the need to quantify and control public spending and extension of the boundaries of local government, due to the supply of public goods and services delegated to hybrid organizations, has highlighted the evident limits of individual financial reports that do not accurately reflect and represent the dynamics of the public sector as a whole. Comparing the consolidation area among the main generally accepted accounting standard systems, the paper aims to examine the effects of application of the Italian accounting standard on the public consolidated financial report. The results show the effects of the lack of definition of “group” and the consequences of the possibility of voluntary exclusion of the entities from the consolidation area. The empirical findings on how Italian Municipalities construct their reporting entity are examined through the financial accountability and decision-making literature. In the perspective of adoption of the IPSAS as a common base for harmonizing the accounting systems of the European member states, the paper could also help standard setters as it discusses and verifies the effects of the regulatory choices.
COMPLEXITY AND CONTROL: THE ROLE OF PROFESSIONAL INFULENCE
CARR, MICHELLE
FLOOD, BARBARA; PIERCE, BERNARD
Category: MA = Management Accounting
This paper explores clinician responses to the operation of management control practices during an economic and fiscal crisis. Using qualitative research methods within an interpretive framework, clinicians were perceived to have become apathetic and indifferent towards the operation of management control practices. Some clinicians accepted this behaviour as appropriate, while, others expressed frustration. This variation amongst clinicians was described as a continuum, with a strong lack of enthusiasm on one side and a willingness to give more attention on the other. A clinicians’ position on the continuum was connected to (i) the usefulness of control information; (ii) the clinician-management relationship and (iii) the clinicians’ area of specialism.
CRITICAL DISCUSSION ON ACCOUNTING VALUATION OF THE MOST RELEVANT ASSETS OF SOCCER CLUBS: PLAYERS' TRANSFER FEES
CARRASCO GALLEGO, AMALIA
CARRASCO, AMALIA; MARTÍN-LOZANO, F. JAVIER
Category: FR = Financial Reporting
The purpose of this paper is to explore and obtain sufficient arguments and evidences to substantiate the reasonable possibility of applying an objective and reliable valuation technique to measure and reasonably predict the market price of “Transfer Fees” of all the players who comprise the squad of soccer clubs at the end of the financial year. In order to achieve our objective, we will discuss about Fair Value Accounting as opposed to Historical Cost Accounting and the feasibility of applying it in accordance with the International Financial Reporting Standards, through an extra-accounting valuation technique of independent experts. In addition, we will conduct a qualitative research work consisting of interviews with professional experts in accounting in soccer clubs, in order to explore their opinion on how clubs currently account and disclose the information about players’ registration rights, so as we can have valuable insights to the debate on our proposals. These interviews evidence the lack of transparency generated by inadequate valuation and accounting of these rights and also the possibility of applying a valuation technique to measure and predict the market price of “Transfer Fees” of all the players. Following the conclusions, we finally propose a way of disclosing these intangibles assets in the financial statements of soccer clubs.
JUSTIFICATIONS OF ACCOUNTING RELIABILITY
CARRINGTON, THOMAS
EKLÖV ALANDER, GUNILLA
Category: IC = Interdisciplinary/Critical
Accounting reliability is an issue that has been topical ever since IASB and FASB choose to recast reliability as faithful representation and simultaneously elevated it, alongside relevance, to be one of only two fundamental qualitative characteristics for financial information. These changes have, however, mainly been discussed in the academic discourse and almost exclusively on a conceptual level. Drawing on Boltanski and Thévenot (2006), this paper takes a different approach by analysing how reliability of accounting numbers is justified through a case study of the accounting and financial reporting process of a large and listed multinational company. We identify reliability justified in three orders of worth, which closely correspond to the “worlds” Boltanski and Thévenot (2006) label industrial, market and fame. The case company is organised roughly in line with these orders of worth and this may be the explanation for why we find surprisingly little in form of conflict between the different “worlds” (orders of worth). More importantly, the justifications of reliability we find do not fall along the lines of the debates in (or with) the IASB or FASB. In fact, reliability in terms of traditional verification played a negligible role in our case.
PROFESSIONALS WITH BORDERS: THE RELATIONSHIP BETWEEN MOBILITY AND TRANSNATIONALISM IN GLOBAL PROFESSIONAL SERVICE FIRMS
CARTER, CHRIS
SPENCE, CRAWFORD; STURDY, ANDREW
Category: IC = Interdisciplinary/Critical
Recent claims have been made that the transnational has supplanted the national in importance vis-à-vis the governance of international professional organizations. Crucial to such claims are assumptions about rising professional mobility and professionals who are increasingly detached from national professional regimes and contexts. We interrogate claims about the importance of transnational spaces by means of a cross-national study of global professional service firms in 12 countries. It is shown how the imperatives of client service, the relatively immobile nature of social capital and the cultural barriers posed all contrive to limit the ability and necessity of professionals to move across borders in pursuit of successful careers. Transnational firms therefore seem to thrive on professionals who are, for the most part, locally groomed– professionals with borders - who may only experience one short period of limited geographical mobility early in their careers. These results challenge arguments about the rise and, certainly, extent of mobility among elite employees of global professional service firms and, in turn, about the extent to which the transnational has supplanted the national as the most important frame of reference for professional organization.
BENCHMARKING, INCENTIVE REBALANCING, AND THE INFLUENCE OF LABOR MARKET COMPETITION ON CEO EQUITY GRANTS
CARTER, MARY ELLEN
CADMAN, BRIAN ; PENG, XIAOXIA
Category: MA = Management Accounting
Abstract We consider whether and how firms balance two potentially incongruous determinants of equity grants - peer grant benchmarking and incentive rebalancing. Studying CEO equity grants in 2006-2013, when compensation peers groups are required to be disclosed, we ex- amine the relative importance of benchmarking and rebalancing. We show that aligning the portfolio of equity incentives is a determinant of whether firms grant equity but not how much, while benchmarking to labor market peers determines the magnitude of the grant but not whether to grant. We find that benchmarking is more important when the labor market is more competitive but less important when the focal CEO holds an abnormally large portfolio of equity incentives. Overall, we provide new insights into how benchmarking, incentive rebalancing, and labor market pressures influence equity grants.
THE PROXEMICS OF ACCOUNTS
CATASUS, BINO
SUNDSTRÖM, ANDREAS
Category: IC = Interdisciplinary/Critical
Earlier literature has shown that accounting overcomes distances to make the things actionable. This paper aims to add to this literature by proposing that it is the account that is at stake when organizations produce distance. We mobilize ideas from the study of proxemics which holds that social interaction is dependent on the ways distance is achieved between two actors. By reporting on a study of a board designing a scorecard as well as producing and analyzing reports, this paper shows that the board is committed to achieving different distances and that the accounts are mobilized differently to accomplish a comfortable proximity. Albeit the strains of making fair representations is a recurring issue for the board, we find that the board mobilizes accounting to achieve separate, and plural distances by imagining ‘the other.’ The board recognizes that accounts are enacted by others (including themselves in the future), and this puts demands on the board to mobilize accounts in ways in which the outcome is a comfortable and plural distances. The board adds to earlier research by concluding that the work of producing, communicating and consuming reports are affected by the ways 'the other' is imagined. That is, the representational dilemma, so often highlighted in accounting, would benefit from including the presumed consumer of the report. After all, there might be someone reading and be acting on the incomplete representation.
THE TIES THAT BIND: KNOWLEDGE-SHARING NETWORKS AND AUDITOR PERFORMANCE
CAUSHOLLI, MONIKA
FLOYD, THERESA ; JENKINS, NICOLE; SOLTIS, SCOTT
Category: AU = Auditing
The dissemination of knowledge in audit firms is a critical process that has gone relatively unexamined by researchers. By surveying a Big 4 audit firm and applying social network analysis, we document the factors that determine the knowledge seeking activities of auditors. We find that auditors tend to seek knowledge from fellow auditors whom they consider their friends, those they are on the same audit team with, those of similar rank, and auditors with longer tenures. We also examine the association between the types and patterns of knowledge seeking ties and individual auditor performance. We find that auditor performance is associated with the number of knowledge ties, the strength of a tie, and the extent of connectedness in the knowledge-seeking network. Taken together, we demonstrate that social ties between auditors improve knowledge acquisition and the latter in turn has implications for auditor performance.
STAKEHOLDER PREFERENCES REGARDING PUBLIC AUDITS IN FRENCH REGIONAL AUTHORITIES: A SURVEY STUDY
CAUSSIMONT, MARIE
Category: AU = Auditing
Taking a utilitarian approach, this study analyses the issue of stakeholder preferences for external auditing. In the local public context, a 2015 French law provides for local authorities to experiment accounts certification practices without stipulating which type of audit should be applied. Our research starts by identifying the attributes of external auditing i.e. nature and quality of external auditing, external auditor’s responsibility, external auditor’s communication. We then identify three applicable types of audit, i.e. financial, comprehensive and regularity audits. A tool employing conjoint analysis is tested on 129 people and then deployed, obtaining 477 replies of which 154 from citizens. We identify a typical external audit adapted to the terrain studied, derived from new public management. This research informs us on the degree of importance that stakeholders attach to external audit attributes, revealing a predominance of auditor responsibility.
DOES INTELLECTUAL CAPITAL HELP PREDICT BANKRUPTCY?
CENCIARELLI, VELIA GABRIELLA
ALLEGRINI, MARCO; GRECO, GIULIO
Category: FA = Financial Analysis
In this paper, we explore whether intellectual capital performance can help predict bankruptcy. Using a sample of US public companies in the period 1985-2015, we test whether the intellectual capital performance reduces the probability of default. We also test whether the inclusion of intellectual capital performance in bankruptcy prediction models improves their predictive ability. We use VAIC as an aggregate measure of corporate intellectual capital performance. Our findings show that the intellectual capital performance is negatively associated to the probability of default. Our findings also show that the bankruptcy prediction models including intellectual capital have superior predictive ability compared to standard models. To the best of our knowledge, this is the first study to explore how intellectual capital contributes to predict the firm’s probability of default. Our research highlights that intellectual capital reduces bankruptcy risk creating long-lasting value. Our research has also practical implications. Bankruptcy prediction by banks, investors and analysts can benefit from the consideration of intellectual capital.
SOCIAL RESPONSIBILITY IN THE PUBLIC SECTOR: AN OVERVIEW OF SPANISH LOCAL ADMINISTRATION AND ITS RELATION TO THE RANKING DEVELOPED BY TRANSPARENCY INTERNATIONAL SPAIN
CHAMIZO-GONZALEZ, JULIAN
CANO-MONTERO, ELISA-ISABEL; GUTIERREZ-PONCE, HERENIA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper studies the application of the concept of Social Responsibility (SR) in local public administrations. It starts from the concept of Social Responsibility of Public Administrations that has emerged through the different initiatives and policies carried out by various international organisms and takes as a reference the best practices of transparency implemented in some European countries. These two issues frame the context of this paper, and its presentation of a synopsis of the different spending policies (on what do they spend, and why?) and of how Spanish local administrations are financed. The study also shows the relationship of these variables to the Transparency Index of the Municipal Governments (ITA 2014) published by the organization Transparency International Spain. The research methodology begins by analysing the variables on spending and revenue in the budgets of over 8000 municipal governments, based on data from the database of the Spanish Ministry of Finance and Public Administrations. These variables are then related to the database of the ITA ranking of municipal governments in an effort to find the relationships that allow us to explain Spanish municipal governments’ degree of SR. The results obtained indicate relationships between responsible management of municipal governments’ spending policies, forms of financing and transparency levels according to the ITA ranking they obtain.
DOES MANDATORY IFRS ADOPTION AFFECT ACCRUALS MISPRICING? EVIDENCE FROM CROSS-LISTED FIRMS
CHAN, ANN LING-CHING
WU, PEI-SHAN
Category: FR = Financial Reporting
We examine whether the mispricing of accruals among foreign firms cross-listed in the U.S. are affected by the mandatory adoption of International Financial Reporting Standards (IFRS). Consistent with the impact of information environment on the accrual anomaly documented in the literature, we find significant reductions in the annual abnormal returns and in the negative return predictability of discretionary accruals among cross-listers from IFRS adopted countries after IFRS adoption.
THE IMPACT OF REMUNERATION RESPONSIBILITY AND COSTING PRECISION ON INTER-FIRM NEGOTIATION
CHANG, LINDA
ANG, NICOLE
Category: MA = Management Accounting
Using an experimental approach, we examine remuneration responsibility (whether negotiators are responsible for their own remuneration, or for a colleague’s remuneration as well) and costing system precision on customer-supplier negotiations. Research indicates that negotiators commonly view the benefits from negotiation to be fixed, and seek to maximize their share of those benefits. However, improved joint outcomes can often be obtained by adopting a riskier approach and using integrative (collaborative) negotiation tactics that facilitate information exchange and a better understanding of what each negotiator values. We predict and find that negotiators who are responsible for another colleague’s use less integrative negotiation tactics than negotiators who are only responsible for their own remuneration. We further find that costing system precision moderates the relationship between remuneration responsibility and joint profits. Specifically, negotiators who are responsible for a colleague’s remuneration as well their own earn higher joint profits than negotiators only responsible for their own remuneration when they are provided with precise costing information, and lower joint profits when they are provided with imprecise costing information.
EFFECTS OF THE INFORMATIVENESS OF CORPORATE DISCLOSURES ON PRICE DISCOVERY
CHANG, MILLICENT
LIM, FELIX; WEE, MARVIN
Category: FR = Financial Reporting
We explore the relationship between disclosure informativeness and the timeliness of price discovery in firms subject to the Continuous Disclosure Regime in Australia. The expectation is of a positive association between informativeness of disclosures and the rate at which information is reflected in a firm’s price. Textual analysis is used to measure informativeness via three metrics: the Fog index, proportion of quantitative information and the proportion of forward looking information. We find disclosures that are easier to read and comprehend, and that contain more numbers are associated with faster price discovery. However when disclosures contain more forward looking statements, price discovery is slower around earnings releases. When the Australian regulator introduced financial penalties in 2005, firms produced more forward looking and quantified disclosures that were harder for investors to understand. Nonetheless, the relationship between disclosure informativeness and price discovery are unaffected by this introduction of financial penalties. These findings suggest a disconnect between intended objective of regulation and the regulation itself.
PEER DYNAMICS AND DISCRETIONARY DISCLOSURE
CHAU, YUEN-KIT
Category: FR = Financial Reporting
While the presence of comparable public peers likely expands investors’ information endowment through information spillover on related exposures, discretionary disclosures by peer firms may also signal information arrival. This can raise investors’ inferred probability that non-disclosure is due to strategic information withholding rather than the absence of new information. I show that the bid-ask spread of the base firm slightly increases when its closest peer initiates discretionary disclosures, but subsequently decreases upon disclosure by the base firm. In addition, I find that the number of comparable public peers is strongly positively associated with the frequency of discretionary disclosure. Overall, my results suggest that the presence of peer dynamics induces firms with more peers to provide discretionary disclosures more frequently.
AUDIT QUALITY AND PARTNER WEALTH
CHE, LIMEI
LANGLI, JOHN CHRISTIAN
Category: AU = Auditing
This paper employs unique and confidential data on audit partners’ wealth and audit related variables for a very large sample of firms in a setting where the auditors’ risk of litigation and loss of reputation is low. We analyze the relationship between audit quality and audit fees at the partner level and test if the strength of this relationship depends on the engagement partners’ private financial position. Overall, we find a negative relationship between audit quality and the fees the engagement partners obtain from their clients, consistent with partners acquiescing to pressure of clients that are of more economic significance to them. Furthermore, this negative relationship is weaker for rich partners, consistent with partners’ wealth acting as guards against fee dependence. These results are robust to different measures of audit quality and of the economic bonding that fees create between clients and partners. We only find partial evidence that audit quality is adversely affected by the partners’ debt. This paper provides new evidence on how audit quality is associated with the financial position of the engagement partner.
COUNTRY INSTITUTIONS AND FIRM RESPONSE TO SUSTAINABILITY INITIATIVES: EVIDENCE FROM VOLUNTARY CORPORATE WATER DISCLOSURES
CHELLI, MOHAMED
BEN-AMAR, WALID
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper investigates the effects of the interaction between country formal and informal institutions on corporate response to sustainability initiatives. We rely on the firm’s voluntary response to the Carbon Disclosure Project (CDP) water survey as an example of a sustainability initiative backed by influential stakeholders. The country’s legal regime is used to assess the strength of formal institutions while the cultural dimensions of uncertainty avoidance and future orientations as well as societal trust are employed as proxies of informal institutions. Based on a large sample of firms from 44 countries targeted in the 2015 CDP Global Water Report, our results show that country’s institutions matter for corporate response to sustainability initiatives. Firms from common law countries are more likely to voluntarily respond to the CDP water survey than their counterparts from code law countries. We also found that uncertainty avoidance and societal trust are negatively related to the propensity to provide voluntary water disclosures while society’s future orientation is positively related to the likelihood of water reporting. Finally, our results show that the effect of cultural attributes and societal trust is limited to countries with weak formal institutions. These findings contribute to the recent literature on the effects of the interaction between formal and informal institutions on corporate behavior.
THE IMPACTS OF CEO TURNOVER TYPES AND SUCCESSOR ORIGIN ON COST STICKINESS: TAIWAN EVIDENCE
CHEN, CHAO-JUNG
CHEN, YU-LIN
Category: MA = Management Accounting
This study extends Chen, Lu, and Sougiannis (2012) by investigating whether the degree of cost asymmetry is a function of turnover type (routine versus non-routine executive changes), and whether the impacts of executive turnover on cost stickiness rely on whether the successor comes from inside or outside the organization. Using a sample of the Taiwan Stock Exchange Corporation and the GreTai Securities Market listed companies for 2005 to 2015, our results clearly demonstrate that, on average, the degree of cost asymmetry is lower in the year prior to a routine CEO turnover and lowest in the year prior to a non-routine CEO turnover. Further, our results show that the degree of cost asymmetry is lower in the year surrounding routine executive change and outside succession and higher in the year surrounding non-routine executive change and inside succession.
INSIDER TRADING, COMPETITION, AND REAL ACTIVITIES MANIPULATION
CHEN, HUI
CHEN, HUI; JORGENSEN, BJORN
Category: FR = Financial Reporting
Corporate insiders, particularly managers, not only have access to their firms' private information, but also control over their firms' operational decisions. In this paper, we consider a setting where managers manipulate the firms' real activities in anticipation of subsequent insider trading opportunities. We find these managers choose production quantities that are strictly higher than the quantities absent insider trading. The overproduction leads to lower firm profits but higher consumer surplus. When we allow the managers to trade both in their own firms' and their rival firms' stocks, we find that the competition among insiders in the financial market drives down the expected insider trading profits and their incentives to distort production decisions. We then discuss the scenario of "substitute trading" when the managers only trade in their rival firms' shares, and show that the managers can earn some insider benefits without sacrificing their firms' profitability. We also explore the possibility of endogenizing the managers' ownership through compensation contracts.
DOES MANAGERIAL ABILITY AFFECT THE ACCURACY OF ENVIRONMENTAL CAPITAL EXPENDITURE PROJECTIONS OF THE ENVIRONMENTALLY SENSITIVE INDUSTRIES?
CHEN, JASON
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We examine whether managerial ability affects the accuracy of environmental capital expenditure projections of the environmentally sensitive industries (ESI). Prior studies examined and found that firms in the ESI manipulated their projected environmental capital expenditures as a tool to achieve corporate legitimation. Some studies in that stream of literature also indicate that human interactions are needed to understand how some firms decide to disclose environmental financial information while others do not. However, the considerable difficulty of accessing key individuals to these firms prevent researchers from examining how human ability impacts the disclosure differences. In order to bridge this gap, we draw on the literature of managerial ability as proxy to study the latent human element behind firms’ different disclosure practices in the ESI. Also, following Chen, Chen, and Patten (2014), we examine the impact of a significant accounting event of SOX on managerial ability to study whether SOX had a positive impact on managerial ability and, in turn, improved firms’ projection accuracy. Finally, based on Baik, Farber, and Lee (2011), we investigate whether firms with complex operations and financial reporting affect their projection errors. We find, overall, that managerial ability is negatively correlated with firm’s projection errors. It appears that the higher the managerial ability the less projection errors were made in the annual 10-Ks. Furthermore, results appear to suggest that SOX has a positive effect to improve managerial ability and, in turn, less projection errors. Finally, firms with complex operations and financial reporting appear to make less projection errors than their counterparts with less complex operations and financial reporting procedures. These results suggest that higher managerial ability has a positive impact to reduce a firm’s overall environmental capital expenditure projection errors.
AUDIT COMMITTEE DIRECTORS’ ACCOUNTING EXPERTISE, INFORMATION COST, AND STOCK PRICE CRASH RISK
CHEN, KEN Y.
ELDER, RANDAL; HUNG, SHENGMIN
Category: GV = Accounting and Governance
Prior studies suggest that audit committee members with accounting expertise enhance financial reporting quality, as measured by accounting conservatism, which in turn is negatively associated with a firm’s future stock price crash risk. We find that firms with an audit committee that possesses accounting (and finance) expertise have a lower stock price crash risk than firms without an accounting expert on the audit committee. We argue that as information cost increases as measured by insider trading profitability, the effect of audit committee accounting expertise on stock price crash risk will be moderated. When we incorporate the information cost measure into our analyses, our empirical results for two stock price crash measures indicate that as insider trading profits increase, the negative relation of accounting (and finance) expertise on audit committees on the stock price crash risk will be moderated.
THE REPUTATION-RECOVERY EFFECT OF INDEPENDENT CORPORATE SOCIAL RESPONSIBILITY REPORTS
CHEN, KUNCHIH
KUO, WEI-CHUAN
Category: FR = Financial Reporting
This paper examines the reputation-recovery effect of corporate social responsibility (CSR) reports. We find that, compared with firms without negative CSR related news, firms with negative CSR related news earn relatively higher returns around the announcement of subsequent independent CSR reports. The evidence is consistent with CSR reports being able to recover the reputation damages caused by prior negative CSR news. The reputation-recovery effect is stronger if the CSR reports are audited by third parties, are mandated by the regulations, and follow GRI G4 guidelines. In addition, we find the power of this reputation-recovery effect is directly related to the settlement of the negative CSR events and related disclosures made in the CSR report.
EARNINGS QUALITY AND CASH DIVIDENDS
CHEN, NI-YUN
LIU, CHI-CHUN
Category: FA = Financial Analysis
We investigate how earnings quality and operating losses influence dividends and the supporting theory behind. The permanent earnings hypothesis states that managers convince investors of the quality of earnings they report by committing to paying dividends and predicts that earnings quality is positively related to dividends. By contrast, the signaling hypothesis suggests that managers in firms with information asymmetry use dividends to convey information to the market. Because the information asymmetry decreases with earnings quality, the signaling hypothesis predicts a negative association between earnings quality and dividends. The results, in favor of the permanent hypothesis, show that a positive association between earnings quality and dividends. Especially, the association is more pronounced for firms reporting losses. The results imply that the losses reported in the firm with high quality are less likely to generate dividend reductions because they tend to be transitory and are less indicative of ongoing operating difficulties.
CORPORATE SOCIAL RESPONSIBILITY, EMPLOYEE PRODUCTIVITY AND FIRM VALUATION
CHEN, SHIEH-LIANG
LIU, CHENG-KUN; LIU, CHIA-YING
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper focuses on the mispricing and employee productivity. Firstly, we discuss whether the more investments in corporate social responsibility, the less likely the share prices will be undervalued. Secondly, we analyze whether there is a positive correlation between spending on corporate social responsibility and the company’s productivity. Finally, we explore the impact of corporate social responsibility on the company’s future financial performance. The findings show that if the spending on corporate social responsibility is high in the prior or/and current periods, current share prices are less likely to be undervalued. A stronger focus on corporate social responsibility in the prior or/and current periods does not lead to higher productivity. This is possibly because the input of CSR has no influence on the incentives to employees. In addition, the more efforts in corporate social responsibility in prior period or current period, the better financial performance going forward. This study hence concludes that CSR input can mitigate undervaluations and improve future operation performance.
PENSION PLAN REPORTING READABILITY, TONE AMBIGUITY, AND CORPORATE CREDIT RISK
CHEN, TSUNG-KANG
LIN, RUEY-CHING ; TSENG, YIJIE
Category: FR = Financial Reporting
This study examines the effects of pension plan reporting readability and tone ambiguity on corporate credit risk by employing American bond observations. Empirical results of this study show that a firm’s pension plan reporting readability variables (FOG, SMOG, and FK) and tone ambiguity all significantly and positively relate to bond yield spread. In addition, the readability effect is through the channels of incomplete information, asset volatility and financial leverage while the tone ambiguity effect is mainly through financial leverage channel. Moreover, the implement of SFAS No.158 (2006) strengthens the readability effect whereas the tone ambiguity effect has no significant changes after the implement of SFAS No.158 (2006). Furthermore, we also find that the readability effect significantly becomes weaker when funded status level, actual returns on pension assets, or the percentage of equity-type pension asset are higher. Finally, our results remain hold with considering endogeneity issues.
THE ROLE OF ACCOUNTING COMPARABILITY IN MITIGATING CULTURE EFFECTS ON CORPORATE CREDIT RATINGS
CHEN, VINCENT
CHOI, HEEICK; KIM, MYUNGSUN
Category: FR = Financial Reporting
This paper examines the role of accounting comparability in narrowing the informational gap induced by cultural differences as reflected in global corporate credit ratings of Standard and Poor’s (S&P). The specific research setting used in this study is the event of IFRS adoption. We first find that the cultural distance between the U.S., the country of rating analysts, and another country is a significant determinant of corporate credit ratings of that country. Second, we find that the industry-level variation in S&P’s adjustments of accounting numbers for rating purposes, a measure of comparability developed by Kim et al. (2013), generally increases after the adoption of IFRS, indicating a decrease in accounting comparability for credit assessment purposes. However, for a subset of companies in the industries whose accounting numbers became more comparable after their IFRS adoption, we find a mitigated effect of culture-distance on credit ratings. Overall our study indicates that accounting comparability mitigates the problem of information asymmetry arising from the cultural differences between credit rating agencies and debt issuers.
CEO CONTRACTUAL PROTECTION AND DEBT CONTRACTING
CHEN, XIA
CHENG , QIANG ; LO, ALVIS; WANG , XIN
Category: GV = Accounting and Governance
CEO employment agreements and severance pay agreements are prevalent among S&P1500 firms. While prior research has examined their impact on corporate decision from shareholders’ perspective, there is little research on their impact from debtholders’ perspective. We examine the effect on debt contracting of CEO contractual protection, in the form of employment agreements and severance pay agreements. We find that compared with other loans, loans issued by firms with CEO contractual protection contain more financial covenants, particularly performance covenants, are more likely to have performance pricing provisions, and have higher loan spreads. We further find that this effect increases with the monetary strength of CEO contractual protection and CEOs’ appetite and opportunities for risk-taking. Collectively these results shed light on the impact of CEO contractual protection on debt contracting.
DOES EXPLORATION INTENSITY AFFECT ANALYST FORECAST BIAS?
CHEN, XIAOMENG
WU, HAI
Category: FA = Financial Analysis
This study examines whether exploration and evaluation (E&E) expenditures are associated with bias in analysts’ forecasts. We find that analyst forecast pessimism increases with the intensity of E&E activities. We also find that analysts’ private information development acquisitions mediate the effect of exploration intensity on analyst forecast bias, but the extent of competition among analysts is not a mediating factor. The results suggest that analysts issue biased forecasts to gain access to management of firms with substantial E&E activities. Additional analyses reveal that firms’ capability of generating revenues from production activities is a viable mechanism for constraining analysts’ strategically biasing behavior. Effective enforcement is needed to prevent the inequity of information access among market participants, particularly in the extractive industries.
EFFECTS OF HIGHER ACADEMIC QUALIFICATIONS AND TRAINING ON PERFORMANCE: EVIDENCE FROM AUDITING INDUSTRY
CHEN, YAHN-SHIR
HUANG, LI-CHUN ; YANG, YI-FANG
Category: AU = Auditing
This study examines the effects of higher academic qualifications and professional training on the operating performance of a professional organization, audit firms. We define higher academic qualifications as auditors with a master’s degree or above. Based on the market segmentation in the auditing industry, audit firms are divided into three categories in terms of size, namely, national, regional and local firms. Adopting an auditing industry dataset not available in other countries, this study contributes unique findings to the literature. Empirical results report that both higher academic qualifications and professional training are positively related to the operating performance of audit firms. Further, professional training moderates the relation between higher academic qualifications and operating performance. In addition, higher academic qualifications exhibit a curvilinear effect on operating performance with a reverse U-shaped relation for the national and regional audit firms and a U-shaped relation for the local audit firms. As academic qualifications and professional training of auditors are similar in operation around the world, practical implications of our findings apply to the auditing industry of other countries. The empirical results of this study contribute knowledge to human resource development (HRD) literature as well.
SOCIAL TRUST AND CORPORATE FRAUD
CHEN, YING
LIN, BIN; SHU, WEI; ZHENG, YING
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Using unique survey data, we investigate the role of social trust and its consequence of firms’ behavior in terms of the possibility of financial fraud. We find that social trust is negatively related to the possibility of corporate fraud, which indicates the social trust’s governance effect on corporate frauds. In addition, governance role by social trust on corporate frauds are only for unregulated companies. This suggests that government regulation could impair the effect of social trust on corporate fraud. The further analyses show that the social trust and formal institution are mutually substituted in governing corporates’ behavior. Finally, we perform a path analysis to find that social trust could influence corporate frauds via increasing organization inter-trust level. Overall, our findings show that social trust can play a governance role in reducing corporate frauds, consequently increasing firm value even in weak institution environment.
AN EMPIRICAL EXAMINATION OF PERFORMANCE IMPROVEMENTS FOLLOWING THE INTRODUCTION OF AN INCENTIVE PLAN INVOLVING SWITCHING FROM DEPARTMENTAL MEASURES TO AGGREGATE MEASURES: THE ROLE OF PAY DISPERSION
CHEN, YU-LIN
Category: MA = Management Accounting
This study investigates whether a group budget-based incentive plan changing from departmental measures to aggregate measures improves group performance. Further, this study examines the dispersion in pay produced by inter-team competitions in a reward and punish tournaments (RPT) under the proportional sharing rule strengthens or weakens the relationship between performance measures choices (departmental vs aggregate measures) and performance consequences. By collecting quarterly data from March 2007 until December 2014 on material usage variance in three plants of one manufacturing firm in Taiwan, this study reveals that group performance increases following the implementation of an incentive plan involving switching from department-level incentives to plant-level incentives. Additionally, the norm of pay dispersion induced by RPT under the proportional sharing rule indeed exacerbates such a relationship.
ARE INNOVATIVE FIRMS TOO AGGRESSIVE IN AVOIDING TAXES?
CHENG, C.S. AGNES
GUO, PENG; WENG, CHIA-HSIANG; WU, QIANG
Category: TX = Taxation
We find that firms with more patents, but not with more R&D, avoid taxes aggressively by employing income shifting tactics. Additionally, we find that more-innovative firms with more patents are associated with higher future stock price crash risk. Our findings are important as we firstly provide large-sample and firm-level evidence of aggressive tax avoidance (through income shifting) by innovative firms with more patents. Our findings are also informative to investors that aggressive tax avoidance behaviors by innovative firms with more patents are likely to cause a stock price crash in the future.
DO FAMILY SUCCESSORS PREFER TO BUILD THEIR EMPIRE? EVIDENCE FROM CHINA
CHI, HSIN YI
WENG, TZU-CHING
Category: GV = Accounting and Governance
The purpose of this study is to examine whether family firms tend to expand their businesses when their family successors inherit the whole business. With the use of a unique dataset from China, we find that family successors tend to implement corporate diversification, thereby achieving higher performance. We also find that family successors who are located in a province with a weak institutional environment are more likely to diversify their business than those who are located in a province with a strong institutional environment. Overall, results show that second-generation family firms are inclined to diversify their businesses to avoid “putting all their eggs in one basket,” especially when exposed to weak property rights protection.
AUDITOR SELECTION STRATEGIES, MANDATORY AUDIT PARTNER ROTATION AND AUDIT QUALITY
CHIANG, HSIANGTSAI
HE, LI-JEN
Category: AU = Auditing
Voluntarily and mandatory rotation of auditors are quite different, and compared to companies that rotate their auditors voluntarily, those that mandatory rotate their auditors are forced to reconsider their reporting strategies and may have different considerations on auditor selections. This study use audit partner rotations of listed companies in Taiwan from 2004 to 2009 to explore the effects of mandatory audit partner rotation on companies’ successor auditor selection strategies and audit quality. The empirical results suggest that, the strategies of successor audit partner selections are different between mandatory and voluntary rotation companies, and mandatory rotation companies are significantly more likely to engage industry specialist to be their successor audit partners. In addition, compared to voluntarily rotation companies, mandatorily rotation companies are more likely to rotate only audit partners rather than rotating both audit partners and audit firms.
OVER TAX AVOIDANCE AND FIRM VALUE
CHIOU, YAN YI
LIU, NAI-YNG; SHIUE, MIN-JENG
Category: TX = Taxation
This study examines the relationship between tax avoidance and firm value, with a focus on firms with over tax avoidance (OTA), which is determined according to whether its current level of tax avoidance is above its predicted level determined by the quality of a firm’s internal information environment and other characteristics. The results show a significantly positive relationship between the effective tax rate and firm value for OTA firms and a significantly negative relationship between the effective tax rate and firm value for non-OTA firms. Further, we find a weak effect of corporate governance on the relationship between OTA firms’ tax avoidance and firm value. Overall, this study contributes to the literature on tax avoidance by providing evidence that OTA is an important factor for understanding firms’ tax avoidance outcomes.
DIFFERENTIAL TIMING IN STOCK PRICE INCORPORATION OF INDUSTRY AND FIRM-SPECIFIC EARNINGS INFORMATION: REVENUE AND EXPENSE ANALYSIS
CHIU, PENG-CHIA
Category: FA = Financial Analysis
Prior empirical studies report mixed findings on whether stock prices anticipate one-year ahead industry-wide components of earnings ahead of firm-specific components. For the sample period from 1972 to 2008, I show that stock returns anticipate industry revenue and expense components earlier than the respective firm-specific components. The timing difference between industry versus firm-specific information about revenue or expense is inversely related to product market competition and accounting reporting quality. Additionally, the timing difference between industry versus firm-specific information about expense line-items varies across line-items. The results are robust to various model specifications, proxies for industry earnings, and industry classification schemes.
ELECTION CYCLES AND CORPORATE ANNOUNCEMENTS OF EMPLOYEE DISMISSALS
CHIU, TZU-TING
AIVAZIAN, VAROUJ; MINUTTI-MEZA, MIGUEL; VYAS, DUSHYANTKUMAR
Category: FR = Financial Reporting
Employee downsizing decisions often have to balance diverging incentives of various constituencies, including investors, managers, employees, and local politicians. We examine the impact of state-level election cycles on the issuance of employee dismissal and plant closure notices by U.S. firms under the Worker Adjustment and Retraining Notification (WARN) Act of 1988. We predict that high political pressure during election periods leads companies to delay WARN notices until after the elections. Examining state-level elections during 1998 to 2010, our univariate results show that the likelihood of issuing WARN notices increases sharply from 5.23% (5.69%) during the election quarter (the quarter immediately before the election) to 10.37% in the quarter immediately after the election. Multivariate regression analysis confirms these findings as well. Drawing from the extensive literature on agency conflicts and determinants of corporate disclosures, we document that the delay in WARN notices is also influenced by equity and debt investors’ monitoring. Overall, our paper provides evidence on the association between election cycles and corporate news announcements.
NON-LINEAR RELATION BETWEEN TAX AND FINANCIAL REPORTING AGGRESSIVENESS
CHO, HYUNGJIN
CHUNG, HEESUN; HWANG, LEE-SEOK; YANG, SEUNGHEE
Category: TX = Taxation
This paper examines a non-linear association between financial and tax reporting aggressiveness. Our empirical findings reveal that there is a positive association between both reporting aggressiveness at the moderate level, but too much aggressive financial reporting leads to less aggressive tax reporting, thereby implying an inverted-U shape relation. In addition, we find that the observed negative relation at the extreme level is not mitigated even for firms with large amounts of non-conformity items, and it is more pronounced after the enforcements of SOX and Schedule M-3, especially for firms audited by Big4 auditors. Our findings remain robust even when we control for the potential endogeneity between the two reporting positions. These results suggest that book-tax conformity and the possible external monitoring may deter managers from pursuing too much aggressiveness in both reporting in the same reporting period.
THE EFFECT OF EARNINGS MANAGEMENT AND LEGAL REGIMES ON AUDIT FEE DECISIONS: INTERNATIONAL EVIDENCE
CHOI, AHRUM
CHOI, JONG-HAG; SOHN, BYUNGCHERL CHARLIE
Category: AU = Auditing
This study investigates whether auditors incorporate their clients’ real earnings management (REM), in addition to accrual-based earnings management (AEM), into their pricing decisions. Using 79,904 firm-year observations from 24 countries, we find a positive association between audit fees and the magnitude of both AEM and REM, suggesting that auditors perceive that AEM and REM increase audit complexity and audit risk, thus exerting more effort on the clients that manage earnings through AEM or REM. This positive relation between AEM/REM and audit fees is more pronounced in countries with a stronger legal regime due to the heightened litigation risk in these countries. Furthermore, the association between AEM and audit fees is greater than that between REM and audit fees, suggesting that auditors are more cautious in detecting and restricting AEM than they are in detecting and restricting REM. Additional analyses show that these findings are more pronounced for Big 4 clients or risky clients. Overall, the results provide valuable insights into how auditors behave when their clients engage in earnings manipulations.
AUDITORS’ FEE PREMIUMS AND LOW QUALITY INTERNAL CONTROLS
CHOI, SEUNG UK
BAE, GIL S. ; LAMOREAUX, PHILLIP T. ; LEE, JAE EUN
Category: AU = Auditing
We examine the relation between low quality internal controls and audit fee premiums. Using a novel dataset of audit hours and audit fees, we find consistent with the audit risk model, that auditors increase their effort (hours) due to low control quality. However, we find that auditors also charge a significant fee premium to clients reporting internal control weaknesses. This premium is observed only for severe internal control weaknesses and is higher for companies with low quality governance mechanisms. The results are robust to multiple methods to address endogeneity including Heckman two-stage model and a propensity-score matched sample. Taken as a whole, reported material weaknesses appear to provide auditors with an opportunity to charge fee premiums even though auditors also respond through higher effort.
ACCOUNTING AND THE TRANSFORMATION OF SOCIAL WORK PRACTICES: THE PERSONAL BUDGETS PROGRAMME IN ENGLAND
CHOW, DANNY
BRACCI, ENRICO
Category: IC = Interdisciplinary/Critical
In her seminar paper on boundary-work, Llewellyn (1998) had shown how accounting technologies and value systems had come to be incorporated into social work. This hybridisation (cf. Kurunmäki 2004; Miller et al., 2008) of roles was conceived as a watershed event in a field that only until recently had portrayed accounting technologies such as costing to be antithetical to the caring values underpinning the professional identity and status of frontline social workers. The recent emergence of a body of literature (Revellino and Mouritsen, 2015; Skærbæk and Tryggestad, 2010; Vosselman, 2014) has articulated the ‘performative’ role of accounting. These insights construe a more active and involved role for accounting, much in contrast to a neutral, passive role assumed for accounting as an objective technology of measurement. In this paper, we use a longitudinal case study to develop an understanding of the performative role of accounting innovations on the provision of adult social care in England. Specifically, we examined a PB pilot in an adult social care department located within a large local government in England. Under a PB scheme, individual recipients of welfare rather than social workers are entrusted with the responsibility for managing the budget to fund their own care needs. This makes it a significant change from existing modes of operation that are centred on more paternalistic forms of care (Rose and Miller, 1992) delivered by social workers.
DISCLOSURE MATERIALITY: AN ANALYSIS OF STAKEHOLDERS' PERCEPTION
CHRISTENSEN, LEIF
CHRISTENSEN, LEIF; RYTTERSGAARD, THOMAS
Category: FR = Financial Reporting
This paper explores the quantitative and qualitative factors associated with how preparers and auditors perform materiality assessments of note disclosures in the annual report. Drawing on a series of interviews with experienced professionals, the study illuminates the way preparers and auditors assess disclosure materiality, which is compared to the way users view it. The study finds that both preparers and auditors tend to consider assessment of disclosure materiality in the same way as materiality of misstatements. This assessment style is misaligned with current initiatives among standard-setters. Furthermore, preparers and auditors appear to be uncoordinated with the way in which users view disclosure materiality. These findings indicate confusion and operational difficulties in relation to the concept of materiality. These difficulties have to be managed by standard-setters if their aspirations about encouraging assessments of materiality and cutting the clutter out of disclosures are to be realised.
THE RISE AND IMPLICATION OF HYBRID CONTROL PROCESSES WITHIN THE PUBLIC UNIVERSITY SECTOR
CHRISTOPHER, JOSEPH
Category: IC = Interdisciplinary/Critical
This study critically reviews the extant literature on university governance to establish how governance control processes under an environment of conflicting management cultures evolve. The findings demonstrate that while public universities are under pressure to adopt and implement corporate control processes, their hybrid management culture requires them to adopt a hybrid or quasi-management set of accountability control processes. The characteristics of these processes across the governance levels differ considerably from the corporate control processes aligned with the corporate culture. The practical implications flowing from these findings suggest that current governance guidelines for the public sector oriented towards a corporate culture must be refined to formally recognize the hybrid culture and hence provide for hybrid accounting and accountability control mechanisms and processes. Such a platform could generate savings though elimination or refinement of unnecessary control mechanisms only aligned with the corporate culture. It also improves efficiency in the monitoring of these processes by providing internal and external monitoring agents (internal and external auditors) a framework to understand the type of control processes to be developed, implemented and monitored in a public sector environment. The theoretical contribution is that the findings provide support for the multi-theoretical approach to governance as a more holistic approach to governance and as a framework for developing appropriate control mechanisms for organizations.
DOES ACCOUNTING EDUCATION ADD VALUE IN AUDITING? EVIDENCE FROM THE UK
CHU, JENNY
FLOROU, ANNITA; POPE, PETER
Category: AU = Auditing
We examine the audit quality and pricing implications of partner education. We exploit a novel institutional setting in the UK where the audit partner responsible for an engagement can be identified; and there is significant variation in auditor educational background due to the absence of any requirement for auditors to have university level accounting education. Using a handcollected dataset covering a large sample of audit partners during 2011-2014 we generate three main findings. First, we document that partners with an accounting education are more likely to detect earnings manipulation and are associated with higher audit fees, but only relative to their peers with a social sciences background. Second, when compared to other less relevant but also quantitative subjects, accounting education is not associated with higher-quality audits or audit fees. Finally, we show that the observed positive relation between accounting education and audit quality/audit fees is concentrated in Non-Big4 audit firms; individual partner education does not seem to play a significant role in Big4 firms. Overall, our study provides direct evidence regarding the incremental value of accounting education.
PUBLIC PRIVATE PARTNERSHIPS: SHARED VALUE CREATION, TRUST AND CONTROL
CHUNG, DEMI
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Public private partnerships are rationalized on shared value creation by combining public sector management and oversight with private sector resources for a direct provision of a public good or service. Yet little is known about what are the sources of value and on the effects of contract control mechanisms for value appropriation. This paper explores this issue from the perspectives of both public sector agencies and private sector firms. Using a unique survey database, we find that our composite measures of resource values have little influence on partner decisions to form a partnership, while partner’s (un)trustworthiness and social activism by external stakeholders have a discernible effect on their decisions. Mitigating controls moderate these influences. An internal coordination framework within the public organization and the enactment of institutional policy can help to reap the most from the combined resources for shared value creation, particularly when trust is yet to be established during the contracting phase.
FINANCIAL FORECAST REFORM AND STOCK PRICE INFORMATIVENESS
CHUNG, YU-HSUAN
CHIU, AN-AN; CHUNG, YU-HSUAN; HUANG, SHAIO YAN
Category: FA = Financial Analysis
This study examines two financial forecast legal environments, mandatory versus voluntary environment, by investigating the relationship between the finical forecast disclosure reform and firm-specific future earnings response coefficient (FERC). The study collects sample from 2003 to 2009 and focuses on Taiwan where the authority reformed the financial forecast regime in 2005. The study provides evidences that the financial forecast influences the FERCs and finds that the impact of stock price informativeness only on mandatory financial forecast regime. Further, the result reveals that the financial forecast of complete form are more likely with high FERCs than that of summary form. Last, the study suggests that the mandatory financial forecast allows investors to have better expectations of future earnings.
ANALYZING PEDAGOGICAL APPROACHES USED IN SECOND AUDITING COURSES
CHURYK, NATALIE
REINSTEIN, ALAN
Category: ED = Accounting Education
We surveyed members of the American Accounting Association’s Auditing Section to identify types of programs that offer second auditing courses, textbooks used for each course, and learning activities. Respondents (n=252) identified unique activities perceived to extend the course beyond the textbook basics. Results reveal textbooks used for first and second auditing courses, learning objectives, website resources, manual and computerized cases and group projects, software programs, video presentations, supplementary materials, and an analysis of national syllabi. These results, from a diverse group of institutions, help develop content for a second auditing course.
MANAGEMENT ACCOUNTING AND NEW SERVICE DEVELOPMENT UNDER SERVITIZATION: SYSTEMATIC LITERATURE REVIEW AND TWO EXPLORATIVE CASE STUDIES
CINQUINI, LINO
LAINE, TEENU; SUOMALA, PETRI; TENUCCI, ANDREA
Category: MA = Management Accounting
The paper aims at understanding and exploring the gap on the implications and potential roles of management accounting systems in manufacturing contexts under servitization. Servitization of manufacturing refers to the shift from selling products to selling an integrated combination of products and services that deliver value in use (Baines et al., 2009). The paper develops a literature review and focuses on two exploratory cases representing manufacturers under servitization. Our findings from the literature review reveals that only a few papers explicitly address the topic of planning and controlling the servitization and even less related to the New Service Development within servitization. New spaces for research are then highlighted. Findings from the cases reveal that less accounting support is attained for services compared with more traditional products. Services are currently less systematically managed in comparison with products. It is due to the lack of information because of the relatively new advent of services compared to the traditional products and also for the scarce support of information tools on similar cost objects. Finally, the organization structure of the companies under servitization may vary along with the servitization initiative and from a company to another, which sets yet additional requirements for accounting as means to guide, or at least support servitization.
PERFORMANCES IN NETWORKED SMES. RESULTS FROM A LARGE SCALE EMPIRICAL INVESTIGATION
CISI, MAURIZIO
DEVICIENTI, FRANCESCO; MANELLO, ALESSANDRO; VANNONI, DAVIDE
Category: FA = Financial Analysis
Using a large sample of Italian small and medium enterprises (SMEs), we investigate the effect of membership in a formal business network (“contratto di rete”) on firms’ economic performance. We obtain our data by merging economic and financial information for a large representative sample of Italian incorporated businesses with information on their membership status in a formal network, covering the years from 2010 to 2014 and forming a longitudinal firm sample. We then investigate the effects of network participation on different measure of performances in the short and medium term, with the idea that networking can create benefits even in the short run. We focus on small and medium enterprises (SMEs) for the relevance of small business in Italy in comparison to other European countries, We find that network participation has a positive effect on value added and exports, but not on profitability. The advantages of networking are stronger in the case of: smaller SMEs, firms operating in traditional and in more turbulent markets, firms located in less developed areas and firms not already exploiting the weaker ties offered by industrial districts. Network characteristics, such as size, geographical dispersion and diversity, are also found to influence performance.
ARE DIVIDENDS MORE VALUE RELEVANT THAN BOOK VALUE AND EARNINGS IN LARGE US COMPANIES?
CLOUT, VICTORIA
CLOUT, VICTORIA; FALTA, MICHAEL; WILLETT, ROGER
Category: FA = Financial Analysis
In capital markets research accounting numbers are assumed to have a relationship with returns. We investigate this relationship to see if the main fundamental accounting aggregates, book value, earnings and dividends, are value relevant in the sense that they can explain and forecast changes in market returns. We model the market-accounting relation as a time series, with a sample of thirty firms over a period of fifty-seven years, using multiplicative market returns models based on error correction principles. The validity of the models and their forecasting strength is assessed on the basis of their ability to predict the direction of change 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 only a weak 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 changes in returns at a level of significance higher than 10%. Reported earnings exhibit strong mean reversion, suggesting the possibility of earnings management.
SHIFTING THE ACCOUNTING PROFESSIONS ENGAGEMENT WITH THE “PUBLIC INTEREST
CLUBB, ERIC
Category: TX = Taxation
While academic debate continues as to the effectiveness of public policy to enhance the accounting profession’s engagement with “serving the public interest”, governments continue to explore ways to achieve that goal. In the Australian context the Federal Government implemented a national code of professional conduct, the Tax Agents Services Act (2009), (Part 30) to guide accounting professionals, while undertaking taxation services, as to the benchmarks expected (taking reasonable care), to act in the public interest. The accounting bodies however have for many years adopted and amended their own code of professional conduct. The Accounting and Ethical Standards Board Pronouncements (APES) numbers 110 and 220 use the concept “due care” in respect of the same professional service delivery of taxation services to private clients. The paper provides a critical analysis of the perceived divergence of these two codes of conduct achieve an acceptable adherence to acting in the public interest. These two keys terms (reasonable care and due care), are explored within the context of both public interest and accountability theory frameworks with a focus on performance and policy accountability. This research is a descriptive study based on semi structured interviews and a literature review on the public interest mandate associated with codes of professional conduct and the accountability theoretical framework.
CONFLICTING INSTITUTIONAL LOGICS: A SMALL AND MEDIUM-SIZED AUDIT FIRM PERSPECTIVE
COETZEE, CARLA
BARAC, KARIN; SELIGMANN, JOANNE
Category: AU = Auditing
Although an abundance of research exists concerning larger accounting firms, studies on small-scale audit firms are scarce. This paper investigates how small and medium-sized audit firms deal with professional and commercial logic for sense-making and legitimisation of their practices in response to mandatory audit relief, which resulted from a change in legislation. Using a multiple-case study strategy, a qualitative research approach was used to show that small and medium-sized audit firms responded to a threat to their sustainability, in an environment transformed by new legislation, by adopting a more commercially oriented approach despite pressures to retain an approach grounded in professional logic.
CORPORATE CHARITABLE DONATIONS, TAX AGGRESSIVENESS AND FIRM VALUE
COHEN, NAVA
COHEN, NAVA; JENY, ANNE; PAUGAM, LUC
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Tax avoidance strategies allow firms to save cash but put them at risk of being perceived as poor corporate citizens. In this study, we examine (1) the relation between firms’ charitable donations and their strategic tax aggressive choices, as captured by six measures of tax aggressiveness; and (2) whether cash charitable donations influence investors’ valuation of firms engaged in tax shelters. First, we find that firms making donations are more likely to refrain from engaging in tax aggressiveness, which is detrimental to the firms’ reputation. Corporate charitable donations provide a corporate culture and visibility that both constrain firms’ tax aggressiveness. Second, we document that tax aggressive firms that engage in corporate charitable donations have higher valuation relative to tax aggressive firms that do not make donations. Our result suggests that market participants consider that charitable donations allow compensating for reputation risks associated with tax sheltering. Our results emphasize the role of corporate charitable donations in the firm’s tax strategies and contribute to our understanding of the relation between tax aggressiveness and firm value.
MANAGEMENT CONTROL SYSTEM AND STRATEGY: THE TRANSFORMING ROLE OF IMPLEMENTATION
COLLER, GRAZIANO
COSTA, ERICKA; FRIGOTTO, MARIA LAURA
Category: MA = Management Accounting
This paper aims at encouraging a discussion of the implementation of Management Control Systems (MCSs) in the MCS–strategy relationship. Borrowing from the literature on software development, we propose two archetypes of MCS implementation—waterfall and agile—and employ them to understand how the MCS–strategy fit unfolds over time. We empirically ground our archetypes on two exploratory case studies based on the collection of extensive qualitative data. We show that MCSs change not only in relation to strategy, but also in response to an autonomous source: implementation. These two implementation archetypes differ in their degrees of specification, in the ways in which the transitions among their implementation phases occur and in the sources and ways in which their feedback loops affect the MCSs; however, both shed light on the dynamic dimension of fit and show that fit should be assessed over time. The introduction of MCS implementation to the determinants of fit or misfit provides practitioners with a further interpretation and an action driver for fit or misfit. MCS implementation should be coordinated with the pace of change of strategy and should be changed in relation to the possibility for an organisation to move from a process- to a people-centred system (or vice versa).
GOVERNMENTAL DISCLOSURES AND STOCK RETURNS: AN EMPIRICAL ANALYSIS OF MANDATED ECONOMIC AND FISCAL FORECASTS
COLUMBANO, CLAUDIO
BAFUNDI, ANDREA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
We find that governmental disclosures of forecasts for revenues, expenditures and economic activity are relevant to equity investors. Our evidence indicates that days surrounding prescheduled disclosure events are associated with cumulative average abnormal returns. We also find that forecasts published by international agencies do not trigger a comparable market reaction, consistent with investors pricing the private information contained in governmental disclosures. Our findings are driven by the pre-­crisis period, are not explained by common market trends, and are not affected by the choice of a particular benchmark index. Our results are consistent with the view that future government policies affect asset prices because they are both relatively undiversifiable and unpredictable. The results of this study contrast sharply with the widely-­accepted notion that investors ignore government announcements, and indicates that governmental disclosures are costless externalities to equity investors. We offer several suggestions for future research on public-­sector disclosures.
PROPRIETARY COSTS AND NONFINANCIAL DISCLOSURES
COMPRIX, JOHANN
NICHOLS, CRAIG
Category: FR = Financial Reporting
Proprietary costs of voluntary disclosure create a threshold where the benefits of disclosure must outweigh the cost, creating a “good news bias.” This bias would be most salient in a sample weighted more toward good news disclosures. Accordingly, we investigate nonfinancial disclosure of product-related information and business expansions. These disclosures occur more frequently than corporate earnings guidance and trigger positive three-day abnormal stock price returns of between 29-53 basis points on average. Consistent with Verrecchia (1983), nonfinancial disclosures occur less frequently but with a stronger good news bias when proprietary costs are high. In addition, we repeat our analysis using management guidance as a comparison. Even though guidance is bad news on average, the good news disclosures also have higher abnormal stock price returns when proprietary costs are high. Overall, our paper provides large sample evidence on the stock price consequences of an important, but previously unexamined type of firm communication and on the role of proprietary costs in disclosure.
ARE SPANISH UNIVERSITY FOUNDATIONS COMMITTED TO TRANSPARENCY? A WEB-CONTENT ANALYSIS
CONESA CARRIL, MARIA C.
ANDRADES PEÑA, FRANCISCO JAVIER; LARRÁN JORGE, MANUEL; MARTINEZ MARTINEZ, DOMINGO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
On December 2015 came into effect Spanish Law 19/2013 on Transparency, Access to Public Information and Good Governance. This law compels Spanish public foundations to disclose extensive economic, legal and institutional information on their web-sites. Subsequently, most autonomic governments developed legislation that deepens on accountability aiming to enhance citizens´ awareness about public administration structure and activity. Besides it, during the past decades, most Spanish universities created one or more foundations as an instrument to closely cooperate with their mission. This paper aims to analyze the institutional and financial information disclosed by these foundations on their websites. Specifically, the objective is to evaluate the commitment to transparency legal requirements of 53 university foundations. Moreover, the relationship between the level of disclosure and some variables has been analysed. The findings indicate, firstly, a generalized non-compliance with regulations plus limited commitment towards transparency by Spanish university foundations. Secondly, the analysis proves a significant correlation between the extent of institutional and financial information disclosed on the foundations' websites. While institution size shows a positive relationship with transparency levels, other variables such as university transparency level, or regional government transparency, are not significantly correlated to more compliance.
TRANSNATIONALIZATION OF PUBLIC SECTOR ACCOUNTING - THE CASE OF EUROPEAN PUBLIC SECTOR ACCOUNTING STANDARDS
CONRATH-HARGREAVES, ANNEMARIE
WÜSTEMANN, SONJA
Category: IC = Interdisciplinary/Critical
Having harmonized accounting in the private sector through the adoption of the IFRS, the European Commission is now pursuing the harmonization of public sector accounting by proposing to adopt EU-specific accounting standards, the so-called European Public Sector Accounting Standards (EPSAS), based upon the International Public Sector Accounting Standards (IPSAS). This paper investigates the tentative decision in favor of EPSAS and against the direct adoption of IPSAS as issued by the only transnational standard setter in the public sector, the International Public Sector Accounting Standards Board (IPSASB), by considering the discursive and political–economic processes underlying (supra)national and transnational standard setting in a global lawmaking context. We use a socio-legal approach, combining the interactions and proximity of the transnational, the local, and the intermediary with elements of legitimacy, technology, and the exercise of power, to reveal that the institutional configuration of EPSAS represents a compromise between the privately-set IPSAS on the one hand, and the push for a public EU-based regulation on the other. Specifically, we show how socio–legal factors, such as competing ideas of accounting’s role in the public sector, Member States’ resistance to reform or privatize their accounting regulations, and concerns of legitimacy and sovereignty, constrained the success of transnational standards in a field dominated by public rule-making authorities.
‘TELLING YOUR STORY’ PUBLICLY: VOLUNTARY AND MANDATORY APPROACHES TO PERFORMANCE REPORTING
CORDERY, CAROLYN
MCCONVILLE, DANIELLE
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Internationally, there are strong calls for charities to be accountable for their performance, with increasing pressure for formal annual reporting to include performance information. This paper asks “How have different jurisdictions responded to calls for increasing performance reporting?” In particular, we focus on accounting standard-setters’ varying responses including the mandating (regulating) of reporting and encouragement to report. We examine performance reporting as an annual, formal exercise, highlighting the widely promoted importance of such reporting and the less discussed challenges. In light of trends in the public regulation of performance, we consider different ways in which regulation could be imposed. Our analysis of standard-setters across four distinctly different jurisdictions shows that a variety of regulatory approaches has been taken: from command and control mandating specific performance reporting standards, through to leaving the development of performance accountability to the market, including by regulatory entrepreneurs. Between these extremes, we find other actors in the standard-setting space that are pushing performance reporting and becoming collaborators in new governance regulatory models. Different approaches lead to different requirements and, it is suggested, may impact on the success of these approaches in increasing performance reporting, and ultimately on improving performance accountability.
CORPORATE SOCIAL RESPONSIBILITY UNDER THE PERSPECTIVE OF SENSEMAKING: THE CASE OF SAMARCO’S ENVIRONMENTAL DISASTER
COSENZA, JOSÉ PAULO
ALVES DIOS, SELMA; DE MELO ALBUQUERQUE, CINTIA; LEVY, ARIEL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper investigates corporate social responsibility using Basu and Palazzo’s model of organizational sensemaking process, which explains how firms think, discuss, and act. To understand the companies’ narratives of CSR practices, we analyze a case of a recent serious environmental disaster in Brazil. Thus we use reports that depict the social and environmental risks caused by a Brazilian mining company facing the consequences of the damage to the environment and the ecosystem in the State of Minas Gerais and Espírito Santo. We show that this company – Samarco – had not disclosed beforehand any relevant information about the real hazards or critical impacts of its operating activities. This issue was not evident in its reports on the economic, environmental and social impacts caused by its everyday activities.
DISENTANGLING THE EFFECTS OF THE SHIFT TOWARDS PRINCIPLES-BASED STANDARDS AND THE REDUCTION IN BOOK-TAX CONFORMITY FROM THE ADOPTION OF IFRS
COSTA, FABIO
ROSA, REGINA; TIRAS, SAMUEL
Category: FR = Financial Reporting
Adoption of IFRS for many countries, has resulted in a shift toward a more principles-based standards, which could increase or decrease reporting quality. The consequences for reporting quality depend on the confounding effects of a change in reporting standards and a change in BTC. We propose disentangling these two effects by comparing (1) countries that adopted IFRS for financial reporting, but prohibited the use of IFRS for statutory/compliance reporting, and (2) countries that exhibited low BTC prior to adoption, such that BTC would be unaffected. We find greater earnings persistence/predictability associated with the reduction of BTC, as well as lower discretionary accruals, suggesting overall reporting quality is improved. We confirm this expectation by finding analysts’ forecast errors attributable to the decrease in BTC are reduced in the post-IFRS period. We also find greater earnings persistence/predictability associated with the shift towards principles-based standards, but find the shift is also associated with higher discretionary accruals. Our results indicate that the increase in earnings management overwhelms the benefits from greater persistence and predictability, in that analysts’ forecast errors attributable to the shift increase post-adoption. By isolating the separate effects of adopting IFRS, our study sheds new light that help clarify the mixed findings found in the prior IFRS studies.
PREDICTION-POSTDICTION MODEL OF RISK REGULATION AND GOVERNANCE IN BANKING: INFUSING A PSYCHOLOGICAL THEORY PERSPECTIVE.
CRAWFORD, JASON EDWARD
Category: MA = Management Accounting
Risk management failures in banks are drawing increasing attention since the 2008 financial crisis. Regulatory efforts to refine policy temporarily leads to increased confidence in risk management, but when failure occurs, public intolerance increases, threating the legitimacy of financial institutions. The cyclical nature of this phenomenon is what I term the prediction-postdiction model of risk regulation and governance. It has been the basis for considerable debate in public hearings, amongst regulatory bodies and academic publications. Much of that debate has focused on the further development of formal policies, structures and processes with very little attention given to the significance of individual actors or acknowledging the complexity and variation of practices in individual banks. In that void, multiple assumptions fill a space where politicians, the media and even regulatory authorities, reconcile predictive and post-hoc accounts. By drawing on psychological theory (cf. Hall, 2016) and case study evidence from a large European bank, I challenge some of the assumptions that continue to give the prediction-postdiction model validity by examining how the operation and effects of risk management practices influence individual mental processes and behaviors over time. I offer deep empirical descriptions from a wide variety of individual perspectives on risk management’s influence on behavior and explain how these tentative findings may be used in future research.
ACCOUNTING LAW IN PRACTICE: COMPLIANCE, CONSISTENCY AND SUBSTANCE FOCUSING ON THE UK’S IMPLEMENTATION OF EU EXTRACTIVE INDUSTRY COUNTRY BY COUNTRY REPORTING OF CORPORATE PAYMENTS TO GOVERNMENTS
CRAWFORD, LOUISE
CHEW, LYNSIE; CHATZIVGERI , ELENI ; GORDON, MARTYN; HASLAM, JIM
Category: IC = Interdisciplinary/Critical
The passing into EU Law of a requirement that all companies domiciled in member states or listed on EU stock exchanges should publish a Report of Payments to Governments on the face of it is a victory for the civil society organizations long campaigning for the attendant increased transparency and accountability, a step towards better conditions and possibilities for many of the world’s poor. But it cannot be taken for granted. It was passed with a condition that it be reviewed (at both member state level, where a review can feed into the federal level review, and at the level of the EU), which is an opportunity to better it or a threat to reverse positive potentialities. The UK Brexit vote adds some uncertainty regarding the future of the law in the UK. And studies of manifestations of practices such as accounting and auditing (often intersecting with the law) caution against too much optimism as to their straightforward effectiveness. With a view to understanding this particular law in practice, so that it be strengthened and better function in line with its intended aims, we explore processes of its construction and early adoption in the UK. In a preliminary analysis, we elaborate how interpretations of the Law within the Extractives Industry run counter to the spirit or substance of the law and give rise to different and apparently problematic translations of the law into practice. Reflecting on our analysis, we make some recommendations as to ways forward.
FACEBOOK POSTING ACTIVITY AND THE SELECTIVE AMPLIFICATION OF EARNINGS DISCLOSURES
CREADY, WILLIAM
HASAN, RAJIB
Category: FR = Financial Reporting
This study examines determinants of Facebook activity levels with a particular focus on Facebook activity around earnings announcements. Facebook activity is generally higher for firms with higher levels of analyst following, individual ownership and trading volume, indicating that it is responsive to investor demand effects. Facebook activity also increases around earnings announcements, with the increase being entirely attributable to posts containing earnings news. That is, in general, firms employ Facebook posts to amplify earnings news. Such activity, however, is selective in that it is lower for firms with high levels of information asymmetry, for firms reporting earnings that exactly meet the consensus analyst forecast amount, and when the earnings news is negative but the accompanying price movement is positive. Hence, firms appear to use Facebook to manage the level of attention paid to earnings news.
APPROACHING PUBLIC SECTOR TRANSPARENCY THROUGH AN INTEGRATED REPORTING BENCHMARK
CRISAN, ANDREI-RAZVAN
CORDOS, GEORGE SILVIU; NISTOR, CRISTINA SILVIA; OPRISOR, TUDOR; STEFANESCU, CRISTINA ALEXANDRINA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
An overall degree of transparency in the public sector, specifically in the case of municipalities, based on detailed financial indicators, operational data and sustainability information encompassed by the integrated reporting, is an actual important research topic. The paper highlights the importance of disclosing qualitative information in order to achieve greater transparency and to discharge public accountability. Moreover, it discusses upon the influential items of the disclosure index revealed by the cluster analysis performed. This contribution becomes even higher when is grounded in theories such as the agency theory, stakeholders, and legitimacy theory. The results approach two directions: transparency at municipalities’ level through qualitative and quantitative influential factors defined by the integrated reporting; the overall level of transparency revealed by the disclosure index.
BIDIRECTIONAL RELATIONSHIP BETWEEN PRIVATISATION PROCEEDS AND BUDGETARY CONDITIONS. AN EMPIRICAL ANALYSIS IN EUROPE
CUADRADO-BALLESTEROS, BEATRIZ
PEÑA-MIGUEL, NOEMI
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This study analyses the relationship between privatisation proceeds and the level of indebtedness and public deficits in Europe from 1995 to 2013. Empirical findings suggest that governments with high levels of deficits and public debt tend to resort to the privatisation of state-owned enterprises (SOEs), as this is considered an appropriate means to improve efficiency and performance. Additionally, we examined the subsequent effect of privatisation of such macro-magnitudes and found that privatisation is useful for consolidating public finances in terms of debt and balance. Moreover, this bidirectional link is also affected by political ideology, showing that previous relationships are stronger in countries governed by left-wing parties.
COMMUNITY ASSET VALUATIONS BY NON-PROFIT GOVERNMENT ENTITIES
CZERNKOWSKI, ROBERT MARIUSZ J.
LIM, STEPHEN
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper examines an implication of applying IFRS to the government sector in Australia. We posit both a self-interest and a transparency motivation for local governments effecting revaluations of both Infrastructure Assets and Community Land. The self-interest motivation was expected to manifest as a relationship between the amount of revaluation and CEO (or management team) remuneration. The transparency motivation was expected to result in a relationship between revaluation and the extent of spending on these assets, measured as both quantum of Materials and Contracts Expense, and as the quantum of contracts awarded by the entity above the disclosure threshold. We also speculated that revaluations may be used to signal to state governments a need for additional funds through capital and/or operating grants. At conventional levels of significance, we find support for only one key relationship: local governments which revalue Community Land (generally metropolitan councils) receive Capital Grants which are strongly positively associated with the extent of Infrastructure Asset revaluation, but negatively with the revaluation of Community Land. Thus, revaluations for such councils provide a strong indication of the extent of asset development needs of such councils.
DETERMINANTS AND VALUE RELEVANCE OF CONFLICT MINERALS DISCLOSURE QUALITY: FIRST EVIDENCE UNDER THE DODD-FRANK ACT
DALLA VIA, NICOLA
PEREGO, PAOLO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper provides the first empirical analysis of conflict minerals disclosure (CMD) quality as mandated by the Dodd-Frank Act. We rely on a thorough content analysis conducted by the Responsible Sourcing Network on a sample of 122 firms that filed CMD to the SEC in 2015. Findings show that firms with long-term oriented incentives, a higher number of board meetings, strong corporate governance systems and a membership to a sustainability index are associated with a higher CMD quality. Our results suggest that both internal and external firm-specific drivers affect adherence to this new mandatory social disclosure regime. We further document a positive significant association between CMD quality and a firm’s cost of capital. From our exploratory analysis, investors seem to demand return premiums for firms that are more forthcoming in the disclosure of conflict minerals practices in their supply chains.
REVIEWING GOODWILL ACCOUNTING RESEARCH: WHAT DO WE REALLY KNOW ABOUT IFRS 3 AND IAS 36 IMPLEMENTATION EFFECTS?
D'ARCY, ANNE
TARCA, ANN
Category: FR = Financial Reporting
We review more than 30 studies from 2008-2016 from three groups: first, studies testing the value relevance of goodwill, other intangible assets and impairment; second, studies investigating explanatory factors for recognition of these assets and expenses; and third, studies of compliance with IFRS 3 and IAS 36 disclosure requirements. We examine the research designs used to identify strengths and weaknesses in the studies and we investigate the impact of data and model selection on the evidence presented. We are interested in the extent to which studies report results that are consistent over time and between IFRS adopting countries. Our review aims to reveal where we can draw confident conclusions about the effects of applying IFRS 3 and IAS 36 and where evidence is not clear and further work remains to be done. Thus, our paper aims to assist academics and practitioners to gain a better understanding of the research evidence and to identify opportunities for future research.
WHY DID POLITICIANS BLAME FAIR VALUE ACCOUNTING DURING THE FINANCIAL CRISIS? THE ROLE OF CONSERVATIVE IDEOLOGY AND SPECIAL INTERESTS
DASKE, HOLGER
BISCHOF, JANNIS; SEXTROH, CHRISTOPH
Category: FR = Financial Reporting
In response to public pressure during the financial crisis, the FASB relaxed fair value accounting rules in April 2009. We investigate the involvement of U.S. congresspersons in the fair value debate preceding this regulatory change. Using public opposition to fair value accounting as a proxy for political pressure on the FASB, we find that the likelihood of a politician’s involvement in the accounting debate is positively associated with both the politician’s conservative ideology and financial connections to the financial services industry. We document that conservative politicians pushed for fair value relaxation as an alternative to government bailouts during the early phase of the debate when they brought the issue on the FASB’s agenda. Later, however, when the potential design of the new accounting rules became more precise, politicians’ involvement in the debate is more strongly associated with the potential benefits of politically connected financial institutions from the April 2009 relaxation. While the finding is consistent with politicians catering to special interest of the financial industry, the results also point to politicians’ ideology playing into the design of accounting rules when these rules are linked to controversial regulatory actions.
AN INTERNATIONAL STUDY OF DETERMINANTS OF VOLUNTARY CARBON ASSURANCE
DATT, RINA
LUO, LE; MALLIK, GIRIJANSANKAR; TANG, QINGLIANG
Category: AU = Auditing
Driven by a scarcity of literature on carbon emission assurance globally, this study investigates corporate incentives for external carbon emission assurance as a way of responding to climate change at an international level with the choice of assurance provider being accounting firms or non-accounting firms. The sample comprises of 5184 firms across 44 countries that reported to CDP (Carbon Disclosure Project) from 2010-2014. The descriptive result suggests that 67% of the sample firms had their carbon emission assured and 53% preferred accounting firms over non-accounting firms. Based on panel data logistic regression model, it was found that firms with higher exposure to carbon risks are more likely to adopt external carbon emission assurance and to choose an accounting firm as an assurer. Moreover, firms with an effective environmental committee, with carbon reduction incentives or higher carbon disclosure scores that had adopted carbon reduction initiatives are more likely to have their carbon emission assured and more likely to choose non-accounting firms as their assurer. Finally, it was found that the adoption of external carbon emission assurance increases during the period under the investigation. This study contributes to the literature by empirically testing the validity and applicability of legitimacy, signal and institutional theory for the emerging practice of corporate carbon assurance.
OPENING THE BLACK BOX: AN IN-DEPTH ANALYSIS OF CONTROLLERS’ ACCOUNTING CHOICES
DE GROOT, THERESE
VAN DE VEN, ARCO
Category: MA = Management Accounting
Earnings management is a frequently studied subject, with a focus on identifying factors influencing earnings management choices. Little is however known about the accounting choice process itself. This study provides insight into the accounting choice process using a qualitative approach, analyzing 98 accounting choices of business unit controllers. The findings show the complexity of the accounting choice process and the influence of the setting of the controller as whole, rather than individual factors, on his/her accounting choices. The study provides an analytical model for analyzing the accounting choice process and the setting of the controller. This exploratory research is based on a field research within one organization and offers an interesting ‘first step’ in research into the underlying dynamics of the accounting choice process.
THE EFFECT OF ALLOCATING DECISION RIGHTS ON THE GENERATION, APPLICATION, AND SHARING OF SOFT INFORMATION
DE KOK, TIES (T.C.J.)
BOUWENS, JAN
Category: MA = Management Accounting
Should a bank take small to medium sized companies at face value? Research in both accounting and finance has tried to answer this question by studying the use of soft information that is qualitative, hard to verify, and costly to transfer. We study how the generation, application, and sharing of this soft information is affected by the location of knowledge and the allocation of decision rights. We exploit a quasi-natural experiment at a large European bank to study whether reallocating decision rights away from the loan officer enables or impedes the use of soft information in the operational decision making process. Our findings indicate that the reduction in decisions rights increases the amount of soft information integrated in the the credit application process. These findings are robust to controlling for strategic loan sorting behavior, manager fixed-effects, and the likelihood of acceptance. We also document that this increase in considered soft information is driven by a change in behavior of the incumbent loan officers and that this change in behavior improves the loan application process through better ex-post loan outcomes.
POLITICAL CYCLES AND OTHER FACTORS UNDERLYING THE CONTRACTING OUT OF LOCAL GOVERNMENT PUBLIC SERVICES
DE LA HIGUERA MOLINA, EMILIO JOSÉ
CAMPOS-ALBA, CRISTINA MARÍA; DE LA HIGUERA-MOLINA, EMILIO JOSÉ; GARRIDO-RODRÍGUEZ, JUAN CARLOS; PLATA-DÍAZ, ANA MARÍA; ZAFRA-GÓMEZ, JOSÉ LUIS
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Many studies have been made of factors that influence the contracting out of local public services. In the present, we examine the influence of political variables (ideology, level of fragmentation and the presence of political cycles) and of socioeconomic and financial variables on the probability of mandatory public services being contracted out in municipalities with over 1,000 inhabitants, using a dynamic method and considering a broad time horizon (2002-2013). The results of a survival analysis conducted on a sample of 2,190 municipalities indicate that the proximity of future elections or a change of governing authority (mayor) both decrease the probability of services being contracted out. On the other hand, political ideology does not influence this decision, a finding that highlights the existence of opportunistic political cycles. Our results also indicate that the global financial and economic crisis reduced the probability of services being contracted out, and that current spending has a significant positive influence on this probability.
EARNINGS MANAGEMENT THROUGH REAL ACTIVITIES IN MUNICIPAL SUBSIDIARIES: IMPLICATIONS FOR THE IMPLEMENTATION OF THE BUDGETARY STABILITY POLICY
DE VICENTE, MARTA
DARGENIDOU, CHRISTINA; GARCÍA OSMA, BEATRIZ
Category: FR = Financial Reporting
Municipalities have regulatory déficit and debt targets. This means that they often face a trade-off between meeting their political objectives and complying with regulatory constraints. We argue that the articulation of balanced budget calculation policies into consolidated and non-consolidated subsidiaries provides both opportunities and incentives for municipalities to exert pressure on their consolidated subsidiaries to shave discretionary expenditure. Consistent with this prediction, we find evidence that municipalities guide their subsidiaries’ expenditure to meet the target of zero non-financial deficit. Further analysis points to the role of subsidies and specifically, operating grants, as a mechanism to control the level of discretionary expenditure in consolidated subsidiaries. We corroborate our findings by testing our predictions on a sample of subsidiaries which are similarly aligned with the municipality but are not subject to pressures arising from consolidation and thus, do not directly influence the municipality’s ability to meet its regulatory targets. We conclude that financial statements of municipal subsidiaries can reveal useful insights on how fiscal policy is implemented at the local government level.
THE HIDDEN COSTS OF AUDIT EXEMPTION
DEDMAN, ELISABETH
DEDMAN, ELISABETH; KIM, JA
Category: AU = Auditing
This paper contains the results of a study of the financial reports of a large sample of UK private companies excused from independent audit by a progressive programme of size-based exemptions. The analysis seeks to inform the debate between practitioners and regulators whereby practitioners argue that audit exemption will be associated with a damaging reduction in the quality of financial reports and regulators assert that the costs saved by smaller firms outweigh the benefits provided by the audit. Other participants in the debate express concerns about the availability and cost of credit to unaudited companies, reductions in the quality of financial reporting, and underpayment of tax, which may become problematic as the oversight provided by auditors declines. Our findings suggest there are hidden costs to firms of opting out of audit, both to firms and users of accounts, which have not been considered by regulators. These costs relate to overpayment of tax, a reduction in financial reporting quality, and excess firm death.
WORKPLACE SAFETY IN THE BANGLADESH READY-MADE GARMENTS INDUSTRY: EXAMINING THE INTERPLAY BETWEEN GOVERNANCE, CULTURE AND ORGANISATIONAL BEHAVIOUR
DEEGAN, CRAIG
AKBAR, SURAIYAH; INGLIS, ROBERT
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Following unprecedented large-scale industrial disasters in Bangladesh, this study utilises institutional theory to examine the factors which have influenced the implementation of new social governance initiatives for workplace safety in the Bangladesh ready-made garments (RMG) industry. The study investigates how the changing institutional environment has influenced the CSR strategy of apparel industry organisations and whether and how change has occurred in organisational behaviour with regard to workplace safety. The study incorporates managerial viewpoints of global apparel buying companies and Bangladeshi RMG manufacturing organisations and reflects on business and ethical considerations that have motivated organisational CSR behaviour. The study examines how the limitations of existing governance mechanisms, legitimacy threats to the global apparel business, and subsequent pressures faced by apparel industry organisations resulted in a restructure of the institutional pillars of the apparel industry. Because of interdependencies between the institutional pillars this paper questions the logic involved in recent international initiatives to improve health and safety within the Bangladesh RMG industry.
TRADING ON RESIDUAL TONE
DEMERS, ELIZABETH
BAGINSKI, STEPHEN; KAUSAR, ASAD; YU, JULIA
Category: FR = Financial Reporting
Prior research documents that linguistic tone accompanying earnings-related disclosures predicts future earnings and is incrementally priced by the market. However, “residual tone” – the portion of linguistic tone that is not associated with fundamentals such as current earnings, expected earnings, and the market’s expectation of earnings as reflected in security prices – predicts negative future earnings and cash flows and is initially incorrectly priced by the market. We investigate whether residual tone is associated with disagreement among traders and whether trader sophistication is associated with a differential response to residual tone. Using a sample of management earnings forecasts, we document that, consistent with investor disagreement over its implications for firm value, trading volume is increasing in the residual tone of management forecasts after controlling for the price reaction to forecasts. The net buying behavior of small investors is positively associated with the tone that is not explained by the firm’s economic fundamentals, while the net buying behavior of large investors is negatively related to this same residual tone. Furthermore, residual tone is negatively associated with future stock returns, resulting in a real wealth transfer from small buying investors to large selling investors that arises from the latter group’s superior skills in processing the more nebulous language-based earnings-related disclosures.
DOES IFRS ADOPTION REDUCE INFORMATION ASYMMETRY: AN M&A BASED APPROACH
DEMIR, VOLKAN
ERTUĞRUL, MELIK; GÜR, ECE
Category: FR = Financial Reporting
By considering a market-oriented approach of takeover announcements and employing a sample of Australia, France and the United Kingdom over the period 1995-2015, the effect of IFRS adoption on information asymmetry is analysed. Cumulative Abnormal Returns (CAR) around the announcement date are calculated, detrended based on three sub periods, and excess CAR figures which are proxies of information asymmetry are obtained. Our outcomes robustly show that IFRS adoption plays no statistically significant role in excess CAR figures and hence, it has no effect on information asymmetry. A battery of robustness checks is also performed and this result remains the same.
THE ROLE OF MANAGEMENT CONTROL SYSTEMS AND TRUST IN OPERATIONALISING UK GOVERNMENT'S POLICY IN ROADS PRIVATE FINANCE INITIATIVE CONTRACTS
DEMIRAG, ISTEMI
AHMAD , SALMAN; CONNOLLY, CIARAN
Category: MA = Management Accounting
This paper analyzes the Private Finance Initiative (PFI) in the UK’s transport sector of roads, with a particular focus on how the central government’s policy objectives in PFI are operationalized through localized practices. It considers the role of management control systems (MCS) and inter-party trust as mediating instruments and facilitators for operationalizing government policy objectives within a road case study PFI project under the UK’s Highways Agency (HA). Our findings suggest that government objectives in the case study project are locally interpreted as performance indicators, which are pursued through complex (and bureaucratic) outcome control regimes. Bureaucratic arrangements for monitoring and incentivizing the private sector contractors resulted in accounting becoming less enabling as it failed to offer adequate incentives for the consortium and created tensions with the HA. Hence, it appears that UK government objectives in the road case study PFI project may not be achieved solely through power-based relationships exercised through contractual MCS, in which case inter-party trust emerged as an additional enabling element.
DO FINANCIAL ANALYSTS CARE ABOUT FCPA VIOLATIONS?
DEMIRAKOS, EFTHIMIOS
BALLAS, APOSTOLOS
Category: FA = Financial Analysis
In this paper, we examine 12,954 equity research reports for 24 firms that are subject to enforcement actions by the U.S. Securities and Exchange Commission (SEC) for violations of the Foreign Corrupt Practices Act (FCPA). We search the text of the equity research reports for a number of FCPA-related keywords and identify 1,079 reports, where an analyst considers the SEC investigation an important issue. Our multivariate empirical analysis shows that financial analysts are more likely to be interested in incidents of FCPA violations, if the fines imposed to the firms by the SEC, DOJ (Department of Justice), and other U.S. agencies represent substantial components of their revenues, operating income, and market capitalization. We also find that the interest of financial analysts in these cases increases when the subject firms are relatively small with poor profitability. We offer illustrative examples of how financial analysts actually refer to the FCPA violations in their equity research reports. We believe that this study contributes to the relevant literature by highlighting the importance and implications of the FCPA statute for capital market participants.
FOR BETTER OR FOR WORSE? THE ECONOMIC CONSEQUENCES OF FREQUNT ACCOUNTING STANDARD CHANGESE
DEMIRTAS, MELANIE
WERNER, JÖRG R.
Category: FA = Financial Analysis
This paper investigates short-term capital-market effects of changing or amending IFRS in the period between 2005 and 2014. The dynamic nature of IFRS is an interesting, yet underexplored setting. Since 2005 the IASB has issued more than 100 changes in accounting standards; claiming to change standards for the better, i.e. to improve transparency of financial reporting from the viewpoint of investors. But any change in the measurement system also makes it hard to understand why there is a change in key indicators – due to a change in fundamentals or due to technical reasons. We thus ask whether standard changes are always for the better, or– at least sometimes – for the worse. Based on an international sample of more than 35,000 firm-year observations from 39 countries, we show that the IASB generally seems to be compliant with its mission to increase the usefulness of financial reports for capital market participants. Looking at the “content” of changes, we show that positive capital market effects mainly arise when disclosure rules are changed whereas changing definition or measurement sections in accounting standards might even increase short-term opacity. We also show that changing accounting standards may have adverse effects for firms closer to covenant violations. The paper adds to the scarce literature on effects of (frequently) changing accounting standards and generates a comprehensive set of proxies for the type and significance of accounting standard changes.
CORPORATE ACCOUNTABILITY REPORTING: 'GREENWASHING' OR MONITORING SYSTEMS?
DERCHI, GIOVANNI BATTISTA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
I investigate corporate accountability (“CSR”) reporting behaviors and I document the different roles that this reporting system may play across organizations. Specifically, I demonstrate that the effect on CSR performance of a firm’s issuance of a CSR report is a function of the type of investments the firm is willing to take and the joint use of complementary governance systems. Using a panel linear regression analysis with a fixed-effect estimator to control for omitted variable concerns, I find that CSR reporting is associated with the occurrence of future positive events. By contrast, the issuance of a CSR report does not seen to affect a reduction of future concerns. This result is consistent with the documented tendency of certain firms to use CSR reports as ‘greenwashing’ systems. Additionally, I show that a firm’s cumulated experience in CSR reporting enhances the occurrence of even more future environmental and social strengths. Finally, I document that a firm’s tendency to ‘greenwash’ is reduced when senior executives’ compensation contracts tied to CSR targets are implemented, supporting the argument of CSR reporting working as an effective monitoring system. Collectively, the findings help understand firms’ reporting behaviors in the field of CSR.
ENHANCING AUDIT QUALITY: CONSTRUCTING A SOOTHING DISCOURSE CENTERED ON APPEARANCES, DEFORMATIONS AND MYTHS
DERMARKAR, SIMON
GENDRON, YVES
Category: IC = Interdisciplinary/Critical
During financial crises, oversight organizations, regulators and professional associations often issue proposals to improve the effectiveness of capital markets. This article examines one such initiative, in response to the financial crisis of 2008, within the regulatory space that surrounds the profession of auditors. Accordingly, several working groups were formed in Canada to analyze issues and to take a stance on the solutions envisioned, on the global scale, to improve audit quality. These working groups published documents that compiled the comments received from stakeholders, and that stated their own analyses. Through a Barthesian theoretical lens centered on myth production, we examine all the documentation related to the Canadian project in order to bring to light what we view as deformations that participate to myth construction. These deformations mute several controversial facets surrounding the Canadian initiative, including: restrictive selection of the issues addressed; the nebulous definition of audit quality retained; and the superficiality of the main recommendation offered. Instead, the project leaders convey a dominant message emphasizing that the audit function is under control in Canada – only necessitating relatively minor adjustments. We conclude that the mythical deformations identified in the project tend to preserve the status quo rather than stimulate a deep-level reflexivity exercise on the notion of audit quality and its underlying assumptions.
INFORMATION RISK AND CDS MARKETS
DESAI, PRAJAKTA
Category: FA = Financial Analysis
This study examines the association between earnings attributes as proxies of information risk and credit default swap (CDS) spreads around compliance with the Sarbanes-Oxley Act of 2002 (SOX). I find a strong association between CDS spreads and earnings attributes. In particular, I find that information risk proxies of accounting-based and market-based earnings attributes matter to the CDS markets before compliance with SOX. This is consistent with the CDS market gathering information from all possible sources before SOX. However, after SOX, the CDS markets find accounting-based attributes to be relatively more important than market-based attributes. In terms of economic significance, a one percentage decrease in the accrual quality leads to an increase in CDS spreads by 13 basis points. This association between CDS spreads and information risk is stronger for foreign private issuers (FPIs) than for U.S. firms. This may be due to the switch for FPIs from prior reporting exemptions to the higher disclosure requirements of SOX. Overall, this study establishes that CDS markets use earnings attributes as proxies for information risk.
‘FORGING ACCOUNTING PRINCIPLES IN FOUR COUNTRIES’: A COMPARATIVE REVIEW OF FINANCIAL REPORTING REGULATION IN FRANCE, GERMANY, JAPAN AND CHINA
DETZEN, DOMINIC
CAMFFERMAN, KEES
Category: HI = History
This paper surveys the English-language literature on the history of financial reporting regulation in four non-English speaking countries: France, Germany, Japan and China. The choice of these countries was based on the availability of a sizeable accounting history literature in the area surveyed. Beyond providing a summary of regulatory events in the four countries, we point to gaps in the literature and suggest opportunities for further research that we invite accounting history researchers to take up. In addition, we explore the relevance of an accounting history literature on non-English speaking countries in an IFRS world. We suggest that this literature can contribute to the development of IFRS by way of exploring and preserving national accounting knowledge, to mitigate the often-heard criticism that IFRS does not respect national circumstances, and to a better standard-setting and regulatory environment by exploring power dynamics and power shifts surrounding the development of accounting regulation.
LEADERSHIP STYLE, PERFORMANCE MEASURE USE AND INNOVATION IN RESEARCH AND DEVELOPMENT PROJECTS
DETZEN, NINA
MÖLLER, KLAUS; VERBEETEN, FRANK
Category: MA = Management Accounting
This study examines the impact of leadership style and performance measure use on innovation in research and development (R&D) projects. We analyse the relationships between two leadership styles, namely initiating structure and consideration, and exploitative and explorative innovation. Furthermore, we argue that project leaders with specific leadership styles use performance measures in different ways to influence the type of innovation in R&D projects. Our results indicate that project leaders with an initiating structure leadership style use performance measures to a larger extent relative to project leaders with a consideration leadership style. In addition, we find that the use of performance measures for evaluation and incentive purposes is associated with exploitative innovation, while consideration leadership style has a direct effect on explorative innovations. Finally, we find different relationships between the leadership styles, performance measure use and innovation for research-intensive projects relative to development-intensive projects. Our results suggest that the project leader assigned to a R&D project has an impact on the type of innovation in the project, also due to a different use of performance measures related to the leadership style.
INTERNAL AUDIT FUNCTION CHARACTERISTICS AND AUDIT FEES IN DIFFERENT INSTITUTIONAL CONTEXTS
DI MEO, FABRIZIO
JOKIPII, ANNUKKA
Category: AU = Auditing
This study contributes to the existing literature by examining the relationship between internal audit function (IAF) characteristics and audit fees, and how this relation is influenced by the mandatory or voluntary implementation of IAFs. Our empirical findings are based on a unique dataset collected from the Common Body of Knowledge (CBOK) study, which was conducted by the Institute of Internal Auditors Research Foundation (IIARF) in 2015. Using data from nine different geographic areas, we find that IAFs focusing more on consulting activities, rather than on assurance activities, and IAFs that are more autonomous are likely to increase audit fees, while more expert IAFs are likely to decrease audit fees. While results related to consulting activities hold regardless of the institutional context, the negative association between IAF expertise and audit fees only holds in mandatory IAF environments, and the positive association between IAF autonomy and audit fees only holds where IAF is voluntary.
HOW MANAGERS’ ON THE JOB EXPERIENCE AFFECTS COMPENSATION DESIGN
DIERYNCK, BART
BECKERS, NATHALIE ; CARDINAELS, EDDY ; YIN , HUAXIANG
Category: MA = Management Accounting
A key challenge in designing appropriate employment contracts is assessing the employee’s intrinsic motivation to execute the task. Prior research, however, has shown that principals heavily rely on extrinsic incentives to motivate employees (Evans et al. 1994). This study experimentally examines whether prior task experience can instigate managers to rely more on intrinsic motivation to motivate employees. Results show that managers who have worked on a task similar as the employees' task rely more on the employee's intrinsic motivation to perform the task by choosing more often a fixed-wage contract instead of an incentive contract. Mediation analyses show that managers with prior task experience perceive the task as more challenging, which influences their perception of employee’s intrinsic motivation. Perception of intrinsic motivation further reduces the managers’ tendency to choose an incentive contract. Additional analyses show that results are robust when controlling for managers’ expectation of employees performance. Relying on intrinsic motivation does not seem to be an inferior choice, as expected profits under the fixed-wage contract are similar to that under an incentive contract. Our results highlight the importance of on the job experience by showing that it helps to develop tacit task knowledge. Principals with prior task experience make different control choices as a result of such knowledge, which can have a positive impact on employee motivation.
SOCIAL MEDIA AND STOCK PRICE SYNCHRONICITY: EVIDENCE FROM SEEKING ALPHA COVERAGE
DING, RONG
ZHOU, HANG
Category: FA = Financial Analysis
This study investigates whether the coverage of public firms on Seeking Alpha, the largest social media platform specializing in financial market in the US, facilitates the incorporation of more firm-specific information into stock price. Using data collected from Seeking Alpha website between 2004 and 2014, we find that Seeking Alpha coverage is negatively associated with stock price synchronicity, suggesting more firm-specific information has been impounded into stock price. Our results are robust to using a matched sample based on propensity score, a two-stage least square (2SLS) approach, and decomposing the synchronicity measure into a market return component and industry return component. Furthermore, we show that the effect of Seeking Alpha coverage on stock price synchronicity is more pronounced in firms with higher financial reporting opacity and firms with less operational complexity. Our findings have important policy implication,because social media has become an increasingly popular venue for information production and dissemination in the 21st century.
DETERMINANTS OF CARBON EMISSION DISCLOSURE
DIYANTY, VERA
ALFANI, GAYO ALLAAM
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This research aims to analyze the determinants of carbon emission disclosure. Determinant factors analyzed in this study are family ownership, financial slack level, social reputation, and industry regulation. The study uses 537 observations from 179 samples of public companies in natural resource and manufacturing industry in Indonesia for the year 2012- 2014. The result of this research shows that the average level of carbon emission disclosure is only 6,25% which indicates that the awareness about carbon emission issue is still low. The regression result shows that financial slack level, social reputation, and industry regulation have a significant positive effect on the carbon emission disclosure level, whereas the family ownership has an insignificant effect on the carbon emission disclosure level. This research can be used as reference for regulator to create some regulations regarding carbon emission issues to increase awareness of businesses about their emission.
COLLABORATIVE MANAGEMENT CONTROL PACKAGE, RISKS, AND PERFORMANCE
DONADA, CAROLE
MOTHE, CAROLINE; NOGATCHEWSKY, GWENAËLLE; RIBEIRO DE CAMPOS, GISELE
Category: MA = Management Accounting
This study aims to deepen knowledge about appropriate control devices in interfirm settings. By proposing a “collaborative management control package” (CMPC), the authors identify which components of the CMCP mitigate transaction risks (transaction scope and dependence) and influence organizational performance. To test the hypotheses contained in the proposed conceptual framework, this study investigates 207 buyer–supplier collaborative relationships. The findings establish the global approach of CMCP and its link to organizational performance, in response to calls in prior literature for new research that reveals how the links among various controls might influence both firm and collaborative performance.
PASSIVE INSTITUTIONAL INVESTORS AND AUDIT QUALITY: EMPIRICAL EVIDENCE FROM THE RUSSELL INDEX RECONSTITUTION
DONG, TING
EUGSTER, FLORIAN
Category: AU = Auditing
Recent studies in Finance show that passive institutional investors play an active role in improving firms’ corporate governance (e.g., Appel et al., 2016). In this paper, we examine how passive institutional investors affect audit quality, a key aspect of the corporate governance mechanism. We exploit the yearly Russell index reassignment, which provides us with an ideal setting to study the causal relation between passive institutional investors (i.e. index trackers) and firms’ audit quality. Around the Russell 1000 and Russell 2000 index cutoff line, firms are arguably randomly assigned, but there is a discontinuity in passive ownership around the index thresholds due to the discontinuity in market-weight based index weights assigned by Russell. By examining firms closely surrounding this cutoff line, our instrumental variable approach provides evidence that passive mutual funds do have a significantly positive effect on audit quality. Contrary to common understanding in the literature regarding the non-activism of passive investors as shareholders, our results suggest that passive investors seem to exert favorable influence on firms’ audit quality, which is manifested in lower discretionary accruals, lower probability of misstatement, and higher audit fee payment.
WITHIN-COUNTRY INFORMATION TRANSFER: EVIDENCE FROM U.S.-LISTED NON-U.S. FIRMS
DONG, YASHU
YOUNG, DANQING
Category: FR = Financial Reporting
This study examines within-country information transfer in the setting of earnings announcement, defined as stock price changes of the firms that are from the same country but different industries with the announcing firm in response to the announcing firm’s earnings release. Using a sample of U.S.-listed non-U.S. firms, we find significant within-country information transfer in the full sample and both good and bad news subsamples. We also find that within-country information transfer is less pronounced if the country peers of the announcing firms have better firm-specific information environment as proxied by strong investor protection, disclosure requirement, and law enforcement, issuing management earnings forecasts, and adopting SOX. In addition tests, we find no evidence of over- or underreaction in within-country information transfer. We also document the evidence of the impact of announcing firms’ names on within-country information transfer if the names contain the information of country identity.  
CORRELATES OF INTERNAL AUDIT FUNCTION MATURITY
D'ONZA, GIUSEPPE
ABDOLMOHAMMADI, MOHAMMAD; SARENS, GERRIT
Category: AU = Auditing
We identify five dimensions of Internal Audit Function (IAF) maturity and establish a composite measure ranging from 0-5. We then identify from the literature six hypothesized test variables as correlates of IAF maturity. We also include several control variables in our model. We use data from the Common Body of Knowledge in Internal Auditing (CBOK 2015) to test our model. We find support for four of our six hypotheses, where staff skills, audit procedures, risk management maturity and combined assurance are significantly or marginally significantly related to IAF maturity. Diversification training and use of technology are not found to be significant correlates IAF maturity. Also with the exception of firm size and IAF size that are not significant, other control variables are significantly or marginally significantly related to IAF maturity. We discuss implications for future practice and research.
BANKS’ DISCRETION OVER THE DEBT VALUATION ADJUSTMENT FOR OWN CREDIT RISK
DOUKAKIS, LEONIDAS
DONG, MINYUE; RYAN, STEPHEN
Category: FR = Financial Reporting
Banks that recognize financial liabilities at fair value currently must record unrealized gains (losses) on these liabilities attributable to increases (decreases) in the banks’ own credit risk, referred to as the debt (or debit) valuation adjustment (DVA), in earnings each period. For a sample of publicly traded European banks during 2008-2013, we investigate the economic and discretionary determinants of DVA. We find that DVA exhibits the expected associations with economic factors, being positively associated with the change in banks’ bond yield spread and negatively associated with the changes in banks’ unsecured debt and average remaining bond maturity. We also provide evidence that banks exercised discretion over DVA to smooth earnings during the recent financial crisis and its immediate aftermath. To remove non-discretionary smoothing of earnings, we decompose DVA into nondiscretionary (normal) and discretionary (abnormal) components and find that abnormal DVA is negatively associated with pre-managed earnings, controlling for banks’ abnormal loan loss provisions (LLP) and realized securities gains and losses (RGL), consistent with banks exercising discretion over DVA to smooth earnings. We further find that banks that record larger LLP and that have histories of using LLP to smooth earnings use DVA less to smooth earnings, consistent with LLP and DVA being substitutable ways to smooth earnings. These findings have implications for how bank regulators and investors should interpret banks’ reported DVA. They may support the FASB’s recent decision in ASU 2016-1 to require firms to record DVA in other comprehensive income.
CAPITAL REQUIREMENTS AND BALANCE-SHEET MANAGEMENT BY LARGE BANKS
DOWNING, JEFF
Category: FR = Financial Reporting
This paper examines whether weaker regulatory ratios are correlated with more balance-sheet management (BSM) by banks. I argue that partly because large banks are subject to tougher regulatory requirements with respect to capital, these banks have stronger incentives than do other banks to use BSM as a way to improve their capital ratios. In line with this argument, weaker capital ratios are correlated with more BSM among large banks, and especially among the largest banks, but not among other banks. Also, the economic magnitude of this relationship among large banks between weaker capital ratios and more BSM is not trivial. In total, the results in this paper suggest that large banks sometimes use BSM as a way to improve their capital ratios.
CORPORATE GOVERNANCE AND THE EXECUTIVE-EMPLOYEE PAY RATIO – EVIDENCE FROM GERMAN FIRMS
DREFAHL, CHRISTIAN
PELGER, CHRISTOPH
Category: GV = Accounting and Governance
The ratio between CEO (executives) and average employee pay has recently become a controversial topic in public and regulatory debates. In this paper, drawing on the theory of managerial power, we analyse how corporate governance factors can contribute to explain the pay ratios. Our study focuses on the German setting where the increasing retreat of blockholders has recently put managers in a particularly strong position and where legislation requires that pay ratios must be considered in setting up executive contracts. Using hand-collected compensation data from German listed firms for the period 2006 to 2013, we reveal that, over and beyond market forces that relate to the relative importance of the activities by CEOs (executives) and employees, ownership structure, board sizes and the extent of variable executive compensation are key drivers of differences in pay ratios. In particular, governance structures that are associated with larger information asymmetries and a powerful management are associated with higher pay ratios. Thus, our findings imply that the mandatory publication of pay ratios might be useful to identify more general deficiencies in firms’ corporate governance.
ANALYSIS OF MACHIAVELLIAN AND NARCISSISTIC DISCOURSE IN FIRMS FINANCIAL REPORTS INVOLVED IN FINANCIAL SCANDALS
D'SOUZA, MÁRCIA
AUGUSTO SAMPAIO FRANCO DE LIMA, GERLANDO; MARTINS MENDES DE LUCA, MARCIA; RAIMUNDA BRITO NEVES ARAGÃO, IRACEMA
Category: IC = Interdisciplinary/Critical
This paper’s motivation is to study the existence of words that display linguistic traits of Machiavellianism and Narcissism in the speech from company leaders who are involved in corruption scandals in Brazil. We discuss the personality traits, not pathological Narcissism and Machiavellianism, supported by the Upper Echelons theory. We analyzed the speech of the leaders in the yearly report of the companies Odebrecht S.A. and OAS S.A. The leaders in the study are involved in fraudulent negotiations detected by Lava Jato Operation, an investigation carried out by the Federal Police of Brazil. The methodological procedures are based in the three-dimensional framework in discourse: text, discursive practice and social practice. The results suggest that the use of words such as “our”, “strong”, “development”, “great”, “larger”, “president”, “confidence” and “values”, imply Narcissistic traits. The semantic analysis of the acts of speech, though, displays Machiavellian traits. It is expected that the results from this research may instigate studies that address the social changes arising from the communication of these speeches.
THE IMPACT OF CULTURAL AND GEOGRAPHICAL DISTANCE ON THE USE OF FORMAL CONTROLS IN GLOBAL SUPPLY CHAINS
DU, YAN
O'CONNOR, NEALE G.
Category: MA = Management Accounting
This paper examines the impact of cultural and geographical distance between supply chain partners on the extent to which buyers monitor their local component suppliers. Using survey data collected from over 1,000 China-based electronics suppliers, we find that foreign buyers use less formal controls, compared with domestic buyers, supporting a “loosening of control” framework, in which culture and geographical distance relates to a greater reliance on delegation of authority than formal control. Furthermore, we find that the level of economic dependence (as evidenced by customer concentration, asset specificity, and component complexity) positively moderates the association between culture and geographical distance and the use of formal controls. Supplier age also positively moderates such association which is opposite to our supplier reputation prediction. These results suggest that foreign buyers pay more attention to reducing information asymmetries associated with culture and geographical distance when suppliers are economically dependent on the supply chain partnerships.
SUSTAINABILITY ACCOUNTING NUMBERS AND AUTHORITY IN INVESTOR-COMPANY RELATIONS
DU RIETZ, SABINA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
In response to Asdal’s (2011) call for studies of accounting numbers and authority, the present work studies how sustainability accounting numbers achieve authority in company-investor relations. Thereby, the study aims to further develop the literature’s explanation of accounting numbers’, and in particular sustainability accounting numbers’, authority. The study does so by analysing three conditions that contribute to quantitative techniques’ seemingly objective character and thus their ability to lend authority, according to Porter (1992a, 1992b, 1995). The study finds that the investor analysts’ familiarity with the sustainability accounting issues, the system and practice, rather than what the numbers seek to represent, allowed them to question the authority of the accounting numbers. Most frequently, the investor analysts questioned the use of sustainability accounting concepts. Rather than responding with further numbers, the corporate executives addressed such questioning by further describing and explaining their work, more or less successfully.
DECOMPOSING ANALYSTS’ EARNINGS FORECAST ERROR: WHAT ARE THE KEY FACTORS?
DUBOIS, MICHEL
GRIGALIUNIENE, ZANA; MORARU-ARFIRE, ANDREEA
Category: FA = Financial Analysis
This paper investigates the key determinants of analysts’ forecast errors. We find that the firm-analyst relationship is at the core of the process of forecasting earnings. Specifically, we find that there is an unobserved, time-invariant component related to the firm-analyst dimension that explains much of the variance in the forecast errors. This component is not yet captured by the existing observable characteristics identified in prior literature. We also show that forecast errors are stable over time, and analysts do not efficiently integrate past information into their forecasts. This study contributes to the existing gap in the literature by narrowing the scope of the “black-box” process through which analysts forecast earnings.
FAMILY GOVERNANCE AND HETEROGENEITY IN INVESTMENT DECISIONS
DUNCAN, KEITH
HASSO, TIM
Category: GV = Accounting and Governance
We show that investors use signals of founding family governance in their investment choices. In the models that assume investor homogeneity, we find a positive effect of founding family ownership, management, and board representation upon the utility of nonprofessional investors. However, using latent class analysis we find distinct clusters that have conflicting utility curves with respect to founding family governance consistent with the experimental asset pricing literature. We identify at least two significant clusters of investors with diametrically opposed views as whether family governance in firms is value enhancing or value destroying. We find evidence of a representativeness bias, as the pro-family involvement cluster also has a positive attitude towards family firms. Investor heterogeneity with respect to the value and desirability of family governance may explain the range of findings in prior empirical work. 
MARKET-WIDE EFFECTS OF OFF-BALANCE SHEET DISCLOSURES:
DURO, MIGUEL
BADIA, MARC; JORGENSEN, BJORN; ORMAZABAL, GAIZKA
Category: FR = Financial Reporting
This paper studies the spillover effects of firms’ off-balance sheet disclosures. We focus our analysis on the mandatory disclosure of oil and gas (O&G) reserves, a setting in which off-balance sheet information is particularly important to understand industry competition. Using a comprehensive sample of Canadian and US O&G producers we document two novel results. First, in contrast to prior research on the informational effect of peers’ earnings announcements, we find evidence that firms’ exhibit lower stock returns when their peers announce more positive news about O&G reserves. Second, consistent with peers’ disclosures affecting managerial decision making, we document that larger increases in peers’ reserves are accompanied by an increase in firms’ investment. We corroborate our results by exploiting three sources of institutional variation. First, the North-American pipeline infrastructure constrains the supply of natural gas, and thus competition in the gas market, but not the supply of oil. Second, the introduction of the fracking technology substantially altered the competition dynamics in the natural gas market. Third, mandatory O&G disclosure rules were modified in Canada and the US in a similar fashion, albeit at different points in time. Overall, our evidence suggests that off-balance sheet disclosures have substantial market-wide effects in the form of both financial and real externalities.
PROFESSIONAL SCEPTICISM THROUGH AUDIT PRAXIS: AN ARISTOTELIAN THEORY OF CULTIVATING TRAIT SCEPTICISM
DYBALL, MARIA CADIZ
MARTINOV-BENNIE, NONNA; TWEEDIE, DALE
Category: FA = Financial Analysis
Professional scepticism is central to audit practice. Yet while there is broad consensus that professional scepticism is a ‘relatively stable’ character trait, both academic and professional literatures discuss various ways it may be cultivated. This paper aims to provide a new theorization of professional scepticism that responds to two critical questions in audit research. First, since character traits are typically thought to be stable across situations and time, can trait professional scepticism be developed; or, is professional scepticism largely an innate disposition? Second, if trait scepticism can be developed, how can audit firms cultivate it in their auditors? Drawing on in-depth interviews with experienced auditors, this paper proposes a neo-Aristotelian theory of how trait professional scepticism is developed by professional communities of practice. Aristotelian theory indicates that trait professional scepticism is neither innate nor indefinitely malleable, but is cultivated through distinct stages of auditors’ careers. To cultivate professional scepticism, audit firms should recruit novice auditors whose pre-professional development makes them receptive to acquiring professional scepticism, and then habituate these auditors into the organizational practices that realize this potential.
PHILOSOPHY OF LANGUAGE AND ACCOUNTING
EBERHARTINGER, EVA
ALEXANDER, DAVID; CIRCA, CRISTINA; DE BRÉBISSON, HÉLÈNE; FASIELLO, ROBERTA; GROTTKE, MARKUS
Category: IC = Interdisciplinary/Critical
It is well understood that accounting practices vary not only across firms but also across countries, reflecting the respective legal and cultural background. Attempts at harmonisation therefore continue to rebound. We show that, beyond accounting practices, the legal and cultural background of a country affects the wording of the national laws itself, even where explicit harmonisation exists. We argue that such different wording is rooted in the philosophy of language, referring particularly to Searle and Wittgenstein. The example of the ‘substance over form’ principle is particularly suitable for our analysis: it is known in all accounting jurisdictions, but still it has very different roots in different European countries, with European and international influences conflicting, which is reflected in different wordings of the principle. The paper investigates 7 different countries (United Kingdom, Poland, Romania, France, Italy, Austria and Germany), and the author team contains citizens and native speakers from all 7 countries. The paper contributes to the debates around the homogenisation of accounting standards, illustrating our theory on the specific application of one common principle to various Member State environments. Our broad conclusion is that different socially-constructed realities will tend to overcome any attempt at harmonised socially-constructed words.
XBRL MANDATE AND ANALYST FOREAST PROPERTIES: EXAMINING THE ROLE OF ANALYST ABILITY AND RESOURCES
EFENDI, JAP
WU, AVA
Category: FR = Financial Reporting
This study examines the association between XBRL mandate and properties of analyst forecasts in the US setting. Using I/B/E/S data from the period 2000 and 2015, we find improvement in analyst forecast accuracy, forecast frequency, forecast timeliness, number of analyst following and a decline in analyst forecasts dispersion after XBRL become mandatory. The study also finds some evidence that analyst ability, especially specific firm experience, and brokerage size interact with XBRL mandate in explaining the improvement in analyst forecast properties. Our results suggest that XBRL improves information environment, and yet the benefits of XBRL to individual analysts can vary depend on their ability and resources.
FIRM MIMICRY REGARDING SUSTAINABILITY REPORTING STANDARDS: AN INSTITUTIONAL VIEW ON THE ADOPTION OF THE GRI
EGGEN, MICHEL
EGGEN, MICHEL; HASSINK, HAROLD; THIJSSENS, THOMAS
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study aims to better comprehend the characteristics of the adoption of corporate sustainability reporting practices, and specifically that of the GRI standard, while taking into account institutional factors within the firm’s organizational field. Institutional arguments posit corporate reporting practices as the result of institutionalized forces driven by relationships between constituents in a shared social environment. Characteristics of GRI adopters are scrutinized for their relationships with firms that previously adopted GRI. This is operationalized by examining current adopters for the number of interlocking directorates, geographic proximate firms, and firms in the same industry that adopted GRI in the previous financial year. A sample of 1739 firms from the S&P1500 is analyzed in the financial period 2008 until 2011. The hypotheses are tested with a binary logistic regression models. The results show that GRI adopters are significantly associated with less interlocking directors with prior GRI adopters and a higher number of industry members that adopted GRI. It provides valuable insights in institutional factors that can shape the business environment in which firms decide to adhere to the GRI framework. The current analyses contributes to a better understanding of the characteristics of the adoption of corporate sustainability reporting practices, taking into account relational factors within the firm’s organizational field.
COMPLIANCE WITH THE GERMAN CORPORATE GOVERNANCE CODE: CAN THE HETEROGENEOUS IMPLEMENTATION BE EXPLAINED?
EISENSCHMIDT, KARSTEN
VANINI, UTE
Category: GV = Accounting and Governance
The implementation of corporate governance (CG) mechanisms should reduce potential agency conflicts in firms and thus improve firm value and performance. Well established CG mechanisms are summarized in national and international CG codes worldwide. Nevertheless, empirical studies reveal mixed results concerning possible effects and outcomes of CG codes and the support of the hypothesis of a ‘one system does not fit all’ approach in CG. Therefore, this paper empirically analyzes possible influence factors on compliance with the German Corporate Governance Code for a large sample of German listed firms in 2015. We chose German companies, because of the specific institutional settings in Germany, e.g. the strong influence of founders on a firm’s management or the relevance of debt financing, which limit the transferability of the results of US and UK studies. In total, we find a significant positive effect of ownership dispersion and firm size on code compliance, whereas the other assumed influence factors (family influence, supervisory board’s size, female members in the supervisory board and auditor’s size) reveal the right direction of impact, but not the required level of significance. Contrary to signaling theory, profitability has a negative relationship to code compliance. Future research should investigate the effects of influence factors on the level of code compliance and firm value respective performance in an integrated research approach.
OBJECTIFYING TRUSTWORTHINESS. MARKET RE-FORMATION WITHIN THE TRANSPORT POLICY FIELD
EK, EMMA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper deals with market formation within the public sector, and in particular with the process of qualifying public services as products on a market. The analysis builds on an in-depth empirical study of a case within the Swedish transport sector. The Swedish Transport Administration (the STA) is the state agency responsible for the building and maintenance of state-owned roads and railroads. Building on sociological research on market formation in particular the writings of Callon et al (2002) on the qualification of products, the paper analyses the process of objectifying the complex infrastructure services as products. The process of defining services being exchanged has been pointed out in previous research as a “formative problem”. The paper shows that the objectification of trustworthiness was a key feature in how the ambition of strengthening the market elements were realized in a setting largely characterized as complex and trust-oriented. The case also illustrates how the new market-oriented role of the STA came to imply coordination solutions that carry many of the traits we usually associate with organizations.
THE IMPACT OF THE TYPE OF AGENCY RELATIONSHIP ON INVESTORS’ INFORMATION NEEDS
EL FASSI, FATEM-ZAHRA
Category: FA = Financial Analysis
This research examines the impact of the type of agency relationship on investors’ needs for financial and accounting information. Indeed, the investors could be in a single agency relationship (investing for their own) or in dual agency relationship (investing on behalf of a principal). An experiment conducted with 160 proxies of sophisticated and unsophisticated investors situated in one of the (single or double) agency relationships studied was carried out. It shows that the type of agency relationship affects behavior as regards acquisitions and the processing of financial and accounting information by each investor type. It highlights, the mediating effect of the investors’ type on the purchasing behavior and the type of agency relationship. Additional tests was performed in order to study the type of information purchased by each type of investor placed in the two different agency relationship. The results are discussed using Sharma’s (1997) notion of professional agent and some cognitive psychology’s concept. This research contributes to current discussions on the new accounting conceptual framework and improves the academic research on the information needs of investors by studying for the first time the impact of the type of agency contract on these informational needs.
AUDITOR SIZE AND AUDIT QUALITY IN PRIVATE FIRMS
ELEMES, ANASTASIOS
LOBO, GERALD
Category: AU = Auditing
We investigate the relation between auditor size and audit quality in private firms. We argue that, profitability- related considerations as well as differences in their reputation and litigation considerations weaken the incentives of Big 4 auditors vis-à-vis non- Big 4 auditors to deliver superior audit quality in private firms. Consistent with this hypothesis, we provide evidence of a negative relation between auditor size and audit quality in the UK private firm setting, only, however, for clients with concentrated ownership structures, that are less likely to demand higher quality audits. For a subsample of accounting firms for which their financial statements are available we further show that the private firm market is a source of decreasing profit margins for Big 4 auditors, whereas the opposite is true for non- Big 4 auditors. The negative relation between auditor size and audit quality disappears in the public firm market where Big 4 profit margins, as well as their reputation and litigation considerations become strong again.
ACCOUNTING STANDARDS ENFORCEMENT AND EARNINGS MANAGEMENT: AN INTERNATIONAL COMPARISON
ELHELALY, MOATAZ
NTIM, COLLINS
Category: FR = Financial Reporting
This paper investigates the effect of the enforcement of accounting standards on earnings management (EM) in 31 countries. We assess the influence of enforcing accounting standards on country-level EM. Our findings are three-fold. First, we find a negative and significant association between enforcement and EM. Second, we extend our analysis and investigate the effect of IFRS on EM and find that the relationship is negative and significant. Third, we investigate whether the interaction between IFRS adoption and enforcement has any impact on EM. We find that the enforcement of accounting standards in IFRS adoption country years is associated with higher levels of EM. This suggests that enforcement of accounting standards in IFRS adoption country-years is associated with more EM. Contrariwise; non- IFRS adopters are more likely to enjoy higher earnings quality as a result of enforcing accounting standards. Keywords:
DO INVESTORS REWARD EARNINGS SMOOTHNESS? EVIDENCE FROM THE UK
ELIWA, YASSER
Category: FA = Financial Analysis
This study investigates the relationship between earnings smoothness (EarnSmooth) and the cost of equity capital (CoEC) in the United Kingdom (UK) after the adoption of IFRS. The results show a significant negative impact of EarnSmooth on CoEC. This finding is consistent with the view that high EarnSmooth reflects high earnings quality and that EarnSmooth is desirable for investors in the non-US context. The results also document that the innate component is the primary driver of the investors’ decision of resource allocation than the discretionary component. These results should be reassuring to US standard setters who are considering adopting or converting to IFRS.
THE INFLUENCE OF AUDIT TEAM LEADER MODELING FALLIBILITY ON AUDIT TEAM MEMBER LEARNING FROM ERRORS
EMBY, CRAIG
SIEWEKE, JOST; ZHAO, BIN
Category: AU = Auditing
This paper investigates the effect of audit team leader modeling fallibility on audit team members’ learning from errors. The paper proposes a model for, and examines the effect of, leader modeling fallibility on learning from errors through three potential mediators – psychological safety, error strain, and error-related self-efficacy. Using data collected from offices of two large Canadian public accounting firms, the study found that there was an overall positive impact of audit team leader modeling fallibility on audit team members' learning from errors. The role of the potential mediators was mixed – one was positive, one was negative, and one showed no significant impact. In addition, there was a statistically significant direct effect of audit team leader modeling fallibility. The paper discusses potential interpretations of these results, and the theoretical and practical implications of this study.
MANAGEMENT CONTROL SYSTEMS IN THE ENTREPRENEURIAL ARENA - REFINING THE NEW CONTROL PARADIGM
ENDENICH, CHRISTOPH
Category: MA = Management Accounting
Despite the crucial role played by entrepreneurship in the digital age and the importance of management control systems (MCSs) for companies around the world, our knowledge about the use of MCSs in start-up companies remains very limited. Against this background, this research examines data collected during a cross-sectional field study composed of interviews at 28 earliest-stage start-up companies in Information Technology-driven and other knowledge-intensive industries. Whereas traditional control theory argues that start-up companies substitute formal MCSs with face-to-face communication, personal supervision and social norms, the data show that the companies visited use dynamic, technology-driven and multi-faceted packages of formal and informal control systems to ensure their development toward challenging and regularly changing corporate objectives. These control systems play a key role in managing the tension arising out of an interplay between economic and financial constraints and the founder-managers’ intention to create an entrepreneurial micro eco-system. This study contributes to the recent development of a New Control Paradigm that emphasizes a positive role for MCSs in innovative and entrepreneurial settings.
GOING CONCERN OPINIONS AND MANAGEMENT’S FORWARD LOOKING DISCLOSURES: EVIDENCE FROM THE MD&A
ENEV, MARIA
GEIGER , MARSHALL ; GOLD, ANNA; WALLAGE , PHILIP
Category: AU = Auditing
In this study we examine the relationship between the auditor’s going concern opinion and management’s forward-looking disclosures in the Management’s Discussion and Analysis (MD&A) section of their 10-K filing. The research objective is two-fold and focuses on whether the presence of a going concern opinion is associated with (1) the quantity of forward-looking disclosures and (2) their level of equivocation. We examine MD&A disclosures from a sample of 2,365 financially distressed companies over the fiscal years 2010-2014 and find that despite the regulatory environment that promotes additional forward-looking disclosure in the presence of a going concern opinion, management provides less forward-looking disclosures in the MD&A if they receive a going concern modified opinion. However, the forward-looking disclosures that management makes in the MD&A are more explicit, as indicated by the use of less equivocal language, in the presence of a going concern opinion. In addition, we find that forward-looking disclosures are significantly different for first-time versus recurring going concern opinions, with first-time opinions associated with less change in forward-looking frequency and equivocation than continuing going concern opinion companies. In sum, we find that going concern opinions are associated with fewer, but less equivocal forward-looking MD&A disclosures.
TRUSTING THE FAMILY FIRM? FAMILY CONTROL AND CULTURAL VALUES DURING FINANCIAL CRISES
EPURE, MIRCEA
AMORE, MARIO DANIELE
Category: GV = Accounting and Governance
Recent insights show that generalized trust may alleviate the adverse impact of financial crises on firms by improving access to credit and other resources from key stakeholders. We study how governance attributes interact with generalized trust in shaping a firm’s reaction to financial crises. Using panel data from Italy and a difference-in-differences approach, we find that trust alleviates the effect of financial crisis on the profitability of non-family firms, while for family firms trust aggravates the negative effect of the crisis. We probe into this dichotomy by exploring heterogeneity in governance characteristics and financing channels.
MANAGEMENT VERSUS AUDIT COMMITTEE’S VIEW OF INTERNAL AUDIT EFFECTIVENESS: ENHANCING PUBLIC SECTOR ACCOUNTABILITY
ERASMUS, LOURENS
COETZEE, PHILNA
Category: AU = Auditing
The objective of this study is to determine the differences in perception of the key stakeholders on the drivers of internal audit effectiveness. The most prominent stakeholders of internal auditing are senior management and the audit committee. To be seen as an effective internal audit function of a government institution, value needs to be added for both these stakeholders. It is thus important for internal auditing to obtain an understanding of what these stakeholders perceive as drivers of internal audit effectiveness. Heads of internal audit functions, chairpersons of audit committees and senior management within the South African public sector responded to a survey. The data was subjected to an Exploratory Factor Analysis and Principal Component Analysis to reduce the set of items, and provide continuous scores for use in a multivariate multiple regression analyses. The study found that senior management and the audit committee differ in their perceptions of the drivers that influence the measures of internal audit effectiveness. In order to enhance the effectiveness of internal audit functions and through this enhance public sector accountability, the internal audit functions should take cognisance of the different perceptions of its key stakeholders in order to manage these relationships.
CSR REPORTING AND CORPORATE REPUTATION: A CRITICAL APPROACH
ESCOBAR PEREZ, BERNABE
BRAVO, FRANCISCO; MIRAS , MARÍA DEL MAR
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study fills in the gap in the literature by examining how the coherence between the complexity of the CSR reporting and the CSR commitments of a firm influences the way that CSR disclosures impact on comporate reputation. “Corporate Reputation”, is designed by considering the reputation rankings (RepTrak) provided by the Reputation Institute. Two main explanatory variables are employed in this study: “CSR Reporting Index” and “CSR commitment”. First, the CSR Reporting Index is based on the disclosure of CSR information, the compliance with GRI guidelines and the assurance of this information. The CSR commitment is measured by using a indicator based on the Social and Environmental Score from ASSET4. Our findings highlight that the effect of CSR reporting practices depends on the degree of coherence between these practices and CSR commitment. The effect of CSR disclosures on corporate reputation is particularly negative for those companies whose CSR reporting practices differ from their CSR commitment. This evidence has direct implications for companies in order to better understand the real effect CSR reporting strategies on the reputation of a firm.
ANNUAL REPORT DISCLOSURES AND THE COST OF EQUITY CAPITAL: NON-LINEAR EVIDENCE FOR THE UK
EUGSTER, FLORIAN
ATHANASAKOU , VASILIKI; SCHLEICHER, THOMAS; WALKER, MARTIN WALKER
Category: FA = Financial Analysis
We use a computer generated index of UK annual report disclosures to provide new evidence for a panel of 5,152 firm-year observations over the period of 2003 to 2014, on the non-linear link between disclosure quality and the cost of equity capital. We consider the possibility that the relation between disclosure and the cost of capital may be nonlinear, and find empirical support for the notion of an optimum level of disclosure. We also present results showing the contribution of the various components of the index to this relation. We find empirical evidence for a higher optimum point for strategic content and performance commentary as well as corporate governance and forward looking information. Furthermore, we use quantile regressions to study how the main relation varies across cost of capital quantiles, and find that the moderating role of overall disclosure on the cost of capital increases monotonically across the nine (from 10% up to 90%) quantiles.
RE-FORMING HEALTHCARE: THE ROLE OF ACCOUNTING ARTIFACTS
EVERETT, JEFF
NEU , DEAN; RAHAMAN, ABU SHIRAZ
Category: GV = Accounting and Governance
This study examines the role accounting plays in major healthcare-policy-reform processes. Focusing on a single hospital site in the African nation of Ghana, and starting from the practice theory of Pierre Bourdieu, the study analyzes how different forms, constructions, and classifications of accounting information—or accounting artifacts—shape policy regimes and facilitate particular patterns of activity and interaction. It further examines how these regimes and patterns, in conjunction with the embedded social memory or habitus of individual actors, in turn lead to the construction and use of new artifacts. The study also highlights how hospital staff and patients use various tactics to work with and around these artifacts, resulting in at times unintended consequences and the need to pursue new policy directions. In so doing, the study furthers our understanding of why policy-reform processes in the field of healthcare are so often sequential in nature.
DO FOREIGN CASH HOLDINGS GENERATE UNCERTAINTY FOR MARKET PARTICIPANTS?
FABRIZI, MICHELE
IPINO, ELISABETTA; MAGNAN, MICHEL; PARBONETTI, ANTONIO
Category: FA = Financial Analysis
This study examines whether foreign cash holdings generate uncertainty among market participants. Using a large sample of U.S. multinational corporations, we provide evidence that cash held abroad is associated with increased uncertainty among analysts and causes dispersed beliefs and abnormal trading volumes among investors. Further analyses document that these results are explained primarily by foreign cash held in countries with low economic growth and high differences in tax policy relative to the United States. Overall, the findings uncover the mapping between cash holdings and their stock market valuation and illustrate the economic consequences of foreign cash holdings. Moreover, the results offer support to the SEC’s recent effort to encourage companies to increase disclosure of their cash holdings.
RESOURCE ALLOCATION AND STEWARDSHIP DEMAND FOR ENVIRONMENTAL DISCLOSURE
FALLAN, EVEN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The purpose is to explore three types of demand for environmental disclosure: resource allocation decision-making, stewardship decision-making, and stewardship incentives demand. This is a field study consisiting of interviews with 23 stakeholders, inspired by the pairwise stakeholder-company (principal-agent) relationships of agency theory and stewardship. Types of demand are analysed for both public and private sector stakeholders within the groups institutional investors, financial analysts, creditors, customers, NGOs, and reporting and environmental authorities. A framework based on the three types of demand appears to be a fruitful tool to explain central aspects of demand. Some cases have none of these types of demand while others have from one up to all three of them. Different motivations in different cases appear to be related to public sector (and possibly NGO) affiliation and effects. Awareness of the reasons for demand may help ensure that pertinent stakeholder information needs are met. Sufficient subdivision of stakeholder groups seems important. The contribution is a systematical and in depth examination of different types of demand for environmental disclosure, aiming to improve the understanding of the theory underpinning it. It is one of few studies to examine and compare the demand of several stakeholder groups, as well as explore the importance of public and of public and private sector affiliation.
UNEMPLOYMENT GOVERNANCE, LABOR COST AND EARNINGS MANAGEMENT: EVIDENCE FROM CHINA
FAN, WENLIN
CHENG, CHEN; HOU, QINGSONG; HU, MINGSHENG; YUAN, JIANGUO
Category: GV = Accounting and Governance
This study investigates the effect of labor cost on earnings management based on 2003-2013 panel data of listed firms in China. We use the average wage of employees in firm-level as the proxy for labor cost. Firms with rising labor cost become more likely to engage in negative earnings management to conceal profits or report losses. The effect becomes more significant in state-owned enterprises, labor-intensive enterprises and firms in high unemployment-rate regions. Further research finds that, under the institutional background of Chinese unemployment governance, firms get more government subsidies, tax preferences and reduce the excessive employment through negative earnings management. To a certain extent, this weakens the policy effect of unemployment governance. Overall, our conclusions are meaningful to the reform of unemployment governance, the standardization of earnings management behavior, the improvement of the government subsidy policies, and the improvement of the efficiency of public resources allocation.
THE SHARPEST TOOL IN THE SHED: AN EXAMINATION OF FINANCIAL STATEMENT MANAGEMENT TOOLS DURING IPOS
FEDYK, TATIANA
SINGER, ZVI ; SOLIMAN, MARK
Category: FR = Financial Reporting
The valuation of STEM (Science, Technology, Engineering and Math) firms has gained attention in the literature over the past two decades. Research has shown that for valuation of STEM firms, accounting items such as sales growth and R&D expenditures are more important than bottom line earnings. In this paper, we examine whether, around the time of the IPO, managers of STEM firms, apply discretion over the same accounting items most weighted by investors for their valuation. We find that investors tend to weigh sales growth and R&D more heavily than earnings in determining market value of STEM firms and that managers respond by managing those items rather than bottom line earnings. This is in contrast to findings in the literature of a bottom line earnings management by IPO firms; where STEM firms are not examined separately. Further, we find that the negative association between abnormal accruals and future stock returns found in prior research is limited to non-STEM firms, whereas for STEM firms stock returns are associated with sales management. Our results shed light on the differential behavior of STEM vs. non-STEM mangers, and highlight the importance of a departure from the traditional IPO earnings management paradigm, which assumes that firms mainly manage their earnings.
THE CURVILINEAR ASSOCIATION BETWEEN PERFORMANCE MEASUREMENT SYSTEM DESIGN AND STRATEGIC PERFORMANCE
FELDHUES, MELANIE LUCIA
MAHLENDORF, MATTHIAS D.; SCHÄFFER, UTZ
Category: MA = Management Accounting
This paper reconciles prior research regarding beneficial and detrimental effects of performance measurement system (PMS) design on performance by arguing for a curvilinear association. By taking the too-much-of-a-good-thing effect as a starting point, we challenge the assumption of a linear association between PMS design and performance outcomes predominantly found in prior research. Based on the example of the level of detail of reporting information, we provide empirical evidence for a curvilinear association following the functional form of an inverse u-shape between this PMS design facet and two strategic performance outcomes. We attribute this to information under- and overload at extreme values of level of detail. Based on a sample of 59 matched dyadic survey observations of heads of administration and chief orthopaedists of German hospitals, we provide empirical support for the curvilinear association between PMS design and strategic performance outcomes. Results are robust against the inclusion of different sets of controls and an additional specification as a seemingly unrelated regression model.
ACCOUNTING CONSERVATISM AND LONG-TERM DEBT CONTRACTS: INTERIM LIQUIDATION DECISIONS
FERENTINOU, AIKATERINI
Category: GV = Accounting and Governance
I examine the optimal level of conservatism, when the firm is financed by a long-term debt contract that includes either earnings-based or equity-based debt covenants, which, after their violation, give the lender the right to liquidate the project. The research is motivated by the fact that previous analytical literature finds that liberalism is preferred in the short-term debt contracts, whereas the empirical evidence shows that conservatism is beneficial in the long-term debt contracts. According to my results, in the case of long-term debt contract that includes earnings-based debt covenants, conservatism is preferred, when the conflict of interest between the firm and the lender is severe. When the conflict of interest is moderate, then liberalism is preferred and when there is no conflict of interest, the level of conservatism becomes irrelevant. The results hold whether or not the debt contract takes into account the history of accounting earnings. When the long-term debt contract includes an equity-based debt covenant, the firm chooses a higher level of conservatism even if the conflict of interest is moderate. The findings indicate that in contrast to short-term debt contract, in the long-term debt contract, conservatism can actually be chosen, when the conflict of interest is severe and when the provided accounting information is less accurate.
INDUSTRY SPECIFIC VS. TASK SPECIFIC AUDITING EXPERTISE: THE CASE OF GOODWILL IMPAIRMENT
FERRAMOSCA, SILVIA
CAUSHOLLI, MONIKA; D'ONZA, GIUSEPPE; GRECO, GIULIO
Category: AU = Auditing
There is growing interest among academics and auditing regulators on the role of auditing on the quality of accounting estimates including impairment of goodwill. Prior research has shown that managers exercise discretion by either delaying the decision to record goodwill impairment, and/or conditional on the decision, understating the amount of impairment leading to overstatement of earnings. This study examines the extent to which auditor expertise mitigates managerial discretion in the context of goodwill impairment. We focus on two types of expertise: industry expertise, measured as within-industry market share, and task specific expertise, measured as the extent to which the auditor has prior experience with goodwill impairment. We find that auditor industry expertise is not associated with either the likelihood of goodwill impairment, or the amount of the impairment. We find strong evidence that prior experience with goodwill reduces managerial discretion related to goodwill impairment. Specifically, prior experience with goodwill impairment is positively associated with both the likelihood of impairment and the amount of impairment. Our findings have implications for the ongoing discussion related to auditor characteristics that affect reporting quality of accounting estimates.
THE ROLE OF SENTIMENT AND STOCK CHARACTERISTICS IN THE TRANSLATION OF ANALYSTS’ FORECASTS INTO RECOMMENDATIONS
FERRER, ELENA
CORREDOR, PILAR; SANTAMARIA, RAFAEL
Category: FA = Financial Analysis
The purpose of this paper is to further understanding of the determinants of analysts’ translational effectiveness and, specifically, the role of stock characteristics in the impact of sentiment in the translation of analysts’ forecasts into recommendations. We also analyse the impact of sample bias (deriving from the degree of analyst coverage) on mean translational effectiveness across all listed firms. The study analyses the non-financial firms listed on the London Stock Exchange from 1994 to 2010. We construct a proxy of intrinsic value of a stock based on that of Ohlson (1995), which incorporates all the information contained in the analysts’ earnings forecasts. As the recommendation is a discrete variable, we use Ordered Probit analysis. Our results show that, although analysts do translate their earnings forecast valuations into recommendations, the effectiveness of this process is reduced by investor sentiment only in highly sentiment-sensitive stocks. This suggests the degree of analyst coverage as a potential conditioner of the observable results in a market. While not totally eliminating this observed effect, the Market Abuse Directive regulation does contribute to reduce the skew between analysts’ earnings forecasts and their recommendations. Finally, analysis of this effect reveals that this kind of skew enables investment strategies yielding positive risk-adjusted returns in highly sentiment-sensitive stocks, during periods of high market sentiment.
THE IMPLICATIONS OF COUNTRY LEVEL AUDIT QUALITY AND ENFORCEMENT OF ACCOUNTING STANDARDS FOR THE TIMELINESS OF GOODWILL IMPAIRMENT RECOGNITION
FILIP, ANDREI
LOBO, GERALD; PAUGAM, LUC
Category: FR = Financial Reporting
Under IFRS, goodwill must be tested for impairment at least annually and impairment recognized if the cash generating unit’s (CGU) recoverable value to which goodwill is allocated falls below its net book value. The recoverable value of a CGU is a subjective estimate that is difficult to verify by outsiders. Empirical evidence indicates that managers delay the recognition of goodwill impairment in their books. Under IAS 36, managers have two approaches to increase the estimated recoverable value of a CGU in order to justify not recognizing goodwill impairment: (1) they can make overly optimistic valuation assumptions, and/or (2) they can increase future cash flow estimates by managing real activities to increase current cash flow. We argue that audit quality and enforcement of compliance with accounting standards influence the relative use of these two strategies. Using an international sample of listed firms reporting under IFRS, we examine the implications for the delay in goodwill impairment recognition. We hypothesize and find that firms in high audit quality and high accounting enforcement countries are more likely to rely on cash flow increasing real activities management to avoid reporting goodwill impairment than firms in low audit quality and low accounting enforcement countries. We also show that cash flow increasing real activities management related to delayed goodwill impairment is detrimental to future performance.
AUDIT COMMITTEE MEMBERS’ PROXIMITY TO CORPORATE HEADQUARTERS AND AUDIT FEES
FIROOZI, MARYAM
MAGNAN, MICHEL
Category: AU = Auditing
In recent years, legislative and regulatory authorities in several countries have devolved several responsibilities to audit committees and their members, especially in terms of negotiations with a firm`s auditors (e.g., SOX, Section 301). In this paper, we investigate how audit committee members’ geographical residence affects audit fees. The location of audit committee members is important, since recent regulatory reforms such as SOX and board diversity initiatives have caused companies to nominate board and audit committee members from different geographical areas to meet regulatory requirements. In addition, globalization and improvements in technology have made it easier for firms to nominate non-local directors. Our results show that firms with more local audit committee members pay lower audit fees. There are at least two possible explanations for our findings; from the supply side, auditors may assign a lower risk to companies with more local audit committee members. From the demand side, local audit committee members may have more negotiation power than non-locals over audit coverage and audit fees due to access to soft information. Our results are robust to endogeneity and alternative explanations.
THE INFORMATION CONTENT OF TAX LOSS CARRYFORWARDS – IAS 12 VS. VALUATION ALLOWANCE
FLAGMEIER, VANESSA
Category: FR = Financial Reporting
This is the first study that analyzes the predictive ability of deferred tax information under IFRS. I examine whether deferred taxes provide information about future tax payments and future performance, using a German sample of IFRS firms. The focus on tax loss carryforwards enables a separation of the two relations, testing on the one hand, the relation between recognized deferred tax assets and future tax payments and on the other hand, the relation between the non-usable part of tax losses and future earnings. I find significantly negative coefficients for both deferred tax items, indicating that higher recognized deferred tax assets are associated with lower future tax payments and higher non-usable tax loss carryforwards with lower future performance. Additionally, I compare the tax accounts’ predictive ability for a matched German and US sample and find no significant differences between firms reporting under IFRS and US-GAAP. Taken together, the evidence suggests that deferred tax items for tax loss carryforwards reported under IFRS provide useful information about future outcomes and that this predictive ability does not differ significantly from firms reporting under US-GAAP.
NON-GAAP EARNINGS DISCLOSURES ON THE FACE OF THE INCOME STATEMENT BY UK FIRMS: THE EFFECT ON MARKET LIQUIDITY
FLOROPOULOS, NIKOLAOS
CHARITOU, ANDREAS; KARAMANOU, IRENE; LOIZIDES, GEORGE
Category: FR = Financial Reporting
This study exploits the special feature of the UK information environment which allows UK firms to disclose non-GAAP earnings on the face of the income statement by examining two interrelated questions. First, we ask whether the decision to disclose non-GAAP earnings on the income statement is related to the firm’s financial performance and corporate governance and second, we investigate the effects of the disclosure decision on market liquidity. Using a dataset of 1,586 hand-collected firm-year observations during the period 2006-2013, we show that better governed firms and firms with weaker financial performance are more likely to disclose non-GAAP earnings. Our evidence also suggests that the disclosure of pro-forma earnings on the face of the income statement increases market liquidity. Together these results suggest that firms disclose non-GAAP earnings to decrease information asymmetry, resulting, in turn, to increased liquidity.
IFRS AND THE PREDICTIVE POWER OF EARNINGS: AN EMPIRICAL EXAMINATION OF PUBLIC AND PRIVATE GERMAN FIRMS
FOERSTEMANN, TILL
GOSSNER, STEPHAN
Category: FR = Financial Reporting
We examine whether the introduction of International Financial Reporting Standards (IFRSs) in 2005 deteriorated public German firms’ financial statement quality. The paper measures financial statement quality using earnings’ predictive power with regard to forecasting cash flow, thereby contributing to the empirical financial accounting literature as only a few studies proxy financial statement quality in this way. Given that IFRSs grant management a significantly larger margin of discretion than German GAAP, we hypothesize that earnings’ predictive power declines after the IFRS introduction. To measure the IFRS effect, we use a disaggregated cash flow forecasting model (i.e., a model in which the explanatory earnings variable is decomposed into cash flow and various accrual components) and panel data comprising 47,303 firm-year observations covering the period from 1987 through 2013. We find that the model’s prediction error increases after the IFRS introduction. We conclude from this finding that earnings’ predictive power (i.e., earnings quality) and ultimately the quality of public German firms’ financial statements deteriorated. The result is robust to a variety of sensitivity tests.
FOREIGN VERSUS LOCAL INSTITUTIONAL INVESTORS AND CEO PAY-PERFORMANCE IN MALAYSIAN FIRMS
FOO, YEE-BOON
GUL, FERDINAND A; MAJID, ABDUL; TEE , CHWEE MING
Category: GV = Accounting and Governance
Recently there have been both regulatory and investor concerns about the exorbitant salaries paid to CEOs of corporations worldwide and calls for more research on how to ensure that CEOs are paid according to their performance. In this study we examine whether institutional investors can affect the association between firm performance and CEO compensation in Malaysian firms. Using a Malaysian dataset from 2002 to 2012, we find that overall total institutional investor ownership has a negative effect on the association between firm performance and CEO compensation. However, we find that these negative results are driven by local institutional ownership; foreign institutional investors, on the other hand, have a positive effect on the association between firm performance and CEO compensation. This suggests that local institutional investors are subject to more conflicts of interests compared to foreign investors. Our results provide new insights on the association between institutional investors and CEO compensation-firm performance relationship in an emerging economy.
THE IMPACT OF SFAS166/167 ON BANK LIQUIDITY AND LENDING
FORGIONE, DANA
ZHAO, QIUHONG
Category: FR = Financial Reporting
We investigate whether and to what extent SFAS166/167 changed the role of securitization in bank liquidity and lending activities. We compare the sensitivity of loan growth to a loan portfolio liquidity index proposed by Loutskina (2011) between affected and control banks. We find that SFAS166/167 significantly reduced the role of securitization in substituting on-balance sheet liquidity, consistent with the conjecture that consolidation may render securitization too costly. The affected banks also reduced lending relative to control banks because consolidating former Qualified Special Purpose Entities (QSPEs) may adversely affect the banks’ ability and willingness to engage in securitization and issuance of new loans. Our results suggest that banks with the highest increase in liabilities from QSPEs experienced the greatest decrease in lending activities. These results indicate that SFAS166/167 are associated with a decline in the role of securitization as a liquidity management tool in banks, and a significant decline in lending.
A DIVIDEND-BASED MODEL TO EXPLAIN THE CROSS SECTION OF EQUITY RETURNS FOR BOTH FINANCIAL AND NON-FINANCIAL STOCKS
FOYE, JAMES
VALENTINCIC, ALJOSA
Category: FA = Financial Analysis
Estimates of expected returns based upon the Fama-French(FF) and Carhart models typically exclude financial firms, including the latest FF five-factor model (Fama & French, 2016, 2015) or Gregory et al. (2013) for the UK. The presumed reason for this is that the book-to-price-based HML factor is not comparable between non-financial (predominantly historic-cost accounting) and financial firms (predominantly fair-value accounting). However, this approach excludes about 20% of FTSE100 market capitalization. This paper proposes an alternative model of expected returns that can be applied to both sets of firms. To do this, we replace the HML factor with a dividend-yield-based factor which works around the accounting issue present in the HML factor. We construct the factor based on dividend yield sorts in the same way as Fama-French calculate the HML factor based on book-to-price sorts. Empirically, we base our analyses on UK market because a large proportion of firms there pay out dividends (as opposed to, say, US market). We find that: i) replacing HML with PMR produces equivalent results for non-financial firms; ii) the PMR (payers-minus-retainers) factor is able to explain returns for portfolios of financial services stocks; iii) the model can be used to combine financial and non-financial firms in the same sample in analyses that require the calculation of expected returns.
HOW IMPORTANT IS PARTNER VARIATION IN EXPLAINING AUDIT QUALITY?
FRANCIS, JERE
CAMERAN, MARA; CAMPA, DOMENICO
Category: AU = Auditing
The United Kingdom requires audit partner disclosure and this setting is used to examine if partner fixed effects explain audit outcomes (audited earnings quality, going concern reporting, and audit pricing). Results indicate that inter-partner variation has significant incremental explanatory power, after controlling for the concurrent effects of audit firms and engagement offices. Similar results have been documented for small, mainly single-office accounting firms in China (Gul et al. 2103). However, the UK has institutions that create incentives for accounting firms to have strong quality control systems, and we expected this would mitigate the variation in partner behavior relative to the lax institutional setting in China. It turns out this is not the case as a Shapley-Owen decomposition analysis shows that partner fixed effects account for around 40 to 50 percent of the r-squares explained by the various models, and explain from three to five times more than the combined effect of audit firms and offices. The magnitude of individual UK partner coefficients is also large, with some partners having higher quality audits, on average, while other partners have lower quality audits. The findings support the conjecture by regulators that partner disclosure is informative in assessing audit quality.
EMPOWERING WOMEN: THE ROLE OF EMANCIPATIVE FORCES IN BOARD GENDER DIVERSITY
FRANCOEUR, CLAUDE
BEN AMAR, WALID; BRIEGER, STEVEN A; WELZEL, CHRISTIAN
Category: GV = Accounting and Governance
This study investigates the effect of country-level emancipative forces on corporate gender diversity around the world. Based on Welzel’s (2013) theory of emancipation, we develop an emancipatory framework of board gender diversity that explains how action resources, emancipative values and civic entitlements enable, motivate and encourage women to take leadership roles on corporate boards. Using a sample of 6,390 firms operating in 30 countries around the world, our results show positive single and combined effects of the framework components on board gender diversity. Our research adds to the existing literature in a twofold manner. First, our integrated framework offers a more encompassing, complete and theoretically richer picture of the key drivers of board gender diversity. Second, by testing the framework empirically, we improve the evidence base concerning national drivers of board gender diversity.
DOES MANDATORY ADOPTION OF IFRS IMPROVE ANALYSTS’ INFORMATION ENVIRONMENT IN LATIN AMERICAN COUNTRIES?
FREITAS DE MOURA, ANDRE AROLDO
GUPTA, JAIRAJ ; MAK, CHUN YU
Category: FR = Financial Reporting
This paper investigates, (i) whether mandatory adoption of IFRS improves analysts’ information environment in Latin American countries where there is not significant change in institutional settings around the official IFRS adoption date; (ii) whether firm-level reporting incentives affect analysts’ information environment; and (iii) whether mandatory adoption of IFRS improves the precision of public, private and consensus information. The results show that mandatory adoption of IFRS improves analysts’ information environment, even after controlling for the firm-level reporting incentives. Firm-level reporting incentives do improve analysts’ information environment to a certain extent. The precision of public information and consensus information increases in the post-IFRS adoption period.
THE IMPACT OF THE MANAGEMENT CONTROL OVER THE INTENTION FOR A COMPANY TO CONTINUE UNDER FAMILY CONTROL
FREZATTI, FABIO
BECK, FRANCIELE; DA CRUZ, ANA PAULA; DE SOUZA BIDO, DIOGENES; MUCCI, DANIEL
Category: MA = Management Accounting
The study aims to address the association between intentions to continue family ties in Brazilian family businesses and management control structures via socioemotional wealth (SEW). With regards to the relationship between the SEW dimensions and diagnostic and interactive control system use, the results support the following connections: (i) the greater the intensity of family control and emotional attachment, the less the diagnostic system is used, (ii) the greater the intensity with which family members identify with a company and the greater the family’s social bonds, the more the interactive control system will be used, (iii) in turn, the greater the family members’ emotional attachment, the less the interactive control system will be used, (iv) the diagnostic system use influences the interactive control system, and (v) we identified that the interactive control system involves a connection between the diagnostic control system and intentions to renew family bonds in the business. This paper shows the importance of management control systems for the continuity of family control in these companies and highlights the paradox involving the interactive control system having a mechanism that bolsters an organization’s propensity to continue under family control and which depends on the existence of diagnostic control. In turn, diagnostic control tends to be discouraged by the intensity of family control and influence.
THE PURCAHSE PRICE ALLOCATION
FRII, PETER
HAMBERG, MATTIAS
Category: GV = Accounting and Governance
Goodwill has been a heavily debated and criticized accounting item, but its origin; the purchase price allocation (PPA) decision has been largely unstudied in the accounting literature. Using a hand-collected sample with 1,112 separately disclosed Swedish business combinations, we explore economic, managerial and ownership determinants of the PPA decision. We document that acquisitions are not only sizable, but they give rise to more goodwill than the sum of all revalued specific assets. On average, nearly three fourths of the excess price becomes goodwill. We find that the size of the excess purchase price and the uncertainty of the acquisition drive the allocation. Acquisition experience, on the other hand, moderates the propensity to allocate to goodwill. In the Swedish sample, managerial motives seem not to affect the PPA decision, but ownership does. We find in particular that family firms are more prone to allocate excess purchase prices to goodwill than to specific assets and liabilities.
OVERCOMING MOTIVATIONAL ISSUES RELATED TO CAPS ON REWARD: GIFT GIVEN AND FAIRNESS IN A SALES CONTEXT
FRIIS, IVAR
BOE, CATHRINE; HANSEN, ALLAN
Category: MA = Management Accounting
In extant research the inclusion of caps in employees’ compensation profile are somewhat of a paradox. On the one hand caps are installed because they have been seen as an element that safeguard firms against paying high bonuses that are based on employees’ luck rather than their performance, which can increase perceived unfairness. On the other hand, caps lower motivation and create incentive for manipulation, and caps can also lower perceived fairness if employees believe that the cap inhibits them from earning the bonus their performance justifies. In this paper we show by means of a case study in a sales department how both motivation and uncertainty problems linked to caps on the bonus payment are reduced because the sales people share the sales performance that goes beyond the gap. We argue that the sharing of performance is an act of gift given that is reinforced by collective measures and dependent on perceived fairness. We contribute to extant research in two ways. First, we show how sharing of sales performance can help to reduce motivation issues related to caps in incentive systems. This practice has not been described in the literature before. Secondly, we show that the norm of reciprocity is reinforced and supported by collective rewards. We illustrate that that individual rewards complemented collective rewards by providing a tool to enforce cultural control. This specific connection between individual and collective reward has not been described in the literature before.
RISK MANAGEMENT INSTITUTIONALIZATION AND BUDGET CONTROL: FIELD STUDY OF THREE STATE-OWNED ENTERPRISES IN CHINA
FU, YUANLUE
CHEN, YASHENG; FU, CHENXI; JERMIAS, JOHNNY
Category: MA = Management Accounting
Enterprise risk management (ERM) is intended to help organizations make better risk-adjusted decisions. To be effective, ERM must be accepted and practiced by the entire organization. In light of the recent global financial crisis, researchers and practitioners have questioned both the effectiveness of the current risk management frameworks and how the frameworks are being implemented. To address these questions, we examine the design and implementation of ERM in three large Chinese state-owned enterprises. Gaining insights from institutional theory, we propose that companies will increase their cash flow stability and optimize their return on investment by integrating the design and implementation of their ERM with the institutionalized budget control. Adoption of the budget control as part of ERM system increases the acceptance and use of ERM for the entire levels of organizations since budget control is perceived as a legitimated system in China.
EARNINGS MANAGEMENT USING CLASSIFICATION SHIFTING: EVIDENCE FROM JAPAN
FUJITANI, RYOSUKE
Category: FR = Financial Reporting
The purpose of this study is to investigate whether Japanese firms engage in Classification Shifting (CS). Unlike prior research, I consider the uniqueness of the Japanese financial reporting environment that might affect incentives to exercise CS. Specifically, this study sheds light on two unique points of Japanese GAAP. One is the unique requirement to report several levels of earnings, and the other is the allowance of managerial discretion over classification of line items. These properties enable managers to exercise discretion over classification of line items, but auditors scrutinize misclassification because core earnings are prescribed by GAAP. Considering these points, this study conjectures that Japanese firms do not shift placement of line items on average, but those with the incentive of earnings management tend to engage in it. The main results are as follows. First, I find no evidence that Japanese firms on average shift core expenses as special items. Second, firms with incentives to manage earnings achieve CS using special losses. Third, firms with incentives shift core expenses as non-operating items. However, this result is sensitive to specifications of models and estimation windows. Overall, this study emphasizes the importance of discussing the characteristics of GAAP in each country when examining CS. In addition, contrary to the IFRS approach, the results highlight the importance of requirements to report special or extraordinary items.
ON THE CAUSAL EFFECT OF INFORMATION ASYMMETRY ON AUDITOR CHOICE: EVIDENCE FROM A NATURAL EXPERIMENT
FUNG, SIMON
WANG, ZHENG ; ZHANG, LIANDONG ; ZHU, XINDONG
Category: AU = Auditing
We provide causal evidence on the agency cost explanation of the demand for high quality auditing. Using brokerage house closures/ mergers as a natural experiment to identify exogenous increases in agency costs arising from information asymmetry, we find that after experiencing exogenous reductions in analyst coverage, treatment firms are more likely to appoint external auditors of higher quality relative to propensity-score-matched control firms. This effect is stronger for treatment firms with greater reductions in analyst coverage. In addition, we show that treatment firms appointing new auditors with higher quality experience increased stock liquidity and reduced cost of equity capital, suggesting that auditor choices have real benefits. We view our results as one of the first pieces of causal evidence supporting the theory that choosing high-quality external auditors is a bonding mechanism that firms use to reduce information asymmetry and the resultant agency costs.
BIODIVERSITY REPORTING. EVIDENCE FROM ENGLISH LOCAL COUNCILS
GAIA, SILVIA
JONES, MICHAEL JOHN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study uses a comprehensive disclosure index to analyse the current nature and content of biodiversity reporting practices adopted by English local councils. By adopting a multi-theoretical framework that relies on economic and social theories, this study also investigates which factors can explain the extent of biodiversity disclosure provided by the local councils. Our findings show that although local councils acknowledge the importance of conserving biodiversity, the information disclosed on local biodiversity is limit and does not allow the interested stakeholder to get a comprehensive picture on the current status of local biodiversity. This study provide also evidence that local councils are likely to provide more comprehensive information on local biodiversity when they have a greater need to conform to the expectation of the communities they represent. Indeed we found the level of biodiversity disclosure to be significantly higher in more visible local councils, in local councils with a greater tax pressure and in local councils that represent communities where environmental values are more important. These findings are in line with the assumptions of social theories that suggest that voluntary disclosures is used, above all, to show conformity with the societal values.
CORPORATE SOCIAL RESPONSIBILITY REPORTING AND VARIETIES OF CAPITALISM: AN INTERNATIONAL ANALYSIS
GALLEGO ALVAREZ, ISABEL
QUINA-CUSTODIO , IVO ALEXANDRE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
this paper analyzes how aspects of national institutions affect CSR reporting on an international level, using the varieties of capitalism approach proposed by Hall and Soskice (2001) and Hall and Gingerich (2009). This approach is concerned with companies and the way they interact strategically to solve the coordination problems that arise from their activities. Considering a sample of countries (France, Portugal and Spain) pertaining to state-led market economies and (US and UK) pertaining to liberal market economies, using data from the Thomson Reuters Eikon database and the Global Reporting Initiative (G3.1), the results we obtained by linear regression show that companies in state-led market economies disclose more on CSR than companies in liberal market economies, and firms in state-led market economies disclose more on stakeholder aspects as social, environment and business behavior than companies in liberal market economies.
PROFIT SHIFTING AND THE MARGINAL TAX RATE: IS THERE A SHIFT-TO-LOSS EFFECT?
GAMM, MARKUS
HECKEMEYER, JOST; KOCH, REINALD
Category: TX = Taxation
This paper presents the first analysis of transfer pricing strategies employing a simulated proxy of the company’s marginal tax rate. Application of this sophisticated tax measure allows us to compare directly profit shifting to subsidiaries with a low statutory tax rate and profit shifting to subsidiaries with tax losses. Using a panel of 23,668 foreign EU subsidiaries, we find that the shift-to-loss effect is significant and that the size of this effect (marginal effect: -.162) does not differ considerably from the shifting to low-tax rates (marginal effect: -.189). Using simulated marginal tax rates also increases the explanatory power of the regression model by more than 30 percent. With regard to the persistence of the observed effects, we find that statutory tax rates are reflected in long-term profit shifting strategies, whereas the shift-to-loss effect is rather a short-term response.
ASSESSING THE RELATION BETWEEN TAXES AND STOCK RETURNS: THE CRITICAL ROLE OF CHOOSING THE TAX VARIABLE
GAO, ZHAN
GIVOLY, DAN; LAUX, RICK
Category: TX = Taxation
This paper investigates the contemporaneous relation between returns and tax expense, holding pretax income constant. Our inquiry is motivated by a stream of research which finds that tax expense is positively related to returns, suggesting that paying more in taxes is “good news.” We report three primary findings. First, we demonstrate that the different tax variables used in the literature capture different aspects of book-tax differences, and thus the choice of the tax variable affects the inferences that can be drawn. Second, using a regression that distinguishes between temporary and permanent differences, we find that temporary differences are negatively associated with returns. We further demonstrate that the positive relation between returns and permanent differences can be attributed to influential observations. Finally, we show that the positive association between returns and both current and total tax expense is explained by influential observations and the intricacies of the accounting for temporary differences.
IS PUBLIC SECTOR PERFORMANCE AFFECTED BY BOARDS OF DIRECTORS’ CHARACTERISTICS? AN EMPIRICAL ANALYSIS OF THE NHS FOUNDATION TRUSTS
GARCIA-LACALLE, JAVIER
ROYO, SONIA; YETANO, ANA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Boards of directors which follow codes of corporate governance (CG) very similar to codes developed for listed firms are a recent innovation in autonomous public sector organizations. However, there is a lack of empirical evidence about the impact of these initiatives on public sector performance. This paper investigates the link between board of directors’ characteristics and public sector performance, in the NHS Foundation Trusts (FTs) in England. In FTs, CG follows a modified private sector model. A series of guidelines for boards of directors are set by the regulator (Monitor), which also evaluates and assess FTs using two main ratings: financial performance and governance, which mainly reflects service quality. The homogeneity in the boards studied as regards their size, independence and female presence does not allow extracting meaningful conclusions about their effect on performance. Having a woman chairing the board results in significantly better service quality, most likely because a chairwoman helps to orientate FTs’ boards towards its main organizational goal, service quality. In addition, our results support the idea that the relationship between board diligence and organizational performance runs from poor performance to higher board activity. Finally, a strong and positive relationship between financial performance and service quality has been found. By improving one dimension, the other is also improved and a virtuous performance cycle is created.
BOARD COMPOSITION AND ACCOUNTING CONSERVATISM: THE ROLE OF PROFESSIONAL EXPERTISE ON BOARD
GARCÍA-MECA, EMMA
ENACHE, LUMINITA
Category: GV = Accounting and Governance
In this study, we examine the relationship between accounting conservatism and board composition. Following Baysinger and Zardkoohi (1986) and Hillman et al. (2000), we categorize outside directors according to their skills, abilities, connections and knowledge in three different categories: business experts, support specialists, and community influential. Our sample consists of all active U.S. biotech firms publicly traded on the NYSE, AMEX, and NASDAQ stock exchanges during the 2005–2013 period. Our study confirms that not all outside directors are equally effective in monitoring and contracting and that certain kinds of outside directors, such as politicians, can even lower the sensitivity of earnings to bad news. Our robustness analysis confirms that these results are not conditional on the accounting measure, and suggest that distinguishing directors according to their skills and abilities is crucial to understanding the way that firm boards affect conservatism.
THE EFFECT OF INTERNAL CONTROL CERTIFICATION REGULATORY CHANGES ON REAL AND ACCRUAL-BASED EARNINGS MANAGEMENT
GARG, MUKESH
Category: GV = Accounting and Governance
This study investigates the stock exchange regulatory changes related to voluntary and mandatory internal control certification and its effect on real earnings management (REM) and accrual-based earnings management (ABEM). Certification by CEOs’ and CFOs’ of firms signify the existence of sound and effective internal controls that may result in lower earnings management. The study is motivated by the debate on costly and less effective audited mandatory internal control deficiency reporting in the US, with Australia adopting a low cost and affirmative disclosure on the quality of internal controls. Using a sample of listed firms from a unique Australian setting between 2000 and 2015, I find certifying firms have lower REM and ABEM in the years prior to the introduction of stock exchange recommendation, with an increase in REM activities during the voluntary regime. Firms making first time certification after stock exchange mandated disclosure, report higher REM and ABEM, relative to firms continuing from the voluntary disclosure regime. Moreover, first time mandatory certifiers switch from REM to ABEM in the year of abolition of the certification requirement. Overall, my findings suggest Australian ICFR disclosures inform on the quality of earnings, and there are different earnings management implications of voluntary and mandatory disclosures.
THE PERCEPTIONS OF FAIR VALUE REVISITED: A COGNITIVE LOAD APPLICATION
GARVEY, ANNE MARIE
GONZALO ANGULO, JOSÉ ANTONIO; PARTE, LAURA
Category: FR = Financial Reporting
The objective of this study is to revisit postgraduate accounting and auditing students’ perception of True and Fair View (TFV) and Fair Value (FV) after changes in Spanish accounting legislation in 2007 in order to observe its evolution. We also examine participants’ preferences for the FV model or Cost model (CV) under IAS 40 on Investment Properties and to what extent these models can show a TFV. Finally we examine aspects of the extraneous load from the Cognitive Load Theory (CLT) to analysis the impact of the presentation of financial information on its understanding and influence on decision making. A survey is used to obtain our answers. We include an abbreviated balance sheet and income statement from the financial statements of a company using both the FV and CV models. Different presentation formats are also given and we ask the participants questions relating to the information provided. This research is a step forward to observing these fundamental and complex accounting concepts incorporating students’ perceptions in relation to a real professional situation in order to improve financial information, especially in the area of presentation, through the application of CLT. As a result of our research and the importance of financial information presentation, we consider that the CLT should be taken into consideration in the Principles of Disclosure (POD) project being analysed by the IASB. Our study has implications for standard setters, regulators and researchers.
IS THE IFRS FOR SMES WORKING? AN EXPLORATORY INTERVIEW STUDY
GASSEN, JOACHIM
Category: FR = Financial Reporting
I investigate how the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) contributes to the development of private firm financial reporting. Therefore, I interview a sample of leading accounting experts from 23 jurisdictions around the globe to understand the role of private firm financial reporting and financial transparency in their jurisdiction as well as the importance of IFRS for SMEs in that regard. I find significant variation across jurisdictions and document that, for the jurisdictions of my sample, IFRS for SMEs predominantly influenced private firm financial reporting and transparency by serving as a blueprint for national regulatory reforms. In some jurisdictions, IFRS for SMEs has also been adopted as an optional reporting framework. According to my experts’ views though, direct firm-level adoption of IFRS for SMEs has been low in these jurisdictions. Based on my response data, I suggest some potential rationales for my findings and discuss potential reasons for the observed cross-jurisdiction variation in private firm financial transparency and IFRS for SMEs adoption.
ACCOUNTING FOR THE UNEXPECTED: A CASE STUDY OF HUMANITARIAN PERFORMANCE EVALUATION IN A LARGE-SCALE REFUGEE CAMP
GATZWEILER, MARIAN KONSTANTIN
RONZANI, MATTEO
Category: IC = Interdisciplinary/Critical
A defining feature of humanitarian crises is their unpredictable nature, making them interesting sites to analyze how accounting systems can facilitate engagement with the unexpected. This paper explores the question of how evaluation systems can be designed to engage with the complexities of humanitarian crisis settings, in which the potentialities for disastrous errors are overwhelming. Informed by empirical research on the management practices in a large-scale refugee camp, this study investigates principles and tactics that allow humanitarian evaluation systems to make a resource of the inevitable ambiguity and incompleteness that define their context. In doing so, we draw from the concept of heterarchy, defined as ‘governance through difference’, and show how it provides promising insights for accounting research. The study contributes to the literature on the enabling role of ambiguity to enhance the evocative power of accounting systems.
FORMAL PARTICIPATION IN THE EFRAG’S CONSULTATION PROCESS: THE ROLE OF EUROPEAN NATIONAL STANDARD-SETTERS
GÄUMANN, MARTIN
Category: GV = Accounting and Governance
While the European Financial Reporting Advisory Group (EFRAG) considers European national standard-setters as close partners that play a vital role for its legitimacy, there is paucity of evidence on the EFRAG’s consultation process and the involvement of national standard-setters. This paper adopts a multi-issue/multi-period approach to investigate the formal participation in the EFRAG’s consultation process. Based on 2,102 comment letters submitted to the EFRAG in the period 2002–2015, this study finds imbalances in the participation across interest groups and geographic origins. Compared to other interest groups, national standard-setters submit more comment letters at all stages of consultation process, and comment on more EFRAG due process documents. The national standard-setters’ comment letter submissions vary significant with the nature of EFRAG due process documents and the project topics, but dispersion in the level of participation is much lower than that of the preparers group. The findings have implications for the legitimacy of both, the EFRAG and national standard-setters, and contribute to the understanding of the role of intermediaries in international accounting standard setting.
TALKING TO MANAGERS: CONFUSING OR STIMULATING? THE IMPACT OF CONTACT FREQUENCY ON MANAGEMENT ACCOUNTANTS’ ROLE CONFLICTS AND INNOVATIVE BEHAVIOR IN THE PRESENCE OF SUPERVISORS’ PERFORMANCE FEEDBACK
GEBHARDT, RALF
NEVRIES, PASCAL; PFENNIG, CHRISTIAN
Category: MA = Management Accounting
The diverse set of tasks and changing requirements ask management accountants (MA) to frequently adapt their services by staying innovative (Davila et al., 2009; Grabner, 2014). To direct innovative aspiration towards effective solutions, intensified contact with managers, who use MA services, may help to receive specified stimuli when and how to engage in innovative behavior. However, such positive effects of close contact to managers might be paralyzed by more subsequent inter-sender conflicts, as a role theory related strand of literature suggests. In such a setting frequent supervisor feedback may help to reduce inter-sender conflict and thus bolster (innovative) performance. Results from the large-scale survey study (n=399) were obtained using structural equation modeling techniques (PLS) and yielded some unexpected findings. The relation between manager contact and innovation orientation is partly mediated by inter-sender conflicts. In line with theory, we find manager contact to incur higher levels of inter-sender conflict, but, contrary to expectations, this leads to a better innovation performance. Furthermore, while frequent supervisor feedback as a moderator variable does not help to mitigate resulting inter-sender conflict, it somewhat reduces innovative efforts. In total, the results indicate that when MAs get into closer contact with managers, more frequent performance feedback does not support a more positive relationship with stronger innovation orientation.
A PROFESSION IN PERIL? ACCOUNTING ACADEMICS, CORPORATISATION, AND THE BRAVE NEW WORLD OF ENGLISH HIGHER EDUCATION
GEBREITER, FLORIAN
Category: IC = Interdisciplinary/Critical
This paper examines the effects of corporatisation on accounting academics with reference to an in-depth case study of PBS, a research-intensive English business school which strongly embraced marketised approaches to higher education after the appointment of a dean with a background in the American financial services industry. It shows that, at PBS, accounting research became marginalised as the dean directed research funding towards business disciplines he deemed more likely to deliver top-ranked publications and large research grants, and that both accounting teaching and curriculum design came to be dominated by teaching fellows with backgrounds in private sector accountancy tuition. The paper concludes that in an increasingly corporatised English higher education system, accounting academia, as defined by original research and research-informed teaching, is in danger of disappearing.
A STUDY OF AUDITOR INDEPENDENCE, NAS FEES AND REPORTING DECISIONS: EVIDENCE FROM U.K. PUBLIC AND PRIVATE MARKETS
GEIGER, MARSHALL
VAN DER LAAN SMITH, JOYCE
Category: AU = Auditing
In this paper we examine auditor independence in public and private company audits by examining the influence of non-audit service fees (NAS) on audit report decisions. Our examination of financially distressed companies in the U.K. provides evidence that, in general, NAS fees are associated with reduced auditor independence, as measured by auditor’s willingness to render a going concern modified (GCM) audit opinion to publicly traded companies, regardless of auditor size, and for private companies audited by non-Big 4 audit firms. Conversely, for private companies audited by Big 4 auditors, we find evidence of an increased probability of receiving a GCM when NAS fees increase. We also find significant reductions in the likelihood of a GCM when NAS fees exceed 70 percent of audit fees regardless of listing status or audit firm size. Our findings provide evidence that auditor independence in the private company market is not lower than that of the public company market, and in some situations may actually be stronger. Our study sheds additional light on differences in the private and public company markets for audit services, and highlights the need to separately assess each of these markets. In addition, we 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 document differences between the Big 4 and non-Big 4 audit firms operating in those markets.
INTERVIEW-BASED RESEARCH IN ACCOUNTING 2000-2014: A REVIEW
GENDRON, YVES
DAI, NARISA TIANJING; FREE, CLINTON
Category: IC = Interdisciplinary/Critical
This paper aims to dissipate some of the nebulosity surrounding the undertaking of qualitative research in the accounting domain. We examine some key practices that underlie interview-based research – not in the spirit of setting inflexible standards but as a platform to sustain reflexivity and methodological debate. We tabulate 641 interview-based research articles in major accounting journals published in the 15 year period 2000-2014 and examine patterns in the way that interview data is drawn upon to support research claims. Specifically, we focus on two issues faced by qualitative researchers: (1) the “appropriate” number of interviews to conduct; and (2) the role of verbatim quotations in research accounts. Across this period, we find that the median number of interviews in published articles in leading accounting journals is 26, with variation across research philosophy and journal outlet. We note several trends across the period including a decrease in the number of interviews in published articles, an increase in the number of block quotations, a marked increase in the length of method sections and a heightened reliance on coding and qualitative software. We critique the notion of saturation and identify three key roles for verbatim quotations – evidence, elaboration and provocation – in the construction of research accounts.
EARNINGS PROPERTIES WITH UNLIMITED LIABILITY FIRMS: EUROPEAN EVIDENCE
GEORGIOU, NADINE
BIGUS, JOCHEN
Category: FR = Financial Reporting
Agency problems of debt are expected to be more severe with corporations than with unlimited liability firms such as one-person businesses and partnerships. In the presence of owners’ unlimited liability, creditors should be less inclined to ask for covenants in debt contracting. We expect earnings properties to respond to the different demand in debt contracting. Based on a sample of European private firms, we find that unlimited liability firms exhibit lower levels of earnings smoothing compared to corporations. The institutional framework also matters: tax-book conformity moderates the association between earnings smoothing and liability status while the strictness of the bankruptcy code and the enforceability of contracts amplifies it. We also find lower levels of conditional conservatism with unlimited liability firms than with corporations. The paper provides evidence for the claim that financial accounting information becomes less important in the presence of owners’ unlimited liability.
COUNTRY-LEVEL GOVERNANCE, ENVIRONMENTAL DISCLOSURE, AND FIRM VALUE: EVIDENCE FROM THE GULF COOPERATION COUNCIL REGION
GERGED, ALI
BEDDEWELA , ESHANI S. ; COWTON, CHRISTOPHER J.
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study examines the impact of country-level governance (CLG) on corporate environmental disclosure (CED) specifically, whether CLG can moderate the association between CED and firm value (FV). Findings obtained using a cross-country sample of 500 firm-year observations during 2010-2014 suggest that the effect of CLG is heterogeneous in that it may increase or decrease CED levels in companies’ annual reports across Gulf Co-Operation Council (GCC) countries. Additionally, the data shows that the collective effect of CLG and CED on FV is more statistically significant than CED alone, denoting that the value of CLG moderates the relationship between CED and FV in the area. By using an institutional framework, we debate that CLG representative of the social context of company’s operational environment may either encourage or discourage the adoption of CED thereby, moderating its relationship with FV. Our evidence offers governments, companies and national regulatory organisations a strong motivation and reiterates the crucial need for a more concerted effort to integrate economic, environmental and political policies to ensure sustainability within the area.
AUDIT COMMITTEE CHAIR AND FINANCIAL REPORTING TIMELINESS: A FOCUS ON FINANCIAL, EXPERIENTIAL AND MONITORING EXPERTISE
GHAFRAN, CHAUDHRY
YASMIN, SOFIA
Category: GV = Accounting and Governance
In this study we examine the impact of audit committee chair financial, experiential and monitoring expertise on the financial reporting timeliness. We find that experiential expertise of audit committee chairs reduces the delay in the audit report lag resulting in more effective audit committee chairs, at least in the face of financial reporting timeliness. We also find that monitoring expertise of audit committee chairs have a significant negative impact on the audit report lag and hence improve the financial reporting timeliness. These are important findings from practice, academic and public policy perspectives.
THE ROLE OF POWERFUL NON-EXECUTIVE CHAIRMAN IN MERGERS AND ACQUISITIONS
GHANNAM, SAMIR
MATOLCSY, ZOLTAN ; SPIROPOULOS, HELEN; THAI, NATHAN
Category: GV = Accounting and Governance
This paper examines the role of the non-executive Chairman of bidding firms and various aspects of takeover outcomes. We study this in the Australian context because the Australian institutional setting is unique, where only 5% of Chairman and CEO roles are combined, compared to 60% in the U.S. Based on a sample of 316 acquisitions by ASX listed firms between 2004 and 2014, we find that firms with a powerful Chairman pay lower bid premiums and they are also less likely to revise the initial offer price. Furthermore, Chairman power is found to have a positive association with the bidding firm’s market reaction to the takeover announcement. Our evidence is robust with respect to alternative tests and variable specifications.
EARNINGS MANAGEMENT IN INNOVATIVE SMALL AND MEDIUM ENTITIES: STRATEGIES AND CONSEQUENCES
GHIO, ALESSANDRO
FILIP, ANDREI; PAUGAM, LUC
Category: FR = Financial Reporting
Uncertainty and complexity surrounding innovative Small and Medium Entities’ (SMEs) activities create high information asymmetries between managers and investors which facilitate earnings management. Yet managers of innovative SMEs do not want to be penalized by market participants because insufficient financing would impair their innovative capacity and future performance. We investigate whether innovative SMEs rely more on real earnings management that are difficult to detect externally than on accrual-based earnings management, and whether the mix of earnings management leads to economic consequences. Using a sample of SMEs listed on the AIM London stock exchange from 1995 to 2014, we document that innovative SMEs engage less intensively in accrual-based and more intensively in real activities-based earnings management relative to non-innovative SMEs. We find that the combination of low accruals earnings management and high real earnings management is done efficiently by focusing resources towards investments in R&D in the future years which lead to higher market value. We further examine the role of regulation and monitoring on accounting quality of innovative SMEs. Results are consistent with the argument that stronger regulation and increased monitoring rules reduce the level of accrual-based earnings management, while they lead to more use of real earnings management.
HOW ARE ACCOUNTING BODIES AND FIRMS RESPONDING TO THE NEEDS OF FINANCIAL REPORTING ON GREENHOUSE GAS EMISSIONS? THE STATE OF THE ART
GINER, BEGOÑA
ALLINI, ALESSANDRA; CALDARELLI, ADELE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper highlights the current accounting approaches to greenhouse gas (GHG) emissions. In particular, it explores and discusses critically the treatment of emission rights (ER) under carbon trading schemes from two distinct angles. On the one hand, it reviews the methods adopted by European accounting bodies at a local level and, on the other, it examines current practices followed by European firms. The institutional decisions and the reactions of European bodies to the European Financial Reporting Group (EFRAG) proposal are rather different, which would suggest some potential difficulties in finding a common solution for the future. Not surprisingly, there is still a diversity of approaches with regard to how firms report ER. While the majority of firms do not record free ER in their accounting books, the proportion of firms that recognize both ER and liabilities is larger than in prior studies. Leaving aside sample differences, the new auctioning system introduced by Phase 3 of the European Emission Trading Scheme (EU ETS) may also have affected firm behavior. Furthermore, it is also worth pointing out the decrease in non-disclosure compared with prior studies. Interestingly, we evidence that local accounting rules and proposals regarding ER do not generally affect corporate financial reporting. This study could be seen as an influential and policy relevant paper.
PROCESSES AND QUALITY OF CASH FLOW FORECASTING: A CASE STUDY OF A MULTINATIONAL CORPORATION
GLAUM, MARTIN
SCHMIDT, PETER ; SCHNÜRER, KATI
Category: MA = Management Accounting
We provide a clinical analysis of cash flow forecasting at Bayer AG, a large German-based multinational corporation. Our work is based on 20 interviews with managers responsible for direct-method cash flow forecasting in subsidiaries across 15 countries. We investigate which information managers use as forecasting input, how they validate the input, how they derive forecasts, and how they validate forecast output. We further examine whether forecasting processes are affected by local entity characteristics (size, region, etc.). We also examine how managers cope with the possibility that forecasting input provided by other company departments may be influenced by managerial incentives. Finally, using quantitative analyses of realized cash flows we analyze whether forecasting practices and entity characteristics impact forecasting quality. We find that forecasting practices vary substantially across local entities, documenting limits to standardization and central control in multinational corporations that operate in heterogeneous and dynamic environments. Furthermore, processes are affected by entity characteristics such as size and complexity. Our quantitative analysis shows that cash outflows are more difficult to forecast than inflows. For cash outflows, validation of input data is positively related to forecast quality. The quality of cash inflow forecasts is higher if forecasters eliminate political influences from operational planning data used as forecasting input.
DOES GREATER R&D QUALITATIVE DISCLOSURE PROVIDE INFORMATION ABOUT FIRM PROFITABILITY?
GOEL, PRATIK
JAIN, ANKIT ; KALLAPUR, SANJAY
Category: FR = Financial Reporting
We construct a weighted word-count based measure to capture the quantity of a firm's 10-K narrative R&D-related disclosures, and document a persistent & significant (statistical and economic) negative association with subsequent firm profitability (ROA) during 1993-2006. These results stand in contrast to prior literature on 10-K narrative disclosures, across disciplines, where such disclosures have been found to convey meaningful information (via positive association) about current and future firm fundamentals. Also, the observed negative bias remains significant even after accounting for alternate explanations in this context. We argue that the unique characteristics of the R&D disclosure environment make it difficult for managers to develop skilled intuitive judgments about the outcome of their firms’ R&D investments, which in turn could adversely affect the accuracy and credibility of these disclosures. The assertion that the worst R&D performers are also the most biased then seems to explain the negative association. The disclosure-type and features of the environment are thus important considerations in this area.
CULTURAL SECRECY AND VOLUNTARY FINANCIAL DISCLOSURE: EUROPEAN EVIDENCE ON SEGMENT REPORTING
GOETTSCHE, MAX
KÜSTER, STEPHAN; STEINDL, TOBIAS
Category: FR = Financial Reporting
Under the management approach of IFRS 8 companies are required to disclose disaggregated financial information in alignment with their internal decision-making and resource allocation process. In order to provide this internal information, management has broad leeway for voluntary disclosure. Relying on the framework of Gray-Hofstede, this study investigates the influence of cultural secrecy on the voluntary disclosure of segmental information prepared under the management approach. Based on hand-collected data for 2,391 firm-years from 15 European countries for the years 2009 to 2014, we show that cultural secrecy is negatively related to voluntary segmental disclosure. Our results are robust to several sensitivity analysis and suggest that management’s strategic disclosure decision is influenced by irrational factors.
CYBER-SECURITY INCIDENTS AND THE PROBABILITY OF FINANCIAL RESTATEMENTS
GOGOLIN, FABIAN
LYNN, THEODORE; ROSATI, PIERANGELO
Category: AU = Auditing
In this study, we investigate the relationship between cyber-security incidents and the probability of financial restatement. Financial restatements have a significant impact on the reputation of managers, firms and auditors; and then also represent a substantial investor risk. In response to a sharp increase in accounting scandals in the late 1990s and early 2000s, regulators have tightened the level of disclosure and monitoring requirements in order to ensure reporting quality and limit the number of restatements. The increasing reliability on information technology has revealed firm’s vulnerability to cyber-security incidents which represent a new threat to a firm’s financial reporting quality. Using a sample of 4,764 firms, we find that, on average, a firm experiencing a cyber-security incident has a 55 percent lower probability of restating their financial statements within a two-year period after the incident when compared to non-breached firms. Further analysis suggests that the negative impact of cyber-security incidents on the probability of future restatements is due to an increase in both auditors and regulators’ monitoring. These results are consistent with the notion of cyber-security incidents signaling potential internal control weaknesses.
IS EXPOSURE TO COMPLEX TAX ISSUES ASSOCIATED WITH BETTER AUDIT QUALITY OF INCOME TAX ACCOUNTS?
GOLDMAN, NATHAN
HARRIS, KATHLEEN; OMER, THOMAS
Category: AU = Auditing
This study examines the association between audit firms’ exposure to complex tax issues and the audit quality of the income tax accounts. Because companies’ income tax accounts are at times complex and represent a material portion of the financial statements, the audit quality of these accounts is a large part of the overall audit quality of firms' financial statements. Consistent with auditor knowledge developing from audit personnel’s experiences, we suggest audit offices with increased exposure to complex tax issues invest more in training its employees and have greater experience with auditing the income tax accounts. Using a post-Sarbanes-Oxley sample of Big 4 audit firms, we find a positive association between exposure to complex tax issues and the audit quality of income tax accounts. Furthermore, when an audit office has an increase in exposure to complex tax issues, there is an increase in the audit quality of the income tax accounts. Additionally, when an audit office has a prior year tax related restatement the likelihood of a current year misstatement decreases, suggesting a learning effect. Lastly, we find the benefits of exposure to complex tax issues is only present for clients that audit offices do not provide APTS, suggesting exposure to complex tax issues and APTS are potential substitutes. Our findings increase our understanding of the dynamics of audit team performance when auditing income tax accounts.
THE EFFECTS OF SOCIAL MEDIA ACTIVISM ON STOCK MARKETS
GOMEZ CARRASCO, PABLO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Building on King and Soule (2007) and based on social movement theory, this study assesses the influence of social media activism on the stock market performance of the targeted firms. We focus on information published on Twitter by two critical external stakeholders: consumer associations and trade unions. To the extent that social media represent a valid medium to mobilize stakeholders’ activism, protests on Twitter may damage firm reputation and legitimacy, leading to capital market reactions. Using a corpus of over 1.5 million tweets belonging to Spanish listed banking groups, we study the impact of activism by looking at targeted firms’ abnormal variations in price and trading volume. Our findings suggest that the activism of key stakeholders in Twitter has a significant impact on investors’ decisions. Further, our empirical analyses indicate that the mechanisms to affect investors’ behaviour differ depending on the characteristics of the external stakeholder group.
HOW DISAGGREGATED PERFORMANCE REPORTS AFFECT TEAM COOPERATION: CONTENT MATTERS?
GOMEZ-RUIZ, LAURA
NARANJO-GIL, DAVID
Category: MA = Management Accounting
This study investigates the effects of the specific content of disaggregated performance reports on team cooperation over periods, when agents’ rewards are based on team performance. In a disaggregated performance report teammates´ individual performance information is shared among partners. Some accounting researchers suggest that disaggregated performance reports increase cooperation, by reducing noise at team level. Others claim that disaggregated reports increase free riding and influence agents´ cognition by emphasizing boundaries between teammates. The present study aims to reconcile these seemingly contradictory results by analyzing simultaneously the effects of disaggregated reports containing different kinds of performance information (agents´ actions vs. payoffs). By conducting an experiment we found that the content of disaggregated performance reports directly affects team cooperation. A disaggregated performance report that displays both agents’ actions and payoffs decreases cooperation over periods, also as a consequence of social comparison among teammates. In contrast, if disaggregated performance reports show only teammates´ actions, then free riding decreases.
GRI ECONOMIC VALUE REPORTING BY BRAZILIAN COMPANIES: THE PERSISTENCE OF OLD SOLUTIONS
GONÇALVES, ROSANA
FREGONESI, MARIANA S. F. A.; RONCOLATO, ARUNA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This research aims to compare the proposed structures for the Brazilian VAS and the EC1/GRI as well as analyze the use of the VAS as response to the EC1 indicators of the GRI Reporting Framework. The VAS and the EC1 structures were compared by means of document analysis. Also a content analysis was made to verify the use of VAS in response to the EC1 indicators. It was determined that the EC1 model differs in a few aspects from the VAS model structure. It is also observed that, conceptually, if the VAS evidenced the investments in the community, it would reach the objective proposed by the EC1. The results showed that among the 528 Brazilian public companies only 71 sustainability statements were available in their websites. Most of them, 51 reports followed the GRI Guidelines. The ECI indicators were reported in 46 statements. This subset of public companies declared EC1 indicators but just 13% had total adherence to GRI guidelines. The use of the VAS as response to the EC1 Indicators was identified in 52% of the 46 companies. The majority disclosures EC1 indicators pointing to the VAS page in their sustantability report (18 companies), other 6 companies use particular formats to disclosure the same data presented in the VAS. Regardless of its limited use, must be further studied the possibility of VAS indicators ensure a more satisfactory compliance with the principals and objectives of Economic Value Reporting GRI Guidelines than the EC1 indicators.
ACCOUNTING INFORMATION DEMANDS OF INSTITUTIONAL DONORS FROM A HUMAN RIGHTS ORGANIZATION IN NORWAY: PARALLEL REPORTING REALITIES
GONCHARENKO, GALINA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Nonprofit accounting practices are challenged by the trend toward harmonization with business accrual accounting principles. At the same time, dissatisfied with the type of information presented in annual financial reports, its main users - institutional donors - create alternative reporting systems in parallel for NPOs they support. The paper undertakes a case study of a Norwegian human rights organization, the Rafto Foundation, explores the reasoning of the high financial accountability demands of its institutional donors, their information needs for decision-making and accountability, and the interlinkage between annual financial reporting and the alternative reporting systems. The study applies the analytical lenses of institutional logics and triangulation of qualitative methods.
PRINCIPAL LEADERSHIP STYLE AND SCHOOL PERFORMANCE: EVIDENCE ON THE MEDIATING ROLES OF RISK MANAGEMENT CULTURE AND MANAGEMENT CONTROL SYSTEMS USE IN AUSTRALIAN SCHOOLS
GONG, ZHIYUN
SUBRAMANIAM, NAVA
Category: MA = Management Accounting
This study examines how differing styles of leadership are related to organizational control features including the shared values and norms towards risks and the manner of use of management control systems (MCS) in the achievement of organizational objectives in the school setting. Based on survey responses from 106 Victorian secondary school principals, we find transformational leadership style is significantly and positively related to performance-oriented RM culture, and that the greater the extent of performance-oriented RM culture, the higher the academic and the financial sustainability of the school. On the other hand, transactional leadership is not significantly related with performance-oriented RM culture, and has a negative impact on the use of MCS in an enabling manner. Interestingly, an enabling use of MCS is not directly associated transformational leadership style, but acts as a significant variable mediating the relationship between RM culture and school performance. These results contribute to the management control literature by providing empirical evidence supporting both performance-oriented RM culture and an enabling approach to MCS as critical mediating variables in the leadership style and organizational performance link.
WHAT ABOUT SUPREME AUDIT INSTITUTIONS? A LITERATURE REVIEW AND SUGGESTIONS FOR FUTURE RESEARCH
GONZÁLEZ-DÍAZ, BELÉN
GARCÍA-FERNÁNDEZ, ROBERTO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This article provides a review of the existing literature regarding supreme audit institutions (SAIs) to establish a map of the field that shows the main research streams addressed to date and to identify challenges and opportunities for future research. The authors gather and analyse 149 relevant articles regarding SAIs published from 1977 to 2014 in journals included in the Web of Science (WOS) and Scopus databases. Research on SAIs is an area of growing importance. The literature review demonstrates that themes related to fulfilment of mandate and the study of human resources in SAIs and their methods of control have received the greatest amount of attention among researchers. The results reveal the need for greater empirical development in the field, strengthening new methodologies and providing comparative analysis, allowing for the exploration of new research streams that focus on the use and integration of the international norms of SAIs, their role in the fight against corruption, collaborations between these institutions through joint audits related to the environment, security, and foreign aid, and the articulation of mechanisms for improving transparency and accountability. This article presents the first literature review regarding the role of SAIs in academic research
ETHICS AND SOX: ASSESSING FIFTEEN YEARS OF BUSINESS ETHICS RESEARCH
GORDON, IRENE M.
NAZARI, JAMAL A.
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The Sarbanes-Oxley Act of 2002 (SOX) was meant to bring legitimacy back to stock markets and to improve the ethics of corporate executives and auditors. The passage of fifteen years provides a convenient point to consider various effects of this legislation including its effect on academic research. In this paper we examine the SOX based academic business ethics literature. Our paper contributes broadly to the academic business field as compared to previous more discipline specific papers. We supplement the literature by examining the scope of SOX topics highlighted in this academic literature and detail how reliant the research is on SOX. We identify the development of trends in the SOX based academic business ethics literature over the preceding 15 years and provide evidence of the broad theoretical frameworks to better understand the breadth and depth of theories used in this body of research. We use our results to pinpoint potential under-researched SOX related topics in the business ethics literature that may provide future research opportunities.
DO INVESTORS TAKE DIRECTORS’ AGE AND TENURE INTO ACCOUNT?
GOSSELIN, ANNE MARIE
BERTHELOT, SYLVIE; COULMONT, MICHEL
Category: GV = Accounting and Governance
This study examines the value relevance of corporate directors’ age and tenure and age and tenure homogeneity on investors. Based on a sample of Canadian firms, the study findings show that investors take directors’ tenure and tenure homogeneity into account, viewing tenure as a positive element, in contrast to tenure heterogeneity, which they perceive as negative. They do not seem to consider directors’ age to be relevant.
SPECIALIST CEOS AND IPO SURVIVAL
GOUNOPOULOS, DIMITRIOS
GOUNOPOULOS, DIMITRIOS; PHAM, HANG
Category: FA = Financial Analysis
This study examines the influence of specialist CEOs on the probability of failure and survivability of initial public offering (IPO) firms. We construct a general managerial ability index based on CEOs’ past employment history in order to classify CEOs into specialist and generalist ones. Specialist CEOs pursue a career in particular functional roles, firms and industry sectors, as opposed to generalist CEOs who accumulate their work experience through various positions, firms and industries. We uncover strong evidence that IPO firms with a specialist CEO have a lower probability of failure and a longer time to survive in subsequent periods following the offering. The finding suggests that specialist managerial ability has significant implications for post-issue performance of newly listed firms. Additionally, specialist CEOs may have incentives that are more aligned with those of the firm and its shareholders; thus, they are more likely to enhance the viability of IPO firms for a longer period of time.
FRAMING IN FORMATION: INVESTIGATING THE FACE-TO-FACE MEETINGS OF ANALYSTS AND MANAGERS
GRAAF, JOHAN
Category: IC = Interdisciplinary/Critical
This study addresses the conflicting findings in the accounting literature regarding the information benefits of public earnings presentations between analysts and managers. By drawing on a perspective of analysts as frame-makers this study explores how calculative frames are enacted within these interactions. In particular, the presented findings invites a more continuous perspective of analysts’ frame-making by investigating how frames develop in times other than during its original establishment. Based on Swedish field data, this study analyses the interactions between analysts and managers through sociological communication theory. Four observations of the activities at earnings presentations are presented: (1) the difference between analysts’ proactive and reactive activities, (2) the organising of accounting deviations, (3) analysts’ collections of experience, and (4) analysts’ narration of managers. The findings illustrate that calculative frames are continuously destabilised by the accounting reports and reframed through interactions with managers. Furthermore, analysts contribute not only to framing the firm, but also to the overflowing of such frames.
THE ROLE OF INDEPENDENT DIRECTORS ON EARNINGS MANAGEMENT: EVIDENCE FROM INDIVIDUAL INCENTIVES
GRANDE HERRERA, CRISTINA
GARCIA OSMA, BEATRIZ; VAZQUEZ, ANTONIO B.
Category: GV = Accounting and Governance
We predict that not all independent directors identically monitor managerial decision making. In particular, we expect that independent directors’ behaviour hinges critically on their individual incentives. Using a large US sample for the period 1997 to 2013, we construct a measure of within-board heterogeneity among independent directors’ incentives that is exogenous to a single firm’s choices. Using this measure, we find evidence that individual incentives influence boards of directors’ ability to constrain earnings management. In particular, we show that boards composed of independent directors with greater individual incentives lower real earnings management and increase informative accrual-based earnings management. Moreover, results show a positive effect of individual incentives on the firm information environment. Our evidence highlights the importance of independent directors’ individual incentives to carry out their fiduciary duty to monitor the financial reporting process.
AUDIT QUALITY AND RISK PREFERENCES: EMPIRICAL EVIDENCE OF THE AUDITOR`S AND INVESTOR’S PERSPECTIVES
GRASCHITZ, SABINE
STECKEL, RUDOLF; STELLER, MARCEL
Category: AU = Auditing
Auditing is intended to fulfil a bundle of functions and specifically should ensure that high quality information is provided for the addressees of financial statements. Although there is no single definition of audit quality that is used as a standard, audit quality can roughly be interpreted as investing the “appropriate” audit effort to issue an “appropriate” audit report on the auditee’s compliance with the relevant accounting principles. Within this paper the auditor and investor’s perspectives on audit effort and audit fees based on their individual risk preference is analysed. This experimental analysis is based on the audit market model of Pummerer & Steller (2013). The results of the case based experimental analysis show that the higher the auditor’s risk aversion the higher the audit effort and the audit fee. In line with theoretical considerations the results indicate that risk averse auditors provide higher audit quality than risk neutral auditors but also charge a higher audit fee. From investors` point of view the results show that risk averse investors prefer a higher audit quality and assess the auditor’s liability as more important than risk neutral investors.
BOARDS AND PERFORMANCE: EFFECT OF DIRECTOR TENURE
GRASSI, LAURA
GIORGINO, MARCO; ZAMAN, MAHBUB
Category: GV = Accounting and Governance
During the last two decades corporate governance reforms in many countries have affected board composition. Independent directors, once a rarity, are now a common feature of boards in most countries. There is also growing support for female directors on board. Motivated by continued debate relating to the independence and tenure of directors, in this paper we examine the effect of experienced directors on firm performance using a sample of EURO300 firms covering the period 2011-2014. Controlling for several corporate governance variables (e.g. duality, size, independence) and implementing several robustness checks, we find director tenure, especially of independent members, is positively associated with both market based and accounting based performance. We also find that tenure of female independent directors has a negative association with market based performance but a positive association with accounting based performance. The tenure and age of female independent members however does not have a significant effect on performance. Our findings also support the idea that it is not the age of independent directors but their tenure which affects performance. Overall, our paper contributes to the literature by providing recent evidence on the effect of director tenure, as well as their age and gender, on firm performance in Europe which has a range of governance policies on board composition.
AUDITING AS AN AFFECTIVE WORK SYSTEM: THE MEDIUM IS THE MESSAGE
GRAY, GLEN
ALLES, MICHAEL; TAKAGI, JUNKO
Category: AU = Auditing
This paper has two objectives. First is to model the role of technology in the joint process by which, (1) external auditors produce audited financial statements, and (2) those reports are then consumed by outside decision makers. Second objective is to use that model to predict the evolution of that interaction between technology and auditing as technology becomes more prevalent and capable. To achieve these objectives, we use an interdisciplinary approach. On the supply side we use the work system framework of Alter (2006) to conceptualize auditing as a process that applies labor and technology to transform unaudited financial statements into audited financial statements. On the demand side, we adopt the sociological construct of affect (Clough, 2008; Boedker and Chua, 2013) to conceptualize the process by which consumers of audited financial statements filter those reports for perceived credibility and relevance based on the extent of trust in the auditor. Together, these define auditing as an affective work system. Following Morrow, Hansen, and Pearson (2004), we argue that trust in the auditor should be viewed as being grounded in both cognitive processes and affective responses. Our model predicts that eventually the fundamental source of assurance may become the audit technology itself. This prediction builds on the thinking of Marshall McLuhan that “the medium is the message” (McLuhan and Fiore, 1967).
IMPROVING MULTIDISCIPLINARY ASSURANCE TEAM PERFORMANCE THROUGH TRAINING INTERVENTIONS
GREEN, WENDY
KOROY, TRI RAMARAYA
Category: AU = Auditing
Multidisciplinary teams (MDTs) are increasingly being used in a range of assurance engagements. In particular, standard setters have recognised the need for the diverse expertise possessed by members of such teams in the conduct of nonfinancial assurance engagements including greenhouse gas (GHG) assurance. Ironically, the performance of MDTs is often impeded by their diversity. We employ a between-subjects experiment utilizing a complex multi-stage analytical procedures task for a GHG assurance engagement to investigate the effectiveness of two training interventions drawn from the educational and cognitive psychology literature - analogical encoding (AE) and collaborative learning (CL) - in enhancing MDT performance. We find that combining AE and CL techniques leads to the highest task performance outcomes. Our results suggest that when these techniques are combined, the team member familiarity and sharing of workload generally associated with CL enhances the improved task ability generally associated with AE to facilitate greater improvement in performance.
THE INTERNAL PROCESS OF GRI REPORTING – INSIGHTS FROM AUSTRIA, GERMANY AND SWITZERLAND
GREILING, DOROTHEA
TRAXLER, ALBERT ANTON
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Over the past decades more and more organizations have decided to publish a sustainability report to create transparency about their contributions to sustainable development. Alongside the increased relevance of sustainability reporting (SR) in practice, research also has focused on the issue. However, there is currently still little known about how organizations manage the process of reporting on sustainability. In this vein, the purpose of the paper is to investigate the ways in which organizations in Austria, Germany and Switzerland perform the measurement of sustainability at the corporate level. Variations in corporate sustainability can be traced back to institutional conditions and the three countries have a lot in common. Particularly relevant for SR are legal traditions, governance structures or the approach to corporate social responsibility (CSR). Therefore, it is appropriate to examine these three countries jointly. To follow this aim a survey with 145 GRI reporters from Austria, Germany and Switzerland was conducted. The findings suggest that the organizations surveyed are not pursuing a mere PR-driven reporting approach. They are involving a wide range of departments, taking into account stakeholders’ needs and using the information gained for their sustainability management.
SHARE REPURCHASING MOTIVATIONS OF UK FTSE350 COMPANIES
GREY, COLETTE
BERRY, CRAIG; FLYNN, ANTOINETTE
Category: FA = Financial Analysis
The popularity of repurchasing shares as a means of returning cash to shareholders has grown substantially, particularly since the turn of the century. In Europe, more share repurchases occur in the United Kingdom (UK) than any other country, and the UK has comparable levels of repurchasing to the United States (US), on a scaled basis. Accordingly, we examine this phenomenon by focusing on the key driving forces of share repurchases behaviour among UK FTSE350 listed firms. We examine a range of hypotheses drawn from the literature (free cash flow, signalling of future performance, capital structure adjustment, substituting for dividend payouts, and maximising executive remuneration) to determine the main motivations for share repurchasing among the FTSE350 firms. The results support the free cash flow and executive remuneration hypotheses with no support for the signalling, capital structure adjustment or substitution hypotheses. Furthermore, we suggest a model to predict the likelihood of identifying a repurchasing firm from a non-repurchasing firm on a sector specific basis. Overall, UK FTSE350 repurchasing firms are in principle well-run enterprises that generate large cash flows while also having significant capital expenditures. They typically pay out dividends, repurchase shares and have high quality corporate governance indicators, which we argue ensures that share repurchasing activity has a positive agency effect from the viewpoint of UK shareholders.
NEGOTIATIONS OF ACCOUNTING FIGURES AND THE INDIVIDUALIZING EFFECTS OF HIERARCHICAL ACCOUNTABILITY
GRISARD, CLAUDINE
ANNISETTE, MARCIA; GRAHAM, CAMERON
Category: IC = Interdisciplinary/Critical
This paper explores the struggles taking place in the backstage of a decision making committee to offer a typology of the actions that actors develop to influence a project they work on, but for which they are not the decision makers. Instead of looking on the process of decision-making, we concentrate on people constructing and gathering the information that are latter use by decisions makers. We try to understand how those people are able to influence a decision on which they are not invited to take part of. We take the specific example of an affordable phone to connect rural areas and of two groups of employees who work on the development of the project. The first group wants to stop the project while the second want one to pursue it. We study the actions of each group to influence the production of accounting numbers, which serve as key variable for the decision makers. First, by highlighting the importance of the variety of hierarchical layers within the process of decision making. Second, we show three different categories of actions, all of which related to a different moment of the production of an accounting result, serving as the main indicator to make the decision.
SUPPLY-SIDE EVIDENCE ON THE ROLE OF THE FINANCIAL PRESS AS AN INTERMEDIARY OF ACCOUNTING INFORMATION
GROßKOPF, ANN-KRISTIN
HITZ, JÖRG-MARKUS
Category: FR = Financial Reporting
We shed light on the economic role of the financial press as an intermediary of accounting information by providing descriptive evidence on the supply of newspaper coverage. Our analyses of coverage and content of both online and print articles provides detailed insights into the structure of information provided, and hence helps to understand factors that shape demand for newspaper coverage. In particular, we find that the supply of financial press in-formation is associated with the quality of the firm’s information environment, and that media attention, not surprisingly is focused on very large firms. Our analyses of the sources of in-formation contained in press articles also reveal that journalists systematically provide addi-tional information beyond re-broadcasting items taken from firms’ earnings announcements. Hence, we contribute to the literature by providing evidence that is consistent with the press assuming both a dissemination role and an information aggregation role.
HOW DO AUDITORS CHARGE AUDIT FEES BASED ON CLIENTS’ FDI CHARACTERISTICS?
GU, JUNJIAN
SEMBA, HU DAN
Category: AU = Auditing
We examine the effect of FDI characteristics on audit fees, and the influence of homogeneity of industries on this effect. Using a sample of firm-year observations of Japanese listed firms over the period of year 2004 to year 2014, we find that audits of companies investing in a greater number of common law countries and developing countries, respectively, will exhibit higher audit fees. Total geographic distance to host countries also increases audit fees. Further, we find that the homogeneity of industries in which a company competes negatively moderates these relationships. Our findings are robust to several sensitivity tests. Overall, this study suggests that auditors do consider audit fees based on clients’ FDI characteristics, which can enrich our understanding on the audit fees determinants, and lead to implications for auditors, regulators, and stakeholders.
CORPORATE CORRUPTION CULTURE AND AUDIT PRICING IN THE U.S.
GU, TRACY
LIU, XIAODING ; SIMUNIC, DAN
Category: AU = Auditing
Using a firm-level corruption culture measure constructed using cultural background information on key company insiders, we analyze how auditors price clients’ corporate corruption culture to understand its role in auditors’ risk judgment. We show that firms with a high-corruption culture are less likely to have Big 4 auditors and industry specialist auditors. Given auditor choice, firms with a high-corruption culture incur higher audit fees and have a longer audit report lag. Moreover, the effect of corruption culture on audit fees is more pronounced for companies with Big 4 auditors and for those with material weaknesses in their internal control systems. The effect on audit fees declined after the implementation of Section 404 of the Sarbanes–Oxley Act requiring auditor attestation to the quality of companies’ internal controls. Using the staggered adoption of universal demand laws as a natural experiment, we find that the reduction in audit fees in response to raising obstacles for shareholder lawsuits is smaller for firms with a high-corruption culture. Overall, we provide large sample evidence that auditors exercise professional skepticism regarding the ex-ante audit risk captured by corruption culture and show that corruption culture interacts with fraud opportunity and the legal environment in affecting auditors’ risk assessment.
DEBT-EQUITY CONFLICT, ACCOUNTING CONSERVATISM, AND EXECUTIVE COMPENSATION
GU, ZHAOYANG
PENG, XIAOXIA (SASHA)
Category: FA = Financial Analysis
Debtholders and equityholders have different preferences for risks. In this paper, we argue that executive compensation combined with accounting conservatism can mitigate the debt-equity conflict. For example, spending on research and development (R&D) would reduce firm’s initial cash flow and increase firm risk that hurts debtholders. Conservative accounting would expense the R&D, resulting in lower accounting earnings initially, while the stock price would react positively when the R&D project has positive NPV. By tying executive compensation more to accounting earnings than to stock returns, managers would be "punished" for taking R&D due to lower compensation in the early years. Thus, they would be incentivized to stay away from R&D, to the benefit of debtholders. Using data from publicly listed firms in the U.S.A., we find empirical evidence supporting the above argument. In particular, we find that the CEO pay sensitivity to accounting return on asset (ROA) increases with financial leverage, a proxy of the equity-debt conflict. Such higher sensitivity is primarily driven by the bonus portion of CEO compensation. In addition, the results are mainly found among firms with higher accounting conservatism and higher uncertainty in operation, consistent with notion that protection of debtholders is most needed when the uncertainty level is high and most effective when accounting is conservative.
DETERMINANTS OF CITIZENS´ ENGAGEMENT ON LOCAL GOVERNMENTS’ SOCIAL MEDIA
GUILLAMÓN, MARÍA-DOLORES
GESUELE, BENEDETTA ; METALLO, CONCETTA; RÍOS, ANA-MARÍA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The advent and rapid diffusion of social media applications has opened up new possibilities of engaging the public in government activities. The aim of this paper is to build a synthetic indicator to measure the level of citizens’ participation on local government’s Facebook page and analyze the determinants of the citizens’ engagement on local governments’ Facebook. The sample consists of 170 Italian and Spanish local governments which used Facebook in 2014. The findings show that local governments publishing much information via Facebook do not increase public participation since citizens cannot pay attention to all the post published. Furthermore, posting information very often does not help to engage citizens. There are more opportunities for increasing engagement when citizens can pay attention to the published posts. Finally, the results reveal the lower the citizens’ income, the higher the level of citizens’ participation.
STAKEHOLDER (DIS)ENGAGEMENT IN SOCIAL MEDIA: THE CASE OF TWITTER AND THE BANKING INDUSTRY
GUILLAMON SAORIN, ENCARNA
GARCIA OSMA, BEATRIZ ; GOMEZ-CARRASCO, PABLO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We study stakeholder dialogue and engagement in social media. In particular, we analyze the content of over a million microblogs on Twitter relating to Corporate Social Responsibility (CSR) communication in the banking industry. We focus on key issues considered by banks in their CSR reports, which we classify into Core or Supplementary depending on their connection with core business activities. We show that CSR information has a relevant presence in social media. Both internal and external users amply discuss CSR topics. However, the evidence suggests limited dialogue between the parties. Significant differences exist between the information interests of internal and external users. Outsiders focus on Core CSR issues, whilst insiders are relatively more likely to discuss Supplementary CSR. Internal users’ information dissemination appears biased towards favorable information, and consistent with a legitimacy-based use of social media. Event studies conducted on dates with significant exogenous CSR news confirm the findings of ‘parallel’ talking, limited dialogue and overall disengagement between firms and their stakeholders in social media.
THE RELATIONSHIP BETWEEN CORPORATE REPUTATION RISK AND CSR REPORTING
GULLKVIST, BENITA M.
BREMSER, WAYNE G.
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study contributes to the literature by providing empirical evidence on the association between reputation risk and CSR reporting. Using financial and CSR data for a large sample of U.S. public companies (S&P1500) from 2012 to 2015 in combination with archival data on reputation risk, we find that a firm’s level of reputation risk is positively associated with the level of CSR reporting. Our results also indicate that a change in the level of reputation risk is associated with higher level of CSR reporting. In addition, our results suggest that environmental, social or governance related risk types are equally significant incentives for CSR reporting, i.e. risk origin appears not to matter. In conclusion, our results indicate that corporate reputation risk is indeed an important incentive for CSR reporting.
MANAGEMENT INNOVATION: BEYOND “GOOD” AND “EVIL” OF FORMALIZATION
GÜNTHER, THOMAS
HEINICKE, XAVER; JANKA, MARC
Category: MA = Management Accounting
Previous literature widely regarded formalization as a necessary “evil” at best and proposed its reduction to foster innovation. Adler and Borys (1996) revised the theoretical arguments by distinguishing between the degree and the type of formalization. They further introduced two types of formalization: Enabling and coercive use of management controls. Our study contributes to the literature by empirically exploring management control of innovation by focusing on management innovation in particular. Based on a survey of 260 large-sized German firms, we test the associations of management innovation with the degree of for-malization regarding organizational structure and the type of formalization regarding three types of enabling management controls, namely cultural, personnel, and action controls. Using polynomial regression equation analysis and response surface methodology we find for all three management controls a positive enabling association with management innova-tion. Furthermore, we reveal a positive interaction between the degree of internal formaliza-tion and cultural controls on management innovation following contingency theory. Thus, we go beyond the assessment of formalization as purely “good” or “evil”.
INTEGRATED REPORTING AND INTEGRATED THINKING IN ITALIAN PUBLIC SECTOR ORGANIZATIONS
GUTHRIE, JAMES
MANES-ROSSI, FRANCESCA; ORELLI, REBECCA
Category: MA = Management Accounting
This paper investigates the internal processes of change in five early adopters of the integrated reporting framework (IRF) and whether the adoption of IRF also leads to ‘integrated thinking’. The study explores research on IR and draws on the management accounting change literature, using it as a lens to observe early adopters’ practice. Five Italian public sector organizations are analysed, using official documents, press releases, and in-depth semi-structured interviews with key internal actors. The research highlights that the processes of change in organizations adopting IR are not only in the use of a new external communication tool, but also in the adoption of a way of thinking, that is integrated thinking, as a result of the process of internalization of the IRF. The paper provides academics and regulators with insights into the process of change to be considered while adopting IR. Also it responds to calls in the IR literature for further field-based studies. A limitation of the study is the number of Italian public sector organizations in our sample, due to the small number of early adopters.
THE ROLE OF INSTITUTIONAL ENVIRONMENT AND GOVERNANCE TO ADOPTION OF INTERNATIONAL AUDITING STANDARDS.
HAAPAMÄKI, ELINA
Category: GV = Accounting and Governance
Efficient corporate governance requires precise and reliable financial information. It is argued that International Standards on Auditing are considered to be an important tool in ensuring process of financial information. Historically, each jurisdiction has developed and pursued its own auditing standards; however, as financial markets grow into a global market, there is a need for a common set of auditing standards. As a result, there is a movement towards harmonization of International Standards on Auditing (ISA) all over the world. This study seeks to explain why some countries have adopted ISA standards while others just partially adopted ISA and still others continue to resist. Moreover, previous studies have not examined adoption of ISA using neo-institutional framework and governance factors. I find that Democracy Level, Import Penetration, Education Level, Control Corruption and Government Effectiveness achieved within a national economy are all predictive of the degree to which International Standards on Auditing are adopted across 115 jurisdictions. My results suggest that all three forms of isomorphic pressures (i.e., coercive, mimetic and normative) are predictive of ISA adoption. Moreover, I found that governance factors are positively and significantly associated with ISA adoption. For policy makers, my findings suggest that the institutional pressure and good governance within an economy are the key drivers of ISA adoption. For investors and global market players, my results provide insights that can help to explain and forecast future ISA adoption within economies. When adopting ISA standards economies are making the financial information more transparent and reliable for global investors.
IMPRESSION MANAGEMENT IN POLISH LETTERS TO SHAREHOLDERS
HADRO, DOMINIKA
KLIMCZAK, KAROL; PAUKA, MAREK
Category: GV = Accounting and Governance
We study impression management in an emerging market setting with high ownership concentration. We use content analysis to identify impression management techniques in a sample of letters to shareholders written in the Polish language by the 60 largest companies listed at the Warsaw Stock Exchange in 2008 and 2013. Then we employ cluster analysis to determine how impression management techniques co-occur. The majority of the letters fall into two categories: positive letters that praise the management and conquering adversity letters that explain how the management delivers performance in negative economic conditions. Finally, we use regression analysis and find that ownership concentration affects the length of the letter, unless the controlling shareholder is a foreign investor. Where non-controlling institutional shareholders are present, the letters are longer. Companies held by foreign investors tend to select a distinct mix of impression management techniques, as they are more likely to prepare conquering adversity letters than positive letters.
USING AUDIT PROGRAMS TO IMPROVE AUDITS OF COMPLEX ESTIMATES
HAMMERSLEY, JACKIE
RICCI, MICHAEL
Category: AU = Auditing
Auditors experience difficultly when auditing complex estimates (Cannon and Bedard 2016; Griffith et al. 2015a) in part because the need to collect some evidence may not become apparent until testing is being performed (Griffith et al. 2015b). In this study, we experimentally examine whether changing the focus of audit programs from a step-by-step to a goal-oriented audit program improves auditors’ search for critical evidence that was not known to be necessary when the audit program was prepared. We expect that step-by-step audit programs may interfere with auditors’ ability to identify unplanned, but relevant procedures and evidence. Our theory suggests that having a general goal, which allows people to remain open to a broad set of ways to achieve the goal, is more effective than having a specific plan when the essential steps needed to achieve the goal are difficult to specify in advance (Parks-Stamm et al. 2007; Bayuk et al. 2010; Masicampo and Baumeister 2012). We find that auditors who use goal-oriented audit programs when auditing estimates are more effective than auditors who use step-by-step audit programs. Our study suggests that a goal-oriented approach to auditing estimates leads to improvements in audit quality on this important and difficult task.
NEDS’ TURNOVER IN BOFIS: THE IMPACT OF FIRM PERFORMANCE, BALANCE OF SKILLS, AND BOARD BUSYNESS
HANIFFA, ROSZAINI
YUSUF, ABDELRHMAN
Category: GV = Accounting and Governance
Banks and other financial institutions (BOFIs), controlling capital services, lie at the heart of the UK economy. The non-executive directors (NEDs) of these BOFIs are under a great scrutiny from investors, regulators, press and the public in general. However, finance still experienced various problems (e.g. corporate failures) and even a cataclysmic event recently (i.e. the global financial crisis), which can be traced back to failure of the NEDs to exercise their "gatekeeping" role diligently. Hence, changes in firms’ board of directors are expected to take place in the wake of firms’ poor performance. Little is known, however, about NEDs’ turnover and its sensitivity to firms’ performance, especially in the UK BOFIs. This study analyses this turnover-performance association using a sample of the UK-listed BOFIs over a 15-year period. We further explore how NED’s different skills and qualifications (i.e. education, network, and experience), relative to his/her board’s collective skills, are associated with the NEDs’ turnover probability, while controlling for other personal and firm characteristics. Finally, in the light of the increased pressure to increase NEDs’ and boards’ time commitment, we examine how the busyness of NEDs and their boards might be associated with NEDs’ turnover probability. Using Logit regressions, our results indicate that the accounting and market performance of BOFIs where the NEDs serve are significantly, statistically and economically, associated with the NEDs’ turnover probability. In addition, there is some evidence that association between NEDs’ skills and their probability of turnover is based on the board’s balance of skills. Finally, NEDs’ external number of board seats is found to be negatively associated with his/her turnover probability only when the board is not deemed busy. Our results suggest that the NEDs in BOFIs are held accountable for their firm performance in the UK, especially following the financial crisis. In addition, NEDs’ different skills (i.e. education, and network) matter, in general, for their turnover probability, but only the NEDs’ education is significant post-crisis. Finally, busy NEDs are less likely to retain their internal slot on the board post-crisis, compared to the pre-crisis period.
DOES CHANGING ACCOUNTING STANDARDS AFFECT EQUITY FINANCING?
HARAKEH, MOSTAFA
LEE, EDWARD; WALKER, MARTIN
Category: FR = Financial Reporting
Prior literature indicates that managers manipulate earnings prior to issuing Seasoned Equity Offerings (SEOs), especially when information asymmetry is high. We exploit the mandatory adoption of International Financial Reporting Standards (IFRS), in Europe in 2005, in order to test the change in the level of earnings management prior to issuing SEOs in the UK and France. The UK is a common-law country with an accounting system similar to IFRS, whereas France is a code-law country with an accounting system that differs materially from IFRS. Despite this difference, both countries are highly comparable economically and institutionally. This facilitates the implementation of a difference-in-differences methodology, where the UK is the control group and France is the treatment group. We argue that IFRS adoption serves to mitigate information asymmetry and improve accounting quality. Accordingly, we find that, following IFRS adoption, earnings management activities decrease among code-law firms prior to issuing SEOs. As a result of the lower levels of earnings management and information asymmetry, we predict and find that the market reaction to issuing SEOs improves significantly for code-law firms following IFRS. Given that equity financing becomes less costly, we find that the propensity to issue new SEOs increases among code-law firms after IFRS adoption. The results persist after running a matched-sample analysis and controlling for self-selection bias.
LOBBYING ON THE BEPS PROJECT? ASSESSING THE RELEVANCE AND OBJECTIVES OF DIFFERENT INTEREST GROUPS
HARDECK, INGA
ELSCHNER, CHRISTINA; MAX, MARCEL
Category: TX = Taxation
This paper investigates lobbying on the OECD Base Erosion and Profit Shifting (BEPS) project. Using content analysis, we study comment letters on two draft reports of BEPS Action 7 on preventing the artificial avoidance of permanent establishment status. Action 7 triggered a strong debate and controversial opinions. More than 100 interest groups sent 160 comment letters with 1,170 pages to the OECD. We use both textual analysis and manual coding to determine the influence of interest groups on the BEPS project. We differentiate between firms and trade associations, members of the tax profession, and NGOs and academics and investigate their influence on the final outcome. We, therefore, compare the interest groups’ preferences for the different options and their specific proposals with the Final Report. Moreover, we analyze which further characteristics are related to successful comment letters. With respect to the broad lines, we detect a stronger influence of the tax profession. On the proposal level, the probability that proposals by academics or NGOs are implemented is significantly lower than for other interest groups.
EVIDENCE FROM AUDIT PARTNER SWITCHES ON THE EFFECTS OF AUDIT PARTNER CHARACTERISTICS ON AUDIT QUALITY
HARDIES, KRIS
CHAPPLE, ELLIE; HOSSAIN, SAROWAR
Category: AU = Auditing
Research on audit outcomes increasingly recognizes that characteristics of the individual auditor is a fruitful area for research and that different markets provide a variety of opportunities to study auditor characteristics. Reviewing the recent literature, we find that it predominantly focuses on the following 6 characteristics when examining potential audit partner effects on audit quality: (1) industry expertise (2) general experience (3) tenure (4) client importance (5) portfolio size, and (6) gender. We argue that the Australian audit market is an ideal setting to investigate the effects of partner characteristics for at least 2 reasons: audit reports identify the audit partner and since 2006 Australian auditors have been required to rotate off engagements every 5 years. Hence, the point of the switch of auditors is an interesting setting to observe any changes in audit outcomes. Despite using a variety of measures to distinguish audit partners, we find little evidence that audit quality is affected by the characteristics of individual audit partners. We find a consistent positive association between audit partner industry expertise and audit quality, but no effects for general experience and partner tenure. Results for gender, client importance, and portfolio size are mixed. Overall, our results seem to provide little support for the existence of an effect of various audit partner characteristics when all these characteristic are controlled for simultaneously.
IMPACT OF CONTROLLED FOREIGN COMPANY RULES ON POST-ACQUISITION INVESTMENT IN TARGET FIRMS
HARENDT, CHRISTOPH
VON HAGEN, DOMINIK
Category: TX = Taxation
We investigate investment in formerly domestic target firms once they enter a multinational entity (MNE). We argue that following the acquisition, those targets are tax-optimized in a profit shifting context if they are acquired by MNEs with no CFC rule in their headquarters’ countries. In this case, we hypothesize that MNE-wide profit shifting opportunities decrease high-tax targets’ cost of capital, which may have a positive effect on real investment of these targets. In addition, we hypothesize that financial revenues of low-tax targets increase after the acquisition. We find evidence for these hypotheses and do not find evidence for the above effects in case of existing CFC rules in the acquirer headquarters’ country. This finding may suggest that CFC rules effectively mitigate MNE-wide profit shifting.
BUILDING BLOCKS OF PROFITABILITY: A FRAMEWORK OF REVENUE DRIVERS AND COST DRIVERS
HARRISON, JULIE
NG, FREDERICK; ROUSE, PAUL
Category: MA = Management Accounting
Business profitability is complex, requiring joint identification and management of the drivers of revenue and cost. Despite a considerable body of literature which studies drivers, there remains a patchwork theory of revenue driver and cost driver relationships, with few attempts to connect the many concepts, terminology, and research approaches. This paper develops an integrative framework which 1) scopes the various driver and concepts and 2) formalises the underlying rules which govern the relationships among revenue drivers and cost drivers. Our model shows that all revenue drivers are cost drivers, but not all cost drivers are revenue drivers. The nature of the relationship is moderated through activities and customer value, which shows the entwining of revenue drivers and cost drivers, as well as how variation arises across settings. A mixed-methods approach involving interviews at seven organisations and a survey of 232 businesses identifies 18 key drivers and empirical evidence of their patterns of importance and interconnections.
EVIDENCE ON THE TRADE-OFF BETWEEN COST STICKINESS AND INCOME SMOOTHING
HARTLIEB, SVEN
LOY, THOMAS
Category: MA = Management Accounting
This study investigates the relationship between cost stickiness and income smoothing. Both arise as a result of managerial discretion. However, an asymmetrical reaction of costs to changes in activity counteracts the ambition to report smooth earnings. Hence, we expect these two managerial phenomena to be negatively associated. Applying both a cross-sectional and a firm-specific model of cost stickiness, we find evidence for this negative relationship. We further separate the discretionary component from our aggregate income smoothing measure and show that the negative relation is primarily driven by opportunistic, garbling managerial behavior. Our results corroborate the important role that managerial discretion plays in financial accounting as well as cost behavior.
DO ANALYSTS’ CASH FLOW FORECASTS IMPROVE THE ACCURACY OF THEIR TARGET PRICES?
HASHIM, NOOR
STRONG, NORMAN
Category: FR = Financial Reporting
Current evidence on the sophistication of analysts’ cash flow forecasts is ambiguous. For example, Call et al. (2009) show that issuing cash flow forecasts has important benefits for analysts’ earnings forecasts, while Givoly et al. (2009) question the validity of this result, arguing that analysts’ cash flow forecasts are simple extrapolations of their earnings forecasts and provide limited incremental information. More recently, Mohanram (2014) and Radhakrishnan and Wu (2014) show that the increasing incidence of cash flow forecasts has helped mitigate accruals mispricing. We contribute to the debate on the usefulness of analysts’ cash flow forecasts and their effect on capital market outcomes by examining whether cash flow forecasts have incremental benefits over earnings for analysts’ valuation outcomes. We find that analysts who are better at forecasting cash flows are better at forecasting target prices, even after controlling for the quality of their earnings forecasts. Our study provides confirmatory evidence on the sophistication of analysts’ cash flow forecasts.
ARCHITECTURES OF POSSIBILITY FOR ACCOUNTING AS SOCIAL AND ORGANIZATIONAL PRACTICE: REFLCTING ON KEY APPRECIATIONS OF PARADIGM DIVERSITY AND METAPHOR
HASLAM, JIM
GALLHOFER, SONJA; YONEKURA, AKIRA
Category: IC = Interdisciplinary/Critical
Gareth Morgan is a central figure in a number of interventions in organizational theory that have come to have a significant impact on the literature of management and organization, including the literature of accounting. Two overlapping and related interests in this context may be summarised in terms of a concern on the one hand to elaborate the diverse possibilities in the theoretical and methodological landscape for organizational analysis and a concern on the other to articulate more expansive metaphors or images of organization. The paper here has a specific and focused concern to overview, assess and orientate this influence in accounting in particular. The study finds that while the increased diversity in analysis of accounting has paralleled that in organization studies more generally, a relatively significant number of metaphors of ‘accounting’ (compared with metaphors of organization) have here been mobilised. At the same time, the paper finds that dominant metaphors in alternative accounting research articulate accounting as negative, displacing appreciations of accounting as enabling. Further, a constraint on analysis has been what is termed here accounting’s delineation. In concluding, indications for ways forward are elaborated.
NEW INSIGHTS INTO THE ASSOCIATIONS BETWEEN FINANCIAL PERFORMANCE AND ENVIRONMENTAL DISCLOSURE AND PERFORMANCE
HASSAN, OMAIMA
ROMILLY, PETER
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study employes dynamic models to examine the assocations between enivromental disclosure (ED), environmental performance (EP) and financial performance (FP) using a longitudinal multi–country sample. It responds to research calls from recent studies to investigate the pair–wise direction of causation between ED, EP and FP, and whether prior environmental disclosure impacts current environmental performance. Importantly, we find good environmental performance to be strongly associated with good financial performance. The causation tests imply one–way causation between the consturcts of interest. The results also show that prior environmental disclosure does not Granger cause current environmental performance. The key policy implication is that environmental performance should be central in the formulation of management strategy at the corporate level and in government policy at both national and international levels.
EVIDENCE ABOUT THE VALUE OF PUBLIC SECTOR AUDIT TO STAKEHOLDERS
HAY, DAVID
CORDERY, CAROLYN
Category: AU = Auditing
We examine evidence about the value of public sector auditing to stakeholders in New Zealand. We apply models of auditing from previous research in mainstream auditing literature to identify gaps in the existing understanding of public sector audit. We obtained evidence by conducting interviews and focus groups with experts employed by the Office of the Auditor-General. We examined documents including audit reports, reports to Parliament, management letters and other documents. We observed Parliamentary Select Committees, examined news media reports about public sector auditing and reviewed social media. Of the explanations that we derived from the existing literature, there is evidence about auditing’s function in agency and management control; there is limited evidence about signaling and insurance; mixed evidence about governance; and no evidence about the confirmation hypothesis, although it is potentially valuable. We conclude that public audit is valuable to stakeholders in many ways. We also make recommendations about potential changes, and we suggest concerns about certain issues.
THE SEMIO-LOGIC OF ACCOUNTING: NON-ESSENCE AND POWER IN IFRS RECOGNITION AND MEASUREMENT
HAYOUN, SHAUL
Category: IC = Interdisciplinary/Critical
This paper engages the debate on the non-essence and power of accounting, in one specific context – IASB’s recognition and measurement practices, and through one specific lens – Ferdinand de Saussure’s theory of social sign systems: semiology. While the debate’s focus has been so far on the contingent socio-material settings of accounting, this paper proposes, with semiology, a complementary perspective on the nature of accounting as a procedural signifying technology. It is argued that IASB’s recognition procedures manifest the semiological principle of ‘reciprocal articulation’, where economic resources and accounting expressions are mutually constituted by delimiting the resource/asset from its broader category (e.g., intangible assets from goodwill), as opposed to a representation of pre-existing resources. It is further argued that IASB’s measurement procedures manifest the semiological principle of ‘value constellation’, where the asset’s value is not intrinsic but rather a product of other values in the system (market-based) and in the statement (entity-specific). This analysis contributes to the literature by explicating a distinction between essence and logic: the objects of recognition and measurement have no essence, but the accounting procedures themselves do have a logic. This is the non-essentialist logic of the accounting sign: its semio-logic. It also sheds light on non-essence and power as immanent, semiological, characteristics of financial accounting.
THE MULTIDISCIPLINARY AUDIT TEAM
HECIMOVIC, ANGELA
MARTINOV-BENNIE, NONNA
Category: AU = Auditing
This study is set within the context of growing adoption of independent assurance of non–financial information by organisations. The study utilises a single case study to examine multidisciplinary audit teams (MATs) in practice. The MATs investigated are composed of experts from environmental/engineering science and accounting within a public sector non–financial subject matter assurance context. Data was collected from numerous sources with unlimited access to internal and external documents, including audit work papers in addition to semi–structured interviews with audit team members, informal discussions, observations of meetings and audit field visits. The data was analysed by drawing on ‘resource diversity’ theory from social psychology in addition to Power’s (2003, 1999, 1997) theoretical perspectives of the traditional auditor’s extension into non–financial assurance. The findings suggest that whilst specific subject matter expertise is deemed as essential, understanding and communicating such expertise within and between MATs is vital for the perceived success of its performance in delivering the audit outputs. The findings propose that too much diversity may impede on this performance. Understanding the deployment and management of a multidisciplinary team with different disciplinary perspectives is timely given the increasing demand for diverse non–financial subject matter assurance.
A BALANCED SCORECARD FOR AUDITING FIRMS: A PROPOSED FRAMEWORK AND RELATED MEASURES
HEGAZY, MOHAMED
ELDEEB, MOHAMED; HEGAZY, KARIM
Category: AU = Auditing
The purpose of this paper is to establish a framework with its related measures for the development of a Balanced Scorecard (BSC) for auditing firms. The BSC development process consists of three stages: a review of the literature for performance evaluation systems and BSC in professional services, the design and construction of the BSC framework, and the validation and follow up of the proposed framework for continuous improvement. A BSC for auditing firms was developed providing the detailed measures for performance evaluation including learning and growth, client, internal business process, financials and audit related perspective of corporate ethics. To validate the developed BSC a survey was undertaken in four auditing firms including two of the big 4 to assess the external auditors’ opinion for the proposed BSC for auditing firms. Descriptive statistics and Confirmatory factor analysis were applied to the results of the survey for interpretation of the practicality of adopting such proposed framework. The results suggest that the development and use of the proposed BSC will enhance the performance of auditing firms. Audit firms would have a better understanding of the various drivers of performance and strategies thereby creating competitive advantage. The most important elements for its success are personnel, customers’ satisfaction and growth.
ENABLING FORMALISATION, ECO-CONTROL USE AND ENVIRONMENTAL PERFORMANCE
HEGGEN, CAMPBELL
SRIDHARAN, VG
Category: MA = Management Accounting
This study explores how a match or mismatch between enabling formalisation and the use of environmental management controls (or eco-controls) in an interactive and in a diagnostic manner is associated with firms’ environmental performance outcomes. Following the recommendations of Burkert et al. (2014), hypotheses are tested by applying polynomial regression with response surface analysis, using data collected from a survey of 221 firms. The findings show that a match between a more enabling formalisation and the interactive or diagnostic use of eco-controls is associated with enhanced environmental performance. However, the curvature of the fit line suggests that the environmental performance benefits of adopting a more enabling formalisation and increased emphasis on the interactive or diagnostic use of eco-controls diminish beyond a certain point. Finally, the mismatch between an enabling formalisation and interactive control does not inhibit performance outcomes, suggesting that they operate as supplementary rather than complementary controls. However, enabling formalisation and the diagnostic use of eco-controls are shown to have interdependent effects on performance, with the degree of mismatch negatively associated with environmental performance.
CORPORATE TAX PLANNING AND STOCK RETURNS
HEITZMAN, SHANE
OGNEVA, MARIA
Category: TX = Taxation
Does corporate tax planning expose investors to non-diversifiable risk? In this paper, we investigate the asset pricing implications of corporate tax planning in the context of policy risk. Corporate tax planning can increase investors’ non-diversifiable risk if it exposes the firm to greater risk from tax policy changes. Our results suggest that a risk premium related to tax planning exists. In the time series, its magnitude varies with political ideology, becoming stronger during periods of high Democratic influence over the White House and the United Sates Tax Court. In the cross-section, it varies with the firm’s size, presence of foreign operations, and tax lobby activity of its industry.
CROWDINVESTORS’ INFORMATION ACQUISITION - AN ANALYSIS OF INVESTOR-LEVEL GOOGLE ANALYTICS DATA
HEMAIDAN, NADER
Category: FA = Financial Analysis
In this paper, we examine investors’ information acquisition on a large German Crowdinvesting Platform by analysing proprietary investor-level Google Analytics data. Our findings indicate that retail investors use more condensed information presented in figures or videos, while ignoring extensive (financial) disclosure. We also find that retail investors significantly decrease information acquisition once a professional risk capital provider is invested. This is consistent with herding. Our results further suggest that information acquisition varies with investors’ sophistication as the presence of patents only influences information acquisition, if the investor already gained experience in crowdinvesting. Finally, we find that investors acquire less information, if the investment is less risky. Our results are consistent with prior literature and document that investor-level and firm-level attributes as well as the dynamics of the funding process are associated with crowdinvestors’ information acquisition.
FROM TRUST TO AUDIT SOCIETY: GRANT GIVERS' PERSPECTIVES ON OUTCOME REPORTING
HENDERSON, ELISA
LAMBERT, VICKY
Category: IC = Interdisciplinary/Critical
This paper presents a novel set of findings to date about charitable giving by grant making bodies and the impact of the audit society. This paper refines stakeholder analysis of charities by analysing perspectives of various grant givers in grant award, management and monitoring under the framework of the audit society. By interviewing grant givers across Scotland, we find that the drive for outcome reporting evolves along a continuum between audit and trust. The impact of onward accountability contributes to a diffusion of the audit society amongst grant funders distributing public monies, who delegate requirements for audit and verification to charities. For these grant givers, outcomes serve a multipurpose role of admittance, compliance and verification in managing grant awards. Larger private trusts on the other hand, may contribute to the retention of mission with more flexible interpretations of achievements. They nonetheless find outcomes a useful shorthand as they seek to minimise their own administration costs. Finally, there are also some ‘elite’ private grant givers which operate on a trust basis for charities. The research contributes to the literature by analysing the impact of trust and audit in a charitable setting.
INFORMATION PROVISION IN CONFERENCE CALLS AND THE COST OF CAPITAL: AN ANALYST-BASED PERSPECTIVE
HENNIG, JAN CHRISTOPH
FIRK, SEBASTIAN
Category: FA = Financial Analysis
This study investigates the relation between the information provision in conference calls and firms’ cost of capital. We hypothesize that firms which respond to the information needs of their primary addressees in conference calls —the analysts—experience lower cost of capital. For a large sample of conference calls, hosted by firms from the S&P 500 over the 2004-2013 period, our results show a negative association between information provision in conference calls and a firm’s cost of capital. In addition, we provide evidence that this link is amplified, when information incorporation is facilitated for analysts. Specifically, consistency of information provision over time and transparency in managers’ wording can increase the effect of information provision on a firm’s cost of capital. Results from a selection model, a propensity score matched sample analysis, and instrumental variables regressions imply that our findings are robust to accounting for endogeneity. Overall, our findings suggest that firms can benefit to a great extent from incorporating analysts’ information needs in the design of their conference calls, in the form of reduced cost of capital.
ANCHORING AND ADJUSTMENT EFFECTS ON AUDIT JUDGMENTS: EXPERIMENTAL EVIDENCE FROM SWITZERLAND
HENRIZI, PHILIPP
HIMMELSBACH, DARIO; HUNZIKER, STEFAN
Category: AU = Auditing
Auditors are faced with the task of formulating opinions about the financial statements by using their professional judgment to determine the type and amount of information to collect, the timing and manner, and the implications of the information collected. The anchoring and adjustment heuristic describes the effect of estimates that start from an initial value, which is then adjusted to yield the final answer. Such adjustments are often biased towards the initial value for which reason it is called ‘the anchor’. According to literature, heuristics and biases in auditing are mostly encountered in the course of analytical audit procedures and interviews with the client. This study reports the results of an experimental research design analyzing the audit judgment of 85 auditors in Switzerland. Based on the results of the experiment, the results indicate evidence on the existence of the anchoring and adjustment heuristic in Swiss audit judgments. Further, we could identify influence of the audit company size (Big4 vs. Non-Big4), the auditors’ experience, and the auditors’ knowledge about behaviorism and anchor heuristic with regard of the anchoring and adjustment effect on audit judgement.
CAPITALIZED RESEARCH AND DEVELOPMENT EXPENDITURES AS A LEADING INDICATOR FOR FUTURE INNOVATION PERFORMANCE
HERB, WOLFGANG
SANDER, PHILIPP; SCHULTZE, WOLFGANG
Category: FA = Financial Analysis
This paper analyzes the relationship between capitalized Research and Development (R&D) expenditures and innovation performance, measured by patent data. Under IFRS, development expenditures are capitalized when the success of an R&D project is highly likely. Hence, such capitalization should be a leading indicator for future innovation performance. We analyze this question based on a unique dataset of hand-collected data for R&D capitalization under IFRS during 2000-2012 and patent data from the worldwide patent database PATSTAT. Patents are more closely related to inventive processes than other performance measures (e.g. profits, sales), which are influenced by further factors (e.g. marketing budgets, market conditions). We find that the capitalized R&D in the current period is positively related to future innovation performance. The results imply that R&D capitalization is informative and can be considered as an indicator of future innovation success.
THE ANNUAL REPORT ALGORITHM: RETRIEVAL OF FINANCIAL STATEMENTS AND EXTRACTION OF TEXTUAL INFORMATION
HERING, JÖRG
Category: FA = Financial Analysis
U.S. corporations are obligated to file financial statements with the U.S. Securities and Exchange Commission (SEC). The SEC´s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system containing millions of financial statements is one of the most important sources of corporate information available. The paper illustrates which financial statements are publicly available by analyzing the entire SEC EDGAR database since its implementation in 1993. It shows how to retrieve financial statements in a fast and efficient way from EDGAR. The key contribution however is a platform-independent algorithm for business and research purposes designed to extract textual information embedded in financial statements. The dynamic extraction algorithm capable of identifying structural changes within financial statements is applied to more than 180,000 annual reports on Form 10-K filed with the SEC for descriptive statistics and validation purposes.
THE DECISION USEFULNESS OF ADDITIONAL DISCLOSURES ON FAIR VALUE ESTIMATES FOR NONPROFESSIONAL INVESTORS: ONE DISCLOSURE TYPE DOES NOT FIT ALL
HERRMANN, THERESA
LACHMANN, MAIK
Category: FR = Financial Reporting
In this paper, we investigate why some disclosures on fair value (FV) estimates are not incorporated into the nonprofessional investors’ investment decisions. Conducting an experiment with career starters at a Big Four accounting firm, we analyze whether the exclusion of this information is caused by the presentation format or the content, and whether this depends on the development of the FV (gain vs. loss). We manipulate the presentation format (balance sheet vs. disclosures) of three different types of additional information on FV estimates (range value, change value, and qualitative information) and show which type is most effective in terms of perceived reliability and decision usefulness. We find that when a FV gain occurs, none of the information significantly increases the reliability and decision usefulness, irrespective of the presentation format being used. However, when a FV loss occurs, a higher salience of the additional information on FV estimates decreases the reliability and decision usefulness. The decision usefulness of the FV and financial statement decrease most when presenting a range value or qualitative information on the fair value estimate. We show that investors become aware of the low reliability of FV estimates only when additional information is presented saliently in the balance sheet. Moreover, investors have varying needs regarding the presentation format of FV–related information, depending on the development of the company’s key assets.
STRATEGIC MANAGEMENT ACCOUNTING OF CUSTOMER-RELATED ASSETS: A THEORETICAL FRAMEWORK AND CASE STUDY
HIMME, ALEXANDER
HENNIG-THURAU, THORSTEN; MARTIN, NICOLE; PAUL, MICHAEL; SATTLER, HENRIK
Category: MA = Management Accounting
Marketing-related costs nowadays represent a large component of total costs in many firms. These costs aim to build so-called customer-related assets like brand equity. It is apparent that the value of many firms depends heavily on these off-balance sheet intangible assets. However, in the context of performance measurement, management accounting has tended to neglect these intangible assets by restricting itself to mainly financial measures. These frameworks fall short in measuring the outcome of investments in intangible assets for the firm and pay little attention to a firm’s customers which are probably the most critical aspect of a firm. Therefore, this paper proposes a framework for measuring and controlling the performance of three highly relevant customer-related assets (i.e., brand, relationship management, quality). The framework links investments in these customer-related assets to the firm’s cash flows and, finally, firm value. Thus, the framework integrates financial and non-financial as well as internal (management accounting) and external (marketing) data for performance measurement, a key objective of strategic management accounting. We demonstrate the practical use of this framework for a major European corporation, combining a large-scale empirical study involving customer survey data with information from the firm’s internal databases.
DISCLOSURE OF NON-FINANCIAL INFORMATION AND GREEN R&D EXPENDITURES
HINTERECKER, HARALD
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper analyzes the ex-ante incentive of a manufacturer to disclose firm specific demand information such as environmental or social performance. In the model, the manufacturer is uncertain about a firm specific demand and a firm specific cost parameter when committing to a disclosure strategy. Absent of any correlation between the demand and the cost parameter, a commitment to disclosure is always optimal. However, it is shown that if the demand and the cost parameter are highly positively correlated, it is beneficial for the manufacturer to commit to not disclosing information provided that there is a fraction of non-Bayesian consumers. Given this high correlation, a change in the disclosure regime reduces manufacturer profit and decreases the incentive of a manufacturer to invest in green R&D.
RECURRING TASKS IN FORWARD-LOOKING INCENTIVE CONTRACTS
HINZ, FREDERIKE
Category: MA = Management Accounting
Managers often focus on tasks with short-term consequences to the detriment of long-term firm profitability. Forward-looking performance measures in compensation contracts can shift the managers' orientation away from the short run to the long run. This paper examines the optimal design of incentive systems with forward-looking performance measures in an environment with recurring shortsighted effort and a one-shot farsighted effort when renegotiation is possible. I show that it is not always beneficial to motivate a recurring shortsighted effort. In particular, if the future shortsighted task is rather unproductive relative to the farsighted task, the firm might be better off by not motivating the future task. In addition, I derive recommendations for the optimal use of long-term performance measures in forward-looking incentive contracts.
REVEALING JUDGMENT HEURISTICS IN USING THE BALANCED SCORECARD: THE INFLUENCE OF EXPERTISE
HIRSCH, BERNHARD
SOHN, MATTHIAS
Category: MA = Management Accounting
Judgmental biases when using the Balanced Scorecard (BSC) have received considerable attention in behavioral accounting research over the last two decades. However, the judgement process that leads to biased or unbiased evaluations based on a BSC has rarely been analyzed. Previous research assumed that managers pay attention to any information given, thus following the rules of rational decision making in performance evaluations. However, a bevy of research in cognitive psychology has found that human judgments can be better explained as heuristics that allow fast and unelaborated judgments. We identify the heuristics that managers apply when evaluating the performance of subordinated managers based on a BSC. In an experiment with undergraduate students (N = 29) and experienced executives (N = 34), we employ a process tracing technique that monitors managers’ evaluation processes. We derive their judgment strategy use from their information acquisition patterns, which are captured in a computer-based online process tracing technique. The results show that managers primarily use heuristics that ignore some of the information offered, resulting in biased judgments. However, we also find supporting evidence that experienced executives use complex decision strategies more heavily than novices. This (partially) de-biases the performance evaluation.
A COMMENT ON THE ‘PRE-ACQUISITION HEADROOM APPROACH’ FOR GOODWILL IMPAIRMENT TESTS
HJELSTROM, TOMAS
HELLMAN, NICLAS
Category: FR = Financial Reporting
SYNPOSIS: The recent post-implementation review of the IFRS for business combinations pointed at significant deficiencies, potentially leading to goodwill impairment losses being recognized ‘too little, too late’ (IFRS Foundation, 2015). In response to the review, IASB staff have developed a new approach, the Pre-acquisition Headroom (PH) Approach, which addresses one of the main factors (allocation of acquired goodwill to a pre-existing cash-generating unit with economic, non-recorded goodwill) that makes the goodwill impairment test ineffective. The current paper provides an analytical evaluation of the PH Approach by comparing it with the current IFRS model which is based on the original theoretical framework behind the standard (Johnson & Petrone, 1998), and recent developments of this framework (Johansson, Hjelström, & Hellman, 2016). We conclude that the PH Approach results in a more effective impairment test compared to the current IFRS model. Compared to the Johansson et al. (2016) approach, considering growth scenarios, the PH Approach is more effective in the short run and less effective in the long run. The reason behind is that the PH Approach favors transaction date consistency over consistent application of fair value measurement both at the acquisition date and during the post-acquisition period. Our analysis further shows that the use of a constant pre-acquisition headroom from the acquisition date makes the PH Approach static and ‘over-effective’.
THE INFORMATIVENESS OF TARGET PRICE FORECASTS: EVIDENCE FROM MERGERS AND ACQUISITIONS
HO, TUAN QUOC
TRINH, RUBY ; XU, FANGMING
Category: FA = Financial Analysis
This paper investigates the information role of analysts’ forecasts of target prices in the context of mergers and acquisitions. We show that firms with high 12-month ahead target prices relative to current stock prices are more likely to become takeover targets in the subsequent one to two years. We also find that target firms with relatively high pre-merger announcement target prices are more likely to receive a higher offer premium and deals with higher target price adjusted offer premium are more likely to be completed. Our results suggest that analysts convey through their target prices valuable information about expected firm values that are useful for market participants in the context of M&A.
BANK STRESS TESTS: AN ACTIVE TREATMENT OR A PLACEBO?
HÖBELT, JOHANNES
GOUNOPOULOS, DIMITRIOS; PAPANIKOLAOU, NIKOLAOS
Category: FR = Financial Reporting
The smooth operation of the banking sector can largely contribute to the stability of the financial system and to that of the entire economy. After the eruption of the global financial crisis, regulators worldwide introduced stress tests as a key supervisory tool to assess the resilience and soundness of systemically important banks on a regular basis. In this paper, we empirically examine the quality of the accounting information that bank authorities use in the conduct of stress tests and how this is related to the outcome of the tests as perceived by market participants and other economic agents. Analysing banks from 27 European countries, we document the average treatment effect on the treated and the link between bank stress tests and accounting discretion. In particular, treatment banks apply discretionary loan loss provisioning to manage capital and earnings and to convey a signal of soundness to market participants, which infers stress tests to be a placebo than an active treatment.
CORPORATE TAX ASYMMETRIES, INVESTMENT BEHAVIOUR AND THE MARGINAL TAX RATE
HOEHL, REBECCA
HILLMANN, LISA
Category: TX = Taxation
This paper aims to analyse the effect of tax loss treatment on investment behaviour. Using simulated marginal tax rates based on unconsolidated financial statement data and applying a new method to determine this tax burden measure, we want to test whether tax losses influence investment decisions. Based on panel data of European subsidiaries, we show that subsidiary’s losses have a positive impact on the investment stock from a tax perspective. The effect is statistically significant, even after various robustness checks.
INTERACTIONS OF PUBLIC OVERSIGHT AND AUDIT FIRM TRANSPARENCY
HOLM, CLAUS
ZAMAN, MAHBUB
Category: AU = Auditing
The governance and transparency of audit firms is an important focus of regulatory efforts aimed at improving audit quality. This paper examines the transparency reports of audit firms, for the four major audit firm networks represented in each of the 28 European Union countries. We focus on whether audit transparency reports from audit firms within the same audit network ascribe to the same reporting format independently of national reporting requirements. Using content analysis approach, we explore patterns of interactions of regulatory pursuance of control in the name of public oversight and efforts by audit firm networks to exude public trust through disclosures. We find (i) each of the audit networks demonstrate a high degree of shared corporate identity, (ii) transparency reporting for the majority of the networks is mainly compliance based, and (iii) the differences between transparency reporting practices overall have more to do with the audit networks and individual audit firm reporting discretion than adhering to the national reporting requirements. Overall, we find that audit firms transparency reporting are mainly compliance based and consistent with a legitimation strategy.
DIMENSIONS OF COMPETITION AND THE DESIGN AND USE OF MANAGEMENT ACCOUNTING SYSTEMS - THE CASE OF CUSTOMER ACCOUNTING SYSTEM SOPHISTICATION
HOLM, MORTEN
AX, CHRISTIAN
Category: MA = Management Accounting
An emerging literature highlights the importance of distinguishing between competition intensity and competition type and study the impact of the interaction between these dimensions of competition on the design and use of management accounting systems (MAS). The key insight from this literature is that different types of competition influence the relationship between competition intensity and MAS design and use differentially, depending on the specific purpose and scope of the MAS in focus. This study proposes that competition intensity can be positively or negatively associated with customer accounting (CA) system sophistication depending on the degree of customer competition firms face. When firms primarily compete on the differentiation of offerings to accommodate customer needs there is a positive association between competition intensity and CA sophistication whereas firms competing on other parameters (e.g., price and product differentiation) will deploy less sophisticated CA systems as competition intensifies. Drawing on combined archival data and survey responses from 209 firms, the results our study finds support this prediction. The study contributes to research on competition and MAS design in several ways. Implications of our results for research as well as practitioners and accounting education are discussed.
ON STRATEGY FORMATION AND THE BECOMING OF STRATEGIC MANAGEMENT ACCOUNTING IN A PUBLIC-SECTOR CONTEXT
HOLMGREN CAICEDO, MIKAEL
HÖGLUND, LINDA; HOLMGREN CAICEDO, MIKAEL; MÅRTENSSON, MARIA; SVÄRDSTEN, FREDRIK
Category: MA = Management Accounting
This papers concerns strategic management accounting (SMA) in public sector agencies. The paper focuses on the challenges of strategy formation in the public sector through an analysis of the strategizing effects of the management accounting techniques in relation to the public-sector context. The paper answers calls for studies on the strategizing effects of costing practices in the public sector in relation to other public-sector goals. The paper broadens the scope beyond cost and efficiency aspects and includes other management accounting aspects that include the role of the government and mass media in the strategy formation of a public-sector organization. The paper suggests that to understand SMA in the public sector, involves a contextual understanding of the governance system in which SMA is situated. This context includes formal governance bodies such as the government as well as other external actors such as mass media. These actors are important to bring into the analysis because their actions toward public sector agencies in many ways influence the choice of management accounting tools whose strategizing effects constitute of strategy.
INVESTORS’ PERCEPTION OF FINANCIAL DISCLOSURE REGULATION TO ACHIEVE PUBLIC POLICY OBJECTIVES: EVIDENCE FROM EXTRACTIVE ISSUERS
HOMBACH, KATHARINA
Category: FR = Financial Reporting
This study examines the effect on firm value (as perceived by investors) of the SEC’s “extraction payments disclosure rule”. Motivated by the empowerment of citizen groups to hold governments and firms accountable, the rule requires extractive issuers to disclose by project the payments they made to governments. Stock price reactions around twelve legislative events surrounding the implementation of the rule suggest that investors, on average, perceive a negative effect on firm value of a strict implementation of the rule. In the cross-section, I find that firms’ abnormal returns around the events are negatively associated with their exposure to public scrutiny, consistent with investors expecting costs from the use of the disclosures by nontraditional monitors such as NGOs and activist groups. These findings inform policy-makers about the consequences on firm value of using disclosure regulation to achieve public policy objectives.
THE SURPRISING BENEFITS OF MANDATORY HEDGE FUND DISCLOSURE
HONIGSBERG, COLLEEN
Category: FR = Financial Reporting
Policymakers have long debated whether regulation would reduce hedge funds’ financial misreporting. The traditional argument against regulation is that hedge funds are unlikely to misreport because their investors are highly sophisticated financial players who can detect and deter financial misconduct. However, recent changes in the composition of hedge funds’ investors have led many to question this argument. In this paper, I use a quasi-natural experiment—in which a subset of hedge funds was regulated, deregulated, and then regulated again—to test whether hedge fund regulation reduces misreporting. Unique features of the setting permit me to study not only whether hedge fund regulation reduces financial misreporting—but, if so, why. The results show that regulation reduces misreporting at hedge funds and that the imposition of disclosure requirements, even without other concurrent changes in regulation (e.g., increases in enforcement), can reduce hedge funds’ misreporting. This finding seems surprising, because hedge funds’ investors are commonly thought to have access to far more information than is required by disclosure rules. Further analyses suggest that the disclosure requirements led funds to make changes in their internal governance, and that such changes induced funds to report their financial performance more accurately.
ORGANIZATIONAL CULTURE AND ITS INFLUENCE ON STRATEGIC AND ACTION PLANNING PARTICIPATION: SURVEY EVIDENCE FROM BELGIUM, CANADA, GERMANY AND POLAND
HOOZÉE, SOPHIE
BEDNAREK, PIOTR; BRÜHL, ROLF; GOSSELIN, MAURICE
Category: MA = Management Accounting
This study investigates subordinate participation in the planning activities of top management and its relation to organizational culture. In particular, we examine the relationship between participation in strategic planning and action planning and whether organizational cultural dimensions can explain the extent of subordinate participation in strategic planning. We hypothesize that participation in strategic planning is positively associated with participation in action planning. Moreover participation in strategic planning is hypothesized to be lower in organizations with high power distance and low uncertainty avoidance than in organizations with low power distance and high uncertainty avoidance. Institutional and in-group collectivism are hypothesized not to influence strategic planning participation. This paper draws on a survey database of top managers across four countries: Belgium, Canada, Germany and Poland. The analysis shows that participation in strategic planning is positively associated with participation in action planning. We also find that uncertainty avoidance is positively associated with participation in strategic planning. Contrary to expectations, we find that in-group collectivism is negatively associated with participation in strategic planning, while no significant association is found for the other cultural dimensions.
EARNINGS QUALITY AND SHAREHOLDERS' SATISFACTION WITH THE MANAGEMENT AND SUPERVISORY BOARD - EVIDENCE FROM GERMAN ANNUAL GENERAL MEETINGS
HÖRNER, SVEN
Category: GV = Accounting and Governance
This study examines whether earnings quality is related to shareholders´ satisfaction with the members of the company´s board. By examining the vote on the discharge of the management and supervisory board in the German setting – as a proxy for shareholders´ satisfaction –, this study responds to the call of Cai et al. (2010) for international research on shareholder voting. Moreover, the paper throws light on the question whether shareholders´ satisfaction with the company´s representatives is affected by the quality of earnings. Using data from 1,059 annual general meetings of German companies from 2010 to 2015, this study provides evidence that earnings quality – which is measured by the magnitude of discretionary accruals – is associated with shareholders´ satisfaction with the board. Furthermore, the study makes use of the German setting which allows differentiating between shareholders´ satisfaction with management and supervisory board. The fact that the findings regarding the discharge of the supervisory board are less substantial in magnitude and significance relative to the management board could imply that shareholders predominantly blame the management board for inferior earnings quality caused by discretionary accruals.
GOT INFORMATION? THE EFFICIENCY OF PRICE DISCOVERY OF QUANTITATIVE CORPORATE DISCLOSURES
HRAZDIL, KAREL
CHUNG, DENNIS; NOVAK, JIRI; SUWANYANGYUAN, NATTAVUT
Category: FA = Financial Analysis
Using a comprehensive sample of actively traded US companies, we analyze how the quantity of information in corporate disclosures affects the efficiency with which investors incorporate new information into stock prices. Specifically, we consider both numerical and textual levels of detail provided in 10-K disclosures: (1) disaggregation (numerical) quantity (DQ) that captures the ‘fineness’ of accounting line items in 10-K filings and (2) textual quantity (TQ) that captures the amount of ‘soft’ or narrative information in annual reports, and document that both DQ and TQ are associated with reduced information asymmetry, lower cost of immediacy, higher trading activity, and an overall improvement in the efficiency of information price discovery. Collectively, our results provide empirical support for the benefits of detailed corporate disclosure, whether numerical or textual.
TOO DARK TO SEE: CORPORATE ENVIRONMENTAL PERFORMANCE AND ANALYSTS’ FORECAST ERRORS
HSIAO, DANIEL
LIAO, QUNFENG; SU, WEICHIEH
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The literature has underexplored why firms voluntarily respond to a third-party environmental disclosure project and whether such transparency improves analyst forecasts on corporate financial performance. In this study we argue that when firms possess greater environmental strengths (weaknesses), they are more (less) likely to participate in an environmental information disclosure project initiated by a third party. However, environmental disclosure may not necessarily lead to accuracy in analysts’ earnings forecasts. We argue that corporate carbon emissions increase corporate environmental liability, which obscures prospects for business operations and thus raises analysts forecast errors. But these errors may be mitigated through effective board governance. Our arguments are supported by a sample of S&P 500 firms that participated in the Carbon Disclosure Project (CDP) during the period from 2006 to 2010.
MORAL REASONING, DISTRIBUTIONAL INEQUITY, AND HONEST REPORTING
HSU, SYLVIA
CHUNG, JANNE
Category: MA = Management Accounting
Our study examines honesty in managerial reporting among individuals with different moral cognitive schemata. We manipulate distributional equity between the firm and participants through the distribution of surpluses. The results show that participants with personal-interest schema, whose moral value resides in self-interest, submit reports with the lowest level of honesty; distributional equity does not affect their honesty. Maintaining-norms participants follow social norms and others’ expectations to act ethically. When the firm unfairly distributes surpluses to participants, maintaining-norms participants are more likely to lie in their budgets. Post-conventional participants act ethically because morality is a universal value. We find that in a distributional-equity firm, they submit a report with the highest level of honesty. When they face distributional inequity, they do not report their budgets truthfully. Also, the effect of distributional inequity on misreporting is more substantial in post-conventional participants than in maintaining-norms participants.
HOW SUITABLE IS IFRS FOR SMES FOR SMALLER FIRMS? EVIDENCE FROM TAIWAN
HSU, YU-LIN
REID, GAVIN
Category: FR = Financial Reporting
Accounting authorities recently introduce IFRS for SMEs with the aim to achieve the convergence of financial reporting when taking into account the inherent difference between large and small firms. This paper investigates whether IFRS for SMEs is really suitable for smaller firms as what policy makers claim. It uses the interview data obtained from Taiwanese companies. This method helps to gain business insights and to enhance our understanding of how firms view this new accounting standard. In this research, five cases of private firms are discussed. Two of them are individual firms and the other three are members of corporate groups. The results show that companies’ attitudes towards IFRS for SMEs can be influenced by their future plans. A sampled firm which anticipates making IPO perceives large benefits of applying IFRS for SMEs while another private firm which hopes to stay private finds this adoption costly. Furthermore, a firm which belongs to a business group often considers the consistency within the group and its accounting decisions are affected by group policies. Hence, if its parent company is required to adopt IFRS, it is more likely to see benefit in complying with IFRS for SMEs. The findings suggest that IFRS for SMEs may not fit all private firms and there is room for improvement in designing accounting regulations for SMEs. This work provides new evidence with respect to IFRS for SMEs, contributes to academic literature and offers crucial policy insights.
DO CREDIT RATINGS INCORPORATE BUSINESS LINKAGES ALONG THE SUPPLY CHAIN?
HUANG, RONG
HU, NAN; REN, SUNQIAN
Category: FA = Financial Analysis
This paper investigates whether credit ratings incorporate business linkages along the supply chain. We first document that a supplier’s bankruptcy risk is significantly associated with its major customer’s bankruptcy risk, thereby leading to a positive association between the credit ratings of the supplier and its major customer. However, the association between a supplier’s and its major customer’s credit rating changes is asymmetric. A supplier’s credit rating change is only positively associated with its major customer’s credit rating change when the customer has experienced a credit rating downgrade, but not when the customer has undergone an upgrade. This asymmetric effect is stronger when the customer-supplier relation lasts for a long time and when the customer is the largest customer of the supplier. We attribute this effect to the asymmetric payoff functions of the creditors, who focus on protecting downside risk rather than generating upside returns. Overall, our paper provides evidence that the customer’s credit worthiness influences the supplier’s credit ratings, suggesting that the debt market can be affected by the product market through the customer-supplier relations.
AUDIT FIRM RANKS AND AUDIT QULAITY: EVIDENCE FROM CHINA
HUANG, TING-CHIAO
LIN, YI-HUNG
Category: AU = Auditing
This paper investigates the association between audit firm ranks and audit quality in China. Using a large sample of Chinese listed companies 2003 to 2013, we find that top 100 audit firms provide better audit quality than other non-top 100 audit firms. In addition, within top 100 audit firms, better audit firm ranks are correlated with higher audit quality. Further looking into the components of audit firm ranks, the results suggest that audit firm revenue, the number of auditors, branches and employees, and comprehensive score are associated with audit quality. Additional analysis suggests that such superior audit quality increases the bargaining power of audit firms with better ranks to charge higher audit fees. Overall, this study suggests that audit firm ranks may serve as a potential channel to assess audit quality and provide relevant information of audit quality to stakeholders. These findings should be of interest to global and Chinese regulators in designing audit quality indicators and the components of audit firm ranks.
THE MONITORING EFFECT OF FINANCIAL ANALYSTS ON EXECUTIVE COMPENSATION
HUANG, ZHONGWEI
Category: GV = Accounting and Governance
This paper investigates how analysts’ monitoring of financial reporting alleviates an agency problem in which a manager inflates her compensation by manipulating earnings. I argue that analysts’ monitoring reduces a manager’s ability to conceal earnings management, facilitating directors’ adjustment to executive compensation in response to earnings management. Consistent with this argument, I find earnings carry a lower weight in determining CEO compensation in firms where exist analyst reports that criticize the quality of earnings. The main findings are robust to matching on performance and controlling for firm-fixed effects and other text in analyst reports. Additional analyses suggest that the weight placed on earnings decreases as actual accruals deviate from analysts’ accruals forecasts. Overall, my findings emphasize analysts’ monitoring role in alleviating managerial rent extraction in executive compensation.
EUROPEAN SECURITIES AND MARKETS AUTHORITY REPORTS AS THE BASIS FOR STUDENT-AUTHORED IFRS TEACHING CASES: EXPERIENCES FROM CASE WRITING AND CLASSROOM USE
HUGHES, SUSAN
Category: ED = Accounting Education
Upper-level undergraduate and graduate financial reporting courses often rely upon teaching cases to help students refine their thinking, research, analysis, judgment and writing skills. However, appropriate teaching cases are often hard to find. This paper describes the rationale for and experience of students writing teaching cases within a graduate level International Financial Reporting Standards (IFRS) class over the past two years. The assignment relies on the reports of the European Securities and Markets Authority, an excellent source of regulatory decisions regarding the appropriate application of IFRS. Four of the 24 cases developed in the course have now been effectively used in the intermediate accounting I classes. One of four was also used in the Master of Accountancy capstone class. This paper discusses the basis for the assignment, provides details on the enforcement cases used as the foundation of the 24 cases, describes the embellishments students added to the enforcement decisions when completing their cases, and the results of students’ evaluation of the case learning experience. The paper also provides suggestions for faculty planning to adopt this learning tool.
THE DYNAMISM OF PRE-DECISION CONTROLS IN THE APPRAISAL OF STRATEGIC INVESTMENTS
HUIKKU, JARI
KARJALAINEN, JOUKO; SEPPÄLÄ, TOMI
Category: MA = Management Accounting
In this study we examine the dynamism of pre-decision controls in the appraisal of strategic investments; an area largely overlooked by the literature. More specifically, we investigate how changes in companies’ economic, strategic, and organizational conditions relate to the increased emphasis on pre-decision controls. Based on the prior literature, we identified 19 controls that we categorised into two control groups: Procedural controls and controls for risk assessment. We used these groups as dependent variables and accordingly constructed two separate models to test the associations between these and the changed conditions. The empirical data is based on 108 interviews among the 150 largest Finnish manufacturing companies. The paper adds to the scarce capital budgeting literature by extending the discussion on the adaptations of pre-decision controls. Specifically, we contribute to the capital budgeting literature by providing a more nuanced picture about the factors influencing the adaptations. We show that changes in management can play a decisive role as a trigger both for procedural and risk assessment control adaptations. Further, we present evidence to maintain the point that financial pressure may drive an increased emphasis on controls related to risk assessment. We also add to the literature by considering the direction of the adaptation (i.e., increased control).
CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE IN EUROPE AND THE UNITED STATES: INVESTIGATING THE IMPLICIT-EXPLICIT-FRAMEWORK USING TEXTUAL ANALYSIS
HUMMEL, KATRIN
MITTELBACH-HÖRMANSEDER, STÉPHANIE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The present study draws on the implicit-explicit-framework of Matten and Moon (2008) and investigates differences in voluntary corporate social responsibility (CSR) disclosures between firms located in liberal market economies, namely the United States, and firms located in coordinated market economies, namely Austria, Germany, and Switzerland. By using textual analysis focusing on the reported topics, as well as readability and tone, we shed new light to the discussion of cross-national differences in CSR disclosure. Our results are based on a sample of 504 reports over a period of eight years, and support the notion that voluntary CSR disclosures provided by firms in liberal market economies are more explicit as regards educational and philanthropic issues, and more readable and optimistic compared to the disclosures provided by firms in coordinated market economies. However, we do not find evidence of this relationship for disclosures relating to parental policies. Finally, our results from additional analyses provide weak evidence for a change toward more explicit disclosure among firms located in coordinated market economies.
DOES VOLUNTARY AUDIT INCREASE SMALL FIRM GROWTH? EVIDENCE FROM A NATURAL EXPERIMENT
HUQ, ASIF
DAUNFELDT, SVEN-OLOV; HARTWIG, FREDRIK; RUDHOLM, NIKLAS
Category: AU = Auditing
Many European countries have abolished mandatory audits for small firms, but we still lack knowledge on whether this affects small firm growth. A Swedish reform in 2010 made audits voluntary for small firms fulfilling certain requirements, while firms that did not meet these requirements still had mandatory audits. We argue that this regulatory change created an almost perfect natural experiment, which can be exploited to evaluate the effects of the reform on employment growth using a difference-in-difference estimator. Our results show that firms who fulfil the requirements for voluntary auditing, as compared to a control group of firms that does not, increased their employment growth rates by on average 0.39%, corresponding to 5 500 jobs being created in the three years following the reform. It thus seems that voluntary audits are reducing the regulatory burden for small firms, making resources available that can be used to increase the number of employees. The current threshold levels for mandatory audits are still significantly lower in Sweden than in most other European countries, which implies that the policymakers in Sweden could create more jobs in small and medium-sized firms if they increased the size threshold levels for mandatory audits.
EFFECTS OF DISCLOSING TAX AVOIDANCE: CAPITAL MARKET REACTION TO LUXLEAKS
HÜSECKEN, BIRGIT
OVERESCH, MICHAEL; TASSIUS, ALEXANDER
Category: TX = Taxation
This study analyzes the capital market reaction to news about tax avoidance. As tax information is usually not published, little is known about the effects of disclosing tax avoidance. However, in the course of the event known as LuxLeaks, hundreds of tax documents were released. Unlike other events used in previous literature, the litigation risk, which is generally associated with tax avoidance, is considerably lower because these documents consist of advance tax rulings. Using an event study methodology, we find significant positive cumulated abnormal returns for the involved firms. Our results show that market participants reward the disclosure of tax avoidance and cast doubts on significant reputational effects. Further analysis suggests that the capital market especially rewards news about a firm’s additional engagement in tax avoidance that is associated with a low risk of litigation.
GENDER DIVERSITY ON THE COMPENSATION COMMITTEE AND CEO PAY-PERFORMANCE SENSITIVITY
HUTCHINSON, MARION
MACK, JANET ; VERHOEVEN, PETER
Category: GV = Accounting and Governance
This study of U.S. listed firms over the period 1996 to 2012, a period when compensation is very much performance based, provides evidence that a more gender diverse compensation committee reduces pay-performance sensitivity, thereby reducing managers’ incentives for excessive risk-taking. The results of this paper demonstrate the trade-off between incentives and risk taking that underlie the use of pay-for-performance. Moderating the trade-off and significantly shaping the pay-for-performance association is the gender diversity of the firm’s compensation committee. Our results support the notion that CEO risk taking is monitored by the compensation committee particularly when females are present. Females on the compensation committee limit incentive pay that place too much risk on the CEO.
THE EFFECT OF CEO TENURE ON PERFORMANCE: THE ROLE OF REAPPOINTMENT INCENTIVES
HYUN, JEONG-HOON
AHN, TAE SIK; CHOI, YOUN-SIK; HYEON, JIWON
Category: MA = Management Accounting
While CEO ‘reappointment’ opportunities (i.e., the possibility of being consecutively appointed as the CEO) can be a significant implicit incentive for a CEO, prior studies have not discussed their impact on performance. We address this issue using the quasi-experimental setting embedded in the performance evaluation system used by Korean state-owned enterprises, in which 1) the decision whether to reappoint CEOs is heavily influenced by politics (specifically, presidential change), which is an exogenous factor, and 2) a CEO can be reappointed only once. We compare the performance of CEOs with and without the reappointment incentive and find that CEOs without the reappointment incentive underperform. In particular, we find that CEOs whose tenure ends in the same year as the presidential change underperform, and that reappointed CEOs significantly reduce their efforts just after their reappointment because reappointment is no longer possible. However, we find that CEOs with external career concerns (CEOs with voluntary departure) do not reduce their efforts, even with no reappointment possibility. Our empirical findings extend the literature on the relationship between CEO tenure and firm performance by implying that ‘reappointment’ opportunity and future career concern play an important role in motivating CEOs.
TRACING THE PATHS FROM INNOVATION TO FINANCIAL PERFORMANCE
HYUN, SOONCHUL
ANDERSON, MARK; BANKER, RAJIV; BYZALOV, DMITRI
Category: MA = Management Accounting
An important challenge in management accounting is linking innovation activities to financial performance. There are two main concerns. One is that innovation activities affect financial performance through chains of cause and effect relations that involve a number of intermediate stages. The other is that the value creation process of innovation depends on organizational context and strategy. We address these concerns by tracing the paths from innovation activities to financial performance at the establishment level. We document that improvements in quality and productivity are intermediate stages in the chain of relations that link product and process innovation to financial performance. We obtain more detailed insights about these relations by evaluating paths from innovation activities to financial performance based on the strategic positioning of the business unit.
THE ROLE OF AN INDIVIDUAL AND PERCEIVED WORK SITUATION IN MANAGEMENT ACCOUNTING CHANGE: TRIGGERS, CONDITIONS AND FATE OF INSTITUTIONAL ENTREPRENEURSHIP
IERMOLENKO, OLGA
BOURMISTROV, ANATOLI
Category: MA = Management Accounting
The paper seeks to add knowledge on understanding the paradox of embedded agency that is about how an actor can enact changes to the context by which he, as an actor, is shaped, and to challenge the “reductionist view of individuals” in the mainstream management accounting change literature. By looking at the institutional entrepreneur (IE) and his role in initiated management accounting (MA) changes in a big private energy company in Ukraine, we analyze the triggers, conditions and fate of institutional entrepreneurship and how they are related to the individual psychological aspects, as perceived work situation and individual “comfort” zones. We identify that actions of an IE are dependent upon his standing in a “comfort” or “discomfort” zones. Whether placed in a “discomfort” zone, where IE may experience the mismatch between the “mindset” and “behavior”, IE may decide to continue searching for another “comfort” zone, often outside the organization, where he might achieve the match between his “mindset” and “behavior”. It provides an opportunity for an IE to perform again – to challenge the status quo in an organization and offer “innovative” solutions. This study shows that MA change and a further transformation of a company may stem from the intentions and skills of an institutional entrepreneur, and not necessarily from organizational routines, external pressures or regulations. Thus, an individual may play an important role in MAS changes, and especially because of the psychological and emotional aspects related to a perceived work situation. Interestingly, the role of emotions in using MAS has generally been little researched and therefore represent a promising area for future research in both, institutional entrepreneurship studies in organizational and accounting literature.
ACCOUNTING FOR FREEDOM: MARKETING JEWS AND GERMANS BY THE ROMANIAN COMMUNIST REGIME
IONASCU, MIHAELA
IONASCU, ION
Category: IC = Interdisciplinary/Critical
During the communist regime, a social phenomenon – the mass migration of ethnic Jews and Germans from Romania – was converted into a commercial transaction, the emigration permits being granted by the Socialist State in exchange for money or other assets. The purpose of this paper is to explore the role plaid by accounting practices in this morally and ethically challenged operation. Analysing the phenomenon within its social, political and ideological context, the paper shows that, besides the control function well established for a Soviet model accounting system, accounting calculative practices also served to legitimize the operation both within the communist society, but also for western liberal countries which denounced the transactions undertaken by the Romanian communist regime as “slave trade in the twentieth century”.
DEVIANT BEHAVIOUR DUE TO BIASING ROLE OF CONFLICT OF INTERESTS: EXPERIMENTAL EVIDENCE FROM THE BIG FOUR ACCOUNTING FIRMS
ISHAQUE, MARIA
ABDEL-KADER, MAGDY ; JABBOUR, MIRNA
Category: AU = Auditing
This paper is meant to examine the biasing role of conflict of interests towards accounting professionals’ decision-making behaviour. We have developed a cognitive approach by integrating social cognitive theory and throughput model. This approach allows better understanding of how in the events of conflict of interests, the perceptual biases might increase (decrease) the likelihood of professionals’ deviant (compliant) behaviour. The theoretical model has been tested by conducting an experiment with 105 professionals from the Big Four accounting firms in UK. The results suggest that decision-making in the events of conflict of interests is prone to biases, unintentional as well as intentional, due to the interference of professionals’ positive outcome expectancy of compliant decision-making, and their perceived difficulty in making compliant decisions. Consequently, the professionals are led to behave in a biased manner and, therefore, higher is the risk of deviant behaviour. The empirical findings can be applied to reduce the likelihood of ‘deviant behaviour due to biasing role of conflict of interests’ – strengthening the professionals’ independence in fact lies at the core of these efforts. For instance, the said biases can be formulated into a successful strategy by alerting professionals of the pathways they use to arrive at a decision, and also by increasing their awareness of the cognitive obstacles they encounter during decision-making.
EARNINGS QUALITY AND THE HETEROGENEOUS RELATION BETWEEN EARNINGS AND STOCK RETURNS
ISIDRO, HELENA
DIAS, JOSÉ; ISIDRO, HELENA
Category: FR = Financial Reporting
We adopt a heterogeneous regime switching method to examine the informa- tiveness of accounting earnings for stock returns. We identify two distinct time-series regimes in terms of the relation between earnings and returns. In the low volatility regime (typical of bull markets), earnings are moderately informative for stock returns. But in high volatility market conditions (typical of financial crisis), earnings are strongly related to returns. Our evidence suggests that earnings are more informative to investors when uncertainty and risk is high which is consistent with the idea that during market downturns investors rely more on fundamental information about the firm. Next,we identify groups of firms that follow similar regime dynamics. We find that the importance of accounting earnings for returns in each of the market regimes varies across firms: certain firms spend more time in a regime where their earnings are highly relevant to returns, and other firms spend more time in a regime where earnings are moderately relevant to returns. We also show that firms with poorer accrual quality have a greater probability of belonging to the high volatility regime.
TAX AVOIDANCE AND COST OF DEBT: THE CASE FOR SYNDICATE RISK MITIGATION AND PUBLIC BOND MARKETS
ISIN, ADNAN
Category: TX = Taxation
Examining the syndicate loans market for publicly traded U.S. firms I show that tax avoidance is positively related to loan spreads. This positive link holds for alternative forms of tax avoidance and is more pronounced for firms with financial constraints and information asymmetries. Moreover, I show that the positive link between tax avoidance and loan spreads is largely eliminated for loans with effective risk mitigating mechanisms in place where lenders either align borrowers’ interests with theirs and/or are able to diversify away loan-specific risks. Notably, these risk mitigating mechanisms are more effective at moderating tax-specific risk premiums for firms with larger financial constraints and information asymmetries. Furthermore, performance pricing provisions, functioning as hybrid screening/monitoring mechanisms, are more effective, ex-ante, at moderating tax-specific risks in comparison to covenant-based monitoring structures alone. Finally, I find that simultaneous access to bank and public debt financing, which reflects greater firm-level financial flexibility and information quality, mitigates agency risks associated with all forms of tax avoidance. These results help identify channels through which firms can mitigate non-tax costs associated with tax avoidance and hence, effectively pursue strategies that persistently reduce their corporate tax burden.
AUDIT FIRM TENURE REGULATIONS AND FINANCIAL REPORTING QUALITY: EVIDENCE FROM THE UK
ISLAM, SHAHIDUL
Category: AU = Auditing
In response to the spectacular financial reporting failures in Western economies in the early 21st century, the UK has undergone a series of regulatory reforms of which the Ethical Standards (ES) by the Audit and Assurance Council (AAC) are among the most prominent. While the issue long association with audit clients died down following the enactment of ES in 2004, it attracted comments from regulators and policymakers in the wake of the 2007-09 financial crisis. This makes audit firm tenure long-standing, potentially unresolved issue even in a changed regulatory setting. In this context, this paper investigates the impact of audit firm tenure regulations on the financial reporting quality (FRQ) of FTSE350 companies over the period 2003-2012. Using estimates of discretionary accruals as the proxy for FRQ, the study finds contrasting support against popular arguments that long audit firm tenure erodes FRQ. Tests of association between audit firm tenure and FRQ suggest that audits conducted during the post-APB ES period have a mitigating effect on discretionary accruals and that longer audit firm tenure does not compromise auditor independence but in fact helps improve FRQ in the form of lower discretionary accruals. These empirical findings have weak support for policymakers’ views that mandating more frequent rotation of auditors would help to improve FRQ. The study makes important empirical contributions with policy implications.
BOARD INTERLOCKS AND REPUTATION SPILLOVER EFFECTS: AN EMPIRICAL ANALYSIS OF FINANCIAL REPORTING POLICIES FOLLOWING MATERIAL ADVERSE EVENTS AT CONNECTED FIRMS
IVANOVA, MARIYA NIKOLOVA
Category: FR = Financial Reporting
I examine whether material adverse events such as financial fraud allegations at one firm affect the financial reporting policies of firms connected to it by a board interlock. I utilize enforcement actions initiated by the Securities and Exchange Commission (SEC) to identify heinous high-profile financial fraud cases. I develop and test two hypotheses: Information and High Publicity that explain why and how the board members of non-investigated firms respond to material adverse events at connected firms. Based on a sample of enforcement events in the period between 1999 and 2014, I report evidence of lower levels of accrual earnings management by interlocked firms following the initiation of a SEC investigation of a fraudulent firm. The results are significant only for cases of manipulations of operating earnings. I also document higher audit committee activity and increased board independence for these firms. Additional tests show that the effect on earnings management persists in the following year in cases where the fraudulent firm was involved in operating earnings manipulations and shared an audit committee interlock with the non-investigated firm. Taken together, the evidence provided in this paper suggests that material adverse events at one firm influence the financial reporting policies of firms in its board network.
CONSUMPTION TAXES AND CORPORATE INVESTMENT
JACOB, MARTIN
Category: TX = Taxation
While consumers pay consumption taxes, the corporate sector may partly bear them, reducing capital returns and investment. Exploiting 95 consumption tax changes in a worldwide firm-panel as well as one local quasi-natural experiment, we show that consumption taxes decrease corporate investment. Firms facing elastic demand decrease investment more strongly because they can pass less of the consumption tax on to consumers. Similarly, firms with more exposure to domestic (end-)consumers decrease investment more strongly. Our novel result of an adverse effect of consumption taxes on investment broadens the scope of the literature that predominantly focuses on capital taxes.
DO INVESTORS FIND CARBON INFORMATION VALUE RELEVANT : EVIDENCE FROM ITALIAN FIRMS
JAGGI, BIKKI
ALLINI, ALESSANDRA; MACCHIONI, RICCARDO; ZAMPELLA, ANNAMARIA
Category: FR = Financial Reporting
Though the existing evidence shows that markets react positively to carbon disclosures, this evidence is primarily based on the US firms. Given the importance of the European financial markets in the global economy, it is important to evaluate market reaction to carbon disclosures by the European Union countries. In this study, we examine how investors react to voluntary carbon disclosures in the Italian capital market, especially if they firms have established environmental committees on a voluntary basis. Our results document that stock price is positively associated with voluntarily disclosed carbon information in the Italian capital market, indicating that investors find carbon information disclosed by these firms useful for their decisions. The results also show that the positive association is especially stronger for firms that have established environmental committees on a voluntary basis, implying that investors find carbon information of these firms more reliable. But imvestors react negatively to higher carbon dislosures by firms from the highly polluting industry sectors defined under the EU_ETS program. A plausible explanation for the negative reaction is that investors perceive that higher carbon emissions would have a negative impact on the firms’ future economic performance if these firms are from the highly polluting groups.
DETERMINANTS OF CONSISTENT KEY PERFORMANCE INDICATORS’ DISCLOSURE: EVIDENCE FROM GERMANY
JANA, STEPHANIE
VOLL, DANIEL; ZÜLCH, HENNING
Category: FR = Financial Reporting
This paper investigates the level of consistency in using financial key performance indicators (KPIs) in capital market information in Germany and examines specific determinants of consistent KPI disclosure. To measure such consistency, the study reports three consistency indices that were uniquely developed for this paper. The indices measure the consistent KPI disclosure of a sample of German listed companies from 2009 to 2014 and consist of up to 396 firm year observations. These indices indicate a high level of inconsistency in the disclosure behaviour of German companies for capital market communication covering the management report, the annual report and the investor relations presentations for year-end earning calls as. The results range from 36% to 48% consistency, indicating room for improvement. The results of a random effects regression analysis report for all indices that the level of consistency increased significantly in 2013 and 2014. The study shows that profitable firms and firms with an above average number of KPIs report more consistently than other firms. This paper contributes to the literature on disclosure topics in accounting by introducing KPI consistency indices as a proxy of disclosure quality and demonstrates that the KPI reporting behaviour of German firms lacks consistency.
PROFESSIONAL LOAN OFFICERS’ INFORMATION SEARCH BEHAVIOR AND THE IMPACT OF THE AUDIT REPORT: EVIDENCE FROM EYE-TRACKING
JARVINEN, TUUKKA
MYLLYMÄKI, EMMA-RIIKKA; SORMUNEN, NINA ; WINTHER BALLING, LAURA
Category: AU = Auditing
The purpose of this paper is to examine whether going-concern (GC) modification and the perceived quality of the signing audit firm (Big 4 vs. non-Big 4) affect loan officers’ information search behavior in their loan granting decision-making process. The eye-tracking technology used in this experimental study enables us to thoroughly scrutinize the information search of professional loan officers. The findings indicate that, not only does the GC modification affect lenders’ information search behavior, so does the credibility of the audit report source. First, the results indicate that lenders’ attention to the audit opinion and the GC modification is the greatest when the report is signed by a Big 4 auditor. Second, the information mentioned in the GC uncertainty paragraph has attention-directing effect since lenders access this information quickly after reading the audit report with the GC modification. This effect is the most evident when the audit report is signed by a Big 4 auditor. Finally, the investigation of lenders’ overall search patterns reveal that, depending on the auditor type and the signing audit firm, there are differences in the type, extent, and order of information acquisition. Specifically, graphical evidence suggests that the content of the audit report seems to have an impact on the early stage of task-relevant information search, and specifically GC modification directs attention to non-financial information.
THE POPULAR PURSUIT OF DIY: EXPLORING THE ROLE OF CALCULATIVE TECHNOLOGIES IN AN ACTOR NETWORK
JEACLE, INGRID
Category: HI = History
This paper seeks to explain the popular growth in DIY activity through the theoretical lens of Callon’s (1986) four moments of translation. This framing facilitates an understanding of the process by which DIY changed from an activity driven by economic necessity to a popular recreational pastime. The paper draws on empirical sources from the 1950s, a key moment in which DIY was embraced by the mass populace. A particular source of reference is the specialist DIY magazines which begin to appear during this decade. Through an ANT (actor network theory) lens, the empirical material illustrates how several diverse actors came together through a process of translation, mobilising a network of forces to promote DIY activity. Following Skærbæk and Melander (2004), the paper suggests the role of accounting, and calculative practices more generally, as interessement devices in this process. The labour cost saving associated with DIY acts as an important interface between actors in the network. Calculative technologies can therefore be seen as a central part of the process through which DIY becomes established as a popular pursuit.
THE EFFECT OF DISCLOSURE QUALITY ON ANALYST DISAGREEMENT, RETURN VOLATILITY AND SYSTEMATIC RISK: THE CASE OF GOODWILL IMPAIRMENT
JENY-CAZAVAN, ANNE
ANDREICOVICI, IONELA; LUI, DAPHNE
Category: FR = Financial Reporting
In this paper, we examine the effect of disclosure quality on firms’ risk environment. Drawing on a sample of European companies that impaired their goodwill during 2006-2014, we construct a unique dataset on the quality of goodwill impairment disclosures, and show that high quality impairment related disclosure is associated with less analyst disagreement and lower firms’ total return volatility, but not systematic risk. Our results are consistent with the extant research that a high (low) level of disclosure quality leads to positive (negative) capital market consequences. Goodwill impairment rules (IFRS 3 and IAS 36) have a stated aim to facilitate financial users’ interpretation of assets’ underlying economic values. Our evidence is of interest to both regulators and investors, by showing that current goodwill impairment disclosure rules could create high uncertainty among market participants.
DOES REAL ACTIVITIES MANAGEMENT INFLUENCE EARNINGS QUALITY?: ANALYSIS ON THE PERSISTENCE OF EARNINGS AND CASH FLOWS AND FUTURE EARNINGS NEWS REFLECTED IN THE STOCK RETURN
JEONG, KWANG HWA
CHOI, SEUNG UK
Category: FA = Financial Analysis
We explore the association between real earnings management and earnings quality. Specifically, we examine whether real activities management influences the persistence of earnings and cash flows, respectively. Further, we investigate the effect of real management on the relation between current stock returns and future earnings. Using 3,688 firm-years observations listed in the Korea Stock Exchange from 2000-2009, we find that real earnings management is negatively associated with the persistence of current earnings for future earnings. We also find that real management restricts the persistence of cash flows for future cash flows. Lastly, we find that real earnings management prevents the market from assessing firms’ future earnings in the current stock prices. Our findings make two contributions to the literature. First, we focus on cash flows component of earnings as well as accruals component of earnings. Second, decreased persistence can be a linkage addressing the negative relation between real earnings management and firm value.
FINANCIAL STATEMENT EFFECTS OF ADOPTING IFRS: THE CANADIAN EXPERIENCE
JERMAKOWICZ, EVA
CHEN, CHUN-DA ; DONKER, HAN
Category: FR = Financial Reporting
This study investigates the effects of adopting International Financial Reporting Standards (IFRS) on financial statements of the largest Canadian firms (S&P/TSX 60) listed on the Toronto Stock Exchange (TSX). We compare accounting numbers reported under pre-changeover Canadian GAAP (CGAAP) with those under IFRS for the same period, and document how IFRS adoption changes key accounting measures and financial ratios. Significant accounting standard differences between two accounting frameworks having direct impact on financial measures in transition to IFRS are analyzed. Our analysis was also separately performed for companies representing Basic Materials and Energy as well as Financial Services sectors because of the large concentration of companies engaged in these industries in our sample. Consistent with our perceptions, we find that significant effects of adopting IFRS are associated with industry practices. The empirical results show that the adoption of IFRS in Canada created more relevant financial reporting for book value of equity and net income in the post-adoption periods. The study should be of interest to U.S. regulators considering IFRS adoption by U.S. publicly traded companies as well as to regulators, standard setters and listed companies in all countries worldwide that are in transition to IFRS.
DISCONTINUOUS SURVEILLANCE: AN ETHNOGRAPHIC STUDY OF ACCOUNT PREPARATION
JERMAN, LAMBERT
Category: IC = Interdisciplinary/Critical
This article seeks to eventalize (Foucault, 1990) account preparation in a multinational company based on an ethnographic study. This consists in identifying the events giving rhythm to the interactions between the various parts of accounting production. This form of problematization shows that three discontinuities—in time, in intensity, and in individuality—characterize account preparation. A temporal discontinuity arises when the moment when preparers are being monitored through accounting constantly fluctuates between what is done, what is being done, and what is occurring. Then, a discontinuity in intensity follows, where book values form a set of heterogeneous objects with varying degrees of importance and truth. Finally, a discontinuity in individualities emerges, where book values are what preparers can relay, rather than being external data monitoring them continuously in corporate governance. The study focuses on the fair value valuation of hedging instruments in a large multinational. It reveals the mechanisms through which operational personnel, accountants, and financial managers can be unintentionally shielded from account user surveillance.
CSR IN THE PEOPLE'S REPUBLIC OF CHINA: FIELD FORMATION AND CONTEXTUAL DRIVERS
JI, SOPHIA
PARKER, LEE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The aim of the paper is to investigate recent Corporate Social Responsibility (CSR) development in the People’s Republic of China (PRC) in its socio-cultural and institutional context and the implications of these contextualised trends carry for the PRC CSR research agenda. This paper investigates the recent trends in PRC CSR practice and regulation, as well as the major socio-cultural and institutional forces conditioning CSR development in PRC. Data and contextual socio-cultural and political information are collected through publicly available sources in both English and Chinese language. English language studies are collected from relevant journal papers and reports. Chinese language information and data are collected from relevant official documents and websites of the government and the Communist Party of China, official documents and websites from the security markets, and research reports produced by domestic CSR research institutes and CSR consultancy organisations. CSR practices and reporting in the past decade has grown exponentially but from an almost zero base. Government leadership with an underlying harmonious socialist ideology, traditional Chinese culture, and a growing Civil Society have significantly contributed to such development. Current CSR practices and CSR research in PRC however are still under-developed.
CEO EQUITY COMPENSATION AND FINANCIAL MISREPORTING: EVIDENCE FROM THE MOTIVE OF MISREPORTING
JIA, YUPING
CAO, WENJIAO; ZENG, YACHANG
Category: GV = Accounting and Governance
The association between Chief Executive Officer’s (CEO) incentive-based compensation and financial misreporting is theoretically and empirically inconclusive. By looking into the Accounting and Auditing Enforcement Releases (AAERs) sample from the perspective of misreporting motives, we identify cases where earnings management is driven by CEO’s desire to increase compensation gains and investigate whether the desire is triggered by high-powered incentive-based compensation. We use a python program to read through the AAERs issued from 2004 to 2013 and to identify misreporting firms where the CEO is overpaid due to earnings management (hereinafter referred to as compensation-related fraud). We find that compensation-related fraud accounts only for 35.71% of the AAER firms during our sample period. In comparison with a matched non-AAER sample, we find a positive association between CEO incentive-based compensation (measured by delta, vega, and bonus to salary ratio) and compensation-related fraud. Results do not hold when we compare the non-compensation-related fraud with the non-AAER firms. We also document within the AAER sample that firms subject to compensation-related fraud pay their CEOs higher portfolio delta and vega than non-compensation-related fraud.
DIFFERENT CONTROLS FOR DIFFERENT AGENTS: THE HIDDEN COSTS OF CONTROL AT WORK
JIANG, NAN
BOUWENS, JAN
Category: MA = Management Accounting
This study attempts to shed light on the design of control systems. We specifically test whether agents respond differently to controls conditional on their experience. We measure whether the introduction of an additional control aimed at working capital reductions works out the same for experienced as well as inexperienced project managers. The introduction of the training arguably serves as an exogenous shock to the firm’s management style, which allows us to run a difference-in-difference analysis to examine project managers’ reaction in response to an explicit control mechanism. We document a negative effect of the introduction of this explicit control for senior project managers. While they used to outperform their junior peers in managing their working capital levels, their working capital actually rises after they had been instructed that working capital levels should decrease and also how that this objective was to be achieved. We argue that the decree to improve the cash conversions along with the mandatory training program is perceived by the senior agents as an infringement of the implicit agreement between the agent and the principal. We predict and find that the explicit control lead junior agents to improve their cash conversion performance.
DO MUTUAL FUNDS TAKE SIDES? EVIDENCE FROM CHINA
JIANG, WEI
KUO, THOMAS; SONG, XIAOQI
Category: GV = Accounting and Governance
This study examines the innovations in the interrelationships among firm performance, tunneling activities conducted by controlling shareholders, and mutual fund ownership in China using an extended sample period from 2003 to 2014. Our results show a U-shaped relationship between mutual fund ownership and tunneling activities and an inverted U-shaped relationship between mutual fund ownership and firm performance. Specifically, we find that mutual fund ownership effectively mitigates the tunneling behavior of controlling shareholders and in turn improves firm performance, consistent with the shareholder activism theory. However, concentrated mutual funds are associated with heavier tunneling and lower firm performance, suggesting that they might collude with controlling shareholders in order to preserve their private interests, supporting the private interest hypothesis. Furthermore, we find that mutual funds enhance firm performance more for firms with heavier tunneling activities. Our results on the non-monotonic monitoring role of mutual funds are robust to alternative performance and tunneling measures and various model estimations. Our study extends the literature on the monitoring role of mutual funds and has potential policy implications.
RESTRUCTURING FOR GLOBAL SUCCESS? POST-RESTRUCTURING PERFORMANCE OF LOCAL VERSUS GEOGRAPHICALLY-DISPERSED COMPANIES
JO, KOREN
MA, GUANG
Category: FR = Financial Reporting
This study investigates the effects of a firm’s geographic dispersion on the post-restructuring performance and the market reaction to the restructuring announcement. Using propensity score matching and difference-in-difference approach, we find that geographically dispersed firms perform worse than local firms in the post-restructuring periods, and geographically dispersed firms have higher overinvestment in post-restructuring periods than local firms, primarily overinvestment in R&D expenditures. We also find that the market overreacts to local firms’ restructuring announcements and underreacts to dispersed firms’ restructuring announcements. Our evidence suggests that geographically dispersed firms have smaller or even insignificant performance improvement from restructuring, while local firms have significantly larger performance improvement. The evidence is inconsistent with the agency costs view of restructuring as theories predict more benefits would be drawn from restructuring for firms with higher agency costs.
THE IMPACT OF PARTICIPATION IN STRATEGIC PLANNING AND ACTION PLANNING ON MANAGEMENT CONTROL EFFECTIVENESS: AN ANALYSIS OF INDEPENDENT AND JOINT EFFECTS
JOHANSON, DANIEL
BEDFORD, DAVID; BEDNAREK, PJOTR; DITILLO, ANGELO; DOSSI, ANDREA; GOSSELIN, MAURICE
Category: MA = Management Accounting
This paper investigates subordinate participation in the planning processes of top management. Specifically, this paper examines the independent and joint effects of subordinate participation in strategic planning and action planning on management control effectiveness. While these planning processes have been subject to significant research, little is known about the interrelationships between strategic planning and action planning. This paper hypothesizes that strategic planning and action planning have both independent and joint effects on MC effectiveness. This paper draws on a large survey database of top managers across 11 countries. The analysis shows that participative action planning has positive, direct effects on MC effectiveness, while no significant association is found for participation in strategic planning. We also find that participative strategic planning and participative action planning are interdependent control choices. However, contrary to expectations, we find that they act as substitutes rather than complements.
THE FIRM-LEVEL CORPORATE GOVERNANCE IMPACT ON THE COMPANY´S INFORMATION ENVIRONMENT
JÖNSSON, MICAEL
NILSSON, OLA; VON KOCH, CHRISTOPHER
Category: GV = Accounting and Governance
In several studies investigating the relationship between firm-level corporate governance (FCG) and financial analyst performance it appears a general assumption that the latter is seen as a proxy for the company´s information environment (IE). The three most common measures are analyst following, analyst forecast accuracy, and analyst forecast dispersion. Researches using these properties indicate a general positive relation between FCG and IE. But consider the facts that the IE consists of different dimensions of information which several studies has shown lately, the used properties must be seen as quite rough proxies of the company´s IE. The purpose of this paper is to investigate the relationship more thoroughly by using a sophisticate model that can analyse the proportion of private information, the precision of private information, the precision of public information and the precision of total information at the same time. Our result shows that higher level of FCG is positively significant for all these new proxies for IE. Higher level of FCG improves, as expected, public, private and total precision at the same time as analysts use relative more private information in their forecasts. When we divide the sample into common and civil law firms we first find support for prior studies that IE is better in common than civil law countries.
AN ANALYST BY ANY OTHER LAST NAME: COUNTRY FAVORABILITY AND MARKET REACTION TO ANALYST FORECASTS
JUNG, JAY HEON
KUMAR, ALOK; LIM, SONYA; YOO, CHOONG-YUEL
Category: FA = Financial Analysis
This paper investigates whether subjective perception such as favorability influences market reactions to analyst earnings forecast revisions. Using the Gallup poll on Americans’ overall opinion about foreign countries, we find that analysts with last names associated with more favorable countries of origin elicit stronger market responses to their forecast revisions. The findings are more pronounced when firms are largely held by individual investors and when analysts have last names whose origins are easier to infer. Following the 9/11 terrorist attacks, analysts with Middle Eastern origins suffer a significant decline in market responses to their forecast revisions. Further, we find no systematic relation between forecast quality and favorability of analysts’ countries of origin, suggesting that our finding is unlikely to be driven by rational weighting based on forecast quality. We also find no evidence that analysts with more favorable countries of origin have better career outcomes. Taken together, our findings suggest that investors’ subjective feeling about an analyst can influence how they process the information in the analyst forecasts.
BETWEEN AMBIGUITY AND CONTROLLABILITY: HOW SCENARIO WORK IMPLICATES MANAGEMENT CONTROL SYSTEM
KAARBØE, KATARINA
BOURMISTROV, ANATOLI; HELLE, GRETE
Category: MA = Management Accounting
Issues of long-term planning in dynamic business environments have not received proper attention of management accounting and management control literature. Informed by the theoretical frame of reference consisting of both foresight and management control literature, we aim in in this study to learn more about why and how organizations mobilize techniques of foresight management (such as scenarios) in management control practices. We report analysis of data collected by interviewing managers working in organization in four different industries (ITC industry, oil- and gas industry, banking industry and the public sector). Our finding show that scenarios are not only quite extensively used in organizations to prepare for organizations towards the uncertain futures, but also implicate management control system in four different ways: “tuning control”, “contingency control”, “action control” and “scenario control”. In order to understand what factors can explain the differences in use of controls, we juxtaposition those control types by discussing notions of “planning ambiguity” and the notion of “controllability”. The results of the study contribute to both the management control literature (by showing how long-term planning is mobilized) and to practitioners using scenarios (by showing how scenarios are useful for management practices).
DO CHANGES IN CONSOLIDATED ACCOUNTING SY STEM AFFECT EARNINGS ATTRIBUTES AND DIVIDEND POLICY ?
KAGAYA, TETSUYUKI
KOMETANI, KENJI
Category: FR = Financial Reporting
This paper examines whether changes in consolidated accounting system affects earnings attributes and dividend policy in Japanese firms. The center of financial reporting system has shifted from non-consolidated to consolidated financial statement in Japan after April 1999. We investigated the changes affect earnings attributes and dividend policy in Japanese firms. First, we compare between consolidated and nonconsolidated financial statements in terms of five earnings attributes: loss avoidance; accruals quality; unconditional conservatism; earnings smoothness; and earnings persistence. The results suggest that the roles of accounting accruals in consolidated financial statements may promote earnings management and contribute to earnings persistence, especially in firms with higher ratios of consolidated sales to non-consolidated sales. Second, we set two groups and examine the relation between increasing dividends and those earnings move-ments. The results show that signaling from consolidated earnings becomes stronger than that from consolidated earnings after they become the center of consolidated financial statements. Third, we calculate the decomposition of earnings in consolidated and nonconsolidated income statements and examine the relation between dividend behavior and those numbers in two groups. The results suggest that consolidated earnings, especially consolidated accruals, may contribute to dividends after fiscal 1999.
OPTIMAL DISTANCE BETWEEN ACCOUNTING MANAGER AND PRODUCTIVE MANAGER
KAI, HISAO
Category: MA = Management Accounting
Companies must respond to the changing business environment. Companies, especially multinational companies, must tackle to rebuild not only the financial reporting system but also the management system. In this environment, the decision of the distance between an accounting manager and a productive manager is important for the shareholder. As the distance is longer, the cost involving accounting is lower and the accounting manager’s incentive of manipulating the performance measure of the productive manager becomes weaker. This is good for the shareholder. On the other hand, as the distance is longer, the accounting manager’s ability of supporting the productive manager becomes weaker. This is bad for the shareholder. Therefore, the shareholder have to solve this tension. But, analytical research about this topic is rare. This paper has contributed to this topic. In this paper, the model is a standard multi-action moral hazard model. The main result is as follows. The optimal distance depends on the sensitivity of the firm value of the accounting manager’s advisory action, the sensitivity of the productive unit’s performance measure to the accounting manager’s ad visory action, and the sensitivity of the productive unit’s performance measure to the accounting manager’s manipulation.
FINANCIAL RISK, MAIN BANK SYSTEM, AND COST BEHAVIOR: EMPIRICAL EVIDENCE FROM JAPAN
KAJIWARA, TAKEHISA
KITADA, TOMOHISA; KOYAMA, MAMI
Category: MA = Management Accounting
We examine the relationship between financial risk and cost behavior, both theoretically and empirically. We suggest that financial risk will affect the degree of discretion in managerial resource adjustment decisions by its impacts on financial flexibility. As expected, our results show that financial risk increases the degree of cost anti-stickiness in the case of a prior activity decrease. On the other hand, financial risk appears to have no statistically significant influence on cost behavior in the case of a prior activity increase. This result is not consistent with our prediction. We also examine the moderating effect of the close relationships between firms and banks on the association between financial risk and asymmetric cost behavior using data on the main bank system in Japan. Consistent with our prediction, our results show that firms’ close ties with the main banks mitigate the adverse impacts of financial risk and allow managers to adjust resources flexibly in response to sales changes, even if the firms face high financial risk.
ONCE BITTEN ONCE SHY: LEARNING OR CONSERVATISM AFTER AUDIT FAILURE?
KAMATH, SAIPRIYA
Category: AU = Auditing
I examine how audit firms implicated in large audit failures behave subsequently. Using a difference-in-difference approach, I find that after a large audit failure, the implicated audit firm shows conservative behavior in audit outcomes. I further examine whether this conservative behavior leads to more informative audit reports due to learning or to less accurate audit reports due to undue conservatism. I find that implicated audit firms are less accurate and are more likely to issue going-concern opinion to clients who do not subsequently fail suggesting a conservative bias that reduces informativeness of audit reports. Further, supporting the undue conservatism hypothesis, I find that the changes in audit outcomes reverse after a year. Exploring the sources of undue conservatism, I posit that this response could be over-reaction of the implicated audit firm due to availability bias. In support of availability bias, I find that within the implicated audit firm, the reaction is strongest for audit offices located geographically closest to the implicated office, and for auditors with clients in the same industry as the failed client. Overall, these results provide evidence that following large audit failures, the increased media and regulatory scrutiny can steer away audit firms from learning and result in unduly conservative behavior. This study also contributes to the literature documenting systematic biases in auditor behavior.
WHICH ANALYSTS TO BELIEVE? ANALYSTS’ CONFLICTS OF INTEREST AND SOCIETAL TRUST
KANAGARETNAM, KIRIDARAN
BAE, KEE-HONG; TAN, HONGPING
Category: FR = Financial Reporting
Using societal trust of the country in which an analyst resides, we examine the impact of trust on the informativeness of analyst research. We find that market reactions are more pronounced to forecasts by analysts from more trustworthy countries. This result holds after controlling for the trustworthiness of the country in which the covered firm is headquartered and other analyst country characteristics. The impact of trust is particularly stronger when analysts are perceived to be subject to conflicts of interest. Our study highlights the importance of societal trust as an important trait in the investment value of analyst research.
THE RELATION BETWEEN TAX AVOIDANCE AND VOLUNTARY DISCLOSURES OF TAXATION-- EVIDENCE FROM UNITED KINGDOM
KAO, WEI-CHUAN
CHANG, CHIH-YA
Category: TX = Taxation
Voluntary disclosure theory predicts a negative relation because the information costs could be higher when conducting tax avoidance. Reducing tax related disclosures could alleviate the concern about whether and how the company has tax avoidance. On the other hand, socio-political theories suggest a positive relation because firms with higher tax avoidance may want to reduce the social concern or legitimize their tax strategy by voluntarily disclosing certain tax information it wishes the public to know. This disclosure could further reduce the concerns when confronting the public pressure or criticism of tax avoidance. Therefore, this study examines the relation between tax avoidance and voluntary disclosure based on the tax-related information disclosed in standalone corporate social responsibility reports to alleviate involuntary scrutiny on tax disclosures. We conduct a content analysis by developing the voluntary tax disclosure index. Using a sample of listed corporations in United Kingdom during 2010-2014, we find a positive association between corporate tax avoidance and voluntary tax disclosures, consistent with the predictions in socio-political theories. This implies that to legitimate tax avoidance or alleviate the increase in the political and reputation costs induced by public concerns, business voluntarily disclose more tax-related information to meet or alter societal expectations.
REVISITING THE POLITICAL ECONOMY OF FINANCIAL REGULATION: LOCATING A TRANSNATIONAL DISCLOSURE INITIATIVE ON THE REGULATORY MAP
KARASIEWICZ BAUDOT, LISA
COOPER, DAVID J.
Category: IC = Interdisciplinary/Critical
Regulatory institutions have been the subject of extensive debate. We suggest the need to better understand the boundaries and interactions of institutions occupying a shared regulatory space. We use proposals for country-by-country (CBC) reporting of payments that firms in extractive industries make to nation states to shed light on this topic. Calls for disclosure by the extractive industries have been raised in three sites within the accounting regulatory space: the International Accounting Standards Board (IASB) and its promulgation of IFRS 6 and IFRS 8; the European Union and its changes to the Transparency and Accounting Directives; and, the US legislature with the Dodd- Frank Act (2010) and related Securities and Exchange Commission (SEC) rulings. We analyze archival documents encompassing activities occurring from 2002 to 2016. We highlight the way in which CBC reporting was debated as an issue to be regulated and how various institutions responded to this issue. Debates reveal different perceptions of the jurisdiction and mandate of regulatory institutions. These perceptions help us to understand how institutions interpret their roles and their responsibilities relative to each other, thereby affecting the division of regulatory labor. The result is an historical analysis set within a social, political and economic context that aids in locating an emergent regulation on the regulatory map and identifying spaces of intervention to promote better accountability.
BETWEEN THE SYMPLEGADES OF RESISTING POLITICIANS AND DEMANDING INTERNATIONAL LENDERS: THE CASE OF THE GREEK STATE BUDGET REFORM
KARATZIMAS, SOTIRIOS
COHEN, SANDRA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This study examines the progress of the Greek state-budget reform during the financial crisis period and within the clashing rocks of the Greek politicians and the Troika. The objective of the reform is common for both parties: the improvement of the budgeting function in a period of scarce resources and extensive austerity. Their different motives, though, define the progress and orientation of the reform. The study contributes to the research agenda regarding public sector accounting reforms and the choices of accounting tools during periods of financial crisis, and explores the conflicts between Greek resisting politicians and a demanding group of external fund providers, on the setting of the Greek state budget reform. The progress of the reform is viewed through the lens of the resistance to change theory and the resource dependency theory. The theoretical framework is supported by primary sources (IMF, EC, Greek Ministry of Finance reports, the MoUs, the reviews of their progress)and informed by the outcome of interviews and informal discussions conducted with five Greek politicians. We conclude that politicians resisted to change by showing an attitude that did not facilitate the process and permitted the creation of significant delays in the implementation of reforms agreed with resource providers. We attribute this behavior to ideological objections as well as practical pressures originating from citizens, and the opposition that put in danger their elected position.
FINANCIAL PATHS OF REORGANIZING FIRMS AFTER REORGANIZATION PLAN CONFIRMATION
KÄRKINEN, EIJA
Category: FA = Financial Analysis
The purpose of this paper is to examine the financial paths of small entrepreneurial firms (n=59) that are reorganizing under the Finnish Company Reorganization Act (FCRA, comparable to chapter 11 in the Bankruptcy Act in the US). The reorganization plans of firms were confirmed in 2000, and the financial data consist of financial statements for the year of reorganization plan confirmation (2000) and the subsequent three years. In addition, non-financial information, such as reorganization strategies, are examined in the study. Up to 55% of the firms failed during the first four years of reorganization program implementation and were forced into bankruptcy. The rest of the firms continued to operate. The financial paths of firms are examined, focusing on 1.) whether different financial paths can be found within the group of failed firms and within the group of non-failed firms (Hypothesis 1) and 2.) whether specific reorganization strategies are connected to the financial paths of firms (Hypothesis 2). Factor and cluster analyses are applied in the study. The empirical evidence supports both hypotheses.
THE CONCEPT OF RATIO ANALYSIS OF CONSOLIDATED FINANCIAL STATEMENTS
KARMAŃSKA, ANNA
WIŚNIEWSKA, DOROTA
Category: FA = Financial Analysis
The article concerns the topic of ratio analysis of consolidated financial statements. This is a subject rarely described both by international and Polish researchers and therefore a need has arisen for a fresh attempt in this field. An existing model created by Anna Karmańska in 2006 was used. It is a set of 38 ratios which can be used to evaluate the profitability, payment capabilities, cash flows and indebtedness of the corporate group, as well as the influence of separate entities on the group result and the rights of minority shareholders. The model was updated to meet the current international accounting standards. Then the data from consolidated financial statements of Deutsche Börse Group for the years 2010-2014 was taken to calculate the given ratios. This is a corporate group domiciled in Germany which operates the Frankfurt Stock Exchange. Each fraction of the model was analyzed, the trend described and any deviations explained. To enable easier comprehension graphs were created for each ratio. Finally, the results were aggregated and conclusions drawn. They were described in a report, which can act as a standard for any future works on consolidated statements analysis. The model proved to be working and is thus recommended for similar works in the future.
THE EFFECT OF DUAL HOLDINGS ON THE LEVEL OF ACCOUNTING CONSERVATISM
KASPEREIT, THOMAS
GLOGER, MARIO ALBERT; LOPATTA, KERSTIN
Category: FR = Financial Reporting
This study evaluates whether dual holdings report less conservatively than non-dual holdings. We define dual holdings as firms who have at least one shareholder who is a creditor simultaneously and hypothesize that this governance structure mitigates information asymmetries and therefore the agency conflict of debt. We assume that governance structures act as substitutes for agency conflict reducing measures like accounting conservatism. Dual holdings therefore offer a unique opportunity to evaluate the impact of information asymmetries on firms’ capital and agency costs as well as the bid-ask spreads and the market valuation. Our sample is based on US data and combines several databases to aggregate 13,483 firm-year observations from 1998-2014. Our modified model based on Basu (1997) shows that dual holdings report significantly less conservative than non-dual holdings. This result is robust to stricter definitions of dual-holdings. We further apply widely accepted models by El Ghoul et al. (2011), Gompers et al. (2010) and Coller and Yohn (1997) to give evidence for lower degrees of information asymmetry in dual holding firms by showing narrower bid-ask spreads, lower cost of capital and higher market valuation for firms with this special governance structure. These consistent findings confirm our hypothesis that governance structures act as substitutes for agency conflict reducing measures. These insights are particularly beneficial for financial analysts and investors.
REFORMING PUBLIC SECTOR ACCOUNTING AND FINANCIAL MANAGEMENT: THE CASE OF SPAIN, 2010-2015
KASPERSKAYA, YULIA
KASPERSKAYA, YULIA; XIFRÉ, RAMON
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This paper interprets through theoretical lenses the public sector financial management reforms adopted in Spain between 2010 and 2015. In this period, coping with intense external pressure, the country passed many fiscally-oriented reforms to escape the 2008 crisis including a change in the constitution. We study the changes that have been adopted in three key public accounting and financial management areas: budgeting, reporting and auditing. Our main research question is whether this series of reforms are likely to have had both a disruptive and positive impact in the Spanish public sector management model. We approach the question in the light of three theoretical contexts: the resource dependence model, the logic of discipline and the leadership-task perspective. Our analysis does not support a strong affirmative answer to the question. The fiscal crisis has been averted but it appears that it is more because of discretionary consolidation efforts rather than the result of adopting structural policies. Our work also highlights some dimensions in which Spain is lagging behind leading practices in the EU. Value for money auditing and accountability standards are still low and the independence of certain critical bodies is not sufficiently protected.
SOCIAL INVESTMENTS. TIME, SPACE AND TRANSLATION POINTS
KASTBERG, GUSTAF
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The overarching research question here is to answer how accounting acts as a performative force. The more specific aim of the study is to investigate how a social problem is turned into an investment. We do this by analyzing the case of social investments (SI) in a public sector context. We add to the existing literature by showing how different accounting practices helped create a new time and space order for social work. This is in line with Powers (2015) theorizing about “the beginning of accounting”. What we add is the observation of what we label translation points allowing parallel problems/solution schemes, which in turn makes it possible to enroll and distance different actor groups. The translation points indicate both likeness (it is quite similar) and disruptions (it is not fully similar) and rest on acts of tying together and disentangling. The empirical study is longitudinal and the paper is based on 39 interviews and 15 observations.
THE STUDY OF THE DOUBLE ACCOUNT SYSTEM AT THE GAS LIGHT AND COKE COMPANY
KASUKABE, MITSUNORI
SAWANOBORI, CHIE
Category: HI = History
The double account system (DAS) is a unique method of financial reporting created in the UK in the 19th century. Previous studies have claimed that DAS was created by canal companies and established with railway companies. That system was eventually institutionalised as the Regulation of Railways Act of 1868. However, the deployment of the DAS prior to the enactment of the Regulation of Railways Act in 1868 was not limited to canal companies and railway companies, it was also adopted by gas companies in London. The purpose of this paper is to examine the various developments of the DAS by considering the Gas Light and Coke Company (GLCC) founded in London in 1810 and examining its accounting practices. The DAS of GLCC was established in 1855. In that year, GLCC prepared the Profit and Loss and the Balance Sheet. This balance sheet is not an ordinary general balance sheet, but it is positioned as a general balance sheet including a capital account at the top of the debit. And GLCC adopted the usual DAS in December 31, 1868. It can be considered that GLCC used the format of the Regulation of Railways Act of 1868. On the other hand, GLCC created the statement about coal and residual products reflecting the nature of manufacturing industry. In previous studies, the development of the DAS was drawn in a single-line manner from canal companies to railway companies, but this study can actually demonstrate a double-track development including gas companies.
THE INTERFIRM CONTRACTING VALUE OF MANAGEMENT ACCOUNTING INFORMATION
KAWAI, TAKAHARU
DEKKER, HENRI; SAKAGUCHI, JUNYA
Category: MA = Management Accounting
We examine how firms’ management accounting information influences interfirm contract design. We theorize that comprehensive accounting information enables firms to design more complete contracts with suppliers, as indicated by issue inclusiveness and clause specificity. We hypothesize that this enabling effect of accounting information is mediated by the up-front negotiation and planning with suppliers of the exchange. Survey data of Japanese manufacturing firms about the management of supplier relationships support the expectation that comprehensive management accounting information enables the development of more inclusive and specific contracts by supporting up-front planning with suppliers. More comprehensive information, particularly financial information, also directly supports clause specificity, indicating that it enables buyers to unilaterally develop more detailed contract agreements. In contrast, buyers with such information make less additional informal agreements with suppliers, consistent with the idea that better accounting information enables more complete contracting.
CAPITAL MARKET REACTION TO NATURAL DISASTER, CORPORATE DISCLOSURE, AND CORPORATE PHILANTHROPY: A CASE STUDY OF THE 2016 KUMAMOTO EARTHQUAKES IN JAPAN
KAWASHIMA, KENJI
KAWASHIMA, KENJI
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study investigates the capital market reaction to the corporate timely disclosures in natural disaster by focusing on the 2016 Kumamoto Earthquake which was occurred in 2016 in Japan. The earthquake was one of the largest disasters in Japanese recorded history. For six months after the earthquake, there had been 297 corporate press releases related to the earthquake, which were reporting safety of personnel, the extent of damage to production facilities, and/or impact on financial performance. Some of them were announcing donations to the relief effort, which were released by both damaged firms and undamaged firms. This study collected the press releases and clarified, and described the information contents with the time when each press releases were disclosed precisely. Then this study examines the impact of the information on the equity prices to identify whether or how much the timely disclosure under the natural disaster is useful for investors. According to the results of regression analysis, the press release which reports that there is no damage is associated with the positive market reaction. However, the results failed to support the hypothesis that the press release announcing corporate philanthropy leads to market reaction, which is not consistent with prior research. There have not been a financial reporting standard related to natural disasters in the world, so this study aims to contribute to the financial reporting standards setting.
EMBEDDING E-LEARNING IN ACCOUNTING EDUCATION MODULES. THE EDUCATORS PERSPECTIVE
KEDZIOR, MARCIN
GRABIŃSKI, KONRAD; HERDAN, AGNIESZKA; KRASODOMSKA, JOANNA
Category: ED = Accounting Education
The paper investigates educators’ perspective on implementation of e-learning in accounting modules in higher education. The primary source of data was a questionnaire conducted among 79 accounting lecturers employed by the leading Polish Economic Universities. The results of the survey have shown that e-learning is not widely used by accounting academics in Poland. The most important benefits of the e-courses included the enhancement of the efficiency of the teaching process and the flexibility of the teaching process. The most serious difficulties were an extensive amount of work associated with designing and updating course materials and technical problems. The effectiveness of e-learning techniques in teaching accounting subjects is determined by easiness of e-learning delivery, more regular and systematic learning process, greater development of students social competences during e-learning classes and more effective process of verification of students’ progress in comparison with traditional classes. Additionally the study provide evidence that lecturers, who decided to use e-learning, perceive this way of teaching as more efficient and in the same time more demanding in comparison to traditional classes. The paper contributes to the understanding of the use of e-learning in accounting education and offers findings which might be useful both for policy makers and practitioners.
RESOLVING THE RELIANCE ON FIXED ESTIMATION DATES IN THE IMPLIED COST OF EQUITY CAPITAL APPROACH
KEMPKES, JAN
WÖMPENER, ANDREAS
Category: FA = Financial Analysis
The objective of our study is to develop and analyze a dynamic approach for estimating firms’ expected cost of equity capital. We contribute to the literature by enabling the usage of any required estimation date, resolving the major shortcoming of the existing models—their reliance on one fixed estimation date. This paper presents our model and discusses it from the perspective of the extant body of literature. We show that the current state of the art approach in dynamic estimation does not satisfy theoretical and practical demands, and offers scope for significant improvements. We conduct our analysis by specially considering capital market efficiency, the consistent appreciation of cash flows with respect to timing as well as straightforward practical implementation for researchers and practitioners. The analysis reveals further insights into residual income valuation as we demonstrate that any realization of residual income in the course of the year is irrelevant to valuation in the absence of dividend realization. Consequently, assumptions regarding the shape of earnings in the course of the year are also irrelevant to valuation. Additionally, our theoretically founded model conveniently facilitates the undistorted incorporation of different fiscal year-ends in large samples and avoids stale measures of expected cost of equity capital.
AUDITOR-PROVIDED NON-AUDIT SERVICES AND EARNINGS QUALITY: EVIDENCE FROM MULTI-LEVEL ANALYSIS
KENT, PAMELA
RICHARDSON, GRANT ; ROUTLEDGE, JAMES ; SHARMA, DIVESH
Category: AU = Auditing
Abstract: We contribute to research and policy making by providing evidence about the relation between auditor-provided non-audit services and audit outcomes across three levels of client-auditor relationships. We exploit an institutional setting where partner identity and auditor-provided non-audit services are reported in the annual report so that economic-bonding between the client and auditor can be uniquely identified at the audit engagement partner, city office and audit firm levels. Audit outcomes are measured by discretionary accruals, accruals quality and earnings persistence using a sample of firms listed on the Australian Stock Exchange in fiscal years 2007 to 2008. We find evidence that higher client non-audit fees are associated with lower accruals quality at the partner, office and firm level. Higher levels of non-audit service fees are related to less persistence for operating cash flows and accruals at the partner level.
THE PREPARATION OF THE IFRS FINANCIAL STATEMENTS IN MULTIPLE LANGUAGES - HANDLING WITH THE TRANSLATION ISSUES
KETTUNEN, JAANA
Category: IC = Interdisciplinary/Critical
An emerging body of literature studies suggests that the translation of accounting standards, or other regulations, into various languages can lead to changes in their meaning or lower their comprehensibility. The present study seeks to explore and analyse how the financial statement preparers and auditors handle with translation and language issues when they (a) apply the (translated) International Financial Reporting Standards (IFRS) and (b) prepare the company financial statements in multiple languages. In doing so, the paper extends the literature examining the financial reporting as social and organizational practice.
HOW DO ACCOUNTING CONSERVATISM AND CORPORATE GOVERNANCE INTERACT IN REDUCING AGENCY COSTS?
KHALIL, MOHAMED
OZKAN, AYDIN; TRZECIAKIEWICZ, AGNIESZKA
Category: GV = Accounting and Governance
This study examines the impact of accounting conservatism on agency costs and whether the relationship is conditional on corporate governance. Using a large sample of UK firms over the period 2003-2010, we provide evidence for the prediction that conservative reporting and strong corporate governance alleviate agency costs. We adopt a novel approach to show that corporate governance and conservatism mostly act as complements in impacting agency costs. However, they seem to substitute each other during the financial crisis and when firms are financially distressed. The findings reveal that the extent to which accounting conservatism mitigates agency costs is conditional on economic conditions, financial distress and internal corporate governance characteristics. The results are robust to different proxies of accounting conservatism, agency costs, and methods of estimations. This paper contributes to the literature by providing direct evidence for the relevance of accounting conservatism to corporate investors through reduced agency costs.
THE IMPACT OF IFRS VERSUS U.S. GAAP ON AUDIT FEES AND GOING CONCERN OPINIONS: EVIDENCE FROM U.S.-LISTED FOREIGN FIRMS
KHURANA, INDER
CHEN, LUCY
Category: FR = Financial Reporting
In this paper, we empirically evaluate the effect of International Financial Reporting Standards (IFRS) versus U.S. Generally Accepted Accounting Standards (GAAP) on audit fees and auditor’s decision to issue a going concern opinion. We posit that IFRS, by specifying broader requirements and requiring more judgment in application than U.S. GAAP, increase auditors’ effort and engagement risk, which leads to higher audit fees and higher likelihood of issuing a going concern opinion. We test our predictions using a sample of foreign firms listed in the U.S. with fiscal year ended from November 16, 2007 to December 31, 2014 that prepare their financial statements under either IFRS or U.S. GAAP. We find that, on average, foreign IFRS firms pay more audit fees than foreign U.S. GAAP firms and are more likely to receive going concern opinions than foreign U.S. GAAP firms. Further analyses reveal that audit fees and the likelihood of receiving a going concern opinion are higher for foreign IFRS firms than foreign U.S. GAAP firms in developed markets and for foreign IFRS firms with more transactional complexity and higher misstatement risk. Overall, our evidence highlights the impact of accounting standards on auditing outcomes and should be useful to the U.S. Securities and Exchange Commission as it deliberates when and how to incorporate IFRS information for U.S. domestic firms.
DO WELL-DEVELOPED AUDIT PLANS ENHANCE AUDIT QUALITY?
KI, EUNSUN
JEONG, KWANG-HWA
Category: AU = Auditing
We examine the effect of audit plans on audit quality. New International Standards on Auditing emphasize that adequate planning helps audit engagements be performed in an effective and efficient manner (New ISA 2012). Using a unique data set providing detailed audit hours by procedure, we examine whether audit plans have a positive impact on audit quality proxied by discretionary accruals. We find that enhanced audit plans are more effective for the engagements with shorter audit tenures than for those with longer tenures while there is, on average, no significant relation between audit tenure and audit quality. Our results are important to policymakers because audit plans play an important role in enhancing audit quality in situations in which the auditor relatively lacks understanding of the client’s business and has little prior audit experience with the client.
MARKET REACTION TO THE ELIMINATION OF THE FORM 20-F RECONCILIATION FROM IFRS TO US GAAP: DOES COMPARABILITY MATTER?
KIM, EUNG GIL
Category: FR = Financial Reporting
The main purpose of this paper is to examine the role of comparability of financial statements in changing accounting practice. This study is based on the elimination of the 20-F reconciliation requirement for foreign cross-listed firms that report in IFRS in the U.S. in 2007. I examine whether the changes in ERC (Earnings Response Coefficient) and the changes bid-ask spread before and after the elimination of 20-F requirement differ according to the comparability and the similarity of firm characteristics This paper attempts to identify the role of comparability in three aspects, such as comparability of financial statements, complexity of business model, and proportion of reconciliation between U.S. GAAP and IFRS. The results of this study are summarized as follows. IFRS firms with low comparability have significantly verified the incremental effect of the negative response to the ERC after the elimination. Bid – ask spread of IFRS firms with low comparability is significantly higher after the elimination, but there is no significant change in bid - ask spread of IFRS firms with high comparability before and after. Overall, the effects of eliminating 20-F requirement in 2007 are discriminative to information users, depending on the comparability.
ARE MANAGERS PUNISHED FOR CRASH RISK? EVIDENCE FROM CHINA
KIM, JEONG-BON
FANG, JUNXIONG; YU, CHUANRONG ; ZHOU, YI
Category: GV = Accounting and Governance
This study examines how stock price crash risk affects subsequent managerial compensation and CEO dismissal rate. We find that managerial compensation significantly decreases and CEO dismissal rate significantly rises following the year of high crash risk, indicating that managers bear the negative consequences of high crash risk. Moreover, we find that this crash risk effects are more pronounced for state-owned enterprises, after split-shares reform, and for firms located in provinces with higher marketization levels. Results from quasi-natural experiments, change regressions, and an instrumental variable approach suggest that it is high crash risk that causes the changes in managerial compensation and dismissal rate, not vice versa. Finally, our evidence suggests that the punishment of managers for high crash risk is efficient in the sense that crash risk significantly decreases subsequent to CEO dismissal.
COST STICKINESS AND INFORMATION OF TAX ACCOUNTS FOR LOSS REPORTING FIRMS
KIM, JI HYE
KIM, JIN BAE; LEE, GUN
Category: MA = Management Accounting
We investigate the effect of information contained in valuation allowance for deferred tax assets on cost stickiness. Dhaliwal et al. (2013) find that managers use their private information properly in estimating valuation allowance for deferred tax assets and the information in valuation allowance for deferred tax assets gives incremental information about the persistence of loss for loss reporting firms. By using tax categories following Dhaliwal et al. (2013), we find that the magnitude of cost stickiness of firms with material increase in valuation allowance for deferred tax assets is significantly smaller than that of other firms. The results suggest that firms with managers’ positive prospect about future performance shows stickier cost behaviors because material increase in valuation allowance for deferred tax assets reflects managers’ negative perspective about future performance. This study contributes to the literature for the following two reasons. First, by examining the effect of managers’ perspective about future performance on cost stickiness, this study helps analyze the mechanism of the cost stickiness more specifically. Second, by providing the link between cost stickiness and tax information, this paper enhances understanding of the relation between cost behavior and tax information.
REPUTATION CAPITAL OF DIRECTORSHIPS AND AUDIT QUALITY. EVIDENCE FROM THE ANALYSIS OF BOARD CENTRALITY AND AUDIT FEES
KIRAN, ANILA
FREDRIKSSON, ANTTI ; KIRAN, ANILA; NIEMI, LASSE
Category: AU = Auditing
The aim of this paper is to investigate the relationship between the demand for audit quality and the reputation capital of those responsible for corporate governance, the directors of the board of the company. It takes time to build reputation capital, but it is easily destroyed as many corporate scandals have shown us. One way that the directors can protect their reputation capital against these scandals is to invest in external monitoring such as high quality financial statement audits. Building on social networks literature, we argue that directors’ reputation capital increases with the number of directorships they hold. We hypothesize and find evidence that the companies that are more connected to other companies through board of directors, demand for higher-quality audit. More specifically, using hand-collected data from the webpages of the Finnish listed companies over the period 2007-2011, we document that both quantity and quality of board connections are positively related to our measure of audit quality, fees paid to the audit firm.
EARNINGS ANNOUNCEMENT CLUSTERING AND ANALYST FORECAST BEHAVIOR
KIRK, MARCUS
DRISKILL, MATTHEW; TUCKER, JENNIFER
Category: FA = Financial Analysis
We examine how a limited attention effect can directly affect the information processing of a sophisticated market participant. Specifically, we investigate whether analysts respond to earnings announcement events differently if more than one firm in their coverage portfolios announce earnings on the same day (“Busy Analysts”). We find evidence that, for the same firm, analysts delay or even skip issuing earnings forecasts in the quarters when they are busy versus quarters when they are not. Compared with “Not-busy Analysts,” the initial responses of Busy Analysts are of lower forecast quality (in terms of forecast accuracy improvements, forecast boldness, and the price impact of forecasts). Further, we find that when analysts face multiple concurrent earnings announcements, they tend to prioritize issuing forecasts for firms with richer information environments over firms with weaker information environments. At the firm level, when a larger percentage of analysts covering the firm are busy, the analysts as a whole are less responsive to the firm’s earnings announcements, implying that the price discovery after the information event is slower. Our study extends the literatures of limited attention and analysts’ information production.
EFFECTS OF DECLINING BANK HEALTH ON BORROWERS' LEVEL OF EARNINGS MANAGEMENT: EVIDENCE FROM THE EUROPEAN SOVEREIGN DEBT CRISIS
KIY, FLORIAN
ZICK, THERESA
Category: FR = Financial Reporting
This study investigates whether deterioration of the financial health of a bank affects their borrowers’ level of earnings management. In order to examine the effects of declining bank health on firms’ earnings management activity, we use a difference-in-difference design and the setting of the European sovereign debt crisis as a shock to the health of certain European banks. These European banks have been severely affected and significantly decreased their lending volume during the crisis. Based on this observable supply shock, we consider these banks as exposed. This setting represents an exogenous shock to European non-financial firms. To reduce a potential self-selection bias, we only analyze earnings management from European firms headquartered in non-directly crisis-affected countries. Using different discretionary accrual measures and a timely loss recognition concept to evaluate earnings management, we find evidence that borrowers of exposed main banks are more likely to engage in earnings management compared to borrowers with healthy main banks during the crisis. One potential explanation for these results could be the increased bargaining power in the development of new banking relationships and in negotiations for new or prolonged funding. Interestingly, we only find evidence for non-listed firms. Overall, our results provide new insights into the consequences of a threatened banking relationship on the borrowers’ earnings management choices.
THE IMPLICATIONS OF FILING DEADLINES FOR QUARTERLY REPORTING
KLASSMANN, FLORIAN
Category: FR = Financial Reporting
In this study, I examine the role of filing deadlines for the quality and information content of quarterly reports. For this purpose, I exploit a change in US regulation that accelerated quarterly filing deadlines for firms that classify as accelerated filers from 45 to 40 days. Using difference-in-differences analyses, I find no evidence of a notable decline in reporting quality as a result of deadline imposed time pressure. However, in line with the regulation’s objective to increase the relevance of quarterly reports, I find that trading volume around the filing dates increases substantially for firms affected by the regulation.
EVALUATION MARKERS IN ANALYST REPORTS AND MARKET RESPONSE TO STOCK RECOMMENDATIONS
KLIMCZAK, KAROL
DYNEL, MARTA
Category: FA = Financial Analysis
Studies of sell-side equity analyst reports show that the text conveys information relevant to investors. The goal of this study is to determine what evaluation markers and mitigation strategies analysts use in an emerging market setting when writing in a language other than English and how this affects investor decisions. We manually code the reports to identify and describe the strategies that analysts use to communicate evaluation. Next, we quantify the use of these communication strategies by developing coding protocols. The findings are that positive and negative evaluations clearly align with a recommendation type and that mitigators are used most often in “hold” reports, while readability is low in “sell” reports. When we regress market price response measures on the report characteristics, we find that the balance of positive and negative evaluations moderates the price response to “sell” recommendations, while the use of mitigation strategies induces a price response to “hold” recommendations. The results suggest that investors consider the relationships between linguistic cues and recommendation type when making their decisions.
FINANCIAL PERFORMANCE AND EARNINGS MANAGEMENT OF SOCIALLY RESPONSIBLE INVESTING FUND FIRMS
KO, WAN SUK
Category: FR = Financial Reporting
The firms whose stocks are selected for inclusion in the socially-responsible investing (SRI) funds are expected to model social responsibility. If corporate social responsibility (CSR) firms or SRI fund firms perform well in the capital market, and reported corporate earnings, as well as the level of CSR activities, is considered an important factor for fund inclusion, the management of a company that expends corporate resources in CSR activities (i.e., that incurs sizable expenses) may have strong motivation for earnings management for their firm’s stock to be selected into SRI funds. This environment motivated this study to investigate the effect of SRI fund inclusion of a firm’s stock on earnings management behavior. The empirical test of the study is based on a sample of Korean firms whose stocks were included in SRI funds from the year 2007 to the year 2011. The findings partially revealed that SRI fund firms engaged in less earnings management (measured by discretionary accruals) than non-SRI fund firms. This empirical result implies that SRI fund firms are more ethical in their earnings reporting than non-SRI firms and focus on long-term profitability rather than short-term earnings management. However, this result changed when an extended analysis is made for a sample of firms included in SRI funds for a prolonged period, which has delicate implications.
DO AUDITORS RECOGNIZE MANAGERIAL RISK-TAKING INCENTIVES?
KOH, WEI CHERN
LEE, KIN WAI
Category: AU = Auditing
This paper examines whether CEO risk-increasing (risk-decreasing) incentives matter to auditors in various settings, over and above the auditee firm-specific characteristics documented in prior research. First, we find that auditors’ litigation risk is positively (negatively) related to CEO risk-increasing (risk-decreasing) incentives. Second, we find that audit fees are positively associated with greater CEO risk-increasing incentives. Third, we document that greater CEO risk-decreasing incentives are positively associated with a lower probability of corporate bankruptcy. Finally, we show that auditors are less likely to issue going concern opinions to firms with greater CEO risk-decreasing incentives. Overall, our results suggest that CEO risk-taking incentives influence auditors’ judgments in significant ways over and above previously documented firm-specific characteristics. More generally, our results show that it is important for auditors to understand the nature of top management equity compensation incentives in assessing audit risk, consistent with recent developments in Business Risk Auditing approach which suggests that auditors should acquire a deep and comprehensive understanding of the auditee’s business models and management characteristics to handle increasing audit complexity.
THE EFFECT OF INTERNATIONAL TAXATION ON MULTINATIONALS’ ORGANIZATIONAL FORM CHOICES
KOHLHASE, SASKIA
AMBERGER, HARALD
Category: TX = Taxation
We use a confidential micro-level dataset on German inbound foreign direct investment relations to determine whether and to what extent international taxation affects multinationals’ organizational form choices. For the sample period 2005-2013, we analyze multinationals resident in 58 home countries and find that a one standard deviation increase in the tax burden difference between corporate (i.e. subsidiaries) and non-corporate (i.e. flow-throughs) organizational forms is associated with a 3.93% higher probability of establishing a flow-through. This tax effect predominantly resulting from dividend withholding taxes is statistically significant and economically meaningful. Alternative repatriation strategies in the form of income shifting do not moderate the association between the tax burden difference and organizational form choices while cross-sectional variation in group structure adjustment costs and the size of economic activities in the host country alter the tax sensitivity. These findings indicate that multinationals structure their activities to minimize the tax burden on profit repatriations. Our findings should interest regulators and researchers alike, as an asymmetric taxation of organizational forms can have nontrivial effects on multinationals’ group structures.
THE INTERPRETATION OF IN CONTEXT VERBAL PROBABILITY EXPRESSIONS USED IN IFRS – EVIDENCE FROM POLAND AND THE UNITED KINGDOM
KOLESNIK, KATARZYNA
GIERUSZ, JERZY; SILSKA-GEMBKA, SYLWIA
Category: FR = Financial Reporting
The main objective of this survey is to specify in what way Polish and British accountants interpret “in context” verbal probability expressions (VPEs) used in IFRS. Our research addresses the question whether Polish and British accountants confronted with identical IFRS excerpts interpret VPEs differently from one other. Due to Polish attachment to the prudence principle, we also hypothesise that this principle will have a significant impact on Polish accountants’ interpretation. Contrary, we assume that this principle will have no impact on their British counterparts. Moreover we hypothesise that the context in which VPEs are used may affect their interpretations. For the purpose of this study a questionnaire was distributed and a sample of accountants and auditors from Poland and the UK was asked to interpret the “in context” VPEs used in IFRS establishing the threshold for recognition of various accounting elements. Our results indicate the differences in the interpretation of VPEs by the Poles and the British. Additionally, we show that the Polish accountants’ attachment to the prudence principle affects their way of interpretation. However, we couldn’t state that this principle would not affect the probability level assigned by the British accountants. We also found strong support for hypothesis that the context the VPEs are used in, affects the interpretation by Poles and partial support for that hypothesis for their British counterparts.
THE EFFECT OF LOCAL CEO’S NATIONALITY ON MANAGEMENT CONTROLS AS A PACKAGE
KONDO, TAKAHITO
NISHII, TAKESHI
Category: MA = Management Accounting
The purpose of this study is to investigate what effects the nationality of a local CEO has on a control package exerted by the headquarters of multi-national companies (MNCs) for managing the foreign subsidiary. In the prior literature, the geographical location of the headquarters of a MNC is one of the context factors that have been considered to be closely related to the design and use of the management controls. In contrast, this study focuses on non-geographical distance based on the local CEO’s nationality to pursue more consistent understanding of a wide variety of foreign subsidiary management. In doing so, we, using the empirical data collected from 613 Japanese MNCs, examined a relationship between the nationality and the tightness of four controls (installing philosophy, involvement in planning, process control, and output control). More specifically, first, using rigorous analysis method, we identify a set of management controls relevant to MNCs, called control package. Second, this study provides demonstrates that the local CEO’s nationality influences the tightness of specific controls (i.e., installing philosophy and output control) in the package. This study, based on the relevant findings under the robust analysis, provides a theoretical foundation for boosting the studies on control package in the future, which will allow us to examine the effects and explore combinations among the tightness of each management control.
EFFECT OF STUDENT ACTIVITY PARTICIPATION ON ACCOUNTING LEARNING - MEDIATION THROUGH POSITIVE PERCEPTION
KOO, JEONGHO
LEE, HYOIK; PAIK, TAE-YOUNG ; PARK, YEON-HEE; YANG, DONG-HOON
Category: ED = Accounting Education
This study investigates whether active participation of students in class activities has positive effects on accounting learning. Specifically, it tests whether active student involvement in board game activities in introductory accounting courses contributes to effective learning. The findings are as follows. First, the more actively that students participate in the game, the higher their favorable changes in perceptions of accounting are. Second, the higher their positive perceptions are, the higher the accounting learning effects are. These results imply that active involvement of learners is a precondition for the accounting learning effect of activities and that positive perception is a mediator for learning effects.
CLOSING THE GAP OF ANALYSTS’ INFORMATIVENESS: AN EMPIRICAL ANALYSIS OF SHORT-RUN STOCK TIPS
KOPITA, ANASTASIA
CHARITOU, ANDREAS; KARAMANOU, IRENE
Category: FA = Financial Analysis
Recent regulatory changes resulted in a widespread transition to coarser recommendation grids potentially entailing lower informativeness of stock recommendations. At the same time anecdotal evidence suggests that capital market participants’ demand on short-run information has significantly increased. Using the unique hand collected sample of 1509 short-run trading ideas, we examine the information content of short-term trading tips and their potential use as a valuable input in the longer-term research output. We document that analysts prefer to provide short-run trading tips for firms with greater performance and potential of revenue generation. Trading tips are informative and incrementally informative, conditional on concurrent stock recommendations. We also find that the predictive power of the short-run news over the long run research horizon is stronger when the direction of the short-run trading tip and the previous recommendation coincide rather than when they differ. We also show that the market reaction to upcoming recommendation changes is greater for firms with short-run trading tips. Our findings provide evidence that an upcoming recommendation upgrade that is accompanied by a short-term rise estimate elicits up to +2.8% higher abnormal returns. Results are consistent with short-run price estimates increasing the overall informativeness of upcoming recommendations’ changes.
POLICY UNCERTAINTY EXPOSURE OF INDIVIDUAL COMPANIES: THE CASE OF THE BREXIT REFERENDUM
KORCZAK, ADRIANA
HILL, PAULA; KORCZAK, PIOTR
Category: FA = Financial Analysis
This paper analyzes the link between stock returns of U.K. firms and changes in the probability of the Leave vote implied by bookmakers’ odds in the run-up to the Brexit referendum. We posit that changes in the probability of Brexit could be interpreted as changes in the economic policy uncertainty. On average, an increase (a decrease) in the probability of the Leave vote, interpreted as an increase (a decrease) in policy uncertainty, led to a drop (an increase) in stock prices. Larger and faster-growing firms were more affected while foreign sales and foreign assets had a moderating effect. The effect of foreign sales and assets went beyond the pure currency translation effect and was consistent with international activities acting as a diversification mechanism of domestic risks. This study provides the first evidence on cross-sectional determinants of the economic policy uncertainty exposure of individual companies.
THE TIMING OF RATING-CHANGE ANNOUNCEMENTS
KRAFT, PEPA
XIE, YUAN; ZHOU, LING
Category: FA = Financial Analysis
This study examines the intraday timing of rating-change announcements by credit rating agencies. We are the first to document that a rating change is more likely to be announced when the market is closed when it is a downgrade than an upgrade. Our evidence is consistent with credit rating agencies announcing downgrades after hours to give investors more time to process information. We find that credit rating agencies are more likely to announce downgrades after hours when downgrades have relatively larger adverse consequences and are unexpected. Specifically, we find that downgrades for financial firms, whose business model depends on high ratings, and downgrades not preceded by a watch-list addition are more likely to be announced after hours. We also find downgrades are more likely to be announced after hours when investors need more time to process a firm’s rating change, that is, when they occur on days with many rating-change announcements. The market reaction to downgrades is similar whether announcements are made after trading hours or before and during trading hours. These patterns hold for both issuer-pay and investor-paid credit rating agencies. Investor-paid rating agencies do not have incentives to cater to debt issuers, which suggests that our results are not consistent with hiding bad news during low investor attention periods. Overall, our results support that credit rating agencies facilitate the use of credit ratings in contracting and valuation.
RELATIVE PERFORMANCE EVALUATION AND SYNERGIES FROM COOPERATION
KRAMER, STEPHAN
HOFFMEISTER, NICK; HOLZHACKER, MARTIN; MATĚJKA, MICHAL
Category: MA = Management Accounting
It is well understood that relative performance evaluation (RPE) improves contracting as long as managers’ ability to strategically interact with their peers is limited. However, RPE is often implemented within firms where interaction and cooperation among peers is essential. Our study empirically examines whether the importance of cooperation affects the use of ex ante RPE, i.e., the reliance on information about peer performance in target setting. Specifically, we use data from 111 business units of an industrial services company where managers need to share specialized equipment and staff with their peers to manage bottlenecks in their capacity. We employ a wide range of empirical proxies for synergies from cooperation and examine their effect on the target-setting process. We find robust evidence that the sensitivity of target revisions to past peer (own) performance is lower (higher) when synergies from cooperation are larger, which is consistent with the theory that a greater reliance on RPE discourages cooperation.
DETERMINANTS OF CORPORATE SOCIAL RESPONSIBILITY DISCLOSURE: EMPIRICAL EVIDENCE FROM POLAND
KRASODOMSKA, JOANNA
DYDUCH, JUSTYNA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper explores whether company size, profitability, financial leverage, industry profile, board size, women on the board, internationalization, and reputation have a potential influence on levels of Corporate Social Responsibility (CSR) disclosure in the annual reports of Polish companies. In this study we use content analysis method to determine the quality of CSR disclosures. The items included in the disclosure index have been determined according to the Directive 2014/95/EU. Hypotheses are tested using multiple regression analysis on a sample of 60 reports from Polish companies listed on the Warsaw Stock Exchange and included in the WIG30 Index and the mWIG40 Index. From the determinants under investigation, only industry has turned out to have an explicit significant influence on CSR disclosures. The research findings also reveal that there is a relationship between company turnover, inclusion in the Respect Index portfolio and duration of the stock exchange listing and the level of CSR disclosures. This study extends the scope of previous studies by including non-commonly used dependent variables: the company’s internationalization and reputation. To the authors’ knowledge, it is the primary step to investigating CSR reporting practices coupled with the corporate characteristics in a CEE country such as Poland. The paper contributes to the understanding of determinants of CSR disclosure and offers findings which might be useful both for theory and practice.
CORPORATE TAX MANAGERS AND THE INTERPLAY BETWEEN TAX AVOIDANCE AND TAX COMPLIANCE
KRENN, PETER
Category: TX = Taxation
This paper contributes to the question of how the implementation of a tax compliance management system (TCMS) and corporate tax avoidance are interrelated to each other. A theoretical analysis shows that both activities have complementary effects on the behaviour of a risk-averse corporate tax manager. Therefore, a more sophisticated TCMS facilitates higher levels of corporate tax avoidance. Additionally, the paper illustrates that investigations regarding the relationship between incentive compensation and corporate tax avoidance should consider heterogeneity in firms' abilities to enforce a predefined level of tax compliance. The impact of a tax manager's personal characteristics on corporate tax avoidance and tax compliance is also evaluated. The level of corporate tax avoidance decreases in the tax manager's risk aversion whereas TCMS quality could either decrease or increase in it. Understanding the determinants of corporate tax avoidance and tax compliance behaviour is an important issue, because these activities have received a high attention of public and politics recently. The investigation makes use of a multi-task LEN model where both tasks, tax avoidance and implementation of the TCMS, have an impact on the risk of after-tax income.
STRATEGIC RESPONSES TO INCREASES IN OWNERSHIP DISCLOSURE
KROECHERT, SARAH
Category: FR = Financial Reporting
The study investigates disclosure avoidance strategies of different types of institutional investors around the introduction of lower reporting thresholds for ownership disclosures. I first examine whether the different investor types reduce their holdings in response to stricter thresholds. I exploit a dataset of privately reported holdings and the fact that the rule changes affect only holdings in some firms. Results of the difference-in-differences analysis show that disclosure avoidance is not a widespread phenomenon. Only holdings of mutual funds and, to a lesser extent, banks decrease. I then study patterns in publicly released ownership disclosures and provide evidence in line with mutual funds minimizing the information content in or delaying the publication of the disclosure document. Finally, I extend the analysis to liquidity effects. While prior literature argues that an increase in ownership disclosure improves liquidity, I find that the combination of high mutual fund holdings and opaque ownership structures can weaken the relation.
THE FIRM'S ACCOUNTING CHOICE AND PERFORMANCE SENSITIVE DEBT CONTRACTS
KRONENBERGER, SANDRA KATARINA
Category: FA = Financial Analysis
Performance covenants in debt contracts are contracting features that lead to changes in the interest rate over the life of the debt contract, based on the measures of performance. I use a theoretical model to show that performance covenants can be useful, given the information asymmetry between the firm and the lender. Not only do they lower the expected value of the good firm's payments and increase the firm value, but they can be used as a mechanism for the good firms to signal their type to the lender. In such debt contracts, accounting conservatism influences the termination decision as well as the interest rate. In the setting where underinvestment is a more important issue, accounting conservatism is detrimental to the firm's value, even though it can lower the debt interest rate. Finally, I show that accounting conservatism discourages good firms from separating via performance sensitive debt contract and facilitates information asymmetry on the debt market.
THE INTERPLAY BETWEEN FINANCIAL REPORTING BIASES AND AUDIT QUALITY
KRONENBERGER, SEBASTIAN
LAUX, VOLKER
Category: AU = Auditing
Investors are much more likely to sue corporations and their auditors for overstated earnings reports than for understated reports. This asymmetry in litigation exposure creates an asymmetry in auditors' effort choices in the sense that auditors work harder on detecting overstatements than detecting understatements. We show that the client firm can exploit these asymmetric incentives and elicit greater audit effort by adopting a more aggressive accounting system. One implication of our analysis is that a heightened ex ante threat of litigation does not necessarily induce corporations to adopt more conservative accounting practices, as is typically argued, but can induce more aggressive accounting. This follows because the auditor's heightened litigation concern renders aggressive accounting a more useful tool to encourage audit effort.
ROUND AND STEADY: AN INVESTIGATION OF GAAP ETR MANAGEMENT
KUBATA, ADRIAN
HOOPES, JEFFREY L.; KUBATA, ADRIAN; WAGENER, TIM; WATRIN, CHRISTOPH
Category: FR = Financial Reporting
We find evidence that firms manage their GAAP effective tax rates (GAAP ETRs) to achieve round GAAP ETRs and zero-change GAAP ETRs (i.e., steady ETRs). Consistent with prior research on discontinuities we interpret the unusually high accumulations of GAAP ETRs at round numbers as firms’ exercise of discretion in the financial reporting of GAAP ETRs (i.e., GAAP ETR management) and investigate whether and why firms manage their GAAP ETRs to achieve GAAP ETRs that are round, and that are the same as the previous year’s GAAP ETRs. We document several factors associated with GAAP ETR management and show that the costs or benefits to GAAP ETR management dramatically changed around the implementation of SOX, as we observe an abrupt curtailment of GAAP ETR management around SOX. Finally, we provide evidence that rounded and steady GAAP ETRs are associated with more informative earnings than non-rounded and non-steady GAAP ETRs as measured by an increase in the earnings response coefficient (ERC).
FRAMING IN REPORTING BEHAVIOR – THE CASE OF GERMAN INCOME TAX RETURN DATA
KÜHNE, DANIELA
PROF. DR. DILLER, MARKUS
Category: TX = Taxation
This paper empirically investigates the presence of a framing effect in reporting be-havior of taxpayers receiving income from employment. Reference dependence and loss aversion as two central characteristics of prospect theory suggest that individuals in a per-ceived loss situation attribute higher value to a given amount of positive change in outcome than individuals in a perceived gain situation do. Applied to tax reporting behavior, taxpay-ers who perceive their tax situation as unfavorable compared to a given reference point are expected to make greater effort to prevent or reduce that perceived loss than taxpayers per-ceiving to be in a favorable situation. Greater effort can in turn be associated with higher reporting aggressiveness. We identify a potential reference point in taxpayers’ previous year’s outcome and examine whether the incentive to generate income-related deductions is higher in a loss situation than in a gain situation using German income tax return data. We find that taxpayers in a loss situation claim higher income-related deductions than taxpayers in a gain situation.
PROFESSIONAL SKILLS LEVELS OF FIRST YEAR TRAINEE ACCOUNTANTS: WHAT EXACTLY DOES THE ACCOUNTING PROFESSION EXPECT?
KUNZ, ROLIEN
DE JAGER, HERMAN
Category: ED = Accounting Education
As an unconscious reaction to changes within the working environment in which accounting professionals operate, accounting practitioners increasingly expect accounting graduates to possess not only the technical knowledge necessary to do their work, but also the broader range of professional skills that will help them to be successful in the working environment. This paper focuses on determining the professional skills expectations of employers, and the proficiency in these skills demonstrated by first year trainee accountants in the first three months of their training contracts, within a South African context: it identifies and quantifies the issues of “what is expected”, “how much do they know” and “how big is the gap”. A questionnaire survey was used to determine the perceptions and expectations of audit managers, and their assessments of the actual capabilities of newly employed first year trainee accountants with regard to professional skills. The findings indicated that audit managers expect the highest level of capability (capable with minimum/without supervision) to be achieved in the business ethics professional skills category, and that newly employed first year trainee accountants do not meet audit managers’ expectations. The professional skills category with the largest expectation-performance difference was the personal attributes category, with the largest expectation-performance difference was the personal attributes category, with a 31.6% difference.
THE TEMPORAL EXPERIENCE OF BUDGETING
KUNZL, FERDINAND
MESSNER, MARTIN
Category: MA = Management Accounting
This paper examines the process of budgeting from the perspective of those who are typically responsible for compiling budgets, i.e. management accountants. Drawing upon data collected in an in-depth case study of a budgeting process in a pharmaceutical firm, we suggest that management accountants have a pronounced temporal experience of the practice of budgeting. They discuss and actively manage the duration of the budgeting practice, they are concerned with meeting particular deadlines that structure the budgeting process, they perceive time pressures in the compilation of budget numbers, and so on. We show how the temporal structure of budgeting results from the interplay of different elements, i.e. rules, practical understandings, general understandings and teleoaffective structures. These elements may specify budgeting in a more or less ‘totalitarian’ manner (Schatzki, 1996). We reason that the more totalitarian the budgeting practice in terms of its temporal dimension and the more the ‘correct’ temporal performance of the practice is at risk, the more questions of temporality also move to the fore in actors’ experience of the budgeting process.
THE RELATIONSHIP AMONG CORPORATE SOCIAL PERFORMANCE, SOCIAL RESPONSIBILITY DISCLOSURE, AND FINANCIAL PERFORMANCE
KUO, TSUILIN
JIANG, JIE
Category: GV = Accounting and Governance
The relationship between corporate social performance (CSP) and corporate financial performance (CFP) has been a hot topic in academic circles for a long time. However, the results of previous studies are inconsistent. Our study considers one of the reasons may be that many studies cannot make a distinction between corporate social performance and social responsibility disclosure, and then conclude with different answers when they examine the relationship of CSP and CFP. Our study aims to distinguish these two indicators and to find the relationship among corporate social performance, social responsibility disclosure and financial performance. Using 1,679 firm-year observations during 2011-2013 of China listed companies, the ordinary least squares (OLS) regression results indicate that: 1. There is a positive relationship between corporate social performance and social responsibility disclosure, support the voluntary disclosure theory based on the signaling theory; 2. There is a positive relationship between corporate social performance and financial performance, support the stakeholder theory; and 3. There is no significant relationship between social responsibility disclosure and financial performance.
CORPORATE SOCIAL RESPONSIBILITY, ENTERPRISE RISK MANAGEMENT, AND MANAGERIAL CONFIDENCE
KUO, YA FEN
LIN, YI-MIEN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper examines the relationship between enterprise risk management (ERM) and corporate social responsibility (CSR), as well as how this is affected by managerial confidence. We also consider the consequences of earnings management for this relationship. The findings show that firms with more effective ERM have greater CSR. Such firms, especially in the electronics industry, have greater CSR when their managers are more confident. However, managers’ earnings management practices moderate this relationship.
FINANCIAL REPORTING QUALITY AND THE COST OF DEBT: EVIDENCE FROM INDONESIA
KURNIAWATI, HENY
VAN CAUWENBERGE, PHILIPPE; VANDER BAUWHEDE, HEIDI
Category: FR = Financial Reporting
Several research papers have documented, both for listed and unlisted companies, the existence of an association between financial reporting quality (FRQ) and the cost of debt. Moreover, the economic significance of this association often turns out to be quite impressive. The majority of these investigations however was conducted in developed countries. This paper contributes by investigating whether the relation between FRQ and the cost of debt also exists in an emerging country like Indonesia. Indonesia’s past reforms in corporate governance and its transition to IFRS create a conducive environment to look for evidence of such a relation. Following Francis et al. (2004) we use seven different operational approximations of FRQ: accrual quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism. For our sample of listed firms over the period 2008-2013, our results show that only predictability and timeliness are associated with the cost of debt.
THE LEVEL OF ACCOUNTING INTEGRATION AND THE COST OF EQUITY CAPITAL: EMPIRICAL EVIDENCE FROM EUROPE
KÜSTER, STEPHAN
GOETTSCHE, MAX; STEINDL, TOBIAS
Category: MA = Management Accounting
The management approach of IFRS 8 reveals the firm-specific link between financial accounting and management accounting numbers within a firm, as any deviation between the sum of segment earnings, which are used for internal decision-making, and the consolidated profit or loss defined under IFRS has to be reconciled. This paper examines whether firms that align their segment earnings measure more closely to IFRS (referred to as a higher level of accounting integration) enjoy a lower cost of equity capital. To shed light on this research gap, we test the influence of the level of accounting integration - a measure based on the segment reconciliations of IFRS 8 - on the average of four implied cost of equity capital models. Using hand-collected segment data for 2,129 European firm-years, we are the first to show that a higher level of accounting integration leads to a lower cost of equity capital. Our result is robust to several sensitivity checks and implies that the capital market perceives lower differences between management accounting and financial accounting as beneficial.
THE HISTORICAL ORIGINS OF ACCOUNTING OF CHANGING DEPRECIATION AND IMPAIRMENT OF ASSETS
KUTER, MIKHAIL
ANDREENKOVA, ANGELINA; BAGDASARIAN, RIPSIME; GURSKAYA, MARINA
Category: HI = History
The application of IAS 36 “Impairment of assets” could not but arouse interest in the historical origins of the two quite early accounting procedures. Historical aspects of depreciation and impairment of assets have been the subject of a number of scientific studies. Unfortunately, the practice of depreciation and impairment of assets in the Medieval Europe during the period of 12th–15th centuries was in-sufficiently investigated, which, according to the authors, is quite unfair. It was during the formation of double-entry bookkeeping, when emergence of the main elements of modern accounting took place and understanding the need to reflect the results of the impairment of assets in accounting appeared, and that determined the main purpose of the research – deep analysis of the archival material in order to identify the facts of depreciation charging, determination of the specific algorithm for calculating the depreciation charging and the order of depreciation reflection in accounting. The discovery of four different examples of depreciation charging in the accounts of double-entry bookkeeping, two of them belonging to the end of the 12th – early 13th centuries, can be introduced as the result of the research. The early algorithm of depreciation using the straight-line method was discovered in this paper. Particular attention is paid to the practice of F. Datini’s companies.
TOP MANAGEMENT TEAM CONNECTIONS AND EARNINGS INFORMATIVENESS
KWACK, SO YEAN
BALSAM, STEVEN
Category: GV = Accounting and Governance
Prior literature (Khanna, Kim and Lu 2015; Zhang 2017) suggests that connections within the top management team (TMT) leads to increased misreporting and lower quality financial statements. In this paper we further probe this issue, finding initially, evidence consistent with this proposition, i.e., discretionary accruals are positively associated with the extent of connections between the CEO and his/her TMT. However additional analysis fails to support this proposition. Using alternative measures of earnings quality, i.e., meet or beating analyst forecasts, income smoothing, we fail to find an association with TMT connections. In contrast we find that the informativeness of discretionary accruals in explaining future earnings increases with TMT connections. Thus we provide evidence consistent with the use of discretionary accruals by connected TMT to improve the informativeness of accounting earnings.
EXECUTIVE PENSIONS AND DEBT RESTRUCTURING CHOICE: IMPLICATIONS OF THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005
KWAK, BYUNGJIN
LOBO, GERALD; MO, KYOUNGWON
Category: GV = Accounting and Governance
Unlike prior studies that focus on outside creditors, we examine whether inside creditors who have executive pensions and/or deferred compensation plans systematically influence firms’ choice between a Chapter 11 reorganization and an out-of-court debt restructuring workout. Using a sample of 345 U.S. financially distressed firms that either filed for Chapter 11 or conducted a workout, we find that firms with executive pension plans were more likely to choose Chapter 11 than a workout. In addition, we find that the preference for Chapter 11 over a workout is weakened after the implementation of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), indicating that BAPCPA effectively restricts the payments of executive pensions under Chapter 11.
THE ECONOMIC CONSEQUENCES OF SEC INTERPRETIVE GUIDANCE AND THE EFFECTS ON FIRM BEHAVIOR: EVIDENCE OF NON-GAAP EARNINGS DISCLOSURE
KYUNG, HANGSOO
WEINTROP, JOSEPH
Category: FR = Financial Reporting
The U.S. Securities and Exchange Commission (SEC) issued new Compliance and Disclosure Interpretations (CDI) in 2010, relaxing the stringent enforcement requirements of Regulations G and S-K. In this paper, we investigate whether these new, non-binding, SEC staff interpretations are economically significant events and whether they allowed for change in a firm’s voluntary disclosure. Using hand-collected non-GAAP earnings disclosure for S&P500 firms from 2006 to 2013, we find significantly positive 3-days cumulative abnormal returns on the announcement of new CDI announcement only for firms with informative non-GAAP reporters prior to the announcement, suggesting investors anticipate the benefits of relaxed interpretive guidance to be limited to informative non-GAAP reporters and investors view SEC staff interpretations as important regulatory actions that affects managers’ behaviors. We also find that managers more frequently use aggressive non-GAAP reporting in the post-CDI period, especially when managers have incentives to report non-GAAP earnings more aggressively and when the governance system is poor. This paper contributes to the voluntary disclosure and regulation literatures by providing empirical evidence that SEC interpretative guidance is economically important events and effective in shaping firms’ disclosure practices.
THE MODERATING EFFECT OF EMOTIONAL INTELLIGENCE ON LOAN OFFICERS’ JUDGMENTS AND DECISIONS
LAGRANGE, BRUCE
ANANDARAJAN, ASOKAN; VIGER, CHANTAL
Category: FA = Financial Analysis
The purpose of this study is to determine whether emotional intelligence (EI) is a moderating variable in loan officers’ information processing and to assess the extent to which EI moderates risk perception and credit granting decisions. To answer the research question, an experimental investigation (via questionnaire) was conducted and participants’ judgments and decisions were examined in light of three methods of disclosing contingencies. After analyzing the information they were provided, participants indicated their judgments and decisions in regard to the following four variables: (1) the overall risk rating, (2) the overall trend rating, (3) the loan granting decision and (4) the interest rate decision. Three different types of disclosure of contingencies were used as independent manipulated variables. Results regarding the impact of EI as a moderating variable, whether in relation to disclosure method and loan officers’ judgments or the relationship between their judgments and decisions, do not indicate that loan officers’ EI has a significant moderating effect on these relationships. Institutional oversight and directives appear to be clear and specific enough to provide the guidance to minimize individual EI differences among loan officers. However, loan officers were significantly influenced by the third method of disclosing contingencies, suggesting participants’ possible functional fixation on the revenue figure in the income statement.
CEO’S GEOGRAPHIC ORIGIN AND CORPORATE MYOPIC BEHAVIORS
LAI, SHUFANG
LI, ZENGQUAN; YANG, YONG
Category: GV = Accounting and Governance
We examine the effect of a CEO’s geographic origin on her firm’s myopic behaviors. Based on the psychological theory of place attachments, local CEOs are more likely to care about their reputation and make contributions to the community where they grew up. As a result, local CEOs are less likely to trade near-term gains for potential long-term losses. We hypothesize that local CEOs are less myopic than nonlocal CEOs. The empirical evidence supports our hypothesis. The results show that after controlling for other related incentives, local CEOs are less likely to cut R&D expenses to avoid earnings decreases or missing analyst forecasts, especially when the firm’s headquarter state has a more closed social structure or a high local investment bias and when the firm’s operation is more locally concentrated. The results are robust to 2SLS regressions and within-firm change analyses employed to address the potential endogeneity issue. Supplemental analyses indicate that local CEOs are also associated with better CSR performance. Overall, the results of this study suggest that a CEO’s geographic origin plays a role in mitigating corporate myopic behaviors and provide further explanations for the popularity of local CEOs in the U.S.
THE EVOLUTION OF THE VALUE ADDED STATEMENT IN ITALY BETWEEN NATIONAL TRADITION AND GLOBAL STANDARDS
LANDIS, CRISTINA
LINK, MICHAEL
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Literature on corporate social responsibility (CSR) reporting questioned whether and to what extent the adoption of global guidelines or standards (like the Global Reporting Initiative (GRI)) is driving to the harmonization of CSR Reporting and consequently to the reduction of country influences in its content (Fortanier et al., 2011). Previous studies showed differences in the CSR disclosure from different countries (Chen and Bouvain, 2009) and that within GRI-Reports issues and indicators might be differently emphasized. Recent research (Haller et al, 2016) pointed out that the disclosure of a value added statement (VAS) turns out to be a key content of GRI-reports in some countries, in particular in Italy, where this issue is included in the (not mandatory) Italian social reporting standards as well. Against this background, this study explores the evolution of the VAS in Italy, a context characterized by the coexistence of national tradition of VAS, expressed in the national standard, and international approach to VAS proposed in the GRI-Guidelines. Based on Institutional Theory, this study explores whether and to what extent the growing popularity of the GRI among Italian firms is influencing the disclosure on VAS and reducing the role of the national standards. We found evidences that the GRI is influencing the disclosure practices in Italy. In particular, Italian companies are leaving the traditional approach to VAS to move to the one suggested by the GRI.
THE EFFECTS OF SUBJECTIVITY ON PERCEIVED PROCEDURAL JUSTICE: EXPLORING CONTEXTUAL AND TRADE-OFF EFFECTS OF UNCERTAINTY AND TRUST
LANGEVIN, PASCAL
MENDOZA, CARLA
Category: MA = Management Accounting
Empirical research on perceived fairness of subjective vs. objective performance measures has produced mitigated results. Although subjective measures can increase perceived fairness as they help to reduce some shortcomings of objective measures, they can also raise fairness issues as there is a risk that they lead to biased evaluations. Our study aims to reconcile some of the conflicting findings of previous studies by exploring contextual and trade-off effects. Based on a vignette survey with 418 managers, our findings show that uncertainty and trust in the supervisor are two key variables that interact to set the conditions under which adding subjective performance measures improves the perception of fairness. In particular, when objective measures are affected by factors that are not under the control of the evaluated managers, introducing subjective measures improves their perception of fairness, but this is true only if evaluated managers trust their supervisor. Moreover, our study explores the justice rules that managers apply when assessing the fairness of their performance evaluation and identifies which rules are predominant in generating perception of fairness according to the context in which the evaluation takes place.
AUDIT EXEMPTIONS AND COMPLIANCE WITH TAX AND ACCOUNTING REGULATIONS
LANGLI, JOHN CHRISTIAN
DOWNING, JEFF; LANGLI, JOHN CHRISTIAN
Category: AU = Auditing
We examine the impact of small firms’ compliance with tax and accounting regulations pre and post a change in the threshold for mandatory auditing. Prior to 2011, all Norwegian firms were required to be audited. In 2011, a law change took effect that allowed small Norwegian firms to choose not to be audited. After this change in legislation, the Norwegian Directorate of Taxes conducted inspections of a representative sample of 2,117 Norwegian firms, with a focus on these firms’ compliance with specific requirements in the tax and accounting regulation. We use the results from these inspections to construct a score that measures these firms’ compliance on the areas covered by the inspections, henceforth the compliance quality score (CQS). We find that the firms that chose to opt out of auditing have lower CQS than do firms that chose to continue to be audited; that the CQS of firms that chose not to be audited declined after opting out; and that some of the opt-out firms mitigated the decline in CQS by engaging licensed accountants. The results should be of particular interest to politicians in countries that are considering increasing the thresholds for mandatory auditing, as our results show that (i) firms that choose not to be audited can experience a decline in CQS after opting out, and (ii) CQS can be maintained at the same level as before the opt-out decision by opt-out firms if they engage accounting experts that assist in preparing the annual accounts.
ACCOUNTING CHOICE AND POLICY CHOICE BY GOVERNMENTS: THE POLITICS OF ATTENTION
LAPSLEY, IRVINE
VICENTE, CRISTINA
Category: IC = Interdisciplinary/Critical
ABSTRACT This study examines accounting and policy choices by government from the perspective of the politics of attention. The study setting is the Scottish Parliament. The examples studied are two high profile policies for complex public finance issues which were proposed by the Scottish Government. This paper uses an adaptation of the Linz model to trace the antecedents of these policies, their policy intent and their progression through due parliamentary process to becoming established government policies or not. This study also reflects on the nature of the outcomes for these policies and the nature of policy failure. The paper concludes with observations on policy formulation from a politics of attention perspective, particularly in the sphere of public money and management. Key Words: Government; Accounting & Policy Choices; Politics of Attention
THE IMPAIRMENT TEST AND MANAGERS’ COST OF CAPITAL ESTIMATES DISCLOSED IN COMPLIANCE WITH IAS 36 AND IFRS 13
LASCHEWSKI, CHRISTIAN
Category: FR = Financial Reporting
This paper analyzes the management perspective on goodwill accounting by assessing determinants of managers’ cost of capital estimates, which have to be disclosed following IAS 36 and IFRS 13. Managers’ cost of capital estimates can be explained by means, motive and opportunity. Means are provided by the high level of judgement necessary, experience with IFRS and in addition by the accounting choices inherent to IAS 36 and IFRS 13. Motives are the traits and biases in management behavior, notably opportunism and home bias. Finally, managers’ cost of capital estimates differ with corporate governance, capital market focus, financial standing and auditor behavior. The findings in this study reflect on the judgement and accounting choices inherent to IAS 36 and on the subsequent implementation in practice. The study is therefore relevant for standard-setters, regulators and practitioners on capital markets.
IN THE MARGINS OF ACCOUNTING: THE MEDIATING ROLE OF ANALYTICS IN A DIGITAL ENVIRONMENT
LASSILA, ERKKI
MOILANEN, SINIKKA
Category: MA = Management Accounting
This piece of research concerns the mediating role of calculative practices as instruments aiming for coordinating the development process in a digital environment. Mediating instrument refers to practices framing the decision-making activities of different organizational members, aligning them with the firm’s economic objectives. Analytics, when seen as calculative practices of accounting, may act as a mediating instrument between creativity and economic reasoning. Analytics can transform complex processes, such as consumer behavior, into single figures through quantification and thus can mediate the market reaction and the potential of the product through quantified consumer behavior. Consumer actions and behavior are collected from the distance and transformed into visual interpretable form of metrics in an instant by a computer code and mathematical algorithm. These quantifications of detailed consumer actions, when transformed into single easily understandable figures and when the individual actor is understood as a calculable self, can coordinate the decision-making process towards the economic ambition of an organization by affecting on chosen development trajectories through verifying or refuting creative pre-assumptions. Therefore, this study contributes to the existing literature by showing that the visibility to the outside world may be brought into the organization without the presence of an accounting professional or traditional accounting tools.
THE STEREOTYPE OF ACCOUNTANTS: A STRUCTURAL APPROACH
LEÃO, FERNANDA
GOMES, DELFINA
Category: IC = Interdisciplinary/Critical
This study aims to provide insights into the construction of the social image of accountants, investigating perceptual dimensions that can influence their social portrait. The identified relevant variables in social judgement established by the Stereotype Content Model (status, competition, warmth and competence) are considered to be part of the analysis of this study. First, in order to identify how accountants are positioned in each one of these dimensions. And second, to design a causal model of the stereotype of accountants. Structural equation modelling is used to test the influence of those four variables on the stereotype of accountants and data was collected through a questionnaire administered to a Portuguese community sample (N=727). The results reveal that accountants are perceived as modestly warm and highly competent and also as a cooperative group which does not enjoy dominant social positions. A medium level of status is attributed to accountants and the findings suggest that they are part of the lower middle class. This study also indicates status, competition, competence and warmth as being important factors in the construction of the social image of accountants. The original predictions of the Stereotype Content Model and further developments are corroborated. In addition, competence and warmth are also shown to be mediating variables of status and competition in the prediction of the stereotype of accountants.
SURVEILLANCE SYSTEMS AND CONTROL PRACTICES IN DIGITIZED CONTEXTS
LECA, BERNARD
LAGUECIR, AZIZA
Category: MA = Management Accounting
Informed by the 2008 scandal of Société Générale, we explore the tensions between surveillance systems and managerial control practices in digitized context, and find inconsistencies. We suggest that the shift from "disciplinary" to "control" society is far from simple and clear. We show that continuous surveillance creates a "field of visibility” allowing for individual redefinitions of autonomy and discretion at work. Finally, we offer a reflection on the limits of the controllability of organisational actors' behaviours through digitized technologies.
FINANCIAL STATEMENT COMPARABILITY AND ANALYSTS’ OVER-OPTIMISM FOR ACCRUALS
LEE, BRYAN BYUNG-HEE
KIM, YONGTAE; LEE, JAY JUNGHUN
Category: FA = Financial Analysis
This study examines the role of financial statement comparability in mitigating analysts’ over-optimism for accruals. Prior research shows that sell-side analysts do not fully incorporate accrual information in anticipating future earnings and thus tend to issue more optimistic forecasts for firms with a higher level of accruals. Using the financial statement comparability measure developed by De Franco, Kothari and Verdi (2011), we find that analysts’ over-optimism for accruals is significantly moderated for firms with a high degree of financial statement comparability. By disaggregating financial statement comparability, we further develop proxies for accrual comparability and cash flow comparability, and find that the inverse relation between financial statement comparability and analysts’ over-optimism for accruals is driven mainly by accrual comparability rather than cash flow comparability. Our results are robust to alternative proxies for comparability, alternative metrics of accruals and cash flows, and controlling for other earnings attributes and analyst characteristics. Collectively, our evidence suggests that financial statement comparability helps analysts process and interpret accrual information, thereby improving their forecast accuracy.
FINANCIAL ANALYST COVERAGE FOR U.S. FIRMS FACING FOREIGN COMPETITION: EVIDENCE FROM TRADE LIBERALIZATION
LEE, DONGYOUNG
WEN, HE
Category: FA = Financial Analysis
This study examines financial analyst coverage for U.S. firms following an increase in foreign product market competition. To capture exogenous shocks to domestic firms’ competitive environments, we exploit a quasi-natural experiment from large import tariff reductions over the 1984 to 2005 period in the manufacturing sector. Using a difference-in-differences research design, we find evidence of a significant decrease in analyst coverage for incumbent U.S. firms when they face higher entry threat from foreign competitors. We also find that analysts with less firm-specific experience and less accurate prior-period forecasts are more likely to stop following the domestic firm when foreign competition intensifies. Overall, our findings suggest that foreign product market competition from global trade liberalization is an important determinant of financial analysts’ coverage decisions.
PAYOUT RATIO AND STOCK RETURN PREDICTABILITY
LEE, EUNYOUNG
Category: FA = Financial Analysis
Stock return predictability by financial ratios has been widely studied over periods. Among many variables, dividend yields were evaluated to perform better than earnings yields. However, Lamont (1998) has claimed that the payout ratio, a measure composed of both dividend and earnings, helps predict the future stock return. In this paper, I re-examined Lamont’s result and checked if log payout ratio still predicts the future return. I repeated the same test with extended sample periods. The result shows that the predictive power of dividend payout ratio is sensitive to the sample period. Further, the log payout ratio showed negative relationship with the future returns, which is different from Lamont’s. Details will be explained below. In sum, even though certain relationship exists between log payout ratio and future returns, it is difficult to assert that log payout ratio has predictive power on future returns.
CEO RESHUFFLE IN BUSINESS GROUPS AND FIRM PERFORMANCE: EVIDENCE FROM KOREA
LEE, GUN
KIM, JINBAE; LEE, MINYOUNG; YI, HAN
Category: MA = Management Accounting
We examine a CEO appointment practice in Korea known as the CEO reshuffle in which large business groups announce the CEOs who will leave the group and who will move to other group affiliates. Using 5,523 observations from 2003–2012, we document that low performance triggers CEO turnover at the firm level, but CEOs with high performance are likely to be relocated to a new place as either CEOs or executives at the group level. We also report that high performing CEOs move to larger yet less profitable affiliates and contribute to their performance turnarounds. Overall, these findings are consistent with the notion that the business group uses its internal labor market to enhance overall efficiency.
CAN MANAGERS BE WRONG AND STILL BE RIGHT? AN EXAMINATION OF THE PREDICTIVE INFORMATION IN MANAGEMENT FORECAST ERRORS
LEE, HANNA
KIMBROUGH, MICHAEL; ZHENG, YUE
Category: FR = Financial Reporting
Investors and analysts rely heavily on management forecasts as inputs into their expectations about upcoming earnings announcements. Intuitively, there is no obvious forward-looking information in management forecasts that pertain to earnings that have already been announced. Nevertheless, we raise the possibility that the management forecast error associated with the current earnings announcement could have forward-looking information incremental to current realized earnings. This possibility arises if the management forecast error (MFE) represents unrealized revenues or expenses originally anticipated by the manager to occur in the forecast period but that ultimately occur in subsequent periods. Consistent with this possibility, we document that MFEs for the current period have incremental information over current earnings in predicting future earnings realizations up to three years ahead. The forward-looking information in MFEs is greater for optimistic forecasts, forecasts made closer to year-end, and forecasts made under greater uncertainty. Our findings hold after controlling for components of realized earnings that are differentially persistent. Managers appear to incorporate the information contained in their current forecast errors in their subsequent earnings forecasts to some extent but they tend to be optimistic about the implications of their current forecast errors for future earnings.
SOCIETAL TRUST AND CORPORATE TAX AGGRESSIVENESS
LEE, JIMMY
KANAGARETNAM, KIRIDARAN; LIM, CHEE YEOW; LOBO, GERALD J.
Category: TX = Taxation
Using an international sample of firms from 25 countries and a country-level index for societal trust, we study how differences in trust across countries relate to corporate tax aggressiveness. We capture tax aggressiveness using an indicator variable for firms with a corporate tax avoidance measure in the top quartile of each country-industry combination. Consistent with our prediction, we find strong evidence that societal trust is negatively associated with the likelihood of tax aggressiveness, even after controlling for other institutional determinants such as home country tax system characteristics. We also explore the effects of three country-level institutional characteristics – strength of legal institutions, information environment, and capital market pressure – on the relation between societal trust and the likelihood of tax aggressiveness. We predict and find that the relation between trust and the likelihood of tax aggressiveness is more pronounced when the legal institutions are weaker, the information environment is less transparent, and capital market pressure is higher.
SLACK RESOURCES AS REAL OPTIONS: A LIFE CYCLE ANALYSIS
LEE, JOO HYUNG
ANDERSON, MARK
Category: MA = Management Accounting
We apply a real options approach to the study of resource slack revealed by asymmetric cost behavior. We combine real options theory with life-cycle analysis and use life-cycle classification to proxy for the option value of resource slack. 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 or cost stickiness (Anderson et al. 2003) to measure resource slack created by a decline in sales. Our analysis of real option value based on the distribution of one-year-ahead sales changes indicates that resource slack would be most valuable for introduction stage and growth stage companies, and least valuable for decline stage companies. We discriminate between cost stickiness associated with discretionary resource slack and cost stickiness due to frictions in adjusting capacity. Following previous research, we use asset intensity and employee intensity to capture differences in frictions in adjusting capacity across firms. Consistent with our real options analysis, we find that discretionary resource slack retained when sales decline is highest for introduction and growth stage companies and lowest for decline stage companies. We find that cost stickiness increases with asset intensity across all stages but only increases with employee intensity for decline firms.
NONDISCLOSURE – A GOOD NEWS SIGNAL?
LEE, KYUNGRAN
Category: FR = Financial Reporting
I examine the implications of nondisclosure in a setting where there is a credible signal as to the proprietary nature of the undisclosed information. Specifically, I investigate the market and analysts' response to firms’ application to the Securities and Exchange Commission (SEC) for a confidential treatment order (CTO), which allows firms to redact required disclosures from SEC filings when the redacted information is proprietary. I find that the market and analysts react favorably to the voluntary nondisclosure of proprietary information using the SEC confidential treatment process. Market and analysts reactions are more favorable to the redaction of information that is more likely to have proprietary value, such as information related to research and development. In addition, I show that the redacting firms experience superior accounting performance compared to their peers in the years following the redaction, consistent with the market and analysts’ response to the redaction. These findings indicate that a firm's willingness to submit to the CTO approval process serves as a credible signal of the proprietary nature of the withheld information. The results of this study suggest a possible role for a credible signaling channel to facilitate communication between insiders and outsiders regarding the nature of withheld information.
INFORMATION HOARDING, CEO TURNOVER AND SUBSEQUENT FIRM PERFORMANCE: EVIDENCE FROM STOCK PRICE CRASH RISK
LEE, MEI YEE
GUL, FERDINAND A ; LAI, KAREN MY; WU, MICHAEL
Category: FA = Financial Analysis
We use a large sample of U.S. firms to demonstrate that stock price crash (SPC) risk as a result of firms suddenly disclosing bad news is positively associated with CEO turnover in the subsequent year (t+1). Hand-collected data from industrial news and annual financial reports demonstrate that the majority of 393 CEO turnovers in our sample that occurred subsequent to SPC are forced in nature. We also find that firms with forced CEO turnovers are subsequently associated with lower discretionary accruals (lower opacity) and better firm performance than firms with other types of CEO turnovers. These results suggest that firms that take disciplinary actions against poor performing CEOs experience a reduction in opacity and an improvement in performance.
COST BEHAVIOR AND EARNINGS INFORMATIVENESS
LEE, MIN YOUNG
KIM, EUNG-GIL ; KIM, JIN-BAE ; LEE, GUN
Category: MA = Management Accounting
This paper examines whether sticky cost behavior reduces the information about future earnings reflected in current stock returns. 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. That is, 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. Our study provides evidence on the effect of sticky cost behavior on the informativeness of accounting earnings.
WHEN DO EXECUTIVE CLAWBACK PROVISIONS HAVE REAL CLAWS IN ACTION? EVIDENCE FROM CONSERVATIVE ACCOUNTING
LEE, SAM
CHOI, AHRUM; OH, PETER; RYU, PATRICK
Category: FR = Financial Reporting
We examine whether executive compensation clawback provisions (“clawbacks”) affect conservative accounting and how compensation contracts interplay with debt covenants (governance) in determining the degree of conservatism. Although shareholders and debtholders may demand less conservatism after adopting clawbacks, which directly restrain managerial opportunism, we predict that firms with clawbacks in place will recognize bad news more timely than good news due to the increase in the ex-post penalty on managers for misstated financial reporting. Consistent with this prediction, we find that firms with clawbacks use more conservative accounting in general. In addition, the positive association between clawbacks and conservatism is less pronounced in firms with a greater number of debt covenants (stronger governance) than in firms with fewer covenants (weaker governance). The results show that clawbacks and debt covenants (governance) are substitutes in determining accounting conservatism. Overall, our findings provide new evidence on (1) the role of compensation contracting in conservative accounting and (2) the interplay between compensation contracts and debt contracts (governance) determining conservative accounting.
THE DECLINE IN AN AUDITOR’S REPUTATION AND THE MARKET RESPONSE TO ITS AUDITEES
LEE, SANG HO
JEONG, SEOK WOO; JUNG, NAM CHUL; YOO, YONG KEUN
Category: AU = Auditing
This study was conducted to observe the market reaction to the decline in an auditor’s reputation, using a recent case involving D Corp. and their auditor, Audit Firm A. Auditor A’s clients experienced negative cumulative abnormal returns from the day the reputation of the auditor started to decline. Because Auditor A failed to detect the insolvency of D Corp. and to make a timely announcement of going concern, this result may indicate investors’ loss of trust for financial reporting truthfulness in the firms audited by Auditor A. Firms in the make-to-order production industry that had a higher balance of unclaimed construction receivables relative to their assets had a higher negative cumulative abnormal return. The main contribution of this study is that a negative market reaction to the decrease in auditor reputation was observed in the Korean capital market, and prior studies were extended by focusing on how damage to an auditor’s reputation influences assurance value. This negative market reaction was stronger within the same industry and account that was involved in the case that led to the fall in auditor reputation.
IN SEARCH OF CONFORMITY: ACCOUNTING FOR THE GREEK SOVEREIGN DEBT CRISIS UNDER INTERNATIONAL ACCOUNTING STANDARDS
LEFRANCQ, STEPHANE
KOHLER, HERVÉ
Category: FR = Financial Reporting
As the Greek sovereign debt crisis erupted in 2011, French banks have collectively adopted an accounting treatment that appeared at odds with the interpretation selected by most of European banks. This accounting treatment has encountered a widespread criticism, in the press but also from the standard-setter. In this article, we rely on a constructivist view of compliance and on the theory of control proposed by Autissier (2008) to understand how an agreement has been reached on the accounting treatment between the banks, their auditors and the French regulators. We also delve into the consequences of the opposition aroused by the publication of the financial statements.
BEHIND THE SCENES: INTERNATIONAL EVIDENCE ON THE MONITORING ROLE OF THE NORWEGIAN GOVERNMENT PENSION FUND GLOBAL
LEHMANN, NICO
SARABI, ALMASA
Category: GV = Accounting and Governance
This paper revisits the monitoring role of international institutional ownership. Based on a novel setting that improves the identification of causal effects, it examines whether the presence of institutional ownership improves firm-level monitoring and in turn increases firm value. In essence, the paper tracks in detail the investment positions of the Norwegian Government Pension Fund Global between 2010 and 2014 and exploits the funds’ entries (initial investment in firms) as well as exits (subsequent divesture from firms) in a two-fold differences-in-differences (DiD) design with two-natural control groups and a comprehensive fixed-effect structure. The respective DiD results document significantly positive monitoring as well as performance effects in the course of the funds’ entries. Corroborating these results, exits of the funds are subsequently followed by significant declines in monitoring and performance. A variety of sensitivity tests, for example, addressing parallel trends assumptions or reverse causality concerns, ensure the validity of these results. Overall, the paper’s findings highlight the beneficial role of institutional ownership.
HOW DO BANKS ACCOUNT FOR SHORT-TERM EFFECTS OF IFRS 9?
LEJARD, CHRISTOPHE
Category: FR = Financial Reporting
This study addresses how EU banks accommodate their accounting policy to face the challenge addressed by the forthcoming implementation of IFRS 9. Precisely, this study identified two challenges that banks would have to face in a short-term: 1) an increase of the amount of their assets designed at fair value through profit and loss, due to failures in Solely Payment of Principal and Interest test, and 2) a decrease on earnings generated by the implementation of the expected losses-based provisioning. Results from a difference-in-differences test show a significant downward trend regarding the amount of assets designed at fair value through profit and loss starting the IFRS 9 publication, and an upward trend for investments held to maturity. A downward and significant trend for cumulated loan loss provisions is also found. In addition, results from multivariate analysis do not exhibit unfavorable impact of those accounting policy changes on the bank share volatility.
SUSTAINABILITY PERFORMANCE REPORTING: AN UNCONSCIOUS SPECTACLE
LEVANT, YVES
JOURNEAULT, MARC
Category: MA = Management Accounting
Building on The Society of the Spectacle by Debord (1967, 1988) and the ideology of numbers proposed by Chelli and Gendron (2013), the aim of this study is to examine the extent to which sustainability reporting standards, such as the GRI guidelines, and the institutional forces surrounding the use of this reporting framework, influence sustainability performance reporting for organizations in a way that transforms them into actors in a technocratic spectacle. More specifically, the paper illustrates, through a case study of an important electricity provider in Canada, how the use of GRI guidelines, which promote a certain ideology through numbers, may help capture the discourse surrounding sustainability performance, leaving other aspects uncovered, to the detriment of the organization’s consciousness. Also, this paper demonstrates how these sustainability reporting standards, legitimized and reinforced through their institutionalization, tend to create a limited scope and an incomplete picture of the organization’s sustainability performance reporting, allowing the organization to unconsciously participate in a technocratic spectacle.
DO FIRMS UNDERREPORT INFORMATION ON CYBER-ATTACKS? EVIDENCE FROM CAPITAL MARKETS
LEVI, SHAI
AMIR, ELI; LIVNE, TSAFRIR
Category: FR = Financial Reporting
Firms should disclose information on material cyber-attacks. However, because managers have incentives to withhold negative information, and investors cannot independently discover most cyber-attacks, firms may underreport cyber-attacks. Using data on cyber-attacks that were voluntary disclosed by firms and those that were withheld and later discovered by sources outside the firm, we estimate the extent to which firms withhold information on cyber-attacks. We find withheld cyber-attacks are associated with a decline of approximately 2.6% in equity values in the month they are discovered, and disclosed attacks with a substantially lower decline of 0.6%. The evidence suggests managers do not disclose negative information below a certain threshold, and withhold information on the more severe attacks. Using the market reactions to withheld and disclosed attacks, we estimate that managers disclose information on cyber-attacks when investors already suspect a high likelihood (46%) that an attack has occurred. Overall, our analyses suggest firms underreport cyber-attacks.
ANALYZING THE ANALYSTS: THE EFFECT OF TECHNICAL AND SOCIAL SKILLS ON ANALYST CAREER
LI, CONGCONG
LI, CONGCONG; LIN, AN-PING; LU, HAI
Category: FA = Financial Analysis
This paper investigates how technical and social skills of financial analysts affect their performance and career advancement. Using a sample of LinkedIn profiles of financial analysts, we document that analysts with good social skill, proxied by the number of social connections, generate more accurate earnings forecasts and produce more informative stock recommendations. These analysts are also more likely to be voted as All-Star analysts and to move to high-status brokers when changing jobs. However, the effect of technical skills, proxied by the quantitative skills disclosed on LinkedIn, only affect earnings forecast accuracy. The analysts with technical skills are indifferent in the likelihood of being voted as star analysts and job separations comparing with other analysts. These findings provide the first large sample evidence that social skills are more important than technical skills in analyst career advancement.
MD&A TEXTUAL SIMILARITY AND AUDITORS
LI, HEATHER
DE FRANCO, GUS; FOGEL-YAARI, HILA
Category: AU = Auditing
This study examines the relation between auditors and the unaudited Management Discussion and Analysis (MD&A). We show that unaudited MD&As are more textually similar when firms share the same auditor. This result suggests that auditors influence unaudited MD&As to be more textually similar. We further show that auditor-related MD&A similarity is negatively associated with MD&A modifications and forward looking statements in the MD&A, suggesting that auditor-related MD&A similarity may decrease the MD&A’s disclosure quality. Although more audit influence is generally considered a positive financial reporting characteristic, our study cautions regulators and standard setters to consider potential negative consequences of mandating the audit of MD&As.
SECRECY POLICY, REGULATION ARBITRAGE AND STOCK PRICE CRASH RISK
LI, TIEMEI (SARAH)
KIM, JEONG-BON ; LI, TIEMEI; ZHANG, LIANDONG
Category: GV = Accounting and Governance
We study how secrecy policy and differences in regulations cross‒border impact the risk of stock price crash. Using a large sample of companies that registered headquarters in 29 countries and establish affiliates or subsidiaries around the world including in offshore financial centers (OFC), we find that secrecy policies of OFCs where companies set up affiliates or subsidiaries and regulation arbitrage between non‒OFC countries and OFCs tend to increase stock price crash risk at the firm level. Moreover, using a difference‒in‒differences research design, we find that, compared to firms without OFC affiliates or subsidiaries, the likelihood of stock price crash to firms that first establish OFC affiliates or subsidiaries becomes higher associated with exhibited secrecy policy and regulation arbitrage. Finally, we find that more conservative accounting information and stronger external monitoring, such as analyst coverage, attenuate the positive relation between secrecy policy (and regulation arbitrage) and crash risk. Our results are robust to a variety of sensitivity checks including IV analysis.
DOES SOX AFFECT TAX AGGRESSIVENESS
LI, YIWEI
ZHANG, XIUYE
Category: GV = Accounting and Governance
In this paper we investigate whether the passage of the Sarbanes-Oxley Act (SOX) in 2002 affects firms’ tax aggressiveness. We document that firms’ tax aggressiveness increased significantly following the enactment of the SOX, suggesting that ethical requirements for managers and enhanced managerial accountability and legal liability play the role in constraining managers’ rent extraction through aggressive tax planning. This evidence is strong and consistent for three different measures of tax aggressiveness, i.e. cash effective tax rate (CETR), yearly total book-tax difference (BTD) and permanent book-tax differences (PREM_BTD). We also document that firms with higher institutional ownership moderate the SOX effect on firms’ tax aggressiveness. This finding is consistent with prior literature which provides evidence on the positive association between institutional ownership and tax aggressive due to lessened concern over rent extraction by strong monitoring, further suggesting that market discipline and regulations are substitutes to each other on the effects of decreasing managerial rent extraction and enhancing monitoring. Our results are robust when using IV approach. In sum, our findings suggest that the passage of the SOX influence firms’ tax aggressiveness due to discouraging price discounting by investors.
THE EFFECT OF VOLUNTARY ADOPTION OF IFRS ON EARNINGS QUALITY: EVIDENCE FROM JAPAN
LIAO, CHIH-HSIEN
DUH, RONG-RUEY; PAN, CHIEN-MIN KEVIN; TAKINISHI, ATSUKO
Category: FR = Financial Reporting
ABSTRACT: This paper examines the effect on earnings quality of voluntary adoption of IFRS by Japanese firms. While many countries around the world have made adoption of IFRS mandatory, the world’s third largest economy, Japan, only began allowing its corporations to adopt IFRS in March 2010. Using a difference-in-difference design and propensity score matching approach, we find that firms voluntarily adopting IFRS have significantly lower accruals and less income smoothing in the post-adoption period relative to control firms that do not adopt IFRS in the same period. We do not find evidence of a significant increase in conservatism. Further, the improvement is higher for firms that hire independent directors and establish audit committees.
CORPORATE SOCIAL RESPONSIBILITY AND CORPORATE FRAUD
LIAO, LIN
CHEN, GUANTING; ZHENG, DENGJIN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper investigates the relation between corporate social responsibility (CSR) and corporate financial fraud in China. Previous literature argues that CSR is a two-edged strategy. On one hand, CSR is considered as a moral commitment that effectively curtails firm’s misconduct. On the other hand, CSR is alleged as a symbolic activity that potentially covers up manager’s opportunistic behaviours. Following these competing arguments, we test the impact of CSR on firm’s propensity to financial fraud by using a sample of Chinese listed firms over the period 2009-2014. We find empirical evidence that CSR is significantly and negatively associated with corporate financial fraud, suggesting that socially responsible firms are less likely to engage in fraudulent activities. Our result is robust to (1) linking different types of corporate fraud to CSR; (2) considering voluntary and mandatory CSR firms; (3) comparing high versus low levels of CSR performance, and (4) controlling for various identification and endogenous issues. Overall, the evidence presented in this paper supports the notion that CSR is an ethical behaviour which constrains corporate misconduct.
CORPORATE SOCIAL RESPONSIBILITY AND ACCOUNTING CONSERVATISM-AN INSTRUMENTAL STAKEHOLDER THEORY PERSPECTIVE
LIAO, YI-HSING
KAO, LI-HUA; SANG, TENG-SHENG; WU, GUAN_SYUN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
We examine the relationship between Corporate Social Responsibility (CSR) activities and accounting conservatism using CSR performance scores from KLD STAT. Our results indicate that better CSR performance is associated with higher level of accounting conservatism. We also investigate the effect of R&D intensity on the CSR performance-conservatism relation. We find that the positive association between CSR performance and accounting conservatism increases for firms with a high level of R&D spending compared to those with a low level of R&D spending. This finding suggests that stakeholder concerns are likely to drive managers to engage in CSR activities. These results hold after we control for the endogeneity issue and the reverse causality concern of CSR performance. Overall, our findings provide a better understanding of why and how CSR performance is related to the level of accounting conservatism.
A REVIEW ON THE MULTIDIMENSIONAL ANALYSIS OF EARNINGS QUALITY
LICERÁN-GUTIÉRREZ, ANA
CANO RODRÍGUEZ, MANUEL
Category: FR = Financial Reporting
Despite the agreement on the multidimensional nature of earnings quality, previous research on this topic has typically used proxies based on single earnings characteristics rather than multidimensional measures of earnings quality. This paper contributes to the knowledge on this topic by showing that measuring earnings quality by single-characteristic proxies can lead to erroneous inferences. We also review the multidimensional measures previously used in the literature, concluding that they can also lead to biased estimations.
DESIGNING AN INFORMATION TECHNOLOGY THAT PRODUCES PROFOUND EFFECTS ON AND FOR MANAGEMENT CONTROLS
LIEW, ANGELA
Category: MA = Management Accounting
This article explores how information technology (IT) can be leveraged and used as an effective and enabling control technology to direct and influence employee behaviours in completing designated tasks appropriately. Prior studies suggest IT only produces mediocre or no effects on and for management controls. This article seeks to explain how to design and use IT that delivers profound effects on and for management controls through Adler and Borys’ (1996) design principles for an enabling control framework. A case study approach was adopted to observe how enabling formalisations are realised in new product development (NPD) practices and to understand the design and social effects IT has on managerial issues and control implications. The research findings showed IT brought considerable internal and global transparencies to the firm. Strong internal transparency was achieved because IT provided employees with a systematic approach to reflect and apply their local knowledge. Global transparency was established because IT provided employees with formal communication channels to disseminate their local knowledge and realise the implications from their completed tasks. Global transparency had transpired because internal transparency was strong at the firm. It was these two transparencies that enabled IT to produce profound effects on and for management controls when the capabilities of IT are leveraged and purposely designed into the management control structures.
DOES DISTANCE IMPEDE REGULATORY MONITORING? EVIDENCE FROM THE BANKING INDUSTRY
LIM, IVAN
ARMITAGE, SETH; HAGENDORFF, JENS
Category: GV = Accounting and Governance
We examine how the information environment influences bank regulatory monitoring. Using distance between banks and regulatory field offices as a proxy for information asymmetry, we show that an increase in distance reduces the quality of bank financial reporting. To establish causality, we use a quasi-natural experiment that exploits multiple exogenous shocks to distance, an instrumental variable approach, as well as the enactment of the FDICIA Act of 1991 as a shock to the information environment. We provide evidence that regulators make use of local informational advantages to demand a higher quality of bank financial reporting. We further show that despite informational advantages, regulators strategically choose when to increase regulatory scrutiny and choose not to do so during the financial crisis. Overall, our study underscores the importance of local information in regulatory monitoring.
THE EFFECT OF XBRL ADOPTION ON THE RECEIPT AND REMEDIATION OF SEC COMMENT LETTERS
LIM, JEE-HAE
HONG, MIN JEONG (MINNA)
Category: IS = Accounting and Information Systems
Given that the SEC’s review process is associated with enhancement of financial statement disclosure, XBRL-provided efficiency gains to the SEC have important implications for the long-term benefits of XBRL to the users of financial statements. This study focuses on the effect of XBRL and the extent of customized extension element usage on the SEC’s review process. We find that the use of XBRL significantly enhances the SEC’s efficiency in their review of financial statements. Further, we find that greater use of customized XBRL elements increases the likelihood of receiving a comment letter and the number of rounds to remediate the comment letter received. These findings suggest that greater use of customized elements lead to a lack of clarity on the financial statements, rather than providing unique firm-specific information, resulting in a more adverse outcome for the firm in the SEC’s review process. Such results extend the literature on the on the economic consequences of XBRL adoption, and can be used as a guide for regulators, board members, investors, and management on the impact of XBRL and, more specifically, the proportion of customized tagging used, on the SEC’s review process outcomes.
NARCISSISM IN THE ACADEMIC ENVIRONMENT
LIMA, GERLANDO AUGUSTO SAMPAIO FRANCO DE
CAMARGOS AVELINO, BRUNA; VENEROSO ALVES DA CUNHA, JACQUELINE
Category: ED = Accounting Education
The objective of this article is to identify whether non-pathological (subclinical) narcissistic personality traits among undergraduate accounting students are related to their school performance and perceptions about academic dishonesty. The data were collected from a sample of 153 students who responded to a survey that included the Narcissistic Personality Inventory. The higher the score was, the greater the probability was of self-classification as superior. On the other hand, the narcissism score did not have any influence on the real school performance. Finally, the narcissism variable did not have any influence on the students’ perceptions regarding dishonest academic practices. Therefore, the fact that certain students demonstrated narcissistic tendencies did not necessarily mean they were more likely think it acceptable to engage in some type of academic cheating.
DO EQUITY ANALYSTS BENEFIT FROM ACCESS TO HIGH QUALITY DEBT RESEARCH?
LIN, AN-PING
HUGON, ARTUR; MARKOV, STANIMIR
Category: FA = Financial Analysis
We examine the role of debt analysts as an in-house resource for equity analysts. We suggest that the availability of debt research facilitates the equity analyst’s task of forecasting cash flows, especially for financially distressed firms. Consistent with this reasoning, we find greater incidence, accuracy, and price impact of cash flow forecasts by equity analysts who have access to high quality debt research and follow financially distressed companies, controlling for familiar measures of equity analyst resources and skill. In placebo tests, we find no evidence that these equity analysts issue superior revenue or earnings forecasts, further precluding the alternative explanation that they are more capable or have more resources, in general. Our results illustrate how research expertise in one area can provide a competitive advantage in another area.
THE IMPACT OF FAIR VALUE ACCOUNTING ON AUDIT QUALITY: EVIDENCE FROM THE GERMAN MARKET
LIN, CHAN-JANE
HSIEH, YU-TING
Category: AU = Auditing
This study investigates the impact of the IFRS adoption on the audit quality. Specifically, we examine the effect of fair value accounting, with the focus on IAS 40, on audit quality. Under IAS 40, firms are required to report fair value of investment property in the balance sheet or disclose that in the footnotes. Given the critical role of auditors in providing assurance for fair value estimates, whether audit quality will be changed following a switch from cost accounting to fair value accounting becomes an interesting and important question. The adoption of IFRS in 2005 by German firms provides a natural setting to investigate the impact of fair value accounting on audit quality. Investigating German firms from 2003 to 2007, we find that such a change does not significantly increase the likelihood of restatement, suggesting that audit quality is not impaired as a result of the change. Prior to the adoption of IFRS, German companies are allowed to prepare financial statements based on German GAAP, U.S. GAAP, or IFRS (early adopters). We further examine whether the impact of the IAS 40 on audit quality will be different for firms switching from non-US GAAP to IFRS and firms switching from U.S. GAAP to IFRS. We find that audit quality increases for both groups of firms, but the effects are more pronounced for firms switching from German GAAP to IFRS than for firms switching from U.S GAAP to IFRS.
FAMILY OWNERSHIP AND EXECUTIVE COMPENSATIONS: THE EFFECT OF EXPENSE RECOGNITION ON SHARE-BASED COMPENSATIONS
LIN, I-CHENG
WU, MING-CHENG
Category: FR = Financial Reporting
This paper examines the difference of executive compensations (cash, stock and stock options) between family firms and non-family firms and further takes into account the policy effect of expensing share-based compensations. Using the Difference-in-Differences (DID) analysis, the empirical results reveal that family firms reduce the executive compensations in the form of stocks and options; meanwhile, family firms also increase cash grants. This paper finds that family firms reduce stock and option grants by more narrow margins than non-family firms. Also, non-family firms increase cash grant by wider margins than family firms. This paper then examines the industry effect, and the results are consistent. According to the empirical results, family firms and non-family firms have different levels of responses on the grants of executive compensations when they face with the policy of expensing share-based compensations.
THE EFFECT OF ELIMINATING THE FORM 20-F RECONCILIATION FOR FIRMS FOLLOWING IFRS ON ACCOUNTING RESTATEMENTS: THE ROLE OF AUDITOR INDUSTRY SPECIALISTS
LIN, YI-HUNG
DAO, MAI ; HUANG, HUA-WEI ; HUANG, TING-CHIAO
Category: AU = Auditing
Our paper investigates whether the incidence of accounting restatement is influenced by the Securities and Exchange Commission (SEC)’s decision to eliminate form 20-F reconciliation requirement for foreign cross-listed companies that follow International Financial Reporting Standards (IFRS). Using 7,851 foreign cross-listed firm-year observations from Compustat, our results show that the elimination reduced accounting restatements, and that this association is more prominent when the cross-listed companies engaged auditor industry specialists. Comparing from Kim et al. (2012), our study can provide more significant evidence that IFRS reporting quality which disclosed from cross-listed firms has been well-recognized and judged by investors or reports users further. The results also support FASB’s (2002) and the SEC’s (2003) expectations that professional judgments provided by auditor industry specialists result in more meaningful and informative financial statements, which is extremely indispensable to more principles-based accounting standards (i.e., IFRS).
DOES ACCOUNTING CONSERVATISM REALLY MATTER TO EQUITY MISPRICING?– A TEST OF CORPORATE LIFE CYCLE
LIN, YI-MIEN
CHANG, CHIA-HUA; PARNG, YUH-JIUAN
Category: FR = Financial Reporting
This study aims to examine the effects of accounting conservatism on equity mispricing. We adopt Basu’s and Khan and Watt’s C-Score models to measure accounting conservatism and use EBO and RKRV valuation models to calculate intrinsic value of a stock. It additionally considers the effects of corporate life cycle on the above relationship. The findings show, firstly, that investors would make a more positive valuation if a company has a high accounting conservatism in the previous period. Secondly, accounting conservatism has deferred and positive effects on equity valuation. Thirdly, accounting quality impacts the equity valuation, the better, the more undervalued. Finally, the stock price of a company at the maturity stage tends to be undervalued, while that of a company in growth stage is likely to be overvalued. Overall, accounting conservatism has positive effects on the stock market.
JOINT DETERMINATION OF CEO COMPENSATION AND AUDIT FEES -THE ROLE OF CLAWBACK PROVISIONS
LIN, YU-CHUN
Category: AU = Auditing
This study investigates whether CEO compensation and audit fees are jointly determined. The role of clawback provisions is discussed. Rather than using endogenous variables in single-equation models, we investigate the joint determination effects using two-stage least squares (2SLS) simultaneous equation. Clawback provisions adopters are collected from the Lexis-Nexis News Library. Based on U.S. listed firms during 2008 to 2015, we find that specific firm characteristics jointly determine CEO compensation and auditor fees. The results of 2SLS show that the adoption of clawbacks is positively associated with CEO compensation but is not significantly associated with audit fees. We further use the sum of CEO compensation and audit fees to measure compliance costs of clawback provisions, and find that clawback provisions entail costs to the adoption firm. This study contributes to both CEO compensation and audit fees literature by showing joint determination effects.
DOES THE CEO MAKE THE DIFFERENCE? BUDGETING PRACTICES IN EMERGING MARKET SMES
LINDER, STEFAN
ZOR, UMMUGULSUM
Category: MA = Management Accounting
Small and medium sized enterprises (SMEs) play an important role for the Gross National Product and employment in most emerging markets. Yet, little is known about their management control systems (MCS) - and in particular about the role of the characteristics of their key personnel for the adoption and extent of use of MCS. This holds particularly true for emerging market SMEs’ budgeting practices. Drawing on a broad sample of SMEs in the manufacturing industries in Turkey, we therefore aim to shed more light at the role of CEO characteristics for emerging market SMEs adoption and extent of use of formal budgeting practices. Our results suggest that apart from age, tenure and education, the CEO’s openness to experiences is an important factor for understanding SMEs’ budgeting practices.
SEC COMMENT LETTER DISCLOSURES AND SHORT SELLING
LING, ZHEJIA
LEE, SAM (SUNGHAN); REZAEE, ZABIHOLLAH
Category: FR = Financial Reporting
Prior studies show that investors generally underutilize information contained in comment letters released by the Securities and Exchange Commission (SEC). We examine whether short sellers, as sophisticated traders, consider information in comment letters when making investment decisions. We find that short sellers front-run comment letter disclosures and that this phenomenon is more pronounced for more severe comment letters and those related to core earnings and revenue recognition. We also present evidence suggesting that short sellers obtain information advantage through social connections with company insiders and insider trading signals. The market reaction analysis further shows that such short selling helps mitigate investors’ inattention to comment letter disclosures. Taken together, our results underscore the importance of comment letters and suggest that short sellers’ activities facilitate disseminating information contained in comment letters to the capital market.
THE ROLE OF AN HEGEMONIC ELITE IN A BANKING CRISIS: LESSONS FROM THE CASE OF BANCO AMBROSIANO
LIONZO, ANDREA
BELLAVITE PELLEGRINI, CARLO
Category: HI = History
The question of how to deal with failing financial institutions is become a controversial issue of vast political and social echo nowadays. In our study, we focus on this debate drawing from the case of Banco Ambrosiano, one of the few and significant European cases of bank bankruptcy happened, and successfully overcome, in the last century. The paper adopts the Gramsci’s theory of ‘intellectual and moral leadership’ or ‘hegemony’ to contextualize the Banco Ambrosiano’s rescue within the social, political and financial situation of the then Italian society. The study reveals that the rescue of Banco Ambrosiano may be considered the result of the interplay of an inspired elite, who mainly drove the rescue process, and the role of some specific and significant accounting data that allowed the elite to identify the forward-looking solutions adopted.
BOOK-TAX DIFFERENCES, CEO OVERCONFIDENCE, AND BANK LOAN CONTRACTING
LIU, SOPHIA H.T.
HSU, AUDREY; LEE, CHENG-FEW
Category: FR = Financial Reporting
We assess information embedded in the difference between the reported book income and the taxable income (the book-tax differences, BTDs hereafter) from debtholders' point of view. Using bank loan contracts of U.S. publicly traded companies over year 2001-2012, we find that a firm with larger book-tax differences pays more interests for its bank loan than does a firm with smaller book-tax differences. Moreover, we find that banks reduce the use of financial covenants while increase the use of general covenants for the borrowing firms which have larger book-tax differences. In addition, banks are more likely to shorten loan maturity and require their lending to be collateralized for a borrowing firm with larger book-tax differences. Taken together, our findings suggest that larger book-tax differences imply the concerns regarding financial reporting quality, thereby increasing information risk and agency costs of debts. Thus, banks tend to take price and non-price protection against borrowers. We further find that the effects of BTDs on loan contracting are stronger if CEOs of the borrowing firm are classified as overconfident as prior studies document that CEO overconfidence is associated with more misreporting (Schrand and Zechman, 2012), less accounting conservatism (Ahmed and Duellman, 2013), and more agency costs of debts (Yang et al., 2013), further increasing banks’ concerns on information risks and agency costs.
CEO FACIAL TRAITS, COMPENSATION, AND CORPORATE VISIBILITY: PAID FOR LOOKS WHEN OTHERS ARE LOOKING
LIU, XIAOTAO
CANACE, THOMAS; CIANCI, ANNA; TSAKUMIS, GEORGE
Category: MA = Management Accounting
Using both archival data and survey data in which participants rated the facial traits of S&P 500 CEOs, we examine the CEO facial traits–compensation relation by disaggregating compensation into its salary and non-salary components. As hypothesized, we find that CEOs perceived as more competent or attractive receive a higher salary pay, but not a higher non-salary pay, particularly for firms with higher corporate visibility (conceptualized as investor visibility, customer visibility, and media visibility). These results suggest that CEO looks matter most when others are looking. In additional analyses, we find that externally (internally) hired CEOs are paid a salary premium for looking competent (attractive), suggesting that the board attaches different values to different CEO facial characteristics of internal versus external CEO hires.
CORPORATE CARBON EMISSION AND FINANCIAL PERFORMANCE: DOES CARBON DISCLOSURE MEDIATE THE RELATIONSHIP IN THE UK?
LIU, YANG
HOEPNER , ANDREAS; YANG, JESSICA ; ZHOU, XIAOYAN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Academic debate relating to the link between corporate environmental disclosures, environmental performance and financial performance is persistent and controversial. In this paper, we investigate whether and if so, how, carbon emission performance is related to corporate financial performance and how disclosures of carbon emission in the annual and standalone reports mediate such relationship. Specifically, we construct a 42-item disclosure index to quantify the quality of corporate carbon emission information of 62 FTSE 100 companies from the period of 2010 to 2012. We find that while carbon emission is negatively associated with financial performance, it is positively related to the level of carbon disclosures which then lead to better financial performance at a marginal significance level. The findings show that market responses to excessive carbon emission; however, companies with poor carbon performance tend to use disclosure strategically to manage the legitimacy threat and to reduce the information asymmetry.
CORPORATE IN-HOUSE HUMAN CAPITAL INVESTMENT IN ACCOUNTING AND FINANCIAL REPORTING QUALITY
LIU, YANJU
CHEN, XIA; CHENG, QIANG; CHOW, TRAVIS
Category: FR = Financial Reporting
In this study, we examine whether and how a firm’s in-house human capital investment in accounting affects its financial reporting quality. We argue that firms with a better staffed accounting department exhibit higher financial reporting quality through a more effective financial reporting system, contributing to better quality of both mandatorily and voluntarily disclosed financial information. Using the number of employees working in a firm’s accounting department as a proxy for its in-house human capital investment in accounting, we find that firms with larger in-house accounting departments (1) exhibit better accruals quality; (2) are less likely to have internal control weakness; (3) report fewer internal control weaknesses; and (4) are less likely to restate, suggesting that the investment in in-house accounting department improves the mandatory disclosures. Our results also show that management earnings forecasts (1) are more frequent, (2) have a longer horizon (3) have smaller absolute forecast errors; and (4) have lower forecast bias for firms with larger in-house accounting departments, implying that the voluntary disclosures also improve with the in-house human capital investment in accounting.
CONSECUTIVE EARNINGS INCREASES: MANAGERIAL DISCRETION OR MANAGERIAL PERFORMANCE?
LIVNE, GILAD
HORTON, JOANNE; LIVNE, GILAD; RUEANGSUWAN, SARAYUT
Category: FR = Financial Reporting
There are conflicting views as to whether consecutive earnings increases (earnings strings) reflect a firms underlying economic performance or opportunistic earnings management. This paper attempts to answer this question. Overall, we find that earning strings are associated with the underlying economic performance of the firm, but that investors appear to mis-price this information. Specifically, we find that earnings strings are positively associated with future growth and lower future risk, after controlling for accounting quality. The returns analysis documents an initial under-pricing of strings that report high abnormal accruals, suggesting investors treat such strings as a product of earnings manipulation. However, this initial under-pricing is corrected (in part) in future returns. Collectively, this paper reports evidence that is consistent with strings being a signal of performance rather than being the result of earnings manipulation, although investors initially appear believe the latter and mis-price these strings.
IMPACT OF MERGERS AND ACQUISITIONS ON TYPES OF EARNINGS MANAGEMENT DURING CRISIS: A STUDY ON CHINESE LISTED FIRMS
LODH, SUMAN
NANDY, MONOMITA
Category: GV = Accounting and Governance
In this research study we examine the impact of domestic and cross-border merger and accusations on types of earnings management practice followed by the managers of the Chinese firms. Similar studies either focus on developed market or they consider the accrual earnings management in the context of M&As. We not only extend these studies but by considering the recent financial crisis time we contributed to the existing literature to a great extent. Our sample consists of 1948 observations for the year 2004-2013. We find that managers in domestic M&As substitute real earnings management for accrual-based earnings management during the financial crisis. Moreover, real earnings management has been exercised in cross-border M&As for both before and during crisis period. The findings of the study will enhance the relevant literature and will guide the policy makers in evaluating the exiting corporate governance mechanisms applied in the second largest economy in the world.
MAINTAINING AND DISRUPTING INSTITUTIONS: (UN)INTENDED CONSEQUENCES OF PARALLEL INSTITUTIONAL WORKS IN A LOCAL REGULATORY CONTEXT
LOEHLEIN, LUKAS
MÜßIG, ANKE
Category: IC = Interdisciplinary/Critical
This study investigates the establishment of the German audit oversight coinciding with the rise of regulatory capitalism. While prior audit oversight research has focused on countries where the global demand for oversight structures overlapped with local pressures for regulatory reforms, we examine the formation of audit oversight within a context that is characterized by a potent, mythologized belief in professional self-regulation and financial auditing. We show how patterns of control can emerge and diffuse despite being de- coupled from the presumed “decline in public trust” narrative. Adopting an institutional field perspective, we theorize our observations through the conceptual lens of institutional work. By illustrating how regulatory systems rely upon patterns of “control of control”, our longitudinal case study shows how regulatory layers were not only constantly defined, shaped, and revised by the audit establishment but also strategically used by small auditors as a means of identity creation and self-differentiation. We thereby offer first insights into how institutional myth is both constructed and drawn apart, and discuss how the predominant role of the profession in the discourse on oversight was disrupted through the intra-professional tensions. By demonstrating the importance of interlinked and parallel works, we advance the existing application of institutional work by introducing “primary work” and "performative work”.
SELECTIVE INFORMATION SHARING OF A MULTI-PRODUCT MANUFACTURER
LÖFFLER, CLEMENS
Category: MA = Management Accounting
This paper identifies strategic reasons for a multi-product manufacturer to selectively share information with its different suppliers. The traditional result in strategic ex-post disclosure settings is that a manufacturer wants to withhold good news from its suppliers, so that the suppliers will not increase their input prices, implementing the seminal "unraveling" result leading to full disclosure. In contrast, on account of the interdependencies arising from the multi-supplier-multi-product structure, we find that the manufacturer always discloses its information to one supplier but may concurrently withhold the same information from a second supplier, engaging in selective information sharing. Selective information sharing in this setting arises because a price change of a supplier affects multiple products that require the same input and affects the pricing decision the other supplier that delivers a complementary input, creating trade-offs in the manufacturer's disclosure preferences. Selective information sharing can arise even when the suppliers can exchange information among themselves.
INFORMATION ASYMMETRY AND LEAD UNDERWRITERS’ ROLE IN THE IPO AFTERMARKET: EMPIRICAL EVIDENCE FOR THE U.S. BEFORE AND AFTER THE LOCK-UP PERIOD
LOIZIDES, GEORGE
CHARITOU, ANDREAS; KARAMANOU, IRENE
Category: FA = Financial Analysis
In this paper we attempt to shed light on whether the role of lead underwriters in the aftermarket IPO through their trading activity leads to information asymmetry prior and after the Lock-Up period. Using a dataset of 1,294 IPO firms in the US over the period 2000-2014, results demonstrate that lead underwriters have an information advantage over the other market participants which is inconsistent with EMH. Specifically, results show that there is strong positive association between changes in holdings of lead underwriters and subsequent buy-and-hold abnormal returns which indicates that lead underwriters do have information advantage over the rest market participants and they seem to exploit this private information for their own benefit. The convincing evidence of exploitation of this information by them and the profit they make to support their commercial activities result in a higher level of information asymmetry. Thus, for safeguarding the interest of public investors more screening is needed to monitor the post IPO activity in order to reduce market inefficiencies.
THE EXPERIENCE OF USING IFRS BY UNLISTED COMPANIES: A SOUTH AFRICAN CASE STUDY
LOLIWE, THANDO
ULIANA, ENRICO; WAWERU, NELSON
Category: FR = Financial Reporting
This study gives a perspective on the experiences of, motivation for, and attitude towards using International Financial Reporting Standards (IFRS) by unlisted companies in South Africa. Using content analysis and case study research methods, this study finds that most of the sampled unlisted companies have positive experiences of using IFRS in South Africa. However, their experiences and perceived benefits of using IFRS were not found to have an influence in their continuing use of IFRS. Further, most of this study’s findings did not meet user-centered design theory. Thus, this study recommends that unlisted companies must consider forming interest groups in order to remedy their lack of interest and nonparticipation in IASB’s standard setting process. Provided that a reciprocal relationship is required between the standard-setting bodies and unlisted companies, the standard-setting bodies need to develop interest of, substantively engage, and provide training and technical assistance to unlisted companies beyond their membership in order to address unlisted companies’ concerns.
CHANGES IN VOLUNTARY AUDIT, CREDIT SCORES AND AGENCY COSTS
LONT, DAVID
SCOTT, TOM
Category: AU = Auditing
Prior literature has examined a change in mandatory audit thresholds for private companies and finds that firms which remain audited after it becomes voluntary have a higher credit score (Lennox and Pittman 2011; Dedman and Kausar 2012). We use a longer sample period compared to prior studies to provide evidence on the impact of changes in firms voluntarily audit choice on credit scores. We document that firms that are audited (not audited) two years in a row have higher (lower) credit scores than those who have changed to being audited (not audited) in the current year. This suggests that audit has a cumulative and a residual effect on lowering agency costs as reflected by the firm’s credit score. We also find that a voluntary audit is more valuable when firms do not have a majority shareholder, higher leverage or both. Thus a voluntary audit has a greater benefit when the firm has higher agency costs, regardless of whether agency costs are measured as minority shareholder-blockholder conflicts (majority shareholder) or shareholder-debtholder conflicts (leverage).
THE EFFECTS OF LGBT EXECUTIVES ON FINANCIAL PERFORMANCE AND FIRM VALUE
LOPES, ANA ISABEL
BRANCO, MANUEL; LOURENÇO, ISABEL; SARQUIS, RAQUEL
Category: GV = Accounting and Governance
Drawing on resource based theory, we analyse the relationship between the presence of LGBT executives on the leadership of a firm with its financial performance and market value. The existence of LGBT executives is considered to be associated with the existence of employee and customer goodwill towards LGBT-friendly policies and practices and lead to human capital and reputational benefits. Our findings suggest that firms with LGBT executives outperform their counterparts in terms of both financial performance and market value. However, after further investigation, we found that there is no direct effect on firms’ market value, rather an indirect one via the effect on financial performance. We interpret this as suggesting that although employee and customer goodwill towards LGBT-friendly policies and practices do directly result in better financial performance and indirectly lead to better market performance, investors are still indifferent to these benefits and/or insensitive to LGBT rights.
INTEGRATED REPORTING AND ITS COMPONENT: AN EMPIRICAL APPROXIMATION TO SOCIAL AND INTELLECTUAL PROPERTY CAPITALS RELATIONSHIPS
LÓPEZ PÉREZ, MARIA VICTORIA
LAZARO, RODRIGUEZ-ARIZA; MARIA CARMEN, PEREZ-LOPEZ; MARIA VICTORIA, LOPEZ-PEREZ; RAQUEL, GARDE-SANCHEZ
Category: FR = Financial Reporting
The integrated report presents a holistic view of business activity, providing an appropriate framework for analyzing the relationships and interactions that occur among the different resources involved in value creation, including human, social and relational, natural and intellectual capital. These concepts are studied in the literature through Corporate Social Responsibility (CSR) and innovation. Their relationship has been analyzed from a perspective of competitiveness, being necessary a change towards stakeholders’ approach that allows us to improve the conceptual understanding of these relations, taking as a reference a sample of leading companies in sustainability. This change of approach responds to the evolution of the CSR concept that it is integrated in the corporate strategy of the company, being framed within the theory of the stakeholders. It is verified empirically taking a sample of 118 European companies for five years. The results obtained show the stakeholders’ approach of firms and that CSR is the reference to address the innovation for those companies in which CSR is part of the corporate strategy.
DEPOSITOR DISCIPLINE AND EARNINGS MANAGEMENT IN PRIVATE BANKS
LOPEZ-ESPINOSA, GERMAN
GÓMEZ-BISCARRI, JAVIER; LÓPEZ-DE-SILANES, FLORENCIO
Category: FA = Financial Analysis
Private banks are not directly disciplined by the equity markets but rely heavily on deposits, which have been shown to react to bank fundamentals thus exerting a significant disciplining effect on banks. Hence, private bank managers have an incentive to manipulate these fundamentals in order to attenuate the discipline of depositor reaction. In this paper we describe how depositor discipline works in private banks and how this discipline represents an incentive for bank managers to manage their earnings and regulatory capital. Our contribution is twofold. First, we show evidence that private bank depositors react to bottomline bank fundamentals. We also show that depositor discipline is persistent, more intense for more informed depositors and local in nature: our evidence suggests that depositors penalize the local branches of banks with bad fundamentals in favor of the local branches of banks with good fundamentals. Second, we show that depositors do not seem to discriminate between “core” earnings and discretionary earnings (i.e. the earnings generated by manager discretionality). This “myopic” behavior justifies the use by banks of earnings management activities and we describe the strategies followed by banks to use this discretionality in order to reduce depositor discipline.
BANK COMPETITION, LOAN LOSS PROVISIONING AND PRO-CYCLICALITY: HOW DOES COMPETITION INFLUENCE THE EXTENT TO WHICH DISCRETIONARY LOAN PROVISIONING PRACTICES REFLECT A FORWARD-LOOKING ORIENTATION?
LÓPEZ-PUERTAS LAMY, MONICA
ALEDO, JUANA; DESENDER, KURT
Category: FR = Financial Reporting
Using a panel dataset of 9,503 banks from 36 countries over the period 1997-2007, we analyze whether competition in the banking sector influences banks’ accounting discretion in the application of loan loss accounting rules. Focusing on income smoothing and the extent to which banks delay expected loan loss recognitions in current provisions as two distinct construct of accounting discretion, reflecting a forward looking orientation, we document that an intensification of competition increases banks’ income smoothing and reduces the delay in recognition of expected loan losses in current provisions. In addition, we show that these effects are stronger for banks that are more affected by competition, i.e., those with a below median efficiency level, below median performance and below median Z-score. Thus, our results suggest that competition helps to reduce pro-cyclicality in loan loss provisioning and that proposals to change loan loss accounting may take into consideration the level of competition to avoid interfering with the incentives provided by current market forces.
A “LOGIC BALANCED SCORECARD” PROPOSAL FOR SOCIO-ECONOMIC, HEALTH AND AGRICULTURAL IMPROVEMENT IN DEVELOPMENT: THE CASE OF RURAL ETHIOPIA
LORAIN, MARIE-ANNE
CANO-MONTERO, ELISA; RAUTIAINEN, ANTTI; URQUIA, ELENA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The Balanced Scorecard (BSC) has been a device used for companies to design and develop their strategy and management implementation. Since Kaplan and Norton created it in the 90’s, many companies of all sizes, public or private around the world have implemented it. Research has been very productive about BSC design, implementation and consequences from the strategic management accounting point of view. In development projects, however, a Logical Framework (LF) is still typically used. LF was partly developed by consultants and mainly studied by social work researchers but it resembles the BSC in some aspects. In LF, objectives, activities, indicators and causal relationships are adjusted to the third world problematics. Not-for-profit organisations (NPOs) declare that once they have defined the indicators framework the development project is easier to follow and assess. In this research paper a theoretical review of the BSC and the LF is done. Further, a proposal of Logic Balanced Scorecard (LBSC), combining the best elements of the two is made, taking into account both BSC and LF philosophies. This proposal is preliminarily tested in a case study of a rural area with six Ethiopian villages in order to improve the socio-economic, agricultural and nutritional situation in the area.
TAX AVOIDANCE AND EARNINGS MANAGEMENT DEPENDING ON THE LEVEL OF BOOK-TAX CONFORMITY
LORENZ, JOHANNES
FREY, LISA
Category: TX = Taxation
Existing empirical literature suggests that discretion in commercial and tax law can promote companies to engage in earnings management and tax avoidance. But high book-tax differences may also provide an additional signal to the IRS, suggesting that the company may have underreported income. We assume that the SEC can condition its audit probability on the financial statement while the IRS can condition its audit probability on both the financial and tax statement. We investigate three settings: (i) independence, (ii) identity, and (iii) correlation between commercial and tax law. We find that the relationship between financial and tax accounting is irrelevant for the overall level of earn- ings management and tax avoidance. However, similarity between commercial and tax law affects the composition of the tax statement. Consequently, tax avoidance is concentrated on those items which are assessed independently from the commercial law. Furthermore, high earnings statements induce the IRS to audit more often. The IRS’ audit effort is reduced by similarity between commercial and tax law, and by conservatism in accounting standards.
INCORPORATING QUARTERLY EARNINGS INFORMATION INTO CROSS-SECTIONAL EARNINGS FORECASTS MODELS
LORSBACH, TOBIAS
HESS, DIETER
Category: FA = Financial Analysis
This study shows how existing cross-sectional earnings forecast models can benefit from quarterly earnings information. Most importantly, this extension strongly improves the accuracy of annual earnings forecasts. In fact, we find that previously reported accuracy advantages of analysts over models diminish once we allow mechanical models to utilize interim earnings information. In addition, our model extension allows to update mechanical forecasts more frequently. This serves investors and asset managers who need to adjust portfolios in response to important new information. Moreover, we present evidence that our more accurate forecasts also yield better estimates of cost of equity capital and future realized returns.
ARE ALL INSIDER SALES CREATED EQUAL? NEW EVIDENCE FROM FORM 4 FOOTNOTE DISCLOSURES
LOTZ, JULIANE
AMEL-ZADEH, AMIR; FAASSE, JONATHAN
Category: GV = Accounting and Governance
We provide new evidence on the information content of insider sales using SEC Form 4 footnote disclosures. Extracting and analysing the descriptions about the nature of the insider sale contained in Form 4 footnotes, we are able to distinguish discretionary from nondiscretionary insider sales. We find that discretionary insider sales are informative to investors and produce significantly lower abnormal returns to the trade filing than nondiscretionary sales. Consistent with investors not fully reacting to the information in these footnotes we find that discretionary insider sales are highly predictive of future negative stock returns and are associated with a higher propensity of analyst downgrades, larger negative earnings surprises and a higher likelihood of future litigation. Our findings suggest that insiders strategically use footnote disclosures describing liquidity-motivated sales to disguise information-based sales.
THE ROLE OF MANAGERIAL ABILITY ON THE IMPLIED COST OF EQUITY CAPITAL
LOUKOPOULOS, PANAGIOTIS
LOUKOPOULOS, GEORGIOS
Category: FA = Financial Analysis
In this paper we hypothesize and find that firms with higher managerial ability enjoy a lower cost of equity capital. We also document that the strength of this relationship is dependent on the nature of the business environments in which firms operate. Specifically, we find that the beneficiary impact of managerial talent is pronounced in settings characterized by low profitability, low profitability, high uncertainty, low growth opportunities but large size-firms and high advertisement expenses. A possible explanation for these findings can be given by a real options framework. In this case, managerial ability is interpreted as a flexibility measure, because it enables firms to adjust flexibly to changes in their external environment and to competitive threats. Hence, managerial ability is most needed when firms are in disadvantageous position with respect to environmental changes (i.e., with lower agility). Overall, our study contributes to the literature, as it introduces a human dimension into the equation of expected returns. It also provides fresh evidence to the literature concerned with characteristic-based models of expected returns.
THE MISALIGNMENT BETWEEN ACCOUNTING FACULTY PERCEPTIONS OF SUCCESS AND ORGANIZATIONAL IMAGE DURING A PROCESS OF INSTITUTIONAL CHANGE
LOURENCO, ISABEL
FERREIRA LEITÃO AZEVEDO, RENATO; PEREIRA DE CASTRO CASA NOVA, SILVIA
Category: ED = Accounting Education
This study analyzes the impacts of a culture change process on a higher education institution in Portugal, and the trade-offs between academic success and institutional image that faculty perceives during this changeover. Known as a center of excellence in academic teaching and executive education, well-positioned in international rankings, the Institute began a significant reorganization process, which included some changes in the department’s governance rules and the implementation of a hiring, tenure and promotion policy. Faculty began to be formally evaluated with a focus on their scientific publications, mainly on the analysis of publication outputs in top journals. The impacts of this policy are discussed based on in-depth interviews conducted with faculty members of the Accounting Department, in which they reflected upon academic success vis-a-vis the career assessment system adopted, followed up by questions about organizational identity and image perception (Gioia, Schultz & Corley, 2000), answered in an electronic questionnaire. Individually, faculty are concerned about their vocations and aspirations, with feelings of apprehension and insecurity. The institutional goals are perceived as potentially unattainable. They also perceive that by shifting the priority towards research, costs in terms of losing the institutional excellence in teaching might arise, keen to the Institute’s organizational identity and consistent with faculty perceptions of academic success.
A FUZZY-SET ANALYSIS OF MANAGERS' INCENTIVES: THE RELATIONSHIP WITH PERFORMANCE AND SATISFACTION
LOURENÇO, SOFIA
ALVES, IRYNA
Category: MA = Management Accounting
This study focuses on the interplay among different types of incentives (monetary incentives, non-monetary incentives, benefits and punishment) and managers’ work related outcomes such as performance and job satisfaction. To address our research question, we collect data via a questionnaire and use fuzzy-set Qualitative Comparative Analysis (fsQCA) to analyze it. Using data from 1 206 managers, we find that there are multiple configurations that consistently lead to high individual performance and job satisfaction. Specifically, the combination of punishment with monetary incentives, non-monetary incentives or benefits enhances managerial performance. Furthermore, the joint use of monetary and non-monetary incentives, or monetary incentives and punishment, is as effective as the sole use of benefits to increase managerial satisfaction.
AN EXAMINATION OF THE ASSOCIATION BETWEEN INTERNAL CONTROL QUALITY AND AUDIT FEES: EVIDENCE FROM CHINA
LU, WEI
JI, XUDONG ; QU, WEN
Category: AU = Auditing
Abstract This study examines the association between disclosure of internal control quality, i.e. internal control weaknesses (ICWs) and audit fees under the voluntary adoption of the Basic Standard of Enterprise Internal Control (China SOX) in China. The scope of China SOX is much broader than the US SOX, encompassing many non-accounting-related areas. The existence of ICWs in client firms increases audit risk, therefore, higher audit fees as a compensation for the greater audit efforts is expected. Using a large sample of Chinese listed firms during the pre-enforcement period before 2012, our results show that audit fees are positively associated with the ICWs disclosed in the internal control reports (ICRs). We find that in the Chinese setting, audit fees are related significantly to non-accounting-related ICWs but not to accounting-related weaknesses, suggesting non-accounting-related ICWs are harder to be detected and considered to be more risky by auditors. We also find that having ICRs voluntarily audited can mitigate higher audit fees associated with the existence of ICWs. Our study provides new evidence, from auditor’s perspective, to the debate in the US on the cost and benefit of SOX and possibility of expanding the scope of SOX.
POLICY UNCERTAINTY AND CORPORATE INNOVATION IN A TRANSITIONAL ECONOMY --EVIDENCE FROM CHINA
LU, XIAOYAN
LI, WENJING; ZHENG, MANNI
Category: GV = Accounting and Governance
This paper intends to systematically understand the ways that policy uncertainty caused by mayor turnover in prefecture level cities in China affects firms’ R&D expenditures. We find that mayor turnover is negatively correlated with firms’ R&D spending due to policy uncertainty caused, but no similar results are found in terms of Party Secretary turnover. Such findings support our argument that policy uncertainty, not political uncertainty affects firms’ R&D spending. However, this finding only exists in State-owned firms, which are inherently and closely connected with regional government officials. Further, we document evidence for SOEs to argue that policy uncertainty through competition and financial constraints causes the delay of firms’ R&D spending.
WHY THE LONG-RUN MARKET VALUE IS A MULTIPLICATIVE POWER LAW OF ACCOUNTING VARIABLES AND THE IMPLICATIONS FOR FUNDAMENTAL ANALYSIS
LUBBERINK, MARTIEN
WILLETT, ROGER
Category: FA = Financial Analysis
This paper presents a theory which demonstrates that a multiplicative power law describes the long-run relation between market values and fundamentals. The theory is based on a small number of testable assumptions. Models based on this theory produce elasticities that accurately reflect the value relevance of accounting variables. More importantly, the elasticities are valid, long-run market response coefficients. We estimate these elasticities in the cross-section for the entire data set of Compustat 31 December year end firms for the years 1963 - 2015. We compare our multiplicative model estimates to estimated parameters of traditional, additive models that relate market and accounting values. Our results demonstrate the superiority of using elasticities to measure market response coefficients. In particular we show that dividends are relevant for market valuation.
VOLUNTARY SENSITIVITY RISK DISCLOSURE
LUI, DAPHNE
GUAN, YANLING; LI, YONG
Category: FR = Financial Reporting
This paper examines the voluntary disclosure of an important liability-driven risk on the balance sheet. Using hand-collected data for a sample from 2005 to 2010 of FTSE 350 firms that sponsor defined benefit plans, we document the practice of voluntary risk disclosure in the form of sensitivities of defined benefit obligations (DBO) to actuarial assumptions. While we obtain only weak evidence that the level of DBO sensitivities is priced by the market, we find that the market lowers its expected return on disclosing firms, despite investors’ ability to estimate DBO sensitivities using known firm and pension plan characteristics. We further show by a path analysis that the reduction in the cost of capital is primarily driven by an information precision effect rather than an information distribution effect. In the wake of standard setters mandating pension sensitivity disclosure, the current low or even negative interest rate environment, and the ballooning pension liabilities in recent years, our results provide important empirical insights to the economic consequences of pension sensitivity risk disclosures.
THE IMPACT OF POWER DISTANCE ON CORPORATE CARBON TRANSPARENCY: DIRECT EFFECT AND MODERATING ROLE
LUO, LE
TANG, QINGLIANG
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Using a sample of 1425 firm-year observations from 32 countries over the period of 2008-2013, the results of our study show an inverse association between cultural value, power distance and the level of carbon disclosure. Furthermore, we demonstrate that larger power distance appears to decrease the creditability of disclosed carbon information. This evidence has not been documented in extant literature. Our findings enhance our understanding that less concentration of power promotes corporate incentives to be environmentally transparent. In addition to the direct impact, power distance plays a role that moderates the inherent relationship between different climate change activities, such as carbon disclosure and carbon mitigation/reduction.
CEO SPORTS HOBBY AND FIRM TAX AVOIDANCE
LUO, SHUQING
SHI, LIRONG; SHIH, AIMEE
Category: TX = Taxation
Recent accounting research suggest that individual executives play a significant role in shaping a firm’s tax planning (e.g., Dyreng, Hanlon, and Maydew 2010). Building on psychology research that finds sports interests reflect individual’s risk taking preferences, we develop a novel measure of CEO risk attitudes based on CEOs’ risky sports hobbies and examine its effect on corporate tax aggressiveness. We find that firms managed by CEOs with riskier sports hobbies are more aggressive in avoiding corporate taxes. This association is more pronounced when CEOs exhibit greater consistency in the riskiness in their range of sports hobbies, and for CEOs engaged in individual sports and outdoor sports. We also find our documented effects are more pronounced for CEOs with greater power. Our results hold after accounting for the endogeneity of CEOs’ risky sports taking decisions.
CAREER CONCERNS AND “UNPAID” EXECUTIVES
LUO, WEI
CHEN, HUI; SODERSTROM, NAOMI
Category: GV = Accounting and Governance
A significant portion of CEOs in publicly-listed Chinese state-owned enterprises receive zero pay from the companies for which they work. Instead, they are paid directly by their controlling shareholder, which can be the Chinese government or parent firms that are controlled by the Chinese government. We explore how these “unpaid” executives are motivated and whether the outcomes of this unusual incentive differ from conventional compensation. Consistent with career concerns as their main incentive, we find that these CEOs have a significantly higher probability of future promotion than other CEOs. This result holds when we examine subsamples in which individual CEOs switch payment regimes. We also find that, compared to peers with paid CEOs, firms with unpaid CEOs have higher return on assets, asset turnover, and asset growth, and they engage in less tunneling. To strengthen our results, we conduct an event study using the Split Share Structure Reform in 2006. The reform liberalized the Chinese stock market, thus redoubling the role of the market as an incentive and potential replacing promotion incentives. Our evidence is generally consistent with a reduction in the strength of promotion incentives following the reform.
VOLATILITY AND THE TIMING OF EARNINGS ANNOUNCEMENTS
LYLE, MATTHEW
RIGSBY, CHRISTOPHER; STEPHAN, ANDY; YOHN, TERI
Category: FR = Financial Reporting
Approximately 95% of publicly traded firms announce earnings outside of regular trading hours, either in the pre-open (before the opening bell) or in the post-close (after the closing bell). We examine whether the timing of the announcement affects how equity investors process the earnings information, as proxied by volatility. We find that firms which announce in the pre-open have higher abnormal volatility following the announcement relative to firms that announce in the post-close. This volatility difference persists for at least three trading days following an earnings announcement and is highly predictable. It cannot be explained by common determinants of volatility such as firm size, profitability, volume, earnings surprises, stock returns, or historical volatility, and is not driven by strategic announcement timing. Option trading strategies based on pre-open versus post-close announcers yield economically large returns, whereas trading strategies using equities yield economically insignificant returns. Collectively our results suggest that equity investors predictably process earnings information differently for pre-open and post-close announcers and that option traders are either unable to fully unravel this predictable phenomenon or that there exists an earnings-announcement-timing risk premium in the traded options that is not present in traded equity.
GLOBAL EXPERTISE OF FINANCIAL ANALYSTS
MA, GUANG
MARKOV, STANIMIR; WU, JOANNA SHUANG
Category: FA = Financial Analysis
We describe the challenges of forecasting earnings in a globally interconnected marketplace, and we document inefficient use of information regarding foreign country exposures and expected country GDP growth at the consensus and individual forecast levels. A country’s proximity to the US, importance to the firm, and visibility, as well as availability of more precise information about foreign country exposures, contribute to consensus forecast efficiency. We identify a dimension of individual analyst global expertise—similarity in exposure between the firm and the rest of the firms in the analyst portfolio—and show that it contributes to forecast efficiency, accuracy, and informativeness and that it helps the analyst achieve the coveted all-star rank, suggesting that globalization not only poses a challenge but also creates an opportunity for research providers and analysts to distinguish themselves.
IMPLICATIONS OF PRIOR JOINT WORK EXPERIENCE BETWEEN ENGAGEMENT AND REVIEW PARTNERS FOR AUDIT QUALITY
MA, MARK (SHUAI)
LISIC, LING; KRISHNAN, GOPAL ; LIAO , GUANMIN
Category: AU = Auditing
Audit reviews play an important role in determining the quality of audit engagements. There is limited archival evidence on the factors that affect the association between review partner and audit quality. We take advantage of a unique setting where information about engagement and review partners is publicly available and examine whether their prior joint work experience, i.e., how long these two partners have been working together, is associated with audit quality and audit efficiency. We find that partners’ prior joint work experience is positively associated with the probability of issuing a modified audit opinion and negatively associated with discretionary accruals and audit lags. Further, the joint work experience is positively associated with earnings response coefficients, indicating that investors perceive audit partners’ prior joint work experience as improving audit quality. Our results are robust to addressing endogeneity using two-stage instrumental variable regressions. Overall, these findings suggest that a review partner’s prior joint work experience with an engagement partner is associated with improved audit quality and audit efficiency.
VALUE RELEVANCE OF PEER-BASED BENCHMARKING IN COST BEHAVIOUR
MADADIAN, OVEIS
AERTS, WALTER; VAN CANEGHEM, TOM
Category: FA = Financial Analysis
We investigate implications of similarity of Selling, General and Administrative expenses relative to sales (SG&A ratio) to industry-specific peer-based benchmark for future performance and its value-relevance. More specifically, we examine whether and how SG&A similarity is associated with future earnings and current stock returns in a sample of listed US firms. The behavioural theory of the firm (BTOF) reinforces the relevance of social comparison for performance assessment and suggest it as a meaningful benchmark in development of reasonable expectations (targets). Drawing on BTOF, we expect higher similarity to an industry-specific peer-based benchmark to reflect incremental information about a firm’s cost behaviour explaining the firm’s future performance and affecting investors’ perception of its value, particularly for firms that previously failed to meet the benchmark (i.e., firms with a prior SG&A ratio larger than the benchmark). We observe a positive relationship between SG&A similarity and future earnings and stock returns, only for firms with a prior SG&A ratio larger than benchmark, consistent with SG&A similarity conveying value-relevant information. We also note a significantly positive relationship between change in similarity (similarity signal) and stock returns, only for firms with a prior SG&A ratio above benchmark, consistent with change in similarity being considered a credible information signal by investors.
HOW FIRMS RECOVER FROM A LOSS IN REPUTATION CAUSED BY ACCOUNTING RESTATEMENT: A STUDY OF ENVIRONMENTAL PERFORMANCE IN POLLUTING INDUSTRIES
MAFROLLA, ELISABETTA
D'AMICO, EUGENIO; MATOZZA, FELICE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
In this article, we examine whether restating firms operating in environmentally sensible industries improve environmental performance in the post-restatement period in order to recover from a loss in reputation. Using a sample of firms listed in 12 IFRS-adopting countries we find that, after accounting restatement, restating firms engage more in environmental responsible practices. We also highlight that the increase in environmental performance is not significantly larger for firms incurred in more severe accounting restatement. In the end, we investigate whether the improved environmental performance influences analyst coverage. The results indicate that analyst following only increases for restating firms taking more environmental responsible activities, suggesting that firms’ efforts to regain their reputation are valued in the aftermath of restatement event.
CONFLICTS OF INTEREST IN AUDITING
MAHIEUX, LUCAS
Category: AU = Auditing
Should an audit firm provide non-audit services (NAS) to its audit clients? Without using the classic argument of knowledge spillovers, the paper shows that it is sometimes optimal for the investors of a distressed firm to let the auditor provide NAS rather than liquidating the firm. This is a consequence of an incentive externality: the possibility of providing NAS ex post increases the auditor's ex ante incentives to exert audit effort. Despite this externality, the provision of NAS may optimally decrease audit quality. The paper studies the negative impact of this decrease in audit quality when two firms in the same industry rely on peers' financial statements. Contingent audit fees on unfavorable audit opinions may reduce this negative informational externality. Using a dynamic framework, the paper shows that, because of reputation effects, the auditor provides more NAS and the audit quality is lower in booms than in recessions.
NONFINANCIAL LEADING INDICATORS OF FINANCIAL PERFORMANCE: EVIDENCE FROM PANEL VAR ESTIMATIONS
MAHLENDORF, MATTHIAS
MARGOLIN, MAXIMILIAN; SCHÄFFER, UTZ
Category: MA = Management Accounting
Prior research finds that nonfinancial performance measures are leading indicators of financial performance. However, these findings focus on the effect of nonfinancial performance on future financial performance and implicitly assume that nonfinancial performance itself is exogenous. We argue that the reverse effect also exists, i.e. firms with better financial performance have more resources to invest in future nonfinancial performance. We find empirical support for this argument using publicly available data on customer satisfaction from 248 companies in the U.S. over 22 years. In particular, we rely on panel vector autoregressive models to estimate the long-run effect of customer satisfaction on firm profitability and earnings. We show that as a consequence of the bidirectional relationship the effect is substantially stronger than suggested in prior work.
SUPERIORS’ DISCRETIONARY BONUS POOL ALLOCATIONS WHEN AGENTS FACE DISPARATE PERFORMANCE RISK
MAJERCZYK, MICHAEL
THOMAS, TYLER
Category: MA = Management Accounting
We examine superiors’ bonus allocation decisions when their agents face disparate performance risk (uncertainty as to how effort translates to performance). Superiors often have discretion over bonus allocations which allows them to account for the risk faced by agents, and it is crucial to understand how superiors use this discretion and the factors that affect their allocation decisions. We provide evidence that when superiors are confronted by inequality in agents’ performance risk, they tend to sympathize with the disadvantaged agents (those with greater performance risk) in their bonus allocation decisions. However, superiors are often charged with decisions, including initial resource allocations, that affect or create disparate performance risk. We find that in this case, superiors are less sympathetic to the disadvantaged agents, and further, when additional information exists that can potentially justify the initial resource allocation decision, superiors will actually favor the advantaged agents through their bonus allocation. Our results provide insight in to superiors’ allocation decisions and that additional information can have a significant biasing effect in how superiors make these decisions. Given the prominence of discretion in bonus allocation decisions and organizational concerns for fairness and the job satisfaction of employees, these results have direct implications for organizations.
DOES IFRS CONVERGENCE AFFECT THE LEVEL OF ACCRUALS-BASED EARNINGS MANAGEMENT AND REAL ACTIVITIES-BASED EARNINGS MANAGEMENT OF EUROPEAN INDUSTRIAL FIRMS?
MAK, CHUN YU
MAK, CHUN YU; MUBARIZ, SAMUR MUSTAFAYEV
Category: FR = Financial Reporting
This research examines the effects of the mandatory adoption of International Financial Reporting Standards (IFRS) on accruals-based earnings management and real activities-based earnings management pre- and post-IFRS. Firstly, we examine whether the effects of mandatory IFRS adoption on earnings management activities are sensitive to managerial incentives by examining mandatory adopters as a treatment sample relative to the control group of voluntary adopters. Secondly, we investigate whether mandatory adopters with substantive concurrent enforcement changes in financial reporting versus mandatory adopters domiciled in the countries with no reporting enforcement changes to show the impact of concurrent reporting enforcement changes on the effects of mandatory IFRS adoption on earnings management. Thirdly, we examine whether IFRS standards alone can restrict earnings manipulations by treating mandatory adopters of IFRS as a treatment group and in contrast with the non-IFRS adopters. The results suggest that although IFRS adoption is the pre-condition, managerial incentives and enforcement of accounting standards play a crucial role in minimizing earnings management and improving accounting information quality.
REFRAMING MATERIALITY IN SUSTAINABILITY DISCLOSURE
MAKELA, HANNELE
KUJALA, JOHANNA; PUROILA, JENNI
Category: IC = Interdisciplinary/Critical
Materiality has become a central element in sustainability reporting to distinguish material information from insignificant, immaterial information. However, no common understanding exists about materiality. Instead, the concept of materiality is malleable and dependent on its framing. Moreover, the concept is used in various ways in different contexts to serve diverse purposes. This study aims to examine how the language used in corporate materiality disclosures constructs different frames to understand materiality. In addition, this study proposes a new way to reframe materiality, so that stakeholder accountability and corporate sustainability are enhanced. The findings of this research suggest the following four ways to frame materiality in current sustainability reporting practices: (1) the risk management frame, (2) the business opportunity frame, (3) the sustainability strategy frame, and (4) the legitimacy frame. The study maintains that the materiality concept is mostly used as a tool to create a particular image for corporate sustainability performance instead of enhancing stakeholder accountability and corporate sustainability. Reframing the materiality concept to acknowledge the relevant and most significant economic, environmental, and social effects of company activities can increase stakeholder accountability and corporate sustainability.
BALANCED SCORECARD IN SMALL AND MEDIUM-SIZED ENTERPRISES
MALAGUENO, RICARDO
ERNESTO, LOPEZ-VALEIRAS; JACOBO, GOMEZ-CONDE
Category: MA = Management Accounting
Empirical research on the effectiveness of balanced scorecard (BSC) is mostly developed in large firms. Previous findings are not easily translated into the small business literature. We investigated the performance implications of the use of BSC by small and medium-sized enterprises (SMEs). Specifically, we focus on the efficiency gains recognized in prior case-based research, and the potential losses resulting from the inflexibilities introduced by this formal managerial practice. We propose that development stage of the firm may influence this trade-off. Based on a survey among 201 SMEs in Spain, we found that firms using BSC for feedforward learning obtained better financial performance and presented higher levels of exploitative innovation. Contrarily to our expectations, we did not find that the use of BSC inhibit explorative innovations. We also found that as SMEs’ development stage increases, the positive effect of BSC on perceived and attained financial performance increases. Suggestions for future research are provided.
TESTING THE DEBT COVENANT HYPOTHESIS USING EBITDA-BASED COVENANTS
MALIKOV, KAMRAN
COAKLEY, JERRY; MANSON, STUART
Category: FR = Financial Reporting
This paper implements a first test of the debt covenant hypothesis for a sample of 445 UK firms over the period 1999 to 2014 by estimating interest coverage and debt to cash flow covenant slack proxies. The results indicate that UK firms mainly use real activities manipulation to avoid interest coverage and debt to cash flow covenant violations. These findings strongly support the debt covenant hypothesis for the UK, in line with its debt-friendly bankruptcy code. By contrast, the results for a sample of French firms offer weaker support for the hypothesis, consistent with the fact that they operate in an equity-friendly bankruptcy environment. These results show that our slack proxies appear to capture cross-country variation in the bankruptcy code for tests of the debt covenant hypothesis.
IMPLIED GROWTH HORIZONS AND THE COST OF EQUITY
MANGELMANS, JOB
RIJKEN, HERBERT
Category: FA = Financial Analysis
We introduce a straightforward method to estimate the implied cost of equity, allowing abnormal growth horizons to fluctuate both cross-sectionally and through time. Our results show substantial dispersion of implied excess growth horizons in cross-sections and time-series for US firms in the years 1988-2013. The cross-sectional difference in our implied cost of equity is a predictor of relative future returns. The return of an investment strategy based on the implied cost of equity improves, when expected excess growth horizons are allowed to fluctuate through time. Our findings suggest that valuation models using fixed growth horizons can be improved by the use of implied growth horizons.
MISMANAGEMENT OF SUSTAINABILITY: WHAT BUSINESS STRATEGY MAKES THE DIFFERENCE? EMPIRICAL EVIDENCE FROM THE U.S.
MANIORA, JANINE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper examines whether and to what extent firms’ business strategy influences the mismanagement of sustainability issues. Specifically, this paper uses newly-available materiality guidance for U.S. firms to define industry-specific material sustainability issues and develops a new definition and empirical measure for mismanagement of sustainability issues. Moreover, exploiting the variation of materiality in different sustainability issues can represent a strategical and tactical action, attributed to unethical business behavior. For this reason, firms’ intended mismanagement of sustainability is specifically measured and empirically examined. Based on Miles and Snow’s (1978, 2003) organizational theory, the comprehensive measure of business strategy developed by Bentley et al. (2013) is used to differ between Prospector and Defender business strategies. Employing multiple firm-level panel regressions, the findings suggest that Prospector-type firms are more likely to mismanage material sustainability issues compared to Defender-type firms. Moreover, Prospectors are more likely to engage in intended mismanagement of sustainability. The findings are consistent with high risk industries and suggest that Prospector-type firms in litigious industries are more likely than Defender-type firms to mismanage sustainability with full intention. The results give implications for researchers, standard setter, auditors (with regard to fraud detection) and firms how to deal with the new challenging aspect of materiality in firms’ sustainability issues. Specifically, the new developed empirical measure for intended mismanagement can be a good starting point for deepening research on unethical business behavior.
CONSERVATISM AND ENDOGENOUS PREFERENCES
MANTHEI-GEH, CHRISTINA
SCHULTZE, WOLFGANG
Category: FA = Financial Analysis
Literature suggests that individuals have endogenous preferences for accounting conservatism due to intrinsic loss aversion. However, no empirical evidence for this claim exists. This paper provides first experimental insights on individuals’ endogenous preferences for conservative compared to neutral accounting. Preliminary findings suggest that in a judgment context based on innate loss aversion, individuals experience higher utility from conservatism and value conservatism more highly than neutrality in accounting. We further investigate if individuals also show explicit preferences for conservative vs. neutral accounting by implementing a choice setting. Preliminary results provide evidence that individuals do not prefer conservative over neutral accounting when presented with both options. The study contributes to the ongoing discussion on accounting conservatism by establishing that a disregard for peoples’ endogenous preferences for conservatism associated with neutral accounting can have detrimental economic consequences, such as a lower willingness to invest.
TAX TRANSPARENCY – AN ANALYSIS OF THE LUXLEAKS FIRMS
MANTHEY, JOHANNES
KIESEWETTER, DIRK
Category: TX = Taxation
This paper finds that the firms involved in the Luxembourg Leaks (‘LuxLeaks’) scandal are less transparent measured by the engagement in earnings management, analyst coverage, analyst accuracy, accounting standards and auditor choice. The analysis is based on the LuxLeaks sample and compared to a control group of large multinational companies. The panel dataset covers the years from 2001 to 2015 and comprises 19,109 observations. The LuxLeaks firms appear to engage in higher levels of discretionary earnings management measured by the variability of net income to cash flows from operations and the correlation between cash flows from operations and accruals. The LuxLeaks sample shows a lower analyst coverage, lower willingness to switch to IFRS and a lower Big4 auditor rate. The difference in difference design supports these findings regarding earnings management and the analyst coverage. The analysis concludes that the LuxLeaks firms are less transparent and infers a relation between corporate transparency and the engagement in tax avoidance. The paper aims to establish the relationship between tax avoidance and transparency to give guidance for future policy. The research highlights the complex causes and effects of tax management and supports a cost benefit analysis of future tax regulation.
IS BUSINESS ETHICS THE ‘LAST RAMPART’ AGAINST TAX AGGRESSIVENESS?
MARMOUSEZ, SOPHIE
LABELLE, RÉAL; VIDAL, JEAN-PIERRE ; WEGENER, MATTHEW
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study examines the relationship between business ethics and tax aggressiveness. Building on the conceptual model of corporate moral development, we hypothesize and find a negative association between the level of business ethics and tax aggressiveness. For our sample of U.S. firms, companies with a higher level of business ethics are less likely to be tax aggressive. Our results are robust to the use of two proxies for tax aggressiveness: the ‘mainstream’ effective-tax-rate measure and the unrecognized tax benefit, which have been identified as capturing the least and the most aggressive tax positions respectively. While we support our business ethics prediction in both our models, we also find a positive relationship between the quality of corporate governance and tax aggressiveness. Our interpretation of these results is that, while ethical firms are concerned about paying their fair share of taxes, shareholders’ interest still comes first.
HOW CORPORATE SOCIAL RESPONSIBILITY INFLUENCES MANAGERS’ ETHICAL BEHAVIOR: AN EXPERIMENTAL INVESTIGATION OF SPILLOVER EFFECTS
MARTIN, PATRICK
JOHNSON, JOSEPH ; STIKELEATHER, BRYAN; YOUNG, DONALD
Category: FR = Financial Reporting
Prior archival research documents a positive association between managers’ socially responsible actions and their ethical behavior in other domains and typically attributes this association to firm- and manager-level fixed effects. Using an experiment, we provide evidence about a new mechanism that helps explain why this association occurs. Specifically, we document that recalling socially responsible actions causes managers to act more ethically, a phenomenon we term CSR spillover. In addition, we provide evidence that CSR spillover 1) is moderated by how managers construe their socially responsible actions (i.e., abstractly or concretely), 2) is robust to situations where the manager’s socially responsible actions are costly or beneficial to the manager, and 3) occurs independently of firm- and manager-fixed effects. Because CSR reporting guidelines and firm policies can affect how managers construe their past socially responsible actions, our results also have several practical implications that we discuss.
ASSEMBLING AN ACCOUNTABILITY WORKSPACE: GOVERNING INTERNATIONAL DEVELOPMENT
MARTINEZ, DANIEL
COOPER, DAVID
Category: IC = Interdisciplinary/Critical
International development agencies provide non-governmental organizations (NGOs) with a series of planning and project reporting requirements as part of the funding process. Taking inspiration from the study of governmentality and accounting inscriptions we examine how funding agencies imbue these requirements with forms and templates that contain programmatic properties to be performed by NGOs. These inscriptions provide project-implementing NGOs with a workspace for them to design, budget, operationalize, and strategize the project. We conceptualise this workspace as a technology of governance, one that is added and modified to address shortcomings in the spirit of continuous improvement. This provides a novel way to study how a loose composition of governing agencies intervene not only in the population they want to constitute, as we have learned from the literature, but also intervene in the the technologies of interventions themselves. To show this, we document how funding agencies address shortcomings in international development by intervening in the logical framework through project design and management inscription devices. Our study is based on field research in Guatemala and El Salvador with international development NGOs and funding agencies and contributes to our understanding of how governing bodies intervene in the constitution of an “accountability workspace” as a means of operationalizing their governmental aspirations.
USEFULNESS OF ADDITIONAL-GAAP VERSUS NON-GAAP MEASURES
MARTINEZ, ISABELLE
DAVRINCHE, GRÉGOIRE; JEANJEAN, THOMAS
Category: FR = Financial Reporting
The study investigates the usefulness of alternative measures of financial performance. We distinguish two families of measures of financial performance: additional-GAAP measures (measures that can be found in the income statement published by the firm in addition to net income, like operating income or Ebitda) and non-GAAP measures (measures that are disclosed outside the financial statements by the management or financial analysts). Based on a sample of French listed firms, we find that: (1) managers strategically disclose Pro forma metrics to positively influence the perception of financial statements users; (2) GAAP Ebitda and GAAP net income have a superior predictive ability; (3) non-GAAP measures (Street earnings and the various Pro forma metrics) have limited information content over their respective additional-GAAP measures; (4) only adjustments made by managers to GAAP operating income seem to improve the predictive ability of GAAP operating income. However, operating income, even with Pro forma adjustments, is by far the metric that leads to the highest prediction error of future cash-flows. Our evidence highlights the usefulness of having standardized metrics (Ebitda and operating income). Such information dominates both street earnings and Pro forma disclosure in terms of ability to predict future cash-flows. Our findings are consistent with income statement disaggregation carrying information to investors.
CORPORATE SOCIAL RESPONSIBILITY AND ITS EFFECT ON INNOVATION AND FIRM PERFORMANCE: AN EMPIRICAL RESEARCH IN SMES
MARTINEZ CONESA, ISABEL
PALACIOS-M,ANZANO, MERCEDES; SOTO-ACOSTA, PEDRO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The link between CSR and business value has been investigated, but a significant research gap remains when considering the relationship between CSR and innovation. The paper assesses its relationship with organizational innovation and firm performance in a single integrative model by using structural equation modelling on a data set of 552 Spanish firms. Our results supports a partial mediation effect of innovation performance on the relationship between CSR and firm performance, since the effect of CSR on firm performance shrinks upon the addition of innovation performance to the model. The findings may help to understand how CSR is an important driver mechanism for companies to be more innovative, efficient and effective.
CORPORATE GOVERNANCE AND INVESTOR PROTECTION AS MODERATING FACTORS OF THE RELATION BETWEEN CSR ENTRENCHMENT STRATEGY AND CAPITAL STRUCTURE
MARTÍNEZ FERRERO, JENNIFER
GARCÍA-SÁNCHEZ, ISABEL-MARÍA; VILLARÓN-PERAMATO, ÓSCAR
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This research is developed under the hypothesis that corporate social responsibility (CSR) can be promoted as a self-defence strategy against managerial discretion costs, leading to the capital market demanding higher debt levels to solve agency frictions and monitor the management. In accordance with this idea, this study aims to examine the complementary or substitutive role of some additional control factors: (i) the strength of corporate governance related to board independence and diversity as a firm-level factor and (ii) the level of investor protection as a country-level factor. We use an international sample from 21 countries for the period 2003–2010. Supporting the market demand for external debt as a control mechanism that avoids managerial discretion and entrenchment risks, our findings support the following: first, the complementary effect of corporate governance on the demand for external debt; second, the substitutive effect of the degree of investor protection on such a demand. Accordingly, debt as a control mechanism is less demanded in countries with a greater level of investor protection, while it remains necessary in firms with more diverse boards that cannot effectively constrain managerial discretion and entrenchment. In addition, the greater predictive power of the investor protection factor on the use of debt acts as a monitoring aspect; that is, country-level factors dominate firm-level factors.
LEADER EFFECTS IN COMPETITION AMONG TEAMS: EVIDENCE FROM A FIELD INTERVENTION
MARTINEZ-JEREZ, F.ASIS
CASAS-ARCE, PABLO
Category: MA = Management Accounting
This paper investigates the effect of the leader on the performance of teams that participate in tournaments. In collaboration with a medium-sized Latin-American bank, we engineered a field experiment by designing a series of contests among the branches of the bank, in which we varied the prize structure of the tournaments (in some tournaments, the prizes were shared among all branch employees, while in other tournaments there was an additional prize for the branch manager). We combined the tournament performance data with measures of leaders’ and teams’ characteristics extracted from pre-intervention survey responses and from the pictures that the branch teams posted in the bank intranet to represent their teams. We find evidence that providing explicit incentives to team leaders has a positive effect on team performance, consistent with leaders exerting more effort in monitoring the work of team members and inspiring them to join efforts for the team above their individual interests. However, these explicit incentives may also diminish the leader’s credibility among team members who attribute the leader’s behavior to self-serving motives.
VARIATION THEORY AS TEACHING METHOD IN INTRODUCTORY ACCOUNTING COURSES - EFFECTS ON STUDENT LEARNING
MARTON, JAN
HOLMGREN, HELÉN; JONÄLL, KRISTINA
Category: ED = Accounting Education
In this paper we study effects on student learning from a systematic use of variation theory in the structure of lectures. We study three introductory financial accounting courses in the 2015-16 academic year. Students are randomly assigned to groups, where the treatment group is exposed to a lecture based on variation theory, and the control group is exposed to a traditional lecture. We measure student understanding both before and after the course, using both essay questions and multiple choice questions. The understanding that we focus on is the link between balance sheet measurement and net income, and the relation to stakeholder incentives and interests. We hypothesize and find that students in the treatment group have a better understanding of financial accounting. We also note that essay questions are more effective than multiple choice questions in measuring understanding. In addition, it may be important to consider pre-study experience of accounting (e.g. through work experience), as this has a substantial impact on the level of understanding.
INFORMATION TECHNOLOGY AND FIRM PROFITABILITY: THE MODERATING ROLE OF COMPETITION
MASHRUWALA, RAJ
ROMERO, JORGE
Category: IS = Accounting and Information Systems
This study contributes to the extant literature examining the relationship between information technology (IT) and firm profitability, by examining the influence of firms’ competitive environment on that relationship. There are two competing predictions regarding how product market competition could impact the IT-profit relationship. On one hand, greater IT spending could be a source of differentiation that enables a firm to better compete in a high competition environment. Alternatively, if IT is a strategic necessity and not a source of competitive advantage, then much of the value generated by IT would be captured by consumers, and would not enable the firm to earn higher profits. We examine this research question utilizing proprietary data on firms’ IT spending budgets to assess whether product-market competition moderates the relationship between IT and firm profitability. We find that IT has a lower impact on firm profits in high-competition environments, than for firms in low-competition environments. To better understand the underlying reasons for this result, we consider the impact of IT on generating revenues and reducing costs separately. We find that for firms experiencing high levels of competition, IT has a significant impact on revenue generation, but not on cost reduction. For firms facing lower levels of competition, IT has a significantly lower impact on revenue generation, but a higher effect on cost reduction. This result helps explain the channels through which competition impacts the IT-profit relationship. Overall, our study underscores the importance of considering the environmental context while evaluating the impact of IT on firm performance.
POST-MARXIST CRITICAL PRAGMATISM AND THE NOTION OF ENABLING CONTROL (INCLUDING ACCOUNTING): THEORETICAL POSITIONING AND WAYS FORWARD
MASQUEFA, BERTRAND
GALLHOFER, SONJA; HASLAM, JIM
Category: IC = Interdisciplinary/Critical
The paper seeks to reflect on implications at micro-organizational levels of a postMarxist critical pragmatism, a progressive philosophy and politics that emerges from what Ernesto Laclau has denoted as the new revolution of our times (Laclau, 1990). Theoretically, we elaborate implications in part by formulating the notion of enabling control (a construct deployed in the literature of management control) in terms of a postMarxist critical pragmatism. This involves a theoretical positioning of enabling control in relation to a (dynamic) construct of ‘emancipatory control’ that has in effect manifested in the critical literature (indeed the construct ‘emancipatory accounting’ is now quite often explicitly used). Accounting is integral to both notions of control. We then open up to further possibilities that conceive of the notion of working in and with but also through micro-organizational domains. We suggest that our theoretical articulation here is indicative of ways forward for praxis (for new pragmatist progressiveness) in and through micro-organizational domains. We see it as a way of approaching organizational control in the problematic context of gloabalisation. The paper builds upon prior work (notably Gallhofer and Haslam, 2003; Gallhofer et al., 2015; Masquefa et al., 2016) and contributes to the literatures of business ethics (including pertaining to the goal of the firm), management control , critical accounting and post-Marxist praxis.
SOCIAL CAPITAL AND BANK STABILITY
MATHIEU, ROBERT
JIN, JUSTIN YIQIANG ; KANAGARETNAM, KIRIDARAN ; LOBO, GERALD J.
Category: FR = Financial Reporting
Using a sample of public and private banks and two proxies for social capital, we study how social capital relates to bank stability. In a region with high social capital, individuals have a greater propensity to honor an obligation; there is also greater mutual trust within a much denser network that deters opportunistic/self-serving actions, such as excessive risk-taking for personal gain (Jha and Chen 2015). Consistent with our expectations, the analysis indicates that banks in high social capital regions experienced fewer bank failures and bank trouble during the 2007–2009 financial crisis. In addition, we demonstrate that social capital is negatively associated with bank risk-taking in the pre-crisis period of 2000–2006.
THE CONVERGENCE OF PRICE AND INTRINSIC VALUE IN INTERNATIONAL EQUITY MARKETS
MATTEI, MARCO MARIA
PEEK, ERIK
Category: FA = Financial Analysis
This study examines the cointegration of aggregate prices and aggregate intrinsic equity values in 41 stock markets around the world during the period 1994 to 2011. Measuring intrinsic values using accounting-based and forecast-based residual income valuation models we find that aggregate prices do not co-move with aggregate intrinsic values in eleven countries in the sample, especially in those countries with developed stock markets, fewer limits to arbitrage and fewer speculative stocks. We show that this finding can be explained as a feature of standard cointegration tests. Examining cointegration of price and value in a pooled, global sample we predict and show that a lack of convergence is not only observed in a portfolio with speculative, difficult-to-arbitrage stocks but also in a portfolio with safe, easy-to-arbitrage stocks. Given that the portfolio of safe stocks is substantially larger in terms of market capitalization than the portfolio of speculative stocks, our findings suggest that the observed lack of price-to-value convergence in global equity markets is a symptom of price efficiency rather than investor speculation.
TRADE CREDIT RELATIONSHIPS OF EUROPEAN SMES DURING FINANCIAL DISTRESS
MÄTTÖ, MARKUS
Category: FA = Financial Analysis
During financial crisis, banks tighten their loan policies and fewer companies can finance their operations with a bank loan. Previous studies suggest that some firms with negotiation power can adjust their trade credit levels easier than others. On the other hand, credit constrained firms are more in need of trade credit finance. This paper focuses on the question whether the capability of adjustment of trade credit levels during 2008 financial crisis is dependent of both firm characteristics and the financial environment. More specifically, we demonstrate that the association between firm characteristics and trade credit adjustment is dependent on the financial environment. On average, during the crisis trade credit levels decrease. The decrease is larger for big companies and the difference between firm types was greater in bank-based environments. We also find evidence about a substitution hypothesis, which is clearer in bank-based environments.
RELEVANCE OF THE CONSTRUCTION IN THE CONSTRUCTIVE RESEARCH APPROACH: PUBLIC SECTOR PERSPECTIVE
MÄTTÖ, TONI
ANTTONEN, JENNA; JÄRVENPÄÄ, MARKO; RAUTIAINEN, ANTTI
Category: MA = Management Accounting
This paper continues the recent discussion on constructive research approach (CRA) methodology. During a longitudinal CRA case study, a performance measurement system (PMS) in a Finnish regional development company (RDC) was constructed. RDCs are non-profit organizations that develop regional industrial policy. Stakeholder theory (SHT) is used in the study to analyse the CRA project. Longitudinal analysis reveals that legitimative relevance became the most important relevance dimension of the new PMS when the created measures were filtered in accordance to the expectations of the key stakeholders. This study also presents non-direct surrogate measures that aim to link organizational activities with the desired outcomes while having to legitimate the organization to stakeholders. Complex causality relations between the organizational activities and the desired outcomes are identified as key reasons for the use of surrogate measures. Findings illustrate the need to study CRA constructions in terms of their lifecycle. Moreover, it is noted that meeting stakeholder expectations for example by “finding a common language” may serve as an indication of legitimative relevance in a situation characterized by the absence of concrete measures. A new framework for analysis is presented where the indications of legitimative relevance include concrete, abstract, official and unofficial performance indicators.
EXPLORING THE POSSIBILITIES AND CHALLENGES OF SECTOR-LEVEL SUSTAINABILITY REPORTING
MAUGHAN, REBECCA
O'DOCHARTAIGH, AIDEEN
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The aim of this paper is to develop our understanding of accounting and reporting for sustainability at a sector-level through a case study of Bord Bia’s Origin Green programme, a sustainability programme for the Irish food and drink sector. Accounting scholars are increasingly engaged with sustainability and sustainability accounting and reporting is of growing importance in practice. As sustainability is a systems based concept, there is a growing recognition that sustainability reporting needs to move beyond single entity reports towards multiple organisation reporting, such as industry, supply chain and sector-level reports. To the best of our knowledge, the Origin Green programme is the first attempt to account for and report on sustainability at a sector level. The study will advance the sustainability accounting literature by creating an evaluative framework for sector-level sustainability reporting. This framework will be used to assess the Origin Green report, a rare practitioner example of sector-level reporting. Further fieldwork will explore motivations for reporting and challenges of accounting for sustainability at a sectoral level. We will engage with tensions and conflicts in this arena to better understand how sectoral sustainability may be maximized. Our analysis will ultimately contribute to making sustainability accounting and reporting a substantive process, with the potential to measure the social and environmental impacts of multiple organisations.
STANDING OUT OF THE CROWD – A CONTINGENCY MODEL OF STRATEGY UNIQUENESS AND INSTITUTIONAL INVESTORS
MAYBUECHEN, FRANZ
OEHMICHEN, JANA
Category: GV = Accounting and Governance
This paper examines the effect of institutional investors on a firm’s strategy uniqueness, an important condition for corporate value creation. We expand the understanding of institutional investors’ influence on firm strategies by underlining institutional investors’ counseling and enforcement tasks in regard to the strategy uniqueness of a firm. Furthermore, we substantiate the counseling and enforcement tasks by considering the moderating role of environmental uncertainty and national shareholder protection. Using a dataset of European and US companies, we find support for the counseling and enforcement argument that institutional investors increase a firm’s strategy uniqueness. Additional analyses show that the relationship between institutional investors and strategy uniqueness is contingent upon a firm’s contextual void (environmental uncertainty) and contextual enablement (national investor protection).
DO AUDITORS AFFECT M&A COMPLETION TIME?
MAZBOUDI, MOHAMAD
CHAHINE, SALIM; HASAN, IFTEKHAR
Category: AU = Auditing
Using an extensive sample of Mergers and Acquisitions (M&A) and audit data at the office-level, this paper investigates how auditors could affect the M&A completion time. It reports that having a common auditor for both acquirer and target increases completion time as the exposure to higher litigation and reputational costs dominates the information access advantage of common auditors. However, auditor’s past experience helps in reducing completion time and moderates exposure to costs except for the target firms with higher information risk (restated financial statements). These results are robust to having BigN auditors at both ends as well as to various acquirer, target, and deal characteristics.
AUDITOR INDUSTRY EXPERTISE IN ITALY, AND EFFECTS ON PRICING, EFFORT, AND ORGANIZATION
MAZZA, TATIANA
AZZALI, STEFANO ; REICHELT, KENNETH J. ; SIMONOV, ANDREY
Category: AU = Auditing
We examine how mandatory audit firm rotation (MAR) affects auditor industry expertise in Italy by examining industry leader audit fee premiums, and audit hours. We learn from interviewing partners of Big 4 audit firms that national industry expertise is likely more dominant than the office level of expertise, because expertise is retained in the firm and transferred to other offices when new clients are accepted. Using the national and office level industry expertise framework (e.g., Reichelt and Wang 2005), we find that national industry leaders dominate over office industry leaders with higher audit fee premiums and greater audit hours. We also learn from interviews that industry expertise has increased over the past decade, and we find evidence that national industry audit fee premiums and audit hour premiums have increased over the past decade. These findings contribute to literature with alternative results (due to higher client turnover under MAR) respect to prior studies where the office industry leaders dominate over national industry leader audit fee premiums, and the magnitude of the audit fee premium is smaller. An implication of MAR is that industry expertise is more costly and more centralized because of higher client turnover.
THE INFLUENCE OF TRUST ON ANALYSTS’ PERCEPTION OF CORPORATE SOCIAL RESPONSIBILITY REPORTS
MAZZI, FRANCESCO
DAL MASO, LORENZO; LOBO, GERALD; PAUGAM, LUC
Category: FA = Financial Analysis
We investigate the role of societal trust in sell-side analysts’ use of corporate social responsibility (CSR) reports in their stock recommendations. We argue that in high trust countries analysts are more likely to view CSR reports as a credible source of information that reduces their perception of social and environmental risks or a credible signal of future financial profitability. Conversely, in low trust countries CSR reports may have limited credibility for financial analysts, who are therefore more likely to disregard this non-financial information. Accordingly, we predict that CSR reports are likely to have a stronger effect on analysts’ perception of a firm’s future performance in high trust countries than in low trust countries. Using a matched sample of international firms, we document that CSR-report issuers receive more favorable analysts’ recommendations than non-CSR-report issuers in high trust countries but 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 result suggests that audit services add credibility to CSR reports in countries where trust is lacking. Our study contributes to the literature on non-financial information and the importance of informal institutions for economic outcomes, and is of interest to regulators regarding the value of CSR reports and audits.
AUDITOR NAME BRAND AND LOAN PRICING
MBAGWU, CHIMA
CHU, LING; MATHIEU, ROBERT; ZHANG, PING
Category: AU = Auditing
This study examines whether auditor name brand has an impact on the cost of bank loans. Using the full sample, the result suggests that clients of non-brand auditors pay higher interests for their new loans. This result is robust to the Heckman’s two-stage model. However, when we use propensity score matched sample, we do not obtain the same result as using the full sample. Our investigation suggests that the result obtained from using the full sample is biased due to the arbitrarily assigned values to the credit rating variable for the non-rated firms. Because the credit rate variable is included in the regression, to include the non-rated firms in the full sample, it is necessary to assign a value to the credit rating variable for those firms. We then use two methods to mitigate the problems caused by the missing credit rating values of the not-rated firms: (1) dropping the credit rating variable from the regression, (2 we run the model using the rated and non-rated firms separately. After the credit rating variable is controlled with above approaches, we do not find evidence suggesting that the auditor brand has an impact on bank loan prices, which is consistent with the results obtained using propensity score matched samples.
CUTBACK MANAGEMENT IN SCOTTISH AND IRISH LOCAL AUTHORITIES: A CASE STUDY APPROACH
MCGEOUGH, FRANCIS
MCGEOUGH, FRANCIS
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
Many governments across the world have faced have faced an unprecedented level of austerity as revenues have declined while demand has increased. Local authorities in Scotland and Ireland have been particularly hit as they have limited scope to raise additional revenue. Therefore, expenditure had to bear most of the brunt of the cuts. The purpose of this research is to identify the approaches taken to manage these, the influences on the approaches taken and the impact the cuts have had. A mixed methods approach is used and this involves the review of documents and the conducting of interviews with senior officials. What is found is that the two case study organisations adopted a similar approach with staff numbers facing substantial cuts while every effort was made to maintain frontline services. The possible long-term impact of these cuts is also outlined.
DEMAND FOR, AND BARRIERS TO, <IR> DISCLOSURES
MCMEEKING, KEVIN
BAMBER, MATT; DEMARTINI, CHIARA; TRUCCO, SARA
Category: FR = Financial Reporting
Based on interviews and surveys of experts from stakeholder groups, this study provides insights into the gap between the integrated reporting information stakeholders demand and what most companies disclose. This paper focuses on <IR> components of annual and sustainability reports. The results culminate in the creation of a best practice index for the disclosure of corporate governance practices. Interview results attribute the low level of adoption of Integrated Reporting by UK corporations to several factors. An expectations gap, preoccupation with the concerns of a subset of user groups, lack of accountability of management, short-term financials myopia and concerns about <IR> effects on costs explain much of the reluctance to fully comply with <IR>.
A REVIEW AND DISCUSSION ON THE INSTITUTIONALIZATION OF ENTERPRISE RISK MANAGEMENT IN ORGANIZATIONS: ACHIEVEMENTS AND FUTURE DIRECTIONS
MEIDELL, ANITA
Category: MA = Management Accounting
Enterprise Risk Management (ERM) has emerged as a new area of research within the management accounting literature. The aim of this study is to explore previous management accounting research on ERM on how ERM practices become institutionalized in organizations. Through the theoretical lens of institutional work, I review previous high-quality management accounting research on ERM on how new ERM practices are created within organizations. The findings show that pressures from the institutional context can help explain why organizations implement ERM. However, the review finds that we also need to understand who the actors are and how actors work to create collective action frames of ERM within organizations in order to understand differences in ERM practices between organizations but also within the same organization over time. Theoretically, the findings contribute to our understanding of how ERM practices are created and institutionalized over time.
OMISSION BIAS WITHIN CORPORATE REPORTING: EVIDENCE FROM A VISUAL ACCOUNTING EXPERIMENT
MELIS, ANDREA
ARESU, SIMONE; JONES, MICHAEL JOHN
Category: FR = Financial Reporting
Omission bias refers to the human tendency to evaluate a wrongful omission (e.g. a deliberate omission of negative information) less harshly than a wrongful commission, although the consequences are often the same. Psychological studies have shown that this bias is widespread. However, the omission bias in corporate reporting has surprisingly not been empirically investigated. Companies may prefer to omit negative information rather than provide misleading/false information as they believe users perceive omissions in a less negative way. The aim of the paper is experimentally to test whether potential accounting users are affected by omission bias. By conducting two experiments on 168 and 76 participants, respectively, we find that accounting users perceive opportunistic omissions of negative information not to be morally wrong. On the other hand, they perceive fabrication of positive information or distracting the reader as morally worse. Omission bias does not depend on the lack of evidence on the preparer’s intention to deceive. Overall, our results show that, in a corporate reporting context, corporate stakeholders’ judgement is likely to be affected by an omission bias. This omission bias is not eliminated by training. The study contributes to the impression management literature showing the importance of incorporating a psychological perspective that takes cognitive biases into account.
WHAT ACCOUNTABILITY FROM INTEGRATED REPORTING? A CASE STUDY
MELLONI, GAIA
LAI , ALESSANDRO ; STACCHEZZINI, RICCARDO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The International Integrated Reporting Council (IIRC) claims that integrated reporting (IR) can enhance corporate accountability, yet critical and interpretative studies have contested this outcome. Insufficient empirical research details how IR preparers deal with their accountability duty when producing IR; to fill this gap, the current study analyses the accountability views expressed by preparers involved in IR construction. Analyses of in-depth interviews with the IR preparers of a global insurer that has adopted IR since 2012 reveals how they provide corporate accountability content and how the process depends on their interpretation of the context(s) in which the IR is produced. The analysis reveals the dominance of several discourses among IR preparers, namely, the “value creation story,” “unconnected sustainability,” “complexity” and “attractiveness”. These discourses reflect how IR preparers assign relevance to organizational and reporting context situations, including the redefinition of corporate governance and strategy, the detachment of the sustainability office from the IR hub, the complexity of insurance business models, and investors’ increasing information needs. The present research urges greater consideration of the intertwined roles of organizational and reporting contexts in shaping the accountability views that are implicit in corporate reporting construction.
BIASED BOARD
MENG, XIAOJING
BALDENIUS, TIM; QIU, LIN
Category: GV = Accounting and Governance
We study a corporate board tasked with advising and monitoring a firm's CEO in an investment setting. The board's incentive to do so is driven by compensation and non-pecuniary incentives---we label the latter board bias. The optimal board bias is jointly determined by the CEO's initial information advantage and by whether the board has commitment power when dealing with the CEO. We show that the optimal board bias is weakly "friendly" (partially aligned with the CEO) if the board lacks commitment power and the CEO's information "antagonistic" (counter to the CEO's bias) if the board has commitment power, or if it lacks such power and the CEO's information advantage is small. For given board bias, commitment power improves communication, thereby reducing the need for the board to exert costly (advising and monitoring) effort. Endogenizing the board bias shows that commitment power may be associated with greater effort by the board. We also show that the shareholders may be better off with a board that lacks commitment power.
NON-GAAP EARNINGS DISCLOSURE AND IPO PRICING
MENINI, ANDREA
BROWN, NERISSA C.; CHRISTENSEN, THEODORE E.; STEFFEN, THOMAS D.
Category: FA = Financial Analysis
The disclosure of non-GAAP earnings measures is increasingly common among firms undergoing initial public offerings (IPOs). We address the influence of this disclosure practice on IPO price formation by investigating the underlying determinants of non-GAAP disclosure in IPO prospectuses and the effect of these metrics on asymmetric uncertainty and partial price adjustment in the IPO process. Using a sample of 696 book-built IPOs (2003 – 2012), we find that firms disclosing non-GAAP earnings figures exclude an economically significant amount of income statement line items pertain to recurring expenses. We find that the disclosure of non-GAAP earnings is largely influenced by: GAAP-based operating performance; industry-peer effects; litigation risk; the presence of venture funding; and the use of non-GAAP metrics in debt covenants. Our pricing tests indicate that the earnings adjustments contained in non-GAAP prospectuses are positively associated with asymmetric uncertainty as proxied by IPO underpricing and post-issue return volatility. Underwriters tend to lowball the initial price estimates of non-GAAP IPOs (especially when issuers exclude recurring expenses), followed by under-adjustment of the offer price after book building. This under-adjustment reflects agency conflicts between issuers and underwriters. Lastly, while some firms use non-GAAP disclosures to mitigate underpricing and lowballing, others act aggressively in their disclosure practices.
VIEWING DISCRETIONARY AND NON-DISCRETIONARY ACCRUALS THROUGH THE UNIVARIATE LENS: A CONDITIONAL HETEROSCEDASTIC MEAN-VARIANCE APPROACH
MENSAH, ALBERT KWAME
Category: FR = Financial Reporting
On a firm-by-firm basis, I apply the univariate conditional heteroscedastic (UCH) mean-variance modeling technique –hereafter called ‘UCH Model’ –to propose a new way to decoupling a firm’s discretionary from non-discretionary accruals. What the UCH Model essentially does is it kills any linear dependence in accruals estimation errors to isolate firm-specific shocks to accruals reporting so that ‘model misspecification’ and ‘low test power’ concerns –known to have plagued existing accruals models –are mechanically eliminated. Validation tests reveal that this new discretionary accruals measure appeals to economic theories (i.e. ‘smoothing’ and other managerial intents) largely popularized in literature. While this measure substantially co-moves with existing measures, I show that the UCH Model outperforms classical models on several grounds aside those captioned above. I therefore encourage accounting researchers to apply this methodology as well in slicing other accounting variables.
CORPORATE GOVERNANCE AND DISTRIBUTION OF ACCOUNTING ADDED VALUE TO STAKEHOLDERS IN AN ECONOMIC CRISIS CONTEXT
MERINO MADRID, ELENA
MANZANEQUE, MONTSERRAT
Category: GV = Accounting and Governance
Following the stakeholder corporate governance, this study aims to test the impact of the corporate governance on the distribution of added value (accounting-based measure) to shareholders with a sample of Spanish listed companies from 2007 to 2012 (period of economic crisis). The results of this study contribute to the debate on the importance of corporate governance (measured through the composition of the board of directors) as factors that influence decision making process, in this case, about the distribution of added value generated by the company to different stakeholders. Furthermore, it should be highlighted that accountant information about value added should be taking into account by the stakeholder research.
CORPORATE GOVERNANCE AND THE VOL-OF-VOL
MERZ, ALEXANDER
TRABERT, SEBASTIAN
Category: GV = Accounting and Governance
This paper is the first to provide empirical evidence on the effect of internal and external corporate governance mechanisms on both the variability of corporate performance and the variability of the variability, or vol-of-vol. Since high vol-of-vol stocks, that is stocks with high degrees of uncertainty, significantly underperform low vol-of-vol stocks, it is crucial for managers not to ignore the connection between governance structures and the vol-of-vol. We show that growth opportunities and leverage have an increasing effect, yet we find strong evidence that board size reduces the volatility and the vol-of-vol. Moreover, we can show that under certain circumstances, it can be beneficial to insulate managers from the market for corporate control in order to lower the uncertainty about future returns. There is additional weak evidence that the percentage of independent directors serving on the board, generally considered a 'good' governance attribute, can also reduce the vol-of-vol. Results are robust to a variety of different tests. Our work is the first step in better understanding how the vol-of-vol can be affected by governance structures.
UNDERSTANDING DEPOSITOR DISCIPLINE IN CREDIT UNIONS
MESA TORO, ANDRES
GOMEZ-BISCARRI, JAVIER; LÓPEZ-ESPINOSA, GERMÁN
Category: FA = Financial Analysis
In this paper we analyze whether credit unions are subject to market discipline by their (member) depositors and examine the variables which influence the intensity of this disciplining effect. We use the longer time series of US credit union data available and divide our analysis in three parts. First, we provide baseline evidence of depositor discipline in credit unions: shares and deposits of credit union members respond to changes in variables which reflect the credit union’s risk-taking strategies. We show that this disciplining effect is long-lasting and it is affected by the existence of an insurance scheme and the extent of local competition from other credit unions and banks. Second, we use proxies of the capacity of members to access and process credit union information to show that discipline is heavily influenced by asymmetric information considerations. Finally, we take advantage of two regulatory changes which act as natural experiments and show that credit union depositors indeed react negatively to shocks that increase the risk-taking capacity of the credit union. Our results have important policy implications regarding the impact that market discipline may have on financial stability through the disciplining of credit unions.
THE PERFORMANCE OF MECHANICAL EARNINGS FORECASTS
MEUTER, MARTIN
HESS, DIETER; KAUL, ASHOK
Category: FA = Financial Analysis
We analyze three different mechanical models to forecast earnings and compare their forecasts to those of analysts. In particular, we examine whether more accurate earnings forecasts also yield more reliable estimates of the implied cost of capital (ICC) which often serves as a proxy for expected stock returns. We extend the results of Hou, van Dijk and Zhang (2012) and Li and Mohanram (2014) by analyzing this ICC-forecast-link for identical firm samples, as suggested by Easton and Monahan (2016), as well as for identical earnings definitions. Our comparisons produce a number of puzzling results: for example, we document that ICC estimates based on mechanical earnings forecasts are always more reliable than analyst-based ICCs, although we find that analysts’ forecasts are much more accurate. In addition, we show that ICCs for firms which are not covered by analysts are more reliable than ICCs for covered firms, although forecasts for covered firms are much more accurate. Overall, our results suggest that both forecast performance and ICC reliability are strongly driven by the earnings definition, rather than the specification of the forecast model.
GRAPHICAL BUSINESS MODEL DISCLOSURE. EMPIRICAL ANALYSIS OF UK COMPANIES’ STRATEGIC REPORTS
MICHALAK, JAN
KRASODOMSKA, JOANNA
Category: FR = Financial Reporting
The main purpose of the business model (BM) description is to explain how a company uses its resources to create value. BM communication in corporate annual report is considered a necessary background for an analysis of its performance and prospects. The aim of the study presented in this paper is to evaluate graphical BM presentation and to explore whether companies’ characteristics that potentially influence it. Former studies focused on financial and narrative disclosure of BM in annual reports. There is also a vivid notion in accounting literature concerning the use of graphs and pictures in annual reports. Contrastingly, very little research is conducted on the use of other graphical aids, including diagrams and pictograms. Hence, in this paper we propose our own method of graphical BM disclosures analysis based on visual analysis theory. It is based on the four main dimensions: orientation, complexity, connectivity, and impression management. Our analysis focuses on the graphical BM disclosure in the strategic reports of 100 UK companies included in FTSE 100. Our final sample consisted of 89 diagrams presented by 82 companies. The research findings reveal that there exist significant differences in graphical BM disclosure in terms of their orientation, complexity and graphical impression management. We did not find the company characteristics like size, number of segments, free float, and negative results to be correlated with the complexity of BM disclosure.
NO PRESSURE, NO DIAMONDS: THE ROLE OF SHAREHOLDER ACTIVISM ON CSR TRANSPARENCY
MICHELON, GIOVANNA
RODRIGUE, MICHELLE ; TREVISAN, ELISABETTA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper investigates whether pressures that arise from shareholder activism lead firms to increase their CSR transparency. Rather than focusing on whether specific shareholder proposals are implemented, we study whether the submission of proposals related to CSR transparency lead firms to increase their CSR disclosures. Such a change in CSR disclosure is ex-ante not obvious because shareholder proposals typically receive low support, are often perceived as interference in daily business activities, or irrespective of the voting outcome, do not bind managers to act. Drawing on social movement theory, we conceptualize how shareholders put pressure on firms by using their voice, challenging corporate activities, and transforming corporate practices. We analyze the content of 2,089 CSR-related shareholder proposals filed during the period 2006-2012 and divide proposals that specifically request improved CSR transparency from those that request other CSR-related initiatives. Using propensity-score-matching to reduce the bias of confounding variables and choosing our control group from the pool of firms that are targeted by CSR proposals—and are, thus, under similar, although not identical, levels of pressure—we show that shareholder activism increases CSR disclosure. Overall, our study contributes to the literature by investigating an underexplored accounting outcome of activism: CSR transparency.
THE ASSOCIATION BETWEEN ACCRUALS QUALITY AND THE AUDIT COMMITTEE MEMBER'S EXTERNAL AUDIT EXPERIENCE: EVIDENCE FROM JAPAN
MIHARA, TAKETOSHI
Category: AU = Auditing
This study analyzes the desirable professional background of the audit committee (AC) members from the perspective of accruals quality. The AC members’ specialties are known to affect the effectiveness of the AC. In this study, I use the Dechow and Dichev (2002) model to evaluate the significance of various types of accounting experts in the AC by analyzing 693 samples of Japanese listed construction companies’ financial statements for six consecutives years beginning in 2009. To take advantage of the uniqueness of data obtained in Japan where certified public accountants (CPAs) commonly have at least two years of prior experience as external auditors, this study focuses on the AC’s CPA so as to evaluate the significance of an AC member's prior experience as external auditor. Then, in order to clarify causality, this study analyzes consecutive data to test whether a CPA’s continuous presence, expected absence in the next fiscal year, or expected presence in the next fiscal year significantly impacts the accruals quality of each fiscal year. The empirical results demonstrate a positive association between accruals quality and the involvement of a CPA in the AC. Interestingly, a CPA’s continuous presence and expected presence in the next fiscal year are both significantly related to accruals quality. This study suggests that external audit experience is a desirable professional characteristic for the AC members.
THE ROLE OF AUDIT FIRMS AND PARTNERS IN A QUASI-VOLUNTARY RISK DISCLOSURE SETTING
MIIHKINEN, ANTTI
BOZZOLAN, SAVERIO
Category: AU = Auditing
This paper examines if audit firm and audit partner level factors explain risk disclosure intensity in a quasi- voluntary setting where the expected level of risk disclosures is explicitly shown by a new detailed standard. 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. We analyze the risk disclosures of the Finnish Nasdaq Helsinki listed clients in three dimensions and show that in line with Carroll’s (1979) model, the audit firms differ in their responsiveness to the new standard. There is variation in the average risk disclosure levels of the clients of the Big-4 firms which decreases as time elapses. At the audit partner level we document that risk disclosure scores are higher for clients who are audited by experienced audit partners (as measured by the number of audited risk reports and foreign working experience). Moreover, we find that women audit partners relate positively to the level of risk disclosures. This study contributes to previous literature by shedding light to audit partner characteristics that affect assurance of risk reviews in a quasi-voluntary setting and also, by providing evidence on the differences of Big-4 firms regarding their strategy to assure softer accounting information. We provide practical implications for regulators who consider different approaches to standardize the assurance of softer accounting information.
THE RELATIONSHIP BETWEEN ACCOUNTING AND SHELL SHOCK IN BRITISH ARMY MEDICAL UNITS 1914-18
MILEY, FRANCES
READ, ANDREW
Category: HI = History
This research examines the role of accounting in creating and enforcing stigma. To do this, we consider the accounting practices used by British Army Medical Units during the First World War and the way those practices contributed to the stigmatisation of soldiers suffering from shell shock. At the time shell shock was a little understood disease. Many questioned whether it was a real illness or whether sufferers were actually malingerers and cowards and medical units. The introduction of onerous accounting procedures for men treated for shell shock and ineffective budgeting methods that led to inadequate resourcing of medical units created tensions that added to the stigmatisation of men with shell shock. We examine how the complexity of accounting by medical units intermediated between those imposing stigma and those stigmatised. Accounting procedures can both contribute to and alleviate stigma. We conclude that the relationship between accounting and stigma is complex and multi-faceted and should be considered in its societal context and conjunction with other stigmatising aspects of society.
INCREASED MANDATED DISCLOSURE FREQUENCY AND PRICE FORMATION: EVIDENCE FROM THE 8-K EXPANSION REGULATION
MILLER, BRIAN
MCMULLIN, JEFF; TWEDT, BRADY
Category: FR = Financial Reporting
Regulators claim that increased mandated disclosure frequency should lead to more efficient price formation. However, analytical models suggest that mandating disclosure may actually impede the price formation process, and prior empirical studies have been unable to document a relation between mandatory disclosure and improved price formation. We re-examine this relationship using an exogenous shock to disclosure caused by a recent SEC mandate related to required 8-K disclosures. We show that price formation improved after the mandate, where firms with the largest increases in mandatory disclosure experienced the greatest improvements in price formation. Consistent with the mandated increase in disclosure improving firms’ information environments, we also find evidence of reductions in information asymmetry for firms with the largest increases in disclosure.
LOCAL VERSUS FOREIGN ANALYSTS' FORECAST ACCURACY: DOES HERDING MATTER?
MIRA, SVETLANA
CHOI, YOUNG-SOO; TAYLOR, NICHOLAS
Category: FA = Financial Analysis
The aim of this paper is to compare the true earnings forecasting ability of different analyst types, classified by both location and employment. We argue that herding forecasts do not reflect the true ability of analysts to forecast earnings as they mimic the other forecasts. Hence, in order to accurately compare the true forecasting abilities of local, expatriate and global analysts, there is a need to control for the segregated herding behaviour of analysts and focus on the bold forecasts which reveal the true forecasting abilities of analysts. Our results show that local analysts and expatriate analysts are equally accurate and they are more accurate than global analysts when we consider all earnings forecasts. However, when one controls for segregated herding behaviour of analysts focusing on their true forecasting abilities, we find that the local analysts are more accurate compared to even the expatriate analysts. This suggests that the relative informational advantage of local analysts is superior to the relative information and resource-based advantage of expatriate analysts. This indicates that local analysts have an advantage in collecting information via closer relations with management, customers, suppliers and other stakeholders of the local firms. To the best of our knowledge, this is the first study to explore the segregated herding behaviour of local, expatriate and global analysts, and its impact on the relative forecast accuracy.
CORPORATE GOVERNANCE MECHANISMS AS DRIVERS THAT ENHANCE THE CREDIBILITY AND USEFULNESS OF CSR DISCLOSURE
MIRAS RODRÍGUEZ, MARÍA DEL MAR
DI PIETRA, ROBERTO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
The aim of this paper is to examine what kinds of CG mechanisms are driving getting an Assurance or a GRI application level, like CSR disclosure decisions linked with credibility and usefulness of the information disclosed, in the particular context of utilities companies. Our sample is composed of 176 energy companies worldwide which currently report about CSR through a sustainability report. On the basis of our findings, we could support the idea that the credibility of the report of the utilities companies will be greater if the company is listed in a Rule-Based country, has a concentrated ownership and the fewer insiders there are on the BoD. Moreover, the usefulness of the CSR information provided by this kind of firms will be higher, the greater the efficiency of the BoD will be. The enhancement of the credibility and the usefulness of the information reported is essential for companies involved in this sector that has been accused of window-dressing.
EARNINGS MANAGEMENT BEFORE M&A: THE CASE OF SWISS ACQUIRERS
MISSONIER-PIERA, FRANCK
HOSTETTLER, SOPHIE; PARISOD, STÉPHANE
Category: FR = Financial Reporting
This paper investigates the potential earnings management activities (i.e. with discretionary accruals and real earnings management) of Swiss acquirers before takeovers. The empirical analysis is based on a sample of 146 firms for the period 1990 – 2015. The results exhibit that for stock-for-stock acquisitions method of payment, acquirers tend to manage earnings upward with both the use of discretionary accruals, and real earnings management activities before the acquisition. This suggests that managers of bidders may strive to increase the price of their stock to the detriment of the target firms.
INTEREST RATE RISK OF LIFE INSURERS - EVIDENCE FROM ACCOUNTING DATA
MOEHLMANN, AXEL
Category: FA = Financial Analysis
Life insurers are exposed to interest rate risk, and are typically more sensitive to interest rate changes on the liability side than on the asset side. This paper develops an accounting-based measure of interest rate sensitivity. My approach uses the coexistence of historical cost and market value accounting, which permits the observation of valuations for different discount rates. Using micro-data, I show that life insurers share a common exposure to interest rate risk. However, within the sector there is a wide dispersion. I find that insurers' size, growth and solvency are negatively correlated to interest rate risk. The heterogeneity suggests that insurers would behave differently during times of stress, which has important implications for understanding the macroprudential risks of the sector.
HOW MANAGEMENT CONTROL SYSTEMS HELP TO ATTAIN ORGANIZATIONAL AMBIDEXTERITY
MOELLER, KLAUS
WENIG, PHILIPP
Category: MA = Management Accounting
This study examines management control systems (MCS) as antecedents for organizational ambidexterity and suggests to manage exploiting and exploring activities simultaneously at the non-executive board level by implementing formal boundary controls and an informal social context into the organization. We empirically investigate the relationships between the organizational context, ambidexterity, and its impact on firm performance. We build on the concept of Gibson and Birkinshaw (2004) and on the levers of control framework (Simons, 1995) and substantiate that under different market dynamics different impacts of an organization´s structure and processes help to achieve superior performance. Using cross-sectional survey data from 274 supervisory board members from 198 listed companies in Austria, Germany and Switzerland (response rate: 22%), a structural equation model is used to test the relationships. We find, as expected, that the emphasis on formal boundary controls and an informal social context is positively related to organizational ambidexterity. In contrast beliefs control and performance management context have no influence on exploitation or exploration. To support our results we tested for dynamic tensions between beliefs and boundary systems, representing a combined approach for the structure of an organization, and between the social and performance management context, reflecting the processes of an organization. We find no support for dynamic tensions.
ACCOUNTING AS A STRATEGIC AGENT
MOERMAN, LEE
VAN DER LAAN, SANDRA
Category: IC = Interdisciplinary/Critical
In this paper we link the potential of accounting as strategy with its role as an accountability mechanism. Drawing on Barad’s (2003; 2007) agential realism, we consider the case of James Hardie Industries Limited’s corporate reorganisation and attendant communication strategy. The strategic use of a balance sheet to ‘materialise’ the long-tail liabilities relating to their former asbestos operations highlights the performative aspect of financial reporting. In doing so, we offer an alternative view of accountability. Rather than financial reporting as delivering accountability through transparency, we suggest financial reports, in this case the balance sheet is used as a device to diffract disclosures to further corporate strategy.
CAN AUDITORS BECOME OVER-CONSERVATIVE? EVIDENCE FROM MARKET REACTIONS TO AUDITOR CHANGES
MOHRMANN, ULF
Category: AU = Auditing
This paper investigates whether equity investors perceive very high levels of auditor conservatism as excessive. This is an important question because the level of conservatism is an often used proxy for audit quality. If some auditors are overly conservative, empirical studies might evaluate such harmful over-conservatism as high audit quality. I use the level of conditional conservatism as my proxy for auditor conservatism. Using a sample of 582 US auditor change announcements from 2004 to 2013, I document a negative link between the replacements of very conservative auditors and the cumulative abnormal returns around the filing date of the 8-k report. This result holds in an event study and in a multivariate regression design. Furthermore, the effect of reportable events is more negative if issued by very conservative auditors. This confirms the higher credibility of very conservative auditors. Taken together, this is evidence against the existence of over-conservatism and, thus, the replacement of very conservative auditors is not in the interest of equity investors. The findings rather point to opportunistic intentions of the manager in deciding to dismiss very conservative auditors.
FAIR VALUE MEASUREMENT DISCLOSURE BY U.S. CLOSED-END FUNDS
MOLDOVAN, RUCSANDRA
HAMMAMI, AHMAD
Category: FR = Financial Reporting
We examine the effect of Level 3 fair value measurement disclosure required in ASC 820 starting with 2012 on the market discount of U.S. closed-end funds. Providing this disclosure is not significantly associated with a reduction in the discount compared to the period when such disclosure was not required. Furthermore, post-2012, the discount of compliers with the disclosure requirement is not significantly different compared to the discount of non-compliers. However, compliers that disclose in a quantitative, tabular format, as required by the standard, have a significantly lower discount compared to the funds that disclose in a textual format. Further tests indicate that this result is not due to a lack of quantitative information, but rather to the textual format being perceived as less reliable. Our results are relevant to standard setters and fund managers and address the fundamental question of the role of disclosure in increasing the reliability and relevance of highly subjective measurements.
EMPIRE BUILDING IN CROSS-BORDER M&AS: THE ROLE OF THE ACQUIRER’S ACCOUNTING STANDARDS
MOMENTE', FRANCESCO
CLEMENZA, CRISTINA ; FERRARI, MASCIA; IVANOVA, MARIYA NIKOLOVA
Category: GV = Accounting and Governance
We investigate if the different quality of the acquirer’s accounting standards (GAAP) affects the premiums paid in cross-border mergers and acquisitions (M&As). Based on Ding et al. 2007, we compute an accounting diversity (AD) score as a proxy for the quality of the acquirer accounting system with respect to the US GAAP, assumed as benchmark. Considering a sample of cross-border M&As completed between 1990 and 2013 with US listed targets only, we show that premiums paid are higher than domestic M&As and they increase with the acquirer AD, after controlling for some governance characteristics of the acquirer. Since a higher AD implies less effective shareholder monitoring and governance controls, high-AD acquirers have more incentives for an “empire building” behavior. Our results support the hubris (Roll, 1986) and agency (Jensen and Meckling, 1976) hypotheses, and the idea that high-quality GAAP could benefit investors by improving the corporate governance mechanisms.
CHANGES IN INTERNATIONAL ACCOUNTING STANDARDS: PRINCIPLES-BASED STANDARDS VERSUS RULES-BASED STANDARDS
MORAIS, ANA
Category: FR = Financial Reporting
One of the objectives of IASB is to develop high quality and understandable financial reporting standards based upon clearly articulated principles. Therefore, principles are requirements, not guidelines, and there should be few exceptions to the principles, inexistence of bright-line thresholds, less volumes of implementation guidance and less level of detail. Standards based on principles should change less than standards based on rules. However, despite being considered principles-based standards, IFRS are continuously being revised and amended. This paper explores the relation between the change in IFRS and the fact that standards are more principles-based or more rules-based. I collected all the changes to IFRS, for IFRS effective between 2005 and 2015. Following Mergenthaler (2012), I determined the Rules-based characteristics (RBC) score for each IFRS. I then regressed RBC score on all the changed IFRS. Results seem to suggest that principles-based standards tend to change less than rules-based standards.
DIFFERENTIAL EFFECT OF TRADE CREDIT AS OPPOSED TO BANK LOAN ON INTERNATIONALISATION OF SMES
MÖREC, BARBARA
Category: FA = Financial Analysis
Numerous evidence show firm’s internationalization is determined by a plethora of factors, with availability of internal and external finance being the most cited. Access to external finance is particularly important for SMEs as investment in internationalization is constrained by the funds availability (Bernard and Wagner, 1997; Bernard and Jensen, 1999; Bellone et al., 2010). This paper builds on two strands of literature: on Greenaway at al. (2007) analysis of the financial factors’ role in exporting decisions, and on Biais and Gollier’s (1997) implications of the use of trade credit as substitution for bank loan. The differential effect of trade credit on SMEs export intensity compared to bank loan is estimated on the full population of companies (including micro companies) in Slovenia, CEE member of the Eurozone with exceptionally impaired access to external financial resources, and markedly above average leveraged corporate sector in the period between 2007 (pre-crisis) and up to 2015. Results confirm the differential effect of trade credit vs. bank credit on firms’ internationalization, and show this effect is stronger in the subsequent phase of the crisis. Furthermore, this effect does not only differ across the various phases of the crisis, but also across company size groups as bank loans are frequently unavailable to micro and small firms, which can consequently use only trade credit to finance internationalization (beside internal sources of finance).
A LONGITUDINAL STUDY OF THE TEXTUAL CHARACTERISTICS IN THE CHAIRMAN’S STATEMENT OF GUINNESS (1948–1996) - AN IMPRESSION MANAGEMENT PERSPECTIVE
MORENO, ALONSO
JONES, MICHAEL JOHN; 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 misused with the objective of influencing stakeholders and masking bad performance. Studies analysing multiple textual characteristics in corporate narratives tend to focus on different companies in a single year or in two consecutive years. Differently, 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.
COST MANIPULATION IN JAPANESE DEFENSE PROCUREMENT CONTRACTS: FOCUSING ON OPPORTUNISTIC COST-SHIFTING
MORIMITSU, TAKAHIRO
SHIRINASHIHAMA, YOSHITAKA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
In this paper, we point out serious problems in Japanese defense procurement from the perspective of management accounting, especially regarding cost overcharging. There is an inherent conflict of interest between the Japanese Ministry of Defense (MoD) and its contract partner firms. While the Japan MoD tries to execute procurement as effectively and efficiently as possible, contracting firms attempt to maximize profit from transactions with the defense department. Furthermore, most of the items included in defense contracts have no market price. Such items must be priced based on the accumulation of appropriate costs plus profits, which are calculated by multiplying the profit rate by the cost. This pricing structure incentivizes companies to execute contracts inefficiently (i.e., firms may have an incentive for overcharging by manipulating costs). This is particularly significant due to the contract provision that requires the return of excess profit. Therefore, we aim to elucidate such overcharging, by analyzing data from individual contracts containing this provision. We use a profit distribution approach to verify whether firms manipulate costs, and a cost manipulation approach and a logistic regression approach to test our hypothesis about the factors that promote cost manipulation. Our result strongly suggests that many firms inflate costs to maximize profit, and partly supports our hypothesis about the promoting factors of cost manipulation.
READING BETWEEN THE LINES: THE COMPLEMENTARITY OF QUALITATIVE AND QUANTITATIVE METHODOLOGIES FOR RESEARCH ON THE LOBBYING OF STANDARD SETTERS.
MORLEY, JULIA
Category: FR = Financial Reporting
Using the case of an IASB standard setting project for non-financial liabilities, I argue that the explanatory value of an analysis of the lobbying of standard setters can be enhanced by extensions to the quantitative research design that draw on textual analysis of the letters and interview evidence. I independently replicate statistical tests carried out by Giner and Arce (2012) as part of their study on the lobbying of IFRS 2 on a new data set of 327 comment letters received by the IASB in regard to the exposure drafts of its project to revise IAS 37 (known as the Liabilities Project). In addition, I conduct semi- structured interviews with 15 key individuals involved in the project, revealing factors that shaped the outcome of the project that would not have been brought to light by the statistical and textual analysis alone.
IS THERE AN ENFORCEMENT PREMIUM IN AUDIT FEES?
MORRICONE, SERENA
FLOROU, ANNITA; POPE, PETER
Category: FR = Financial Reporting
We examine the costs of financial reporting enforcement with a focus on audit fees. We exploit cross-section and time-series variation in the level of financial reporting enforcement scrutiny applied to UK listed companies to identify the effects of enforcement on audit fees. Based on a comprehensive sample over the 2000-2011 period we document an increase in audit fees when financial statements are subject to proactive review by the Financial Reporting Review Panel; the average enforcement premium is almost six percent. Further analysis indicates that the enforcement premium is most significant for companies listed on AIM, especially those with larger auditors. Finally, the enforcement premium depends on the time available to expend further audit effort after FRRP announcements. Overall, our study indicates that financial statement enforcement leads to an economically significant increase in audit fees, but these costs are borne disproportionately by AIM companies.
TRENDS AND CHALLENGES OF PUBLIC ACCOUNTABILITY IN LOCAL GOVERNMENT ACCOUNTING RESEARCHES: LITERATURE ANALYSIS USING TEXT MINING
MOTOKAWA, KATSUHIRO
HIROSE, YOSHITAKA; KUROKI, MAKOTO
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
For the past 30 years, local governments (LGs) in the European Union (EU) and the other countries have sought to improve public accountability. Accounting practitioners and researchers have shown a growing interest in public sector accounting. Although Broadbent and Guthrie (2008), for instance, conducted a comprehensive literature review on public sector, it does not specifically focus on public accountability in LGs. The purpose of this study is to clarify trends and challenges of public accountability in LG accounting (LGA) research. It examines two research questions: What is the fundamental issue of public accountability research in LGs? How has the focus of public accountability research in LGs transited? We conduct a literature analysis based on structured literature review framework, and using text mining on articles to reveal trends. This study led to three main findings: research on public accountability in LGAs has focused on accrual accounting; specific practices, such as e-government and environmental accounting and auditing, were the focus of research from 2010 to 2015; and finally, the 10 most-cited articles were published intensively after 2000. This suggests that accounting researchers focused on new accounting practices after the 2010, but that accrual accounting remained central to the discussion. This study contributes to academic researchers by showing traditional and recent issues in LGA research, and introduces use of text mining to accounting domain.
THE DIFFERENT DIMENSIONS OF SUSTAINABILITY AND BANK PERFORMANCE: EVIDENCE FROM THE EU AND THE US
MOUFTY, SOUAD
CLARK, EPHRAIM
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper looks at four different dimensions of sustainability and examines their effects on bank performance in the US and the EU. Content analysis is applied to a sample of 483 reports to construct a consistent index that reflects the multi-dimensionality of sustainability. Using structural equation modelling path analysis to test the sustainability model, the results reveal a significant positive relationship between the social dimensions of sustainability and bank performance while no evidence was found for the relationship between the environmental dimensions of sustainability and bank performance.
ACCOUNTING DIGITAL GAMES´ EFFECTIVENESS: A STRUCTURAL EQUATION MODELLING APPROACH
MOYA, SOLEDAD
CARENYS, JORDI; PERRAMON, JORDI
Category: ED = Accounting Education
The objective of this study is to assess the effectiveness of accounting digital games with regard to their attributes, motivation, and learning outcomes, as three of the main dimensions that play a role in the effectiveness of digital game-based learning. To this end, several experiments were conducted as part of the learning process in different MSc in Accounting and MBA programmes in a Spanish Business School. Through an exploratory and confirmatory factor analysis of survey data, the research identified six types of components generated by the simulation (configuration, engagement, satisfaction, attention, conceptual understanding and skills development). In contrast to the extant literature in accounting education, that analyses separately these dimensions, this study follows a multidimensional approach by using Structural Equations Modelling (SEM). The application of SEM indicates significant relationships between the identified components. The findings of the study support the hypothesis that there are observable relationships among the attributes of a game, the motivation it engenders and the perception in the learner about the achievement of learning outcomes.
NEOLIBERALISM AND FINANCIAL REPORTING STANDARDS FOR INDONESIAN ISLAMIC FINANCIAL INSTITUTIONS
MUKHLISIN, MURNIATI
HUDAIB, MOHAMMAD; KININMONTH, KIRSTEN
Category: FR = Financial Reporting
This paper explores how neoliberal ideology is rooted in Indonesian infrastructural powers through the process of financial reporting standardisation for Islamic Financial Institutions (IFIs) and how its forces divert them from the actual objective of Islamic finance, especially in countries where Muslims constitute a majority. The paper, taking critical perspective with 26 semi-structured interviews, reveals the tacit strategy of key actors involved in adopting international financial reporting standards (IFRS) and their special efforts to engage the highest political power in the country, with some degree of secrecy from the public. Our finding concludes that political and economic imperialist agenda exists in the financial reporting standardisation for Indonesia to advance the “laissez-faire” and omit the “moral aspects” as reciprocal motive for the elites’ economic and political interests that heavily influence the application of IFRS for IFIs in Indonesia. The paper contributes to the literature by extending the political economic perspective of neo-liberalism [as informed by Nef & Robles, 2000; Neu et al., 2006; Neu & Ocampo, 2007; Cooper et al., 2010; and Sikka, 2015] on the financial reporting standardisation process for the case study of Islamic financial institutions.
TAX INCIDENCE AND TAX AVOIDANCE
MÜLLER, MAXIMILIAN A.
JACOB, MARTIN
Category: TX = Taxation
The debate on corporate tax avoidance infers firms’ tax burden from their effective tax rates but the two are only the same if firms bear the taxes they pay. If firms only partly bear tax payments because they can shift them to stakeholders, they are less inclined to avoid paying taxes. Such firms would report high effective tax rates but bear a low tax burden. We find that firms with higher ability to shift tax payments to stakeholders report higher effective tax rates and are less inclined to exploit tax avoidance opportunities. These findings imply that firms with high effective tax rates do not necessarily “under-shelter” but shift the corporate tax incidence to their stakeholders instead.
PRIVATE DEBT AND TIMELY LOSS RECOGNITION
MÜLLER, SONJA
FRANKE, BENEDIKT
Category: FR = Financial Reporting
In this study, we investigate whether firms recognize economic losses earlier in accounting earnings after issuing private debt. Focusing on the window around firms' issuance of private loans, our results suggest that firms significantly increase timely loss recognition following an issuance. This effect is significantly stronger for firms facing severe agency conflicts of debt, such as in times of high information uncertainty or low financial health. This finding is consistent with borrowers committing to a conservative reporting strategy when facing agency problems with their lenders. We further document that the increase in timely loss recognition is positively associated with the use of performance-based covenants suggesting that firms adjust their accounting properties to increase contract efficiency by facilitating the transfer of control rights to lenders. Overall, our results are in line with agency conflicts under private debt providing sufficient incentives to change reporting properties.
THE ROLE OF CONTROLS IN INNOVATION: AN EXAMINATION OF DIAGNOSTIC USE, INTERACTIVE USE, AND DYNAMIC TENSION
MÜLLER-STEWENS, BENEDIKT
MÖLLER, KLAUS; STEINMANN, JAN-CHRISTOPH; WIDENER, SALLY K.
Category: MA = Management Accounting
The purpose of this paper is to empirically investigate the relationship between different uses of control systems, the alignment of the product development process, and innovativeness in terms of product newness and innovation rate. The paper builds on the levers of control framework by Simons (1995) and suggests that, in addition to the individual uses of controls, using controls jointly can result in dynamic tension that enhances innovativeness. Using data from a survey of 695 R&D professionals from North America and Europe, this study uses structural equation modelling to examine whether diagnostic use, interactive use, and dynamic tension (the joint use) are positively related to innovativeness through process alignment. The results show that process alignment is a strong predictor of innovativeness, which is driven by interactive and diagnostic uses. Exploratory analysis emphasizes the role of process alignment in technologically turbulent environments. The results show that dynamic tension is positively associated with product newness and innovation rate, but the relationship is not mediated by process alignment.
LIMITATIONS OF THE DOMINANT ACCOUNTING MODEL AND SHIFT TOWARDS AN INTERPRETATIVE MODEL IN DEMOCRATIC CONTEXTS
MUÑOZ ARENAS, ALBERTO
Category: IC = Interdisciplinary/Critical
This work represents a first step of a research focused on the comprehensibility of public accounting information. It also seeks to propose clear and comprehensible information formats to improve the contents of public financial reporting. As a starting point, this work addresses the textual nature of accounting language, the constraints imposed by the prevailing paradigm, and the need to adjust it through an alternative critical approach capable of orienting Accounting towards an inclusive and comprehensive communication model.
THE ABILITY OF AUDIT REPORTS TO EXPLAIN INSOLVENCY: EVIDENCE PRE-IAASB’S NEW REPORTING REGIME
MUNOZ-IZQUIERDO, NORA
CAMACHO-MIÑANO, MARÍA-DEL-MAR ; PASCUAL-EZAMA, DAVID; SEGOVIA-VARGAS, MARÍA-JESÚS
Category: AU = Auditing
A more informative audit report has been recently proposed by the IAASB, becoming effective for audits of financial statements after December 15th, 2016. However, there has been little research into how informative the report is before the revised Auditor Reporting Standards. Our paper helps to fill this gap by examining the reports’ predictive ability regarding insolvency situations pre-IAASB’s new reporting regime. As the report ensures the quality of financial statements, and disclosures in the report should be included when businesses do not comply with GAAP or when risks or uncertainties exist, we hypothesize that disclosures should warn users about a plausible insolvency and contribute to distinguish between insolvent and non-insolvent firms. Parametric and non-parametric methodologies are used in a sample of 404 insolvent firms filing for insolvency proceedings during 2004-2014, matched with a 404 non-insolvent group. Disclosures explain insolvency with an accuracy of around 80%. Indeed, disclosures regarding GC, assets’ valuation, subsequent events and legal procedures represent early signals of insolvency. Our evidence contributes to prediction literature highlighting interrelations with the role of auditors. Furthermore, investors, regulators and auditors benefit from this study, as it analyses the report before significant changes included in the new regime, such as the inclusion of key audit matters and a separate section of material uncertainty related to GC.
CAPITAL MARKET OUTCOMES TO HIGH-QUALITY ANNUAL REPORT NARRATIVES: EVIDENCE FROM UK ANNUAL REPORT AWARDS
MUNRO, JACQUI
CHIRCOP, JUSTIN; YOUNG, STEVE
Category: FR = Financial Reporting
I analyse capital market reaction to the publication of high-quality annual report narratives where high-quality is proxied by firms that have been shortlisted for UK annual report narrative awards between 2007 and 2014. Using a matched-sample design to mitigate self-selection, I find that high-quality annual report narratives contain less new information (lower absolute abnormal returns), but are nonetheless useful to investors (abnormal trading volume). The results are explained by timeliness of information disclosure to the market (Beekes and Brown, 2006). High-quality annual report narratives inform share price less than their matched counterparts because firms that publish high-quality narratives tend to disclose price-sensitive information earlier.
DO PRIVATE FIRMS ENGAGE IN EARNINGS MANAGEMENT PRACTICES TO GET CAPITAL SUBSIDIES?
MURA, ALESSANDRO
PIANO, MARCO; VALENTINCIC, ALJOSA
Category: FA = Financial Analysis
Capital subsidies in favour of disadvantaged European regions dramatically dropped during the 2007-2013 European Union (EU) programming period due to relevant changes in the EU membership and rules. These changes have implied for beneficiary firms a greater effort both to compete for a lower slide of public resources and to demonstrate their ability to integrate the residual unsubsidised stake of their investments either through their own internal resources or by external financing. Assessing firms’ operating and financial performance becomes thus central for granting authorities that have to select the beneficiaries. In turn, these stricter conditions to gain a non-tax benefit in the form of capital subsidies are expected to influence the financial reporting process of private firms. Using a large sample of beneficiary and non-beneficiary firms, this study aims to investigate whether private firms manipulate their financial accounts in order to benefit from capital subsidies after the EU changed its aid policy. Results show that Italian private firms manage earnings upward, by exercising accounting discretion on specific revenues and expenses, in order to receive capital grants. Southern firms appear to manipulate earnings more than Northern firms especially as the levels of subsidization grow.
A THEORY OF TAX AVOIDANCE AND GEOGRAPHIC SEGMENT DISCLOSURE
MURAKAMI, YUTARO
SHIIBA, ATSUSHI
Category: TX = Taxation
This paper considers whether multinational firms disclose geographic segment earnings or not, and how they choose the level of tax avoidance. We develop a multi-period model in which a manager decides the level of her effort and transfer earnings between two countries which have different tax rates. The after-tax profit earned in each country is determined by the manager's effort and ability as well as each country's tax rate and environmental uncertainty. In this model, we specify the conditions where the manager does not disclose geographic segment earnings and increase the level of tax avoidance, which is consistent with empirical evidence. When the manager cares about the stock price, disclosing geographic segment earnings leads to the reduction of firms' tax avoidance, but does not necessarily lead to more efficient outcome. This is because the manager faces a trade-off between tax-payment minimization and stock price maximization.
GENDER COMPOSITION OF CORPORATE BOARDS AND FIRM PERFORMANCE: EVIDENCE FROM RUSSIA
MURAVYEV, ALEXANDER
GARANINA, TATIANA
Category: GV = Accounting and Governance
This paper studies economic effects of the gender composition of corporate boards in Russia. It takes advantage of a new and unique longitudinal dataset of virtually all Russian companies whose shares were traded in the RTS/MICEX/MOEX in 1998-2014. Using multiple identification approaches, alternative measures of gender diversity and several performance measures, we find some evidence that the gender composition of corporate boards matters in Russian firms. In particular, the regression results suggest better performance of companies that have two to three women on the board. This effect appears to be more pronounced in bad economic times/for firms experiencing economic difficulties. The presence of women on the corporate board also seems to strengthen the sensitivity of CEO turnover to past firm performance.
FROM NOVICE TO EXPERT: AN EXPERIENTIAL JOURNEY
MURPHY, BRID
HASSALL, TREVOR; MURPHY, BRID
Category: ED = Accounting Education
The ability of accountants to appropriately perform in practice is linked to over-arching professional competence. Continuing Professional Development (CPD) is the current solution with reference to post-qualification maintenance and development of professional competence. Previous studies have examined practitioner engagement with formal CPD mechanisms but there is little evidence to demonstrate how CPD supports accounting practitioners. This paper explores how accounting practitioners perceive competence in the context of their professional status and how, through engagement with CPD, they maintain and develop their professional competence. It is situated within the largest professional accounting body operating in Ireland, Chartered Accountants Ireland (CAI). Interviews were conducted with participant members to obtain a range of perceptions and experiences. Findings highlight that participant practitioners experience a series of developmental blocks at varying experiential stages. These experiential stages are akin to four of the stages cited by Benner’s (1984) model of skill acquisition: novice, competent, proficient and expert. The study reports significant differences between perceptions and practices among participants at these experiential stages.
THE EFFECT OF CHIEF OPERATING OFFICERS ON REAL EARNINGS MANAGEMENT
MYERS, LINDA
CASSELL, CORY; DOUCET, ANDREW; JOHNSON, E. SCOTT
Category: GV = Accounting and Governance
Because Chief Operating Officers (COOs) are responsible for internal operations and because the use of real earning management (REM) can have negative consequences on long-term operating performance, we posit that firms with COOs will be less likely to use REM to inflate near-term earnings. Consistent with this, we find that the level of REM is lower for firms employing COOs than for other firms. In subsequent tests, we investigate whether the use of REM varies with the likelihood that COOs are heir apparent to the Chief Executive Officer (CEO) position and find that heir apparent COOs engage in more REM than do non-heir apparent COOs. Overall, our results suggest that the presence of a COO restricts the use of REM on average, and that this effect is driven by COOs who are less likely to ascend to the CEO role in the near term.
HORIZON PROBLEMS AND CAPITAL EXPENDITURE: EVIDENCE FROM THE PUBLIC SECTOR
NA'IM, AINUN
RAKHMAN, FUAD
Category: MA = Management Accounting
Elected governmental leaders are often restricted by regulatory term limits. This study investigates if the regulatory term limit exacerbates horizon problems among the mayors of local governments, especially when the term limit is binding. We use data covering approximately 500 local governments in Indonesia, which applies a limit of two consecutive five-year terms, in the period from 2008 to 2014. We find that first-term and second-term mayors differ in both the budget composition and the level program implementation. First-term mayors are associated with higher allocation to capital expenditure and better implementation of capital programs. Further, we find that capital program implementation steadily increases in the first term towards the reelection year. In the second term, the level of program implementation continuously decreases until year four. Overall, the results suggest that the two-term limit has the unintended consequence of slowing down programs associated with capital expenditure among local governments under second-term mayors.
PREPARERS’ PERCEIVED BENEFITS OF IFRS: WHAT FACTORS DETERMINE FINANCIAL STATEMENTS PREPARERS’ ATTITUDE TOWARDS IFRS?
NAKAMURA, MIHO
NAGATA, KYOKO; OZU, CHIKAKO
Category: FR = Financial Reporting
This paper investigates the factors that affect Japanese firms' overall attitude towards IFRS. We have conducted questionnaire survey of Japanese listed firms in 2008 and 2013-2014 that consists of nine general questions and seventy specific questions in the process of enforcing IFRS, and examined the survey responses using principal component analysis. The results reveal that larger firms, firms with high oversea sales, or firms with high foreign ownership are more likely to take positive attitude towards IFRS, although they also express serious concerns about costs involved during the transition process. Those firms with positive attitude towards IFRS expect improved communication with investors and better reputation in the global market from implementing IFRS. These results suggest that preparers expect IFRS to work as an external quality assurance on Japanese firms' financial reporting.
THE EFFECT OF SFAS 158 ON THE MISPRICING OF PENSION PLAN FUNDING
NAM, JONATHAN
KIM, JAE B.
Category: FR = Financial Reporting
In this study, we examine whether the adoption of SFAS 158 has any effect on the mispricing of the funding status of pension plans. We find that the overvaluation of firms with severely underfunded pension plans, as reported by Franzoni and Marin (2006), is no longer observed in the years after the adoption of SFAS 158. In addition, we find that the mitigating effect of SFAS 158 adoption on the mispricing of the funding status of pension plans is more pronounced for firms with a larger amount of off-balance-sheet disclosed pension liabilities. Overall, our results suggest that SFAS 158 has a positive effect on investors’ valuation of the funding status of pension plans, particularly due to the requirement for previously disclosed pension liabilities to be recognized on the balance sheet.
EVALUATING LOCAL GOVERNMENTS' PERFORMANCE IN CRISIS TIMES
NARBÓN-PERPIÑÁ, ISABEL
BALAGUER-COLL, MARIA TERESA ; NARBÓN-PERPIÑÁ, ISABEL; TORTOSA-AUSINA, EMILI
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
In Spain, local governments' play an important role in the provision of public services, and form a sub-sector whose powers have increased over time. However, with the economic and financial crisis situation they faced a decline in their revenues along with stricter budget constraints. In this context, the challenge of managing the available resources as efficiently as possible is more relevant, if possible. In this paper, we analyse the overall cost efficiency in Spanish local governments during the economic crisis period (2008--2013). For this, we measure efficiency, for which we consider four different non-parametric methodologies. Moreover, given how problematic it is precisely define the bundle of services and facilities that municipalities must provide, we compare three different output models. We carry out the analysis for a sample of 1,574 Spanish local governments with population between 1,000 and 50,000. Our results suggest that the efficiency of Spanish local governments has improved over the crisis period 2008--2013 since they have reduced their budget expenditures (inputs or costs) while maintaining local public services and facilities (outputs). Moreover, our results confirm that the level and variation of the efficiency scores are affected by the approach taken as well as the output selection. Therefore, policy-makers must be cautious in the interpretation of empirical studies using one particular method or output model to take performance decisions.
DISCLOSURE ENFORCEMENT CONSEQUENCES – EVIDENCE FROM GERMAN FIRMS
NASEV, JULIA
LASCHEWSKI, CHRISTIAN
Category: FR = Financial Reporting
In 2006 Germany passed an EU law (EHUG) that strengthened the enforcement of private firms’ disclosure by introducing fines with the aim to improve the access of company specific financial information for third parties. We document that non-compliers, i.e., firms that did not disclose prior to the reform had fewer net benefits from disclosure, e.g., they were smaller, younger, more levered, had fewer fixed assets, were less likely to be listed, less likely to have a limited liability legal form, more likely to be owned by an individual, more likely to have a foreigner as ultimate owner and less likely to have released a consolidated report. We also show that while disclosure quantity increased, average disclosure quality declined after the reform suggesting that since non-compliers do not benefit from disclosure when forced to disclose they tried to reduce disclosure related costs such as proprietary costs by engaging in earnings management. These differences in financial reporting quality between compliers and non-compliers remain stable over time. Finally, we do not find differences in abnormal investment between non-compliers and compliers indicating that an increased disclosure quantity does not have effects on firm’s real decisions related to investment efficiency.
MANAGEMENT ACCOUNTING RESEARCH IN AFRICA: REVIEWING THE PAST TO BUILD THE FUTURE REVIEW
NDEMEWAH, SINCLEAR RICHARD
HIEBL, MARTIN R.W.
Category: MA = Management Accounting
Although the interest of researchers on Management Accounting in developing countries have considerably growth within the last decades, a very small number of these studies are based on Africa. To our knowledge, a literature review in this field exclusively based on Africa does not exist in the existing literature. To fill that gap, this paper mainly uses the systematic literature review method to analyses 68 empirical articles on Management accounting in Africa. It contributes to understand the existing management accounting Practices in Africa, their influencing factors and investigates these practices in the Africa. Our results suggest more generally that the management accounting practice in Africa is still mainly restricted to traditional practices of budgeting and performance measurement. Additionally, we found that the diffusion of management accounting Practices in Africa is positively related to external institutional factors such as the pressures from foreign powers, stakeholders and donors as well as the globalization, privatization and decentralizations. From the existent literature, the current accounting practices are not widely accepted in Africa. The findings also reveal Management Accounting in Africa has the potential the increase the overall performance, but also induces the misuse of decision and resource power.
MACROECONOMIC ACTIVITY INFLATION AND AGGREGATE DOWNSIDE RISK IN EARNINGS
NEGAKIS, CHRISTOS
KOUSENIDIS, DIMITRIOS; LADAS, ANESTIS
Category: FA = Financial Analysis
Previous research has shown that aggregate earnings contain information for economic activity and inflation. In this study we focus in the downside risk of aggregate earnings and show that this measure is negatively related to current and future economic activity (using growth in real GDP as its proxy) and inflation rate. These results hold when we control for information from the stock market and imply that aggregate downside risk in earnings is a useful predictor for both the economic activity and inflation. Moreover, we also find that downside risk in earnings has incremental predictive ability over the downside risk in stock returns, while the latter is positively related to future economic activity and inflation. This last result shows that downside risk in earnings has different information content from downside risk in stock returns. More importantly however this result may also help in explaining the previous finding of the negative relation between aggregate stock returns and earnings. In specific, the likely implication is that aggregate downside risk in stock returns may relate to higher future payoffs, while the downside risk in earnings may relate only to lower economic activity.
'FRAGILE' ASSESTS AND ORGANIZED EXTORTION PROCESSES: THE CASE OF CENTRAL AMERICAN STREET GANGS
NEU, DEAN
Category: IC = Interdisciplinary/Critical
This study analyzes the role of accounting within the organized extortion activities of the street gangs Mara Salvatrucha and Barrio 18. These two street gangs are responsible for the majority of the more than $650 million of annual extortion activities that occur in the Northern Triangle countries of El Salvador, Guatemala and Honduras. Using a combination of archival, interview and participant observation data, the analysis illustrates the games of strategy and threats that occur around assets and proxies for asset value. Accomplishing extortion requires infrastructures of information and infrastructures of violence to help street gangs know assets and make them fragile as well as accounting skill to calculate and negotiate an extortion amount. While both information gathering activities and violence are necessary, street gangs tend to be pre-disposed to violence which potentially limits the types of extortion calculations that can be used. This said, street gangs utilize work around and compensatory strategies to partially make up for deficiencies in information and for their lack of formal accounting training.
VOLUNTARY DISCLOSURE OF BUSINESS CORE ACTIVITIES AND ITS ASSOCIATION WITH EARNINGS QUALITY
NEULAND, JANA
GRÜNING, MICHAEL; NEULAND, JANA
Category: FR = Financial Reporting
Due to the dominance of financial and accounting conventions in Germany, German GAAP financial reporting is limited in capturing information on biological assets. Although information about the production and use of biological resources is key to evaluate the economic situation of agricultural firms, special characteristics of livestock are not taken into consideration in financial statements. Biological assets are indistinguishable from other fixed assets, but there is no requirement for a separate disclosure. Altogether, the low regulatory quality allows for comprehensive managerial discretion in accounting. A number of agricultural companies disclose biological assets as a separate position voluntarily. Different from other research about the interaction of voluntary disclosure and earnings quality the voluntary disclosure in this special setting relates to the very core of a firm’s business activities. Accordingly, we are not limited to observe voluntary disclosure of information which are of marginal, maybe even questionable value to investors and creditors. Disclosure of livestock, i.e. the core asset to predict future cash flows and value the firm varies considerably among German agricultural firms – which makes the setting ideal to study the interaction of disclosure and earning quality. This paper finds some evidence on voluntary disclosure determinants of agricultural companies and of an association between voluntary disclosure of a core asset and earnings quality.
CROSS-LISTINGS AND VOLUNTARY DISCLOSURE: INTERNATIONAL EVIDENCE
NG, JEFF
CHEN, LONG; DONG, YASHU; TSANG, ALBERT
Category: MA = Management Accounting
This paper examines changes in firms’ disclosure behavior around cross-listings. Using an international setting, we find some difference in the likelihood or frequency of management forecasts between cross-listed firms and firms with similar firm characteristics but are not cross-listed. In addition, within the cross-listing sample, we observe higher likelihood and frequency of management forecasts when differences in accounting standards between a cross-listed firm’s home and target countries are larger. Further, we find that firms choosing to cross-list in target countries with larger difference in accounting standards tend to provide more voluntary disclosure prior to, rather than after their cross-listings, and such voluntary disclosure helps firms attract more foreign institutional ownership in their cross-listing target countries. Collectively, our evidence suggests that although accounting standards difference across countries could act as a deterrent to firms’ cross-listing activities, cross-listed firms, by providing more management forecasts voluntarily, preemptively alleviate the information disadvantage faced by foreign institutional investors and thus successfully prompt these institutional investors to hold their shares.
EFFECTS OF DIRECTOR NETWORKS ON ACQUIRING FIRMS’ EARNINGS MANAGEMENT PRIOR TO MA: TIME IS IMPORTANT
NGUYEN, THAI QUOC
DUONG, CHAU
Category: GV = Accounting and Governance
We investigate whether and how director networks between directors of acquiring and target firms in MA have impacts on accruals earnings management of acquiring firm. We compare average level of earnings management during two years before MA between acquiring firms in which their directors have director networks with directors of target (director networks) and acquirer firms in which their directors have NO network with directors of target (no-director networks). We do not find significant difference in the average level of accruals earnings management between these two types of firms. Our further analysis, however, shows that firms with director networks increase the level of earnings management significantly two years before the MA while firms with no-director networks manage their earnings more actively one year before MA. Our findings suggest that lower uncertainty about the MA deal in firms with director networks allow the firms to strategically time their accruals earnings management.
USING THE PROFILE OF CEOS TO DETECT EARNINGS MANAGEMENT
NGUYEN, TRI TRI
DUONG, CHAU; NARENDRAN, SUNITHA
Category: GV = Accounting and Governance
This research develops a composite score, namely PSCORE, to capture the profile of chief executive officers and examines how well PSCORE could signal the presence of earnings management. PSCORE aggregates nine aspects of the profile of chief executive officers which have been shown in the extant literature as drivers of earnings management. The factors cover four dimensions including financial expertise, reputation, internal power and personal characteristics. We find that PSCORE is positively correlated with many empirical proxies of earnings management, including discretionary accruals, proxies for real earnings management and the deviations of the first digits of figures reported on financial statements from what are expected by Benford’s Law. The findings suggest that having a general assessment of the profile of chief executive officers could signal the presence of earnings management.
DOES CAPITAL TAX UNCERTAINTY DELAY IRREVERSIBLE RISKY INVESTMENT?
NIEMANN, RAINER
SURETH-SLOANE, CAREN
Category: TX = Taxation
Tax uncertainty is often claimed to be harmful for investments. Capital taxes, such as property and wealth taxes, are particularly exposed to tax uncertainty. Capital tax uncertainty emerges from expected tax reforms, the unclear outcome of future tax audits, and simplified estimates of capital tax bases in investment models. Uncertain returns on investment as well as stochastic taxation contribute to overall uncertainty. Hitherto, it is unknown how capital tax uncertainty affects investment timing. However, it is well known that both uncertainty and capital tax may decelerate investment activities. We are the first to study the investment timing effects of stochastic capital taxes in a real options setting with risky investment opportunities. Our results indicate that even risk neutral investors are sensitive with respect to capital tax risk and may react in a surprising manner to a newly introduced stochastic capital tax. We find that increased capital tax uncertainty can accelerate risky investment if such uncertainty is sufficiently low compared to cash flow uncertainty. In contrast, high capital tax risk delays high-risk innovative investment projects. Thus, tax legislators and tax authorities should avoid high levels of capital tax uncertainty. Broadening the capital tax base or increasing the capital tax rate induces ambiguous timing effects. High-growth investments are likely to be postponed if they experience a capital tax cut.
AUDITORS’ PERCEPTION OF THE ASSURANCE FOR MANAGEMENT REPORTS
NIENABER, MATTHIAS
KAJÜTER, PETER; NIENHAUS, MARTIN
Category: AU = Auditing
We provide novel survey-based evidence on how auditors perceive the audit of management re-ports. By exploiting a unique setting in Germany where the audit of management reports has been mandatory for many years, we find that auditors perceive a lower auditability and a higher audit risk associated with the audit of management reports compared to the audit of financial statements. We also provide evidence that specific elements of the management report such as management forecasts or sustainability information are particularly challenging to audit for auditors. The extent to which audi-tors perceive a low auditability of management reports, however, varies with client characteristics such as size or listing status. In a last step, we shed light on the particular audit procedures used by auditors when auditing management reports. Our findings may be helpful for regulators in gauging the conse-quences of introducing a mandatory audit requirement for management reports. The findings may also inform the current debate about the assurance of sustainability reports or integrated reports, which share similar characteristics.
THE EFFECT OF STOCK OPTION PAY ON ANALYST TARGET BEATING – EVIDENCE FROM A QUASI-NATURAL EXPERIMENT
NIENHAUS, MARTIN
Category: GV = Accounting and Governance
This study provides plausible causal evidence on the effect of stock option pay on analyst target beating. I exploit a unique setting created by the introduction of Financial Accounting Standard (FAS) 123R in 2005, which led to an exogenous increase in the cost of option pay and thus to a substantial decline in option pay for some firms while leaving other firms unaffected. Using difference-in-differences analyses, I find a strong decrease in analyst target beating for firms with a decrease in option pay. In contrast to the notion that option pay provides incentives for earnings management, I do not find that the decrease in target beating is accompanied by a decrease in various earnings management activities. Instead, additional analyses provide plausible evidence that the decline is driven by a decrease in management effort.
THE IMPACTS OF PENALTIES FOR EARNINGS MANIPULATION IN STRATEGIC AUDITING WITH SIGNALING
NIGGEMANN, FELIX
Category: AU = Auditing
The purpose of this paper is to analyze the impacts of penalties for accounting fraud on auditor independence, the strategic decisions regarding audit effort, and the conduct of fraudulent accounting in manager-auditor interactions considering further interaction and signaling. As accounting fraud is a criminal act, I extend the existing strategic auditing literature by applying the insights from the economics of crime literature. Using a game theoretical model of strategic manager-auditor interaction, I allow for the manager to cover-up his earnings with another criminal act and find three main results. First, the manager cannot be incentivised to never commit accounting fraud resulting in a positive probability of a failed audit concomitant with a misrepresented financial report. Second, raising the penalty for fraudulent accounting never strictly decreases fraudulent behavior. On the contrary, higher penalties can encourage not only fraudulent accounting but also crimes of other nature as well. Third, I find that raising the penalty for accounting fraud can harm auditor independence, as he may be open for bribery if committing to a low audit effort is credible. These results raise the question whether the extensive increase in fraud penalties introduced by the Sarbanes-Oxley-Act (SOX) is more than solely a political statement, and suitable to serve their purpose as an instrument to restore investors' confidence and trust in financial statements.
TRUST, DISTRUST AND INTER-ORGANIZATIONAL MANAGEMENT CONTROL
NILSSON, ULF
AGNDAL, HENRIK
Category: MA = Management Accounting
Trust, distrust and inter-organizational management control This paper seeks to further conceptualize the association between trust, distrust and inter-organizational management control. In a case study of a retail buyer’s attempts to introduce controls resting on open book accounting, we identify some arenas of inter-organizational interaction associated with trust, others with distrust. Explanations can be found in the nature of control instruments but also in the implementation process in the particular arena. These findings lead us to question the purposefulness of studying (dis)trust and control at the relationship level. Instead, we suggest a different unit of analysis, namely the control domain within a relationship. By this we mean a particular area of inter-organizational interaction where control is applied for monitoring or coordination purposes. Since trust and distrust are not isolated phenomena, we also propose the term spillover effects to denote the ways that trust and distrust spread to interact with control in other domains of a relationship. Unlike the dominant view in control research that trust-building represents a cumulative process, we thus argue that the formation of trust (and distrust) can also be seen as a diffusion process. This approach allows us to align some of the paradoxical findings of earlier research.
THE VALUATION RELEVANCE OF CREDIT RATINGS: EMPIRICAL EVIDENCE FROM FINANCIAL INSTITUTIONS AROUND THE WORLD
NIYAMA, JORGE KATSUMI
CASTELO BRANCO, MANUEL; CURTO, JOSÉ; LOURENÇO, ISABEL
Category: FA = Financial Analysis
This study investigates whether the market valuation of the two summary accounting measures, book value of equity and net income, is higher (lower) for the financial institutions positively (negatively) rated by the Moody’s and/or by the Standard and Poor’s, when compared to financial institutions that are not rated by these credit rating agencies. Findings suggest that positive ratings have an impact in valuation both in developed and emerging countries, and that in the case of emerging countries negative ratings do not impact market valuation significantly. Overall, the results are consistent with the idea that credit ratings are useful in reducing value uncertainty of the issuing firms and in mitigating information asymmetry in capital markets.
CSR DISCLOSURE, MARKET TRADING VOLUME, AND PRICE RESPONSE
NODA, AKIHIRO
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Recent years have seen a growing interest in corporate social responsibility (CSR) activities among market investors. Given the rise in socially responsible investment, information transparency on CSR performance is of substantial policy interest in asset market operations. This study uses a rational expectations model to analytically examine the effects of a firm’s CSR reports on market participants’ behavior, i.e., how CSR disclosure influences market trading volume, market price responses to market order flow, and the price informational efficiency regarding firm CSR performance. Moreover, this study presents a model in which there exists a trader, whose payoff depends on both the firm’s liquidation value and CSR performance, as well as liquidity traders and a market maker. First, results of the equilibrium analyses show that CSR performance uncertainty, which is irrelevant to firm economic performance, may increase market trading volume. Second, the market price response to CSR disclosure may decrease with CSR performance uncertainty. Third, price efficiency regarding firm CSR performance may increase with CSR performance uncertainty. Overall, the results suggest that, from the CSR reporting regulation view, the weight of a firm’s economic and CSR performance in CSR disclosure plays an important role in maximizing the degree to which price explains CSR performance.
COMPETITIVE THREATS, INFORMATION ASYMMETRY, AND INSIDER TRADING
NOVAK, JIRI
Category: FA = Financial Analysis
This paper provides evidence that intensified product market competition increases information asymmetry between corporate insiders and investors. I use volume and gains from insider trading as proxies for information asymmetry. I show that when a firm faces competitive threats insiders purchase and sell more stocks and their trading better predicts future stock returns and long-term profitability changes. These results hold for several alternative measures of competitive intensity and they are related to the degree of restrictiveness of insider trading regulation. I show that future firm performance turns more idiosyncratic when competition intensifies increasing forecasting relevance of firm-specific information better known to insiders. Furthermore, I provide evidence that firms reduce informativeness of mandatory and voluntary disclosures leaving investors in a disadvantage.
ACCOUNTING FOR INVESTMENT SECURITIES IN BANKS, RISK-BASED REGULATION, AND INFORMATION ASYMMETRY
OBERSON, ROMAIN
DONG, MINYUE
Category: FR = Financial Reporting
This study examines the association between accounting valuation of investment securities, the risk-weighting under Basel rules, and bank information asymmetry. Using a sample of U.S. banks from 2001 to 2014, we find evidence that the accounting value of investment securities is positively associated with banks’ bid-ask spreads. This relationship is weakened, when the risk-weighting of investment securities increases. Considering the heterogeneity in the nature of securities and the difference in accounting treatment of investment securities, we refine the analysis by partitioning securities into three categories ASC 320: trading, available for sale (AFS), and held to maturity securities. We find consistent results for AFS securities that the risk-weight of AFS securities moderates the positive relationship between the AFS securities and information asymmetry, but such a relationship is not valid for the other two categories. We also apply the dispersion in analysts’ earnings forecasts as a proxy for information asymmetry and we find consistent negative interaction coefficient. In addition, we examine the influences of bank specific characteristics on such relationship. Consistent with prior studies, our results are significant in banks that are weakly-capitalized or those engaged in earnings management. Overall, this study provides new evidence showing that the regulatory risk-weight moderates the relationship between accounting valuation and information asymmetry.
BUYER-SUPPLIER POWER DEPENDENCY IN TECHNOLOGY SUPPLY CHAINS: UNDERSTANDING THE ROLE OF MANAGEMENT CONTROL MECHANISMS
O'CONNOR, NEALE
JACOBS, KERRY; WU, ANNE
Category: MA = Management Accounting
While from a transaction cost perspective the issue of power and dependence is critical to the management of supply chain performance, existing results are often unclear or contradictory. We argue that further attention needs to be paid to the notion of power and dependence, particularly to the distinction between issues of position power and resource power and how the nature and balance of power is related to the use of management control mechanisms by buyers in business to business supply chains. Following a multiple case research design based on three studies of consumer electronics buyers with different degrees of power and their suppliers, we explore and extend the notion that management control mechanisms play an important role in managing different dependency contexts and draw on the management control literature to distinguish between cost control and performance management mechanisms. Based on the case studies, propositions are built concerning when and how management control mechanisms are deployed. As an underlying methodology, we conduct a within-case analysis followed by a cross-case analysis upon which we draw five propositions. The results show the impact that the power balance of the parties has on the use of different management control mechanisms as well as complementary multi-sourcing and vertical integration strategies deployed.
THE PENETRATION OF THE GLOBAL ACCOUNTING REGULATIONS INTO DOMESTIC STANDARD SETTING: THE ACCOUNTING STANDARDS BOARD OF JAPAN (ASBJ) FROM 2005 TO 2008
OGATA, KENSUKE
Category: IC = Interdisciplinary/Critical
Japanese accounting standard setter, the ASBJ, developed many domestic accounting standards, which aimed at converging with global standards, during the period from 2005 to 2008. This behaviour substantially differed from that of the period from 2001 to 2004. An aim of this paper is to make clear the standard setting process in the ASBJ during the period from 2005 to 2008, more specifically, to explain why and how the ASBJ changed the accounting standard setting approach. Based on the strategy-structure-performance paradigm in traditional organisation theory, we use social network analysis for analysing organizational structure of the ASBJ and discourse analysis for approaching the regulatory environment in which it found itself. According to our analyses, the Japanese regulators and business actors understood that the ASBJ should move Japanese standards closer to global standards on the ground of the isolation threat from the international society. To do so, the ASBJ structured itself as an accounting-profession-centric organisation for fostering a technical progress and for utilising the knowledge and wisdom concerning global standards that large Japanese accounting firms had acquired through their global networks. Consequently, the ASBJ developed many standards which aimed at converging with global standards.
TRANSFER PRICING CONFLICTS AND THE DECISION AUTHORITY OF THE TAX FUNCTION IN MULTINATIONAL COMPANIES
OLBERT, MARCEL
BAERSCH, SVEN-ERIC; HECKEMEYER, JOST HENRICH
Category: TX = Taxation
Our study investigates the degree of centralizing the decision authority with regard to the determination of transfer prices and transfer pricing outcomes. Analyzing survey data from transfer pricing managers of multinational companies (MNCs), we find that the allocation of transfer pricing decision authority at the tax department of a firm’s headquarters is associated with a higher propensity for disputes with tax authorities, in particular with respect to transactions involving financial activities, intellectual property and services. Our insights are of relevance for both firms and tax authorities. Specifically, transfer pricing disputes seem to be more frequent for firms with centralized decision making structures while we find no such relationship for common tax planning characteristics. We provide novel insights on the design and the objectives of firm-specific transfer pricing systems and show that centralization of decision authority is a major driver of external transfer pricing conflicts but not of internal coordination conflicts.
E-PORTFOLIO: IN SEARCH OF AN ALTERNATIVE ASSESSMENT
OPDECAM, EVELIEN
BUYSSCHAERT, FANNY; DE BEELDE , IGNACE
Category: ED = Accounting Education
Portfolios are considered valuable instruments related to competency-based education, used to guide and monitor students during their learning process. The main objective is to explore the possibility of introducing an electronic portfolio as an instrument to guide and assess the accomplishment of competences within an accounting educational setting. This study explores the differences in content, frequency and structure of these portfolio's. Moreover, this study explores the effect of an e-portfolio on student participation, student performance and student satisfaction. Participants were 87 graduate students in Business Economics, for an audit course. First, the study showed that students do not participate stable over time when using an e-portfolio. Students participated according to the deadlines. Second, we found a significant effect of the e-portfolio on the performance on the oral audit exam. Third, the study showed a low students’ appreciation of the e-portfolio. Moreover, the implementation procedure of the e-portfolio is discussed. Experiences are shared for the teaching practice and improvements of the implementation method are provided.
THE EMERGENCE OF INTEGRATED REPORTING IN PUBLIC HIGHER EDUCATION: EVIDENCE FROM EXISTING DISCLOSURE PRACTICE
OPRISOR, TUDOR
CORDOS, GEORGE-SILVIU; CRISAN, ANDREI-RAZVAN; NISTOR, CRISTINA SILVIA; STEFANESCU, CRISTINA ALEXANDRINA; TIRON-TUDOR, ADRIANA
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
The conceptual delineations and implementation of integrated reporting has raised questions regarding the need for restructuring organizational reporting. However, it looks nothing but a re-branding of previous forms of holistic reporting that focuses on both financial and non-financial metrics. The purpose of this paper is to set the grounds for showing whether public sector reporting entities already have these concepts in focus in their practice and how close are their current annual reports to a standard integrated report. Hence, the author assess the disclosure level using the basic model of integrated reporting, revolving around the fundamental concepts as fixed references. This research focuses on determining a disclosure index to assess the previously mentioned level of closeness between the two reporting sets, applied on two samples (one consisting of 53 top-ranked public universities worldwide – which are practically a benchmark, and another consisting of 53 public universities from an East-European emerging country). Using analytical tracking of the disclosure level on index components, the findings reveal disclosure patterns and prominent sources of data from existing reporting sets where information required to construct an integrated report can be found. Also, by employing comparative testing, the authors show that there are statistically significant differences between the levels of closeness to integrated reporting between the two samples of universities.
CORPORATE SOCIAL RESPONSABILITY, FINANCIAL INDICATORS AND GENDER IN LISTED COMPANIES IN FRANCE AND SPAIN
ORGAZ-GUERRERO, NEUS
ARIMANY-SERRATS, NÚRIA; MENENDEZ-PLANS, CARLOTA; ORGAZ-GUERRERO, NEUS; SABATA-ALIBERCH, ANNA
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
Purpose: This research’s objective was to investigate if the financial indicators and number of women who are on the board of directors of the top 20 companies listed on the Spanish and French stock exchange affected these companies’ corporate social responsibility (CSR) scores, from 2010 to 2013. Methodology: Based on a review of the literature on the relationship between CSR, financial indicators and gender, we developed a model using panel data. Our main goal was to analyse which accounting information explains companies’ CSR score, which was measured by the indices generated by the CSR Monitoring Centre for Spanish companies and published by the consultancy firm, Reputation Institute, for French companies. In addition, this study sought to establish if gender is an explanatory variable for CSR scores. Findings: The explanatory variables of the CSR index are gender, company size, debt levels, sales and return on assets (ROA). The results reveal that sales, the presence of women on the board of directors and ROA best explain CSR index scores.
PEER INFLUENCE ON MANAGERIAL HONESTY: THE ROLE OF TRANSPARENCY AND EXPECTATIONS
OSTERMAIER, ANDREAS
BRUNNER, MARKUS
Category: MA = Management Accounting
We investigate peer influence on managerial honesty under varying levels of transparency. In a laboratory experiment, managers report their costs to a superior to request budget. We manipulate whether the managers learn each other's report and cost (full transparency) or the report but not the cost (partial transparency). The results show, first, that managers are susceptible to peer influence, as they join peers in reporting honestly and dishonestly both under full and partial transparency. Second, however, the effect of peer influence is asymmetric. While managers' dishonesty increases much when peers' reports are higher than they have expected, the opposite is not true. Third, partial transparency reinforces this asymmetry in peer influence. Unlike full transparency, it allows managers to substitute self-serving assumptions for missing information and to thus justify their own dishonesty more easily. The contribution of this study is twofold: it provides evidence for the interaction between transparency and peer influence and it highlights the role of (disappointed) expectations in fueling dishonesty. Our findings warn firms that especially partial transparency may spread dishonesty more than honesty. Transparency may also hurt firms that push honesty norms (as in ethics codes) but fail to enforce compliance, thus raising and disappointing managers' expectations.
TRUST IN FAIR VALUE ACCOUNTING: EVIDENCE FROM THE FIELD
OW YONG, KEVIN
LIM, CHU YEONG; NG, JEFFREY; PAN, GARY
Category: FR = Financial Reporting
We provide survey evidence on the reliability of fair value estimates. We formulate our survey questions based on the various issues raised in the fair value accounting debate as to whether a fair value accounting model will benefit investors, and whether the application of the fair value measurement model facilitates or impedes financial markets. We find that our survey respondents indicate an overall high level of trust toward financial statements. Notwithstanding that, our survey respondents believe fair value accounting has the potential to decrease their level of trust in financial reporting. We also find that our survey respondents express a high level of distrust toward Level 3 fair value estimates. This result is especially revealing given that survey respondents have direct access to the fair value estimation process of these instruments. Apart from fair valuing trading securities and available-for-sale securities, there is a lack of support toward fair valuing other classes of assets. When we assess differences in opinions between auditors and accountants, we find that the former exhibit more trust toward fair value accounting than the latter. Interestingly, we also find that auditors perceive there is a higher benefit accruing to investors from the adoption of fair value accounting than accountants.
THE EFFECT OF EXPENSE RECOGNITION ON FUTURE STOCK PRICE CRASH RISK
PAEK, WONSUN
Category: FR = Financial Reporting
This study examines whether different patterns of expense recognition affect stock price crash risk. A firm experiences stock price crash when firm-specific hidden bad news arrives to stock market at once. Following Dichev and Tang (2008), we consider the association between current-period revenues and previous-period (next-period) expenses to be accelerated (delayed) recognition of expenses. We find that stock price crash risk increases with the delayed expense recognition and it decreases with the accelerated expense recognition. This suggests that delayed expense recognition is a means to hiding bad news.
THE MACROECONOMICS DETERMINANTS ON THE ADOPTION OF THE IFRS FOR SMES
PAIS, CLÁUDIO
BONITO, ANA
Category: FR = Financial Reporting
The objective of this study is to analyze the macroeconomic factors that influence the decision of the countries in the adoption of International Financial Reporting Standards (IFRS) for small and medium-sized entities (SMEs). Based on a sample of 84 countries, it is found evidence that countries without a national set of financial accounting standards for SMEs, experience in the application of IFRS and a common law legal system are more likely to adopt IFRS for SME. However, the level of education, the level of foreign aid received by a country, the quality of accounting standards and the relationship between accounting and taxation have no impact in the national adoption decision of IFRS for SMEs. Additionally, it is found that European Union (EU) member countries are less likely to adopt the standard. Knowledge of macroeconomic factors affecting the national adoption decision of IFRS for SME is useful for a several numbers of entities that define the international accounting harmonization, as the IASB, regulators and international accounting firms, since this information can help them in promoting worldwide adoption of the standard.
THE EVOLUTION OF MANAGEMENT CONTROL IN A TRANSITION CONTEXT. A MOLDOVAN CASE STUDY
PALADI, IRINA
FENIES, PIERRE
Category: HI = History
The purpose of this paper is to provide a comprehensive evidence on (evolution of) management accounting function/change in a transition context. A longitudinal case study on a company from a former Soviet country using historical data allows us to assess the main features of management control function under the centrally planned economic system and the transformations induced by the transition to market economy. A stakeholder approach highlights the importance of (considering) the emergence of new stakeholders and their impact on management control function evolution in case company. The methodology is based on a single case study, in a historical perspective. We rely principally on primary data collected from semi-structured interviews with company representatives. We used as well secondary data. The empirical description of the case is organized around the management control function, analysing its actors, tools and organisation in different periods of time. The study provides insights on management control change during an extended period of time, characterized by different economic systems (command economy and transition to market economy and radical changes induced by the transition process. This work contributes to research evidence on former former Soviet companies and extends our knowledge about radical transformations of management control in a turbulent and uncertain environment of transition).
THE INFLUENCE OF NATIVE VERSUS FOREIGN LANGUAGE ON INTERNAL AUDITORS’ JUDGMENTS ON WHISTLE-BLOWING: EVIDENCE FROM CHINA
PAN, PEIPEI
PATEL, CHRIS; ZHENG, ZHUORU (BELLA)
Category: AU = Auditing
Our paper contributes to the literature by examining the influence of Chinese internal auditors’ native language, namely Simplified Chinese versus English on their whistle-blowing judgments. Whistle-blowing as an internal control mechanism is important and controversial both globally and in China. The topic of whistle-blowing is selected because the traditional Chinese cultural values of interdependence, obedience and subordination discourage organisational members to engage in whistle blowing. However, the Code of Ethics requires internal auditors to report wrongdoings. This ethical dilemma provides an appropriate context for our study. We conducted a controlled within-subject experiment among 120 Chinese internal auditors who are proficient in both Simplified Chinese and English. To address the limitations of prior research, the complexity of individuals’ ethical judgments is captured by using a combination of a uni-dimensional ethics measure and a Multidimensional Ethics Measure (MEM). Our findings support the hypothesis that Chinese internal auditors are likely to be more ethical when the ethical dilemma on whistle-blowing is presented in Simplified Chinese than in English. Our findings have implications for researchers and the globalized business world where proficiency in more than one language is predominant. We suggest that systematically different ethical judgments in native and foreign languages needs to be recognized by researcher and business world.
WHAT CAN WE LEARN ABOUT CREDIT RISK FROM DEBT VALUATION ADJUSTMENTS?
PANARETOU, ARGYRO
LIN, WEN; PAWLINA, GRZEGORZ
Category: FR = Financial Reporting
Motivated by the debate about the introduction of the fair value option for financial liabilities (FVOL) and the requirement to recognize and separately disclose in financial statements Debt Valuation Adjustments (DVAs), this study investigates what we can learn about credit risk from the DVA disclosures. Using a sample of U.S. bank holding companies that adopt the FVOL, we show that DVAs cannot be explained by the same factors that explain changes in the credit quality of these institutions. Estimated DVAs based on a structural model generally deviate from the reported DVAs, indicating that reported DVAs provide information that is not captured by the market. This can be a result of a superior ability of managers to estimate own credit risk or the opportunistic use of the FVOL. The paper therefore contributes to the literature on the economic consequences of fair value accounting and non-mandatory disclosure.
MEASURING REPORTING QUALITY: RECOGNITION VERSUS DISCLOSURE
PANDIT, SHAILENDRA
CASEY, RYAN; GAO, FENG; KIRSCHENHEITER, MICHAEL; LI, SIYI
Category: FR = Financial Reporting
This paper builds a new measure of financial reporting quality (RQ) based on the disaggregation quality (DQ) measure from Chen, Miao, and Shevlin (2015) and the financial statement articulation model from Casey, Gao, Kirschenheiter, Li, and Pandit (2016). Similar to DQ, RQ is a parsimonious measure of the quality of data disaggregation in the annual report that can be constructed through counting the number of nonmissing financial statement items for all industrial companies in the Compustat universe. However, RQ constitutes a more refined measure as it undergoes three steps of screening to minimize errors in the counting process. The paper further proposes separate RQ measures based on recognition and disclosure relations, respectively. Empirical tests show that the two reporting quality measures—RQ-recognition and RQ-disclosure—exhibit different levels of association with proxies for the quality of the company’s information environment, including forecast accuracy, dispersion, and bid-ask spread.
HOW ACCOUNTING INFORMS RISK DISCOURSES IN PUBLIC INTEREST DECISIONS: A CASE STUDY
PANFILO, SILVIA
LAI, ALESSANDRO; STACCHEZZINI, RICCARDO
Category: IC = Interdisciplinary/Critical
On the 26th July 2012 ILVA S.p.A. - an Italian iron and steel company belonging to the second European steel industry group - was accused of environmental disaster, and its operations were halted by the Italian Magistrature. A few months later, the Italian Government declared the company as a Strategic National Interest Site (SIN) and allowed it to restart production: the Government substantially gave prominence to social risks (unemployment issues) rather than societal ones (related to environmental and health issues). The paper explores how accounting (i.e. calculative technologies) participates in the construction of risk discourses. Drawing on a Foucauldian Discourse Analysis (FDA), the analysis shows that the role of accounting is twofold: at first, it makes possible to build a specific discourse on risk; secondly, it legitimizes the “truth” that governors try to support.
COMPONENTS IN BANKS' INCOME STATEMENTS AND THEIR RELEVANCE FOR EQUITY AND BOND INVESTORS
PAPADOPOULOS, SAVVAS
MARTON, JAN
Category: FR = Financial Reporting
In this paper we study the relative effect on stock and bond markets of different components in banks' income statements. We divide the operating part of the income statement into loan loss provisions (LLP) and all other operating income. Our hypothesis is that LLPs - which relate to default probability in banks - give a stronger effect on bond markets. Meanwhile, other parts of operating income - which provide a general measure of performance - gives a stronger effect on stock markets. Results confirm this hypothesis. Although there is a large literature on the relevance of accounting for credit losses, it tends to focus on relevance for shareholders rather than debtholders. Our findings suggest that debtholders are primary users relating to accounting for credit losses. This suggests a rebalancing in the user focused in research.
ASYMMETRIES IN THE PERSISTENCE AND PRICING OF CASH FLOWS
PAPANASTASOPOULOS, GEORGIOS
Category: FA = Financial Analysis
Consistent with the implications of conditional conservatism, we show that the differential persistence of cash flows relative to that of accruals is higher across loss firms than profit firms. Further, we find that the positive relation of cash flows with future returns is more severe in loss years relative to profit years. The abnormal return earned from a hedge strategy on cash flows for loss firms is more than two times higher than the respective return for profit firms. Overall, we conclude that naïve fixation on earnings is a key factor in explaining the cash flow effect on future returns.
MAKING SOCIAL IMPACT CALCULABLE: THE DEVELOPMENT OF SOCIAL RETURN ON INVESTMENT
PARISI, CRISTIANA
Category: MA = Management Accounting
This paper explores the measurement of social impact with a particular focus on the Social Return on Investment (SROI) managerial technology. Aspects of Actor-Network theory (ANT) are mobilised in order to study the mechanisms of representing and making a complex object such as ‘social impact’ manageable. More specifically, it is suggested that the SROI managerial technology is a centre of translation, which allows social impact to be made commensurable. This research is based on an in-depth case study of the creation of the SROI for the Adolescent Health Programme (AHP) programme of a large international development organisation rooted in Bangladesh. The aim is to investigate how SROI guidelines are translated into practices via a “large star-shape web of mediators” (Latour, 2005; p. 217) that allows a previously black-boxed object such as social impact commensurable. This study contributes to the stream of accounting research drawing upon ANT by showing how the human actors and non-human traces are arranged in the creation of social impact through the measurement of the SROI. The in-depth analysis performed by this paper broades the view on the infrastructure of referentality needed to fill out the calculation of the social impact through the SROI. In fact, the paper illustrates how the definition of social impact linked to the calculation of the SROI is clear in principle, but ambiguous in practice and only held together because it refers to other agencies for support.
THE EFFECT OF CLIENT SIZE ON AUDIT QUALITY TURNING POINT
PARK, YEON HEE
CHOI, KWON IL ; KO, WANSUK; SONG, INMAN
Category: AU = Auditing
Audit quality turning point may be affected by audited firms' size and the turning point for smaller firms may be different depending on audit firms' types.In general, the audit period is longer, the more decrease auditor independence, but the more increase auditors' expertise. However, as time passes, audit quality may begin to decrease when the effect of the higher auditor expertise no longer offsets the effect of the lower auditor independence. Especially, when a firm’ size, which may reflect the complexity of the firms' operating activities may affect auditors' expertise. This study has two research objectives. First, this study tests whether audit quality’s turning point may be different depending on client’s size. Second, it analyzes whether the audit quality’s turning point may be different in smaller firms depending on auditors' type. The results of this study are as follows. The larger the client firm, the later the audit quality turning point. In addition, for smaller clients, the audit quality turning point of BigN firm comes sooner that of non-BigN audit firm.
25 YEARS OF CHANGE IN MANAGEMENT CONTROL SYSTEMS AND BUSINESS EDUCATION IN ESTONIA
PÄRL, ÜLLE
Category: ED = Accounting Education
Significant economic growth at the beginning of 2000s, accession to the European Union in 2004, adopting the euro in January 2011 and introducing e-Residency in 2014 are landmark changes in Estonia during the last 25 years. In Estonia, apart from the changes in the business environment, substantial changes have occurred in business education and training over the last 25 years. This article provides an overview of statistics and studies completed in Estonia over the last 25 years. We analysed and summarised information from several studies. The current research once again emphasizes that the main factor facilitating management control developments in Estonian companies is the education and experience of the (top) management. To develop the business and economic environment in the country, Estonian entrepreneurs need high-level data processing, analytical and financial education, and practical training courses.
DO PERSONALITY TRAITS INFLUENCE THE EFFECTIVENESS OF BALANCED PERFORMANCE EVALUATION SYSTEMS? AN EXPERIMENTAL INVESTIGATION USING AMAZON MECHANICAL TURK.
PATELLI, LORENZO
DWORKIS, KELSEY
Category: MA = Management Accounting
We conduct two experiments to determine whether the level of narcissistic personality characteristics influences the performance implications of performance evaluation systems (PES). In our first experiment, we investigate whether narcissism intervenes in the relationship between the design of PES (i.e., the use of a different number of dimensions and a wider dispersion of measurement weights) and individual performance. In our second experiment, we introduce feedback valence to determine the effects the sign of feedback has on individuals with different levels of narcissism and under different designs of PES. For both experiments, we use participants recruited through Amazon Mechanical Turk. We find that individuals with a high level of narcissism perform better under more balanced PES. Also, we find that independent from narcissism, individuals perform better when provided with positive feedback and yet, this effect is stronger in the presence of narcissism. Finally, results indicate that individuals with high level of narcissistic characteristics seem to thrive under balanced PES when provided with positive feedback. These results are consistent with our hypotheses that balanced PES cause goal conflict due to the syphoning of cognitive resources towards self-regulatory processes and that narcissism and feedback valence influence subsequent performance implications.
ENHANCING BANK STABILITY THROUGH INVESTOR HORIZONS
PATHAN, SHAMS
PATHAN, SHAMS
Category: GV = Accounting and Governance
We assess whether investor horizons influence bank risk-taking, and if so what tools that enable this. We find that short- (long-) term investors increase (decrease) risk-taking and substantially deter (improve) performance during the 2007-2009 financial crisis. These relations are more prevalent with competition and strong shareholders’ rights. In contrast to short-term investors, long-term investors engage in more conservative investment, financing, business and loan-monitoring activities. Long- (short-) term investors enable managerial incentives that discourage (encourage) risk-taking. For instance, long-term investors offer more inside debt to CEOs. We use two popular identification strategies – indexing and two-stage least squares – to suggest that these relations are causal. Overall, the results suggest that bank stability can be enhanced through heterogeneity of investor horizons.
MAINTAINING THE UNIVERSAL BANKING MODEL - AN INSTITUTIONAL THEORY PERSPECTIVE ON THE ENDOGENIZATION OF A TRANSNATIONAL POST-CRISIS FINANCIAL MARKET REFORM
PELGER, CHRISTOPH
MÜNZER, MARGIT
Category: IC = Interdisciplinary/Critical
In the aftermath of the financial crisis, governments and regulators intended to strengthen financial stability by changing the regulatory architecture of banking and financial markets. One of the issues widely discussed was the question whether the universal banking model, i.e. the possibility to combine trading and deposit-taking activities, should be restricted or prohibited by regulation. Relying on the theories of institutional maintenance work and the endogenization of law, this paper examines the rule-making process of the EU structural banking reform which did not lead to any final regulation. We show different rhetorical strategies employed by actors in the regulatory space and analyse how the views voiced by those actors successively entered the European regulatory proposals. Moreover, we reveal the important role that the establishment of prior national regulations on banking structure in some EU countries played in shaping the transnational rule-making process. Overall, our findings indicate an iterative interplay between endogenization and institutional maintenance work as endogenization is not only the result of successful maintenance work but is also part of institutional maintenance work itself.
THE BATTLE AGAINST FRAUD: DO REPORTING MECHANISMS WORK?
PELTIER-RIVEST, DOMINIC
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This paper explores how well reporting mechanisms work, investigates current trends and develops a framework for implementing effective mechanisms. This study shows that the median number of annual reports equals 1.2 percent of the number of employees in an organization and that 40 percent of these reports have merit (Navex, 2014). In addition, 42.2 percent of all frauds are detected through internal reports, whatever their form. Organizations with formal reporting mechanisms sustain fraud losses that are 40.5 percent less than other organizations (ACFE, 2014). Moreover, employees are more willing to report theft, human resource and workplace issues than fraud and corruption, while 21 percent of all whistleblowers have experienced some form of retaliation for reporting wrongdoing (ERC, 2014). The study results show that the option to remain anonymous is offered only by 74 percent of reporting mechanisms. This paper argues that effective reporting mechanisms should actively encourage whistleblowing, that all credible allegations should be independently investigated and that whistleblowers should be offered the option to remain anonymous. The oversight and the daily administration of reporting mechanisms should be given to two different parties who are independent from management and do not participate in incentive compensation plans (Lipman, 2012). The effectiveness of reporting mechanisms should be periodically assessed and communicated during ethics training sessions.
EFFECTS OF RULES-BASED VERSUS PRINCIPLES-BASED ACCOUNTING STANDARDS ON ACCOUNTING QUALITY
PENG, BAOCHUN
CHENG, C.S. AGNES ; LI, XIAO (AMANDA)
Category: FR = Financial Reporting
We develop a theoretical model that analyzes the effects of using rules-based versus principles-based accounting standards on accounting quality. Earnings produced under principles-based accounting standards tend to be unbiased and does not involve conservatism. However, under rules-based accounting standards, investors could choose to use accounting conservatism as a tool to preempt earnings management. Additionally, when firms interact strategically, the risk of earnings management can become pervasive—a risk better controlled under rules-based accounting standards. In general, when there is a greater degree of uncertainty that earnings management is being used, rules-based accounting standards serve to better control the practice. However, principles-based accounting standards have the advantage of enabling the manager to timely disclose private information—an advantage that increases as the economic environment becomes more complex. Whether the regulator favors rules- or principles-based accounting standards depends on the potential (1) cost reduction resulting from better controlling earnings management practices (rules-based) versus (2) gains from more timely disclosure of private information (principles-based).
THE IMPACT OF BUSINESS STRATEGY AND MANAGERIAL PERSONAL INCENTIVES ON FIRMS’ CSR ENGAGEMENT.
PENG, CHIH-WEI
Category: MA = Management Accounting
While there is a growing body of studies examining both the differences between firms that perform strongly and poorly with regard to CSR, prior works have not paid much attention to the association between CSR and competitiveness strategies. This study thus analyzes how corporate strategy affects managerial CSR engagement based on US firm data from the KLD database for the period 2008-2012, in order to fill this gap in the literature. This study finds that prospector strategy has a strong positive association with CSR. In addition, this study also explores the role of managerial personal long-term and short-term incentives in relation to CSR. This study finds CEOs with long-term incentives are more motivated to engage in CSR. In contrast, CEOs with short-term incentives are less motivated to invest CSR. Finally, integrating the business strategy and managerial incentive literature, this study investigates whether firms have superior CSR if they tend to align their managerial personal incentives with the company’s overall strategy. This study finds CEOs with short-term incentives have less incentive to invest in CSR if their firms adopt a defender strategy, and this is not a case for those adopting a prospector strategy. This study can thus contribute to implementing business strategies more effectively, insofar as it can improve our understanding of the complexity of CSR within a competitive environment.
THE VALUE RELEVANCE OF BRAND VALUATION
PERRONE, ANDREA
BAGNA, EMANUEL; DELL'ATTI, VITTORIO; DICUONZO, GRAZIA
Category: FA = Financial Analysis
The reports published by independent parties are often used to provide an estimation of brands due to the lack of literature and best practices regarding which brand valuation method is more value relevant and reliable than the others. In the last years, brand valuation debate is growing in importance because of the need to provide a value of intangibles for different purposes such as property transfer, purchase price allocation and tax benefits. However, different valuation methods are used by brand agencies. The purpose of this study is twofold. Firstly, we aim to understand whether brand valuation related to listed companies provided by Interbrand, Brand Finance and Millward Brown (BrandZ) is value relevant and therefore whether these brand valuations are taken into consideration by investors in their decision-making process. Secondly, we assess which of the three methods reflects the stock markets in a better way. We analyse a sample of 71 brands valuated by Interbrand, Brand Finance and BrandZ from 2013 to 2015 and published on their reports. The results show that brand valuation provided by the independent agencies is value relevant; in addition, they reveal that Brand Finance method, based on the royalty relief approach, is more value relevant than the others and therefore it is better reflected into stock prices. This study can contribute to the extant literature on value relevance by providing evidence on the impact of stock prices of brand agencies’ valuation.
VOLUNTARY DISCLOSURE AND INFORMED TRADING
PETROV, EVGENY
Category: FR = Financial Reporting
I study the impact of informed trading on voluntary corporate disclosure in the presence of two frictions: cost of disclosure and value of managerial information. In the absence of both frictions, informed trading has no impact on disclosure even when traders are not certain whether the manager has information. If disclosure is costly, then informed trading reduces disclosure. Since traders can discover favorable information about the firm, additional disclosure of the information is not necessary. If managerial information is valuable for the firm, then informed trading increases disclosure. Since traders can discover unfavorable information about the firm, the manager with such information has less incentives to pool with uninformed managers and discloses to show that he is informed. I also show that informed trading can have both a positive and a negative real effect on the firm value by crowding in or crowding out information production in the firm. These results hold for general information structures and are robust if traders can choose how much information to acquire.
THE FRAMING OF CONTROLS
PETTERSEN, INGER JOHANNE
SOLSTAD, ELSA
Category: IC = Interdisciplinary/Critical
New control challenges have emerged, as public services are coordinated between autonomous units. To solve such problems, mergers of hospitals into large units have been introduced in Norway. However, there is great uncertainty as to the effects of increased hospital consolidation. This study focuses on the internal management aspects as mergers between hospitals often imply management control at a distance. The research question is how clinical department managers and professionals in hospitals perceive their relations with top managers at a distance when the contexts are changed due to mergers. A merger process including two hospitals was studied over 11 years. The paper focuses on distance as one important contextual element that affects the relationship between top managers and their employees in a merged hospitals. Our study shows that not only geographical distance but also other aspects of distance, such as the emotional and cognitive dimensions, may play significant and different roles in management control between organizational levels. This implies that the effect of distance may be different in vertical and more lateral and horizontal management controls. Our article contribute to our understanding of distance, because in mergers physical distance has been problematized more than the other dimensions of distance.
AUDITOR LIABILITY CAPS, AUDITING ENFORCEMENT AND ASYMMETRIC ECONOMIC CONSEQUENCES
PETTERSSON, KIM
Category: AU = Auditing
This paper investigates the economic consequences of auditor liability caps and auditing enforcement in the EU Member States. Our results cannot support that audit quality is lower in the Member States with a cap on auditor liability than in the Member States without a cap. However, we find evidence of higher \emph{perceived} audit quality in the Member States without a cap on auditor liability than in capped Member States. Interestingly, we also show that auditing enforcement is only effective in the Member States \emph{without} a cap on auditor liability. This adds to the political debates in the EU, the US, and other countries\slash jurisdictions on the regulation of auditor liability.
THERE IS NO LOCK-IN EFFECT ON REAL ESTATE MARKETS
PETUTSCHNIG, MATTHIAS
HOERMANSEDER, STÉPHANIE A.
Category: TX = Taxation
We utilize the introduction of a real estate capital gains tax in Austria in 2012 to empirically analyze the impact of the introduction of such a tax. For our analysis we exploit administrative data on the universe of real estate transactions in Austria from 2009-2015 gathered from the official Austrian Land Register which is kept by the local district courts. We find a very strong short-term timing reaction during the announcement phase of the tax reform as activity levels in the market increased by 25%. This short-term concentration effect however is not linked to any statistically significant short-term price reactions. Over the long run, the analysis does not provide statistically significant evidence for the existence of a lock-in effect. In contrast to financial markets on the real estate market the transaction volume reverts back to the long time average after the short-term peak during the announcement phase.
OVERCOMING VALIDITY PROBLEMS WITH THE DESIGN OF EPMS IN AN AGRICULTURAL SETTING
PHAM, HANNAH
BROWN, DAVID; BROWN, PAUL; SUTTON , BRUCE
Category: SEE = Social and Environmental Accounting & Ethical Issues in Accounting
This study explains how environmental performance measurement systems (EPMS) can be designed to overcome validity problems with sustainability performance measures, thereby improving the quality of sustainability related information, and decision making. Extant EPMS research provides little insight into how to design valid environmental performance measures which could provide managers with precise environmental performance information to enable decision making and control over environmental sustainability. We argue that there are two key reasons for this; that theories from environmental and other sciences are yet to inform EPMS design; and that while environmental management typically occurs at an operational level, EPMS typically reside at the organisational level. We address these two challenges with a new theoretical construction of a multi-level decomposition EPMS model - which we label, Water and Economic Sustainability Performance Measurement (WESM). The model integrates science into an accounting framework. We subsequently examine how the WESM model can be used to support managers in improving sustainability-related decision making and control using a two- phased crop production simulation modelling approach. The simulation results provide significant implications for the cotton industry (and agriculture more broadly) with the potential to save hundreds of gigalitres of water and increase profitability by tens of millions of dollars per crop season in Australia.
THE COLONIZATION OF PUBLIC ACCOUNTING FIRMS BY MARKETING EXPERTISE: PROCESSES AND CONSEQUENCES
PICARD, CLAIRE-FRANCE
DUROCHER, SYLVAIN; GENDRON, YVES
Category: IC = Interdisciplinary/Critical
This paper highlights the colonization of public accounting firms by marketing expertise. Using data collected through interviews with auditors and marketing experts complemented with data generated through documentary analysis, we examine the marketing-oriented transformations that took place in public accounting firms and the important outcomes ensuing from the spread of marketing ideology in the field. To carry out this work, we developed a customized conceptual framework aimed at enriching our understanding of the “marketization” of public accounting. We document the development of various marketing strategies and the underlying translations of public accounting firm day-to-day activities (in terms of business relationships and technical advice) into marketing language. Our findings point to the transformation of public accountants to “part-time” marketers and the colonization of the minds of public accountants whose core values are being subjected to the invasive influence of marketing expertise, which may have the potential to undermine substantive auditor independence.
MULTINATIONAL TAX AVOIDANCE: IS IT ALL ABOUT PROFIT SHIFTING?
PIERK, JOCHEN
BEUSELINCK, CHRISTOF
Category: TX = Taxation
The standard perception on international tax planning strategies is that multinational companies (MNCs) avoid taxes via cross-jurisdictional income shifting. In the current paper, we investigate this allegation by observing the proportion of within-country tax avoidance for a large sample of European multinationals and their domestic and foreign affiliates. We find that, on average, MNC tax avoidance is positively related to the level of subsidiary tax avoidance suggesting that not all tax avoidance pertains to income shifting. Moreover, we find that MNCs with more subsidiaries rely more on within-country tax avoidance but find no evidence that within-country tax avoidance substitutes for cross-jurisdictional income shifting in low-intangible MNCs. However, we document that in more recent years, i.e., when income shifting has landed in the eye of the debate on ethical tax planning, listed firms have relied significantly more on within-country tax avoidance strategies compared to before the crisis period. In general, these findings are in line with the political cost hypothesis as in Zimmerman (1982).
THE EFFECTS OF TIME PRESSURE ON THE BELIEF REVISIONS OF NONPROFESSIONAL INVESTORS
PIETSCH, CHRISTIAN
MESSIER, WILLIAM
Category: FA = Financial Analysis
This study examines the effects of time pressure (TP) on nonprofessional investors’ belief revision and short-term investment decisions. In an online experiment, individual investors, who actively invest in common stocks, completed an investment decision case. Participants made a stock price judgment and a short-term investment decision following the receipt of a news announcement that contained four pieces of mixed information about the company’s stock. We manipulated the order in which the information was presented and the time available to make the stock price judgment and investment decision. First, we find that TP has a significant effect on investors’ stock price judgments. Individuals under relatively higher levels of TP estimate the stock price to be significantly lower, compared to investors under low TP. Second, significantly more participants in the low TP condition decide to invest short-term, compared to participants under a relatively higher level of TP. Manipulation checks suggest that the increased cognitive strain, caused by higher levels of TP, result in attentional selectivity in the form of heavier weighting of negative information in order to cope with increased levels of TP and the attentional selectivity decreases perceived TP, stress, and difficulty. Third, neither the order in which information was presented to investors nor its interaction with TP significantly affected participants’ stock price judgments and investment decisions.
PENSION PLANS ASSUMPTIONS: THE CASE OF DISCOUNT RATE
PINTO, INES
MORAIS, ANA ISABEL
Category: FR = Financial Reporting
In 2009, International Accounting Standards Board decided to revise IAS 19 – Employee benefits. One of the revisions is related to the measurement of the annual expense for a defined benefit plan, which includes the net interest expense or income, calculated by applying the discount rate to the net defined benefit asset or liability. This value replaces the interest cost (determined using the discount rate) and expected return on plan assets (determined using the expected long-term yield on the assets in the fund). This change may increase pension costs, as the expected return has traditionally been higher than the net interest. The objective of this paper is to investigate the impact of the changes in the measurement of the annual expense for a defined benefit plan on firm valuation and managerial discretion. Since the discount rate is now used both for the measurement of the interest cost and the return of plan assets, we expect that companies will no longer have the flexibility to manage assumptions of defined benefit plan. Therefore, we expect that after the revision of IAS 19, there will be an increase of annual expense and consequently a decrease in firm valuation measured by Tobin´ Q. We use a sample of FTSE 100 companies for the period between 2009 and 2015. Our results show that after the enforcement of IAS 19 revised, the impact of the return on plan asset on firm valuation is negative which suggests that there is less managerial discretion.
OPERATIONAL RISK DISCLOSURE QUALITY AND NATIONAL CULTURE: EVIDENCE FROM THE EU BANKING INDUSTRY
PINTO BASTO, FLORENCE
MARQUES, ANA
Category: FR = Financial Reporting
We study the association between national culture and voluntary operational risk disclosure quality in the EU banking industry, using a unique hand-collected dataset of 469 firm-year observations for 78 listed EU banks for the period of 2008-2014. We predict and find that individualism vs collectivism is the only cultural dimension that is associated with voluntary operational risk disclosure quality. We control for several bank-level and country-level variables when conducting the analyses. We also find that this association is weaker for global banks. This evidence is consistent with global banks’ board of directors being more culturally diverse, which may explain why cultural values of the country where the bank is headquartered are less meaningful. Our results are robust to sensitivity tests, including the use of GLOBE’s in-group collectivism dimension.
THE AUDITOR'S REPUTATION AND ITS EFFECT ON AUDIT QUALITY AND AUDIT PREMIA
PLIETZSCH, ELISABETH
KRONENBERGER, SEBASTIAN
Category: AU = Auditing
In this paper, we emphasize the importance of reputational concerns on parameters of the audit process. Based on Bayesian belief updating, we model a concave reputation function, which represents auditor's history of successful and unsuccessful signals and indicates the potential reputational gains and losses for an auditor at a given point in time. We show that audit quality does not always increase in audit reputation, as commonly suggested, but has a U-shaped form. As a consequence, the client does not automatically prefer high reputation in an auditor, but sometimes picks the auditor with the smaller reputation. This finding contributes to empirical research on Big 4 vs non-Big 4 audit quality and Big 4 premia.
DOES ACCOUNTING STANDARDS CHANGE ON EQUITY-LIABILITY CLASSIFICATION MATTER? EVIDENCE FROM COOPERATIVE ENTITIES.
POLO-GARRIDO, FERNANDO
MARI-VIDAL, SERGIO
Category: FR = Financial Reporting
This paper aims to test and to assess if a change in accounting standards affecting the definition of equity and liability in cooperatives matters, as well as to shed light on the possible determinant factors. In face of the new accounting standards, cooperatives had to reclassify members’ shares from equity to liability or to modify their articles of association changing the terms of the members’ shares in order to retain the accounting equity classification. Based on a sample of Spanish cooperatives extracted from SABI, results show that cooperatives perceived important effects and a big majority chose to modify articles of association. Results reject the “information approach” and support the “contracting approach”, therefore accounting change matters even if there is not a change in the cash flows. In order to determine the main factors that can affect the decision of the cooperative, a mixed logit model is proposed. The results showed that cooperatives with higher share capital, debts ratio and non current assets are more prone to modify their articles of association in order to retain the accounting equity classification. The paper contributes to literature on the economics effects of accounting standards, providing additional evidence in a different and particular setting. Where, the accounting change affects to a core characteristic of the organizational form. Members’ shares are not subject to structuring opportunities. The firms affected are non-listed.
THE IMPACT OF INTERNATIONAL DIVIDEND AND CAPITAL GAINS TAXATION ON CROSS-BORDER M&A PRICES
PÖNNIGHAUS, FABIAN NICOLAS
VON HAGEN, DOMINIK
Category: TX = Taxation
We model how a country’s residence taxation system, i.e., the taxation or non-taxation of foreign dividends and capital gains, affects cross-border M&A prices of this country’s MNEs. In a first step, we theoretically compare different residence taxation systems derived from our model and provide a ranking of these systems. In a second step, we apply our model on a detailed tax data set for various countries on a global scale and observe substantial variation across these systems. In a third step, we find that our model holds if applied to a large cross-border M&A data set in a regression analysis. For example, for the United Kingdom, we predict that the change from crediting to exempting foreign dividends in 2009 has increased the prices that UK MNEs are able to pay for foreign targets by around 40%.
THE IMPACT OF THE MOST RECENT FINANCIAL CRISIS ON EUROPEAN BANKS' PROCYCLICAL BEHAVIOR: A TURNING POINT
PORCUNA, LUIS
Category: FR = Financial Reporting
This paper examines the impact of the most recent financial crisis (2008.-) on the effect of the loan loss provisions (LLP) on European banks' credit fluctuations. Macroeconomic variables and the Composite Indicator of Systemic Stress (CISS) show us that the last crisis has not been homogeneous but it may be split into two stages: (i) subprime crisis (2008-2009), and (ii) sovereign debt crisis (2010.-). We use a panel based on 125 European listed commercial banks spanning 2005-2013. Our results show that LLP are procyclical with the exception of those banks with a good financial performance which use LLP in order to offset such procyclicality. The non-discretionary component of LLP amplifies credit cycle, whereas discretionary LLP expands it. On average, the financial crisis has boosted the use of LLP to smooth income, which is significant during subprime crisis. In turn, while non-discretionary LLP amplifies credit similarly to upturns, the financial crisis did not have any effect on the discretionary LLP so as to expand credit lending, which is consistent with "taking a bath" argument.
MARKET REACTION TO ETHICAL DEFAULT IN THE AUDIT PROFESSION
PORCUNA, RUBÉN
Category: AU = Auditing
In this paper, we empirically document the negative market reaction to an auditor’s ethical default in the statutory audit. To achieve this goal, we analyze the market share variations surrounding the public disclosure of the auditor’s enforcement actions by the Spanish Public Oversight Board, entitled with the ultimate responsibility for the supervision of the audit quality. We apply the difference in difference approach over a treatment group of 640 firm-year observations and a matched control group of 51,456 firm-year observations. We test whether there are significant (negative) changes in the sanctioned auditors’ market share surrounding two relevant events along the supervision of the audit quality, i.e. the initiation of the investigation and the disclosure of the enforcement action. The results indicate that, whereas the initiation of the investigation does not have a significant impact on the auditor’s market share, the public disclosure of sanction has a negative and significant effect on the auditor’s market share. This negative economic consequence is higher in the case of second-tier audit firms than for the Big 4 audit firms. We measured market share using auditor’s total turnover and the number of clients and both approaches offer similar results. Our conclusions might be relevant for the audit regulatory bodies, since the auditor’s enforcement releases entail not only monetary penalties but also a significant drop of the turnover and the economic activity.
AUDIT COMMITTEES’ INDEPENDENCE AND THE INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS IN WESTERN EUROPE
PORETTI, CÉDRIC
BRUYNSEELS, LIESBETH ; SCHATT, ALAIN
Category: GV = Accounting and Governance
We examine whether the percentage of independent members sitting on the audit committee, in different institutional settings, impacts the market reaction (measured by the abnormal stock returns variance and the abnormal trading volume) to earnings announcements. For our sample composed of more than 7’500 earnings announcements made by European firms from 15 countries between 2006 and 2014, we find that the market reactions to earnings announcements are significantly larger when the audit committee is more independent, but only in countries with weak institutional setting. Our results generally hold after controlling for numerous methodological issues. We conclude that more independent audit committees are substitutes for weak institutions to increase the credibility of earnings announcements. Our results should be of great interest for European regulators who recently introduced new requirements for public firms regarding audit committees’ independence.
SPEND MONEY TO MAKE MONEY? VOLUNTARY AUDIT REVIEWS AND FIRMS’ COST OF DEBT
PORUMB, VLAD ANDREI
KARAIBRAHIMOGLU, YASEMIN
Category: AU = Auditing
We analyze whether the voluntarily purchase of an audit review is negatively associated with the cost of debt. The information provided by the audit review of quarterly reports is seldom made public and it represents a tool through which boards are better able to monitor the actions of management. Given the internal use of the audit review, public debt holders are less likely to benefit from the verification of the quarterly reports. Nonetheless, the audit review is likely accessible by banks, due to their ability to access private firm information. This translates in less ex-ante and ex-post monitoring effort for banks when deciding to grant loans and should therefore result in better loan contracting terms. Specifically, we expect that the firms with an audit review have a lower cost of debt. We draw on a sample of 686 non-financial Canadian firms in the 2005-2015 period to test our contentions. Our results suggest that firms with an audit review have a lower cost of debt relative to firms with no-audit review. We further check if the cost of debt of the review firms decreases subsequent to the 2011 mandatory IFRS adoption. In line with our expectations, we find that the review firms’ cost of debt is lower in the post-IFRS period relative to no-review firms. While previous literature documents costs associated with the review in the form of higher audit fees, our findings suggest that, from a debt market perspective, it also brings benefits through lower cost of financing.
MATERIALIZING RADICAL INNOVATION CAPABILITY: THE ROLE OF MANAGEMENT CONTROL SYSTEMS
POSCH, ARTHUR
GRABNER, ISABELLA; WABNEGG, MARKUS
Category: MA = Management Accounting
Recent research on The Resource Based View of the Firm argues that firms need complementary structures for capabilities to enhance performance. Following this argument, we suggest that management control systems are such a factor of the internal firm environment, which influences a firm’s ability to translate radical innovation capability into innovation performance. Thus, we posit that apart from having the necessary capabilities, firms also need to possess matching MCS in order to generate successful innovation outcomes. We suggest that cultural controls provide an overarching frame of reference for employees and are hence suitable to help firms translate radical innovation capability into innovation performance. Conversely, we posit that performance monitoring limits firms in harvesting the benefits from radical innovation capability due to its variance-reducing nature and the negative behavioral effects on employees that it entails. Moreover, we elucidate the role of perceived environmental uncertainty as a relevant contingency factor that influences the extent to which MCS can support firms in converting radical innovation capability into innovation performance. We empirically test and find evidence for three of our four hypotheses by combining survey data with patent information of the firms in our sample. In sum, our study contributes to prior management accounting research by suggesting a moderated causal-model form in explaining a firm’s innovation performance.
WHAT HAVE WE LEARNT FROM 12 YEARS OF PCAOB INSPECTION OUTCOMES?
PRASAD, ASHNA
GAO, RU
Category: AU = Auditing
The PCAOB inspection program has existed for over a decade but long-term trends in their inspection outcomes providing holistic insight into the nature and frequency of audit deficiencies has not been researched. Using 2,542 firm-level inspection reports issued by the PCAOB over the period 2004–2015, we categorise the publicly reported Part I deficiencies into either GAAP departures (indicative of absence of audit evidence) or audit deficiencies (related to insufficient and inappropriate audit evidence gathered by the inspected audit firms). We find that GAAP departures are significantly less common over the period compared to audit deficiencies. We find recurring audit deficiencies for specific audit firm categories as well as for all firms in a number of areas for both GAAP and audit deficiencies. Our findings suggest the need for the PCAOB to tailor their audit guidance for these areas by audit firm type to reduce these recurring audit deficiencies.
THE EFFECTS OF PREFERENCE FOR QUANTITATIVE INFORMATION AND UTILISATION OF QUANTITATIVE VERSUS QUALITATIVE INFORMATION ON AUDITORS’ MATERIALITY JUDGEMENTS
PRASAD, PRANIL
CHAND, PARMOD; PRASAD, PRANIL
Category: AU = Auditing
This study extends prior research on accounting materiality judgment by examining the effects of individuals’ preference for quantitative information on utilisation of quantitative versus qualitative information and judgment of professional accountants. It further examines if bias introduced by utilisation of more quantitative than qualitative information is mitigated by provision of a decision aid, simple intervention, motivation of accountants’ to process information systematically and the accountants’ level of involvement in the decision making process. Bias in judgment of accountants due to over-reliance on quantitative information has serious implications for audit and financial reporting quality. The results show that differences in utilisation of quantitative versus qualitative information exist between accountants who have a high and accountants who have a low preference for quantitative information when provided with a mixture of quantitative and qualitative information related to materiality decisions. The study further finds that accountants who utilise more quantitative than qualitative information make biased materiality judgment compared to accountants who use both or more of the qualitative information. The availability of a decision aid, motivation to systematically process information and level of involvement did not significantly reduce the bias observed from higher reliance on quantitative information, however, a simple intervention in the form of a warning that auditing standards require accountants to consider both quantitative and qualitative information and that auditing standards are legally enforceable induces auditors to utilise quantitative and qualitative information equally and leads to an unbiased materiality judgment. The results of this study are of interest to stakeholders such as auditing standard-setters, accounting firms, enforcement agencies such as Australian Securities and Investment Commission (ASIC) and professional accountancy bodies.
THE EFFECTS OF BOARD INTERLOCKS WITH AN ALLEGEDLY FRAUDULENT COMPANY ON AUDIT FEES
PRENCIPE, ANNALISA
IVANOVA, MARIYA
Category: AU = Auditing
Drawing on the literature on diffusion of corporate practices and the effect of reputation on audit fees and litigation premium, we suggest that a material adverse event such as an SEC investigation at a firm leads to an increase in the audit fees at firms connected to the former though board interlocks. We argue that allegations of financial fraud at one firm raise concerns about the corporate governance practices also at connected firms, which increases audit engagement risk. We document a significant increase in audit fees in cases where the interlocking director serves on the audit committee of the alleged fraudulent firm. The marginal effect is on audit fees is 6.6% on average, and is higher (7.8%) if we limit the analysis to only cases where the interlocking director served on the board of the fraudulent firm when the fraud was perpetrated. Audit fees also increase when the fraudulent firm is subject to a class action lawsuit. We estimate that the audit fees of firms whose director serves on the audit committee of the fraudulent firm and the fraudulent firm is subject to class action litigation increase by 12.9% in the year after the public announcement of SEC investigation, which is both economically and statistically significant.
HOW DOES REDUCING PAY DISPERSION AFFECT EMPLOYEE BEHAVIOR?
PRESSLEE, ADAM
BROWN, CONOR; EVANS, JOHN; MOSER, DONALD
Category: MA = Management Accounting
Prior research suggests that pay dispersion among employees can cause lower-paid employees to feel unfairly treated and thus lower their effort. Recently, some firms have reduced pay dispersion by raising lower-paid employee’s wages in an attempt to mitigate this effect. However, popular press articles suggest that reducing pay dispersion could also cause higher-paid employees to leave the firm. We conduct a series of experiments to examine the effect of reduced pay dispersion on lower-paid employees’ effort and higher-paid employees’ turnover intentions. In Experiment 1, we find that reducing pay dispersion can increase lower-paid employees’ effort by increasing their perceived pay fairness. We also show that it is the reduction in pay dispersion rather than merely the increase in the lower-paid employees’ wages that yields these results. In Experiment 2, we replicate the results of our first experiment without collecting data on perceptions of pay fairness to ensure that the results of the first experiment were not the result of demand effects. Finally, in Experiment 3 we find that, contrary to concerns expressed in the popular press, higher-paid employees indicate that they are not more likely to leave the firm for a comparable job when lower-paid employees’ wages are increased, and may even be less likely to leave. Implications for theory and practice are discussed.
CORPORATE GOVERNANCE AND TAX AVOIDANCE: EVIDENCE FROM GOVERNANCE REFORM
PRICE, RICHARD
KERR, JOHN; ROMAN, FRANCISCO
Category: GV = Accounting and Governance
Extant research on the relation between corporate governance and tax avoidance finds mixed or weak evidence on whether governance influences the extent of tax avoidance. The varied findings can be attributed to the relative invariance in underlying governance among U.S. firms, the ubiquity of equity compensation among U.S. firms, the ambiguity of executive compensation as a governance proxy, and the focus on few aspects of governance in drawing inferences on this relation. In this paper, we re-examine the issue in a setting using both governance reform in Mexico’s emerging market and manually collected data to construct a broad governance index. This setting allows us to explore the relation between governance and tax avoidance in a new setting generally unaffected by equity incentives and where the effects of governance are likely to be impactful. We find that tax avoidance decreases following the introduction of governance reform in Mexico. In addition, we show that firms with stronger governance engage in less tax avoidance. These findings provide new evidence that improved governance reduces tax avoidance. Additional analysis shows that the association between governance and tax avoidance is greatest for firms most likely to be sensitive to costs associated with tax avoidance or that suffer from poor governance: family-owned and non-U.S.-cross-listed firms. We also investigate the potential effect of subsequent tax reform and find evidence that governance and tax reform may act as substitutes rather than complements, a finding new to the literature.
IFRS ADOPTION BY CZECH UNLISTED COMPANIES UNDER FOREIGN CONTROL: MVQCA OF COSTS AND BENEFITS
PROCHAZKA, DAVID
Category: IC = Interdisciplinary/Critical
The paper investigates the relation between benefits and costs of IFRS adoption by Czech subsidiaries under foreign control. In particular, it tries to identify conditions, under which benefits of IFRS adoption following the parents command are at least comparable with the incurred costs. The analysis releases an implicit assumption of accounting research about the homogeneity and integrity of economic groups. In contrast, the paper rests on the findings of business research on the parent-subsidiary links and highlights the existence of tensions within the separate legal elements of a MNE, resulting in different perception of and compliance with the group policies by the subsidiaries. Based on the in-depth interviews in pilot study and subsequent semi-structured survey, several findings are revealed: the costs of IFRS adoption exceed the benefits. Czech subsidiaries do not believe that voluntary IFRS adoption in statutory financial statements may bring about any substantial benefits compared to local GAAP financial statements. However, there are some benefits of the IFRS adoption by the group stemming from the employment of IFRS-based principles within the management accounting. The ultimate perception of IFRS usefulness is influenced by variety of factors, which different combinations produces the comparable results. For the identification of potential scenarios and their necessary and sufficient conditions, multi-value Qualitative Comparative Analysis (mvQCA) is applied.
FINANCIAL STATEMENT-BASED FORECASTS AND ANALYST FORECASTS OF PROFITABILITY: THE EFFECT OF MANDATORY IFRS ADOPTION
PRONOBIS, PAUL
DEMMER, MATTHIAS; LOMBARDI, TERI
Category: FA = Financial Analysis
This study examines whether mandatory IFRS adoption is associated with an increase in the out-of-sample accuracy of financial statement-based models that include both income statement and balance sheet information for forecasting profitability. The study also examines the relation between analyst forecast accuracy and financial statement-based forecast accuracy around mandatory IFRS adoption. We find significant improvement in financial statement-based forecast accuracy around mandatory IFRS adoption. We find significant improvement in analyst forecast accuracy around mandatory IFRS adoption only in countries that concurrently made substantial improvements to financial reporting enforcement. We also show that the improvement in analyst forecast accuracy is associated with the improvement in financial statement-based forecast accuracy and that analysts place more weight on financial statement-based forecasts after mandatory IFRS adoption in countries with concurrent changes in enforcement, while they place the same weight on financial statement-based forecasts after mandatory IFRS adoption in countries without concurrent enforcement changes. Finally, we document that financial statement-based forecasts provide incremental information over analyst forecasts for explaining year-ahead profitability for firms in countries that did not bundle mandatory IFRS adoption with concurrent changes in enforcement.
BIG AUDITING FIRMS, AUDIT-NON AUDIT FEES AND CORPORATE SOCIAL RESPONSIBILITY REPORTING
PUCHETA-MARTINEZ, MARIA CONSUELO
BEL-OMS, INMACULADA; RODRIGUES, LUCIA LIMA
Category: AU = Auditing
The aim of this paper is to examine how big auditing firms and audit/non-audit fees impact on Corporate Social Responsibility (hereafter CSR). We use a panel data of Spanish non-financial listed firms for the period 2004-2014, composed of 1.312 firm-year observations. We find that the big four auditing firms and audit and non-audit fees paid by audited firms encourage CSR disclosure practices. Overall, our results suggest that big auditing firms play a relevant role in CSR reporting, which may help to mitigate informative asymmetries between managers and stakeholders. Furthermore, audit and non-audit fees paid by audited companies promote the voluntary non-financial information disclosure. These findings should be of interest to policy makers, given the relevant role that CSR disclosure may play in the decision-making process of all the stakeholders.
PERFORMANCE MEASURES AND SHORT-TERMISM
PUGH, EMMA
MARGINSON , DAVID
Category: MA = Management Accounting
The purpose of this paper is to explore three assumptions made about short-termism and its association with performance measures. The assumptions explored are: the short-term temporal scale as a one-year period; the manifestation of short-termism as relatively uncomplicated behaviour; and the interplay between financial and non-financial measures. To explore these assumptions, a case study of a multinational retail organization was undertaken. Data were collected from 24 interviews with middle-level managers, observation and internal company documents. This paper finds that managers can hold very different understandings of what constitutes the short term and long term. While the evidence illustrates that the short term may be a period of one quarter or less, no standard definition emerged. In terms of the manifestation of short-termism, this study finds evidence that managers’ inter-temporal trade-offs can take many guises and are often underpinned by a well-thought-out approach. Finally, the findings illustrate that the interplay between financial and non-financial measures may not be of prime importance in shaping managerial short-termism. The empirical findings suggest that quantitative (financial and non-financial) measures lead to limited foresight and short-termism, whilst qualitative (non-financial) measures encourage a longer-term focus. Thus, the paper highlights problems with three assumptions made about short-termism and its association with performance measures.
MUTUAL FUND HERDING, INFORMATION ENVIRONMENT, AND STOCK PRICE CRASH
QIAO, ZHENG
HUNG, SHENGMIN
Category: FA = Financial Analysis
We study the effect of mutual fund herding on stock price crash. We first document that mutual fund herding deteriorates information environment and intensifies information asymmetry. Firms with high mutual fund herding level demonstrate less private information availability and low earnings transparency. We further uncover a positive predictive relation between mutual fund herding and stock price crash, which is mostly concentrated in mutual fund buying herding. Conditional on opaque earnings disclosure or high insider trading profit, the association between mutual fund herding and stock price crash becomes more pronounced. Overall, our results suggest that mutual fund herding affects corporate information environment and amplifies stock price crash risk.
THE GOODWILL IMPAIRMENT TEST DATE CHOICE
QUAN, YING
CREADY, WILLIAM; QUAN, YING
Category: FR = Financial Reporting
This analysis investigates factors influencing firm decisions regarding their date choices for conducting annual goodwill impairment tests mandated under SFAS 142. We present evidence that initial date choices made by firms were made subject to two distinct anchoring (Taversky and Kahneman, 1979) effects: (1) that SFAS 142’s one-time requirement that firms conduct an initial assessment at the start of their fiscal year; and, (2) the conventional accounting cycle’s notion that balance sheet valuation adjustments are made on balance sheet dates. Consequently, firms were overly prone to choose earlier rather than later quarters and end of quarter rather than early quarter annual impairment test dates. Over 80% of the quarter to quarter date changes in our sample are to later quarters and over 94% of the within quarter date changes are to earlier in quarter dates. We further argue that the test date decision itself is impacted by inertia (Hannan and Freeman, 1984). Inertia, in conjunction with adaptive theory, argues that events trigger changes away from suboptimal state. Accordingly, we find that firms are more likely to make date changes when triggering events occur, such as expected goodwill write-off, additional impairment tests after the annual test quarter, and/or goodwill write-off from annual tests.
THE IMPACT OF AUDITOR-PROVIDED NON-AUDIT SERVICES ON PERCEIVED AUDITOR INDEPENDENCE: POST EU-REGULATION EVIDENCE FROM DENMARK
QUICK, REINER
VAN LIEMPD, DENNIS ; WARMING RASMUSSEN, BENT
Category: AU = Auditing
This study focuses on the impact of the provision of non-audit services on auditor independence as perceived by Danish stakeholder groups. Thereby, the usefulness of the new EU PIE Regulation, as well as of the amendment of the Danish Auditor Act, based on the new EU Audit Directive, will be evaluated. We prefer the survey method as research methodology in order to collect a broad range of data. Our findings indicate that the joint provision of non-audit and audit services negatively affects perceived auditors’ independence. However, participants’ perceptions differ by the type of stakeholder group. Many individual services, even those not on the EU black list, are seen as problematic. Nevertheless, the impact on independence in appearance differs by the type of service. In the light of our results, the EU cap on non-audit service fees seems to be too generously dimensioned. Chinese walls, i.e. the separation between audit firms’ staff that provides auditing services and audit firms’ staff that provides non-audit services, as well as an approval of non-audit services by the audit committee are not regarded as helpful in enhancing auditors’ independence. Finally, respondents see a need to apply similarly strict regulations to large non-public-interest entities.
FINDING ACCOUNTING HISTORY RESEARCH TOPICS – AN ANALYSIS OF LEADING JOURNALS 2006-2015
QUINN, MARTIN
SPRAAKMAN, GARY
Category: HI = History
This paper analyzes and categorizes published research papers in three specialist accounting history journal – Accounting History, The Accounting Historians Journal and Accounting History Review. A key objective is to find under-represented areas for future research. We inductively derive a categorization system, and classify over four hundred papers from 2006-2015 according to twelve categories. The results show some areas appear quite under-researched, for example, the history of accounting and religion and accounting education. Drawing on some statistical analysis, we also note similarities and differences across the three journals and suggest avenues for future researchers.
GOVERNMENTAL AUDIT REGULATORY REFORMATION AND AUDIT QUALITY IN INDONESIA: A HABERMASIAN ANALYSIS
RAHMAN, ASRARUL
HUDAIB, MOHAMMAD; STONER, GREG
Category: AU = Auditing
Recent governmental audit reforms in Indonesia commenced around the time of historical political regime changes. These changes effectively started in the late 1990s ending the 32-year-old autocratic regime. Periods of and around these reforms were inundated by international assistance in various aspects including financial and regulatory aspects. This study explores how disturbances brought about by international and national forces influence audit reforms and the evolution of audit quality, during the period of political regime change. We draw our analysis on the notion of Social Evolution, as informed by Jurgen Habermas’ Theory of Communicative Actions, to delineate the role of regulatory audit reforms and its impact on the evolution of audit quality. A set of face-to-face interviews were conducted with executives and staff of the Indonesian Supreme Audit Institution (BPK RI). The interviews captured participants’ understandings of audit quality, from which we find that their understandings are critically influenced by the audit regulatory reforms, which were heavily reshaped by international assistant intervention.
DETERMINANTS OF FINANCIAL REPORTING QUALITY IN THE PUBLIC SECTOR
RAKHMAN, FUAD
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
This study investigates the determinants of the quality of financial reports issued by local governments in Indonesia. I use the types of audit opinion on the financial reports as a proxy for reporting quality, with an unqualified opinion as the best and a disclaimer as the worst quality. Using 1,504 financial reports of local governments in Indonesia from the periods 2008 through 2011, I find that larger local governments, those with higher fiscal independence, and those situated in metropolitan areas are associated with better financial reporting quality. Further, I find that the proportion of capital expenditure budget is associated with low financial reporting quality. Lastly, I find that managerial factors such as age, gender, and experience of mayors do not affect the quality of local governments' financial reporting. This study contributes to the policy makers by providing empirical evidence on the determinants of financial reporting quality in the public sector.
NON-ADOPTION OF THE IFRS FOR SMES IN AUSTRALIA: A CASE STUDY OF THE INFLUENCE OF PRIVATE VERSUS PUBLIC INTERESTS
RAM, RONITA
GRAY, SIDNEY
Category: FR = Financial Reporting
Our study adds to a growing body of literature that examines why internationally developed accounting standards are been rejected by developed countries (Oulasvirta, 2014). Specifically this study examines why Australia did not adopt the IFRS for SMEs. Using document analysis and interviews with the key players involved in this decision making process, we seek to understand the factors driving this controversial decision. This study uses theories of regulation to show how the private interests of groups other than SMEs have been met by not adopting the IFRS for SMEs in Australia. Our research shows that the process involving the Big 4 firms, large corporations and regulators has led to regulation formulated in a way that over-rides the interests of SMEs. It also shows that board members’ ideological belief can, and at times, do capture the standard setting process and when this happens the eventual standard derived is not in public interest. In this context, we offer suggestions on how the needs of SMEs might be better served within the current financial reporting system in Australia.
ACCOUNTING SCHOLARS AND THE GAP BETWEEN RESEARCH AND PRACTICE: HOW DO WE CHOOSE OUR RESEARCH TOPICS?
RAMASSA, PAOLA
AVALLONE, FRANCESCO; QUAGLI, ALBERTO
Category: IC = Interdisciplinary/Critical
The divide between accounting research and practice has generated significant interest among scholars, policy makers and practitioners over the last decades. The paper contributes to this conversation by providing empirical evidence on an essential phase of the research process that has not been directly examined by previous studies, namely the scholars’ choice of research topics. More specifically, we draw on the diffusion of innovations theory to investigate what factors influence this choice and how accounting scholars take them into consideration in this decision. Evidence from 318 survey responses by European scholars suggests that they select research topics considering mainly four factors: (i) explicit research requests; (ii) short-term publishing opportunities; (iii) practice and education needs; and (iv) intellectual needs of the academic community. Additionally, scholars do not reveal a substantially common view on what counts when deciding the focus of their research efforts, but can be grouped into four clusters placing a different importance on the above mentioned four factors. Our results provide insights into the antecedents of the research-practice gap, with important policy and practical implications, especially in the current context characterised by “publish or perish” tenures and pressures of government research measurement systems.
THE AUDIT COURT SOCIETY: APPLYING AN ELIASIAN THEORETICAL FRAMEWORK TO THE ANALYSIS OF THE UP-OR-OUT SYSTEM IN AUDIT FIRMS
RAMIREZ, CARLOS
GARNIER, CLAIRE; STENGER, SEBASTIEN
Category: IC = Interdisciplinary/Critical
This paper studies the “up-or-out” system that rules career management in Big 4 audit firms. In its approach to socialization of auditors, the existing literature has so far rather highlighted a top-down internalization of patterns of behavior and social roles by junior auditors. We consider a more competitive and horizontal dimension of socialization in order to understand how auditors eventually succeed by surviving the up-or-out system. To this end, we use the concepts of figuration and interdependencies, as theorized by Norbert Elias. Based on participant observation and interviews, our research reveals that, in Big 4 firms, individuals are interdependent, as allies as well as adversaries, and that success in the "up or out” system is based on the manipulation of these interdependencies. We show that audit firms constitute a figuration where interdependencies turn the reputation of individuals into an “exchange value”, whose currency determines their fate. We try thus and adopt a new perspective on human resources management within Big 4 firms: auditors are not just the passive recipients of socialization processes, they must also actively engage in strategic relationships to build their "reputation" and access the successive levels of the “up or out” system.
HOW MULTI BUSINESS SEGMENTATION AFFECTS THE PROBABILITY OF MEETING ANALYSTS’ EARNINGS FORECASTS AND ECONOMIC CONSEQUENCES ASSOCIATED WITH IT
RAONIC, IVANA
SAHIN, ALI
Category: FR = Financial Reporting
In this study, we examine the propensity of meeting analysts’ forecasts by multi segment firms. First, we predict a significant negative association between multi segmentation and meeting forecast probability. Second, we argue and find that multi segment firms are less likely to engage in upwards earnings management and downwards forecast management to meet analysts’ forecasts relative to single segment firms. We explain this by multi segment firms’ weaker incentives to carry out earnings/forecast management for a purpose of meeting forecasts since the costs of such activities appear to be higher relative to single segment firms. In particular, we find no evidence of a premium or a reduction in a diversification discount when multi segment firms meet analysts’ forecasts (which we interpret as a sign of weaker investor reaction to meeting forecasts for multi segment firms), but find significant incremental multi segment discount if earnings/forecast management is used to meet forecasts. Our tests further reveal that multi segment firms exhibit more complex information environment than single segment firms (they receive more comment letters from the SEC, exhibit higher bid-ask spread, higher discretionary accruals and higher forecast errors, etc.), which altogether reduce the multi segment firms’ probability to meet analysts’ forecasts.
CONSEQUENCES OF DIVIDEND POLICY AND TAX AVOIDANCE
RASHID, HARUN
ANDERSON, MARK; RASHID, HARUN; WARSAME, HUSSEIN
Category: TX = Taxation
Dividend policy is a highly researched area, yet, there is little research on the consequences of dividend policy for the largest “minority shareholder”, the government. In addition, while there is substantial research on the determinants of tax avoidance, only a few accounting studies have addressed the taxing authority’s reaction to corporate tax avoidance. Therefore, in this paper, we investigate how dividend payout policy is related to effective tax rates (ETRs), book-tax difference (BTD), unrecognized tax benefits (UTBs), and consequences of tax avoidance such as audit settlement (AS) and interests and penalties (IPs) imposed by the Internal Revenue Service (IRS). We find that dividend payout has significant positive (negative) relation with BTD (BOOK-ETR), and UTBs indicating that dividend policy may induce managers to carry out a risky or aggressive tax strategy. We also find that dividend payout is associated with both AS and IPs arising from tax audits conducted by the IRS suggesting that some portions of the dividend induced UTBs are not sustained. Our results are robust to a battery of robustness checks.
HYBRIDIZATION OR ESCALATING CONFLICTS IN HEALTH CARE?
RAUTIAINEN, ANTTI
MÄTTÖ, TONI; PELLINEN, JUKKA; SIPPOLA, KARI
Category: PSNP = Public Sector Accounting & Not-For-Profit Accounting
New Public Management (NPM) solutions have been widely introduced to the public sector, with high hopes of hybridization of best practices from managerial, administrative and professional traditions. However, relatively few NPM success stories have been witnessed. Instead, conflicts over power, stability, decoupling, and incompatible institutional logics have been witnessed. Nevertheless, it is not clear when the NPM and other change pressures lead to hybridization and when to conflicts, even to “escalating conflicts” that may promote changes but also eventually threaten the whole existence of the organization. Our findings from a longitudinal Finnish health care case study suggest that conflicts, which break the existing administrative structures, can facilitate changes in operations, in the institutional logic (decision-making rationale) and in organizational identity, but the conflicts also risk the continuity of the organization. We suggest that hybridization occurs if there is a prominent core institutional logic that is affected by other institutional logics in a way that supports several logics, and when such hybridization is also supported by changes in organizational structure.
LABOR TAX AVOIDANCE MEASURES AND DETERMINANTS: EMPIRICAL TESTS ON FRENCH UNLISTED FIRMS
RAVENDA, DIEGO
ARGILES-BOSCH, JOSEP MARIA ; VALENCIA-SILVA, MAIKA MELINA
Category: TX = Taxation
We develop new measures of labor tax avoidance (LTAV) using social contribution expenses reported in income statements of a sample of 1,049,606 French firm-years. Based on a simulation experiment, our results reveal that LTAV measure based on abnormal social contribution expenses tends to be the best specified and the most powerful in detecting LTAV. Moreover, we find that firm-specific financial variables and macroeconomic variables significantly influence LTAV. This study could foster further research on the effectiveness of our LTAV measures and on the factors influencing LTAV for other types of firm in different socio-economic and institutional contexts. Importantly, these measures could integrate the other direct and indirect methods generally applied to estimate undeclared work, seen as a form of conforming LTAV. Finally, they may assist tax authorities to direct their inspections, detect labor tax evasion, and then strengthen the protection of the employees from employers’ illegal practices, as well as reducing tax revenue shortfall and related issues of equity in the social security system.
THEIR NAME LIVETH FOR EVERMORE: ACCOUNTING FOR THE HUMAN COST OF WAR
READ, ANDREW
MILEY, FRANCES
Category: HI = History
The currency of war is human life yet the cost of human life lost in war remains an under-researched area of accounting. This research considers the cost of human life through an examination of the war cemeteries built on the Western Front after the First World War. A qualitative and historical study of the planning and building of the cemeteries is adopted to demonstrate that these cemeteries form an accounting report of the cost of war. Drawing on research on the transformative power of accounting we consider transformations in interpretation of this accounting report in the inter-war period Cold War period and contemporary period. This research suggests the boundaries of accounting are already able to accommodate war cemeteries and their construction as accounting reports has the potential to enhance our understanding of the power of users to give meaning to accounting disclosures.
THE IMPACT OF TAX LOSS CARRY-FORWARDS ON FIRMS' FINANCING BEHAVIOR
RECHBAUER, MARTINA
Category: TX = Taxation
Tax loss carry-forwards (TLCF) can be offset against taxable income over several years. They temporarily put firms into a state of at least partial tax exemption. I empirically examine the impact of TLCF on firms' financing behavior. My analysis is based on a panel of listed Italian parent companies between 2009 and 2012. Unlike previous studies, I do not rely on database-driven methods in order to identify firms' TLCF status. I derive firms' TLCF status based on information on TLCF published in firms' IFRS statements. As a result, I am able to provide reliable results regarding the impact of TLCF on firms' financing behavior. In order to examine the impact of TLCF I perform OLS regression analyses with firms' debt-to-capital ratio as the dependent and firms' TLCF status as the main explanatory variable. I find that the debt-to-capital ratio of firms with (especially large) TLCF is significantly lower than that of firms without if only interest on debt is deductible for corporate income tax purposes. Furthermore, my results suggest that TLCF firms react significantly less to changes in the tax incentives related to debt and/or equity financing. The magnitude of the effects derived tends to be substantial. Legislators and empirical tax research should thus consider firms' TLCF status when deciding upon which tax policy to pursue, or when investigating tax incentives and corporate financing.
EARNINGS GUIDANCE CHARACTERISTICS, IMPRESSION MANAGEMENT AND THE PROBABILITY OF MISSING THE EARNINGS TARGET
REDIGOLO, GIULIA
BOZZOLAN, SAVERIO
Category: FR = Financial Reporting
This paper investigates whether qualitative features of earnings guidance can help to predict the probability of a firm missing the earnings target. More precisely, we examine whether consistent guidance characteristics and guidance tone can significantly predict the probability of a firm missing financial analyst expectations in a subsequent period. Our results suggest that firms releasing consistently precise and disaggregated guidance are more likely to miss the expectations, while the impression management score is negatively associated with it. When examining the different types of consistency, we find that earnings guidance consistently given in the form of qualitative description, disaggregated at the expenses level and accompanied by supplemental explanations are positively associated with the probability of falling short of earnings expectations. This paper contributes to the collective understanding of the phenomenon of firms missing analysts' expectations and expands current research on guidance characteristics and their role as part of a wider disclosure strategy. The paper also contributes to the impression management literature by providing evidence of a link between managers’ use of tone in earnings guidance and future expectations.
PORTFOLIO RETURNS TO THE ANALYSIS OF STRATEGIC ADVANTAGE
REES, WILLIAM P.
GALLAGHER, RONAN; HAIG, ALISTAIR; REES, BILL
Category: FA = Financial Analysis
We examine the performance of US common stock portfolios formed using strategic advantage as independently assessed by Morningstar analysts from July 2002 to August 2016.  We find no evidence of excess risk-adjusted returns associated with strategic advantage alone. However, bivariate sorts on strategic advantage and size, Morningstar recommendations, Morningstar valuations or independent analyst consensus recommendations reveal interesting heterogeneity and substantial abnormal returns. Positive risk adjusted returns are associated with portfolios with no strategic advantage coupled with indicators consistent with unfavoured stocks: small, high price to value or adverse recommendations. Across four portfolios the estimated monthly abnormal return for unfavoured firms with no strategic advantage averages 77 basis points or 12.5 percent per annum. We propose two possible explanations for our results: firstly, analysts find it more difficult to classify strategic competitive advantage for smaller or unfavoured firms; secondly, favoured and hence glamourous stocks tend to be overpriced in comparison with unfavoured stocks with no competitive advantage.
RM ACCORDING TO COSO IS NO “ONE-SIZE-FITS-ALL”-APPROACH FOR ORGANIZATIONAL PERFORMANCE IMPROVEMENTS
REGELMANN, PHILIPP
NIEMANN, HERMANN-HENNIG ; SARTOR, JULIA
Category: MA = Management Accounting
While existing literature focuses on financial performance improvements of risk management on a macro level, this paper explores whether advancing RM capabilities to an Enterprise risk management according to the COSO ERM framework leads to organizational performance improvements on a micro level. The findings provide evidence to the contrary, no significant evidence as well as supporting evidence. In conclusion, it cannot be hold on to the thesis that the COSO ERM Framework is a “one-size-fits-all”-approach. Additionally, COSO’s general requirement of the alignment of risk exposure with risk appetite is not supported as the steps of RM process are not necessarily the same ones that affect organizational performance the most. Instead, five control variables are presented which influence the organizational performance.
DO PCAOB INSPECTIONS HAVE AN EFFECT ON ANNUALLY INSPECTED FIRMS’ AUDIT FEES AND AUDIT QUALITY?
REICHELT, KENNETH
JOHNSON, ELIZABETH; SOILEAU, JARED
Category: AU = Auditing
We investigate the effect