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OPERATIONAL PERFORMANCE INDICATORS, INNOVATIVE MANAGERIAL PRACTICES, ADVANCED MANUFACTURING TECHNOLOGIES AND OPERATIONAL STAFF INVOLVEMENT IN FIRMS: AN INTERNATIONAL COMPARATIVE ANALYSIS
ABDEL-KADER, MAGDY
ABDEL-MAKSOUD, AHMED
Category: MA = Management Accounting
It is argued that developments in the design of performance measures should be examined across various disciplines to enhance management accountants’ understanding of the role other disciplines play in the development and implementation of performance measurements as well as the potential contribution management accounting would have for other disciplines. The importance of operational non-financial performance indicators ONFPIs has been highlighted in relation to the deployment of innovative managerial practices (IMPs) and advanced manufacturing technologies (AMTs). On the other hand, the human resource literature argues that the level of importance of ONFPIs is not new. This interdisciplinary study aims to investigate whether the levels of importance of ONFPIs are ascribed to the deployment of IMPs/AMTs or to shop-floor (SF) involvement, i.e. human resource, in manufacturing firms in three countries, UK, Japan and Egypt. The results of our large scale surveys generally support the existence of significant bilateral relationships between levels of importance of ONFPIs and levels of deployment of IMPs / AMTs and extent of SF involvement. However, the study provides unequivocal evidence of the strength of the relationship between IMPs deployment and level of importance of ONFPIs, more interestingly, such strong relationship remain unchanged even when tested in different country-context.
DEVELOPING A PERFORMANCE MEASUREMENT MODEL FOR AGRICULTURAL EXTENSION AGENTS
ABDEL-MAKSOUD, AHMED
ABDEL-MAKSOUD, BAHGAT M.
Category: MA = Management Accounting
The literature identifies agricultural extension as a core element of any development in agricultural systems worldwide. It emphasizes the importance of measuring the performance of extension agents as a key to improving the effectiveness of agricultural extension. This is an interdisciplinary study, combining management accounting with agricultural extension; its aim is to develop a performance measurement (PM) model for agricultural extension agents. The model identifies two main components: those of the agricultural extension organization and of the farmers. Each incorporates two aspects with various variables. The proposed model identifies causal relations among variables of the model‟s variables. We investigated the causal relations in our proposed model empirically in early 2011 at a local level in the governorate of Assuit in Egypt. Three groups of respondents totalling around 270 respondents were incorporated. Data were collected through personal interviews using structured questionnaire forms. Path analysis technique was applied. Overall, the empirical findings validate the causal relations envisaged in the proposed PM model. The proposed PM model overcomes shortcomings in previous PM for agricultural extension agents‟ criteria/models in agricultural extension literature. Our model is not just a theoretically proposed model, as the proposed causal relations amongst its variables are empirically investigated. The proposed PM model could be used as a schema for communicating strategy, planning, and controlling which contribute in achieving harmony/integrity across organizational levels. Also, the model would make apparent any lack of coordination or completeness. The contribution of this study emerges from the fact that it is better to examine the development and implementation of PM models across various disciplines to enhance understanding, recalling the contributions which management accounting might have for other disciplines.
THE IMPACT OF AUDIT FIRM COMMONALITY ON CORPORATE ACQUISITIONS
ABDEL-MEGUID, AHMED
ABDEL-MEGUID, AHMED; APPIAH OKYERE, KOFI; OXMAN, JEFF ; YILDIRIM, YILDIRAY
Category: AU = Auditing
This paper introduces a new situational audit quality attribute, the sharing of an auditor by the acquirer and target in a corporate acquisition; audit firm commonality. We argue that the role of the auditor in mitigating information asymmetry is amplified by being situated between the two parties involve in the acquisition. We empirically examine the effects of commonality on certain characteristics of acquisitions namely the likelihood of deal completion, levels premiums offered by the acquirer, deal duration, and the wealth level of target shareholders. Our results suggest that commonality is associated greater likelihood of deal completion, higher premiums offered by the acquirer and increases in the wealth of target shareholders. Furthermore the results of additional tests indicate that switching by one party to the auditor of the counterparty of the deal, in the year before the deal announcement, generally improves the chances of completing the deal. Also, such switches do not mitigate the impact of having a common auditor on target wealth gains.
THE ASSOCIATION BETWEEN DISCLOSURE QUALITY OF FORWARD-LOOKING INFORMATION AND CORPORATE GOVERNANCE MECHANISM
ABED, SUZAN
ROBERTS, CLARE
Category: FR = Financial Reporting
In recent years regulatory bodies have disseminated corporate governance requirements in order to enhance transparency and to boost investor confidence to improve integrity of the capital market. This paper witnesses the importance of corporate governance mechanisms and investigates the relationship between the quality of disclosure of forward-looking information in the narrative sections of annual reports and governance mechanisms of British companies. Computerized content analysis using QSR NVivo 8 is used to measure the extent of forward-looking information in the narratives of the annual reports. The result of regression analysis of 238 UK non-financial companies shows that board size and the independence of the audit committee are associated with the level of voluntary disclosure of forward-looking information. Additionally, the results document that corporate disclosure is significantly related to a company’s size, performance, cross-listing status and operating cash flow.
EXAMINING SELL-SIDE ANALYSTS’ USE OF INTELLECTUAL CAPITAL IN PRODUCING NARRATIVES ABOUT FIRM VALUE.
ABHAYAWANSA, SUBHASH
CUGANESAN, SURESH
Category: FA = Financial Analysis
This paper examines how Intellectual Capital (IC) is mobilised and performed by sell-side analysts and implicated in the production of knowledge claims about firm value. IC narratives contained in analysts’ initiating coverage reports are analysed to identify performances of relationships among IC elements and between IC and financial capital (FC). It was found that the boundaries of IC elements are ephemeral with their identities and properties changing based on their performance by analysts. Yet patterns of IC performance are identifiable, comprising mobilisation by analysts in: (1) narrating the value potential of IC; (2) mediating external forces and value through IC; (3) calculating value through IC; and (4) legitimising investment action through IC. The inimitability of IC elements as well as substitutability is also observed. Finally, FC is also performed by analysts not only as an effect of IC but as a cause of IC, a legitimiser of IC and sometimes a manifestation of IC itself. The findings suggest that IC is performed in a variety of ways, with non-linear inter-relationships between elements and with FC and with variable ontologies. This provides analysts with degrees of freedom to deviate from a formulaic approach and paint a picture in line with their personal opinion about the firm’s value and interests as evidenced elsewhere in capital markets research. Research as well as practice/policy initiatives should consider such ‘demand-side’ performances of IC.
NARRATIVE REPORTING IN THE UK: A STUDY OF THE CHANGES IN BUSINESS REVIEW DISCLOSURES
ABOU-SEADA, MAGDA
KHOJAH, MAYSOON
Category: FR = Financial Reporting
Narrative reporting in annual reports refers to all reports excluding the financial statements and accompanying notes. Narrative reporting, especially the business review, has undergone a number of recent changes in the UK. Several surveys have reported an increase in the size of narrative reports over the years. Deloitte’s (2007) survey found the average length of the annual report to be 89 pages with the narratives making up 54% of it. In 2010, the average length of the annual report increased to 101 pages with narrative disclosures making up 51% of it (Deloitte, 2010). Interestingly, Campbell & Slack (2008) survey shows that financial analysts do not see the usefulness of narrative disclosures. The survey, however, reveals that analysts still prefer to have the narrative disclosures even if they do not read such disclosures. This study aims to look at the development, in terms of size and content, of narrative reporting in the UK in the period 2006-2011 focusing, in particular, on the overall business review and the risks and uncertainties section in two industry sectors: supermarkets and telecommunications. The findings show that the average length of the business review section has increased over the years. The information, however, appears to be better organised in appropriate headings.
DETERMINANTS OF VALUE CREATION DISCLOSURE: THE FRENCH CASE
AGBODJO, SERGE
Category: GV = Accounting and Governance
According to economic theories that advocate profit maximization, the concept of value creation lacks a clear definition and sound regulatory framework. Despite the absence of legal obligations, this notion is disclosed by some French listed companies. This research aims to define value creation and identify the determinants of disclosure. A double theoretical framework combining positive agency theory and resource dependence theory are mobilized. The empirical method is qualitative and quantitative. The qualitative study is based on semi-structured interviews with several leaders of listed companies. The quantitative study focuses on the determinants of information disclosed on value creation in the annual reports of 84 companies in the SBF120 index from 2006 to 2010. Results show that performance, governance and corporate liquidity, determine disclosure. However, influence of these variables depends on the dimension of disclosure.
INSTITUTIONALISING MANAGEMENT CONTROL: A FIELD STUDY OF FINANCIAL ACCOUNTABILITY AND QUALITY MANAGEMENT AS ANCHOR PRACTICES
AHRENS, THOMAS
Category: MA = Management Accounting
A key question for accounting and control research is how accounting and control practices can act upon other organisational and social practices. This paper draws on Swidler’s (2001) notion of “anchor practices” to suggest that the financial accountability and quality management practices of a German retail bank anchored much of its managerial activity. Anchor practices define fundamental social entities, lie at the heart of antagonistic social relationships, and are highly visible. Field material is presented to suggest that financial accountability and quality management practices provided managers with strategies of action that structured many of their various activities over many years and through radical organisational change.
THE IMPACT OF IFRS ADOPTION AND CORPORATE GOVERNANCE PRINCIPLES ON TRANSPARENCY AND DISCLOSURE SCORES
AKSU, MINE
AKSU, MINE; ESPAHBODI, HASSAN
Category: GV = Accounting and Governance
The beneficial consequences of reduction in asymmetric information through disclosure and the performance effects of International Financial Reporting Standards (IFRS) are well-established. However, whether disclosure quality indeed increases due to mandatory or voluntary regulation or best practices , such as the adoption of IFRS and Corporate Governance Principles is still an empirical question that hasn’t been directly tested. This paper tests this in an emerging market where the code law tradition, dominant family ownership, and lax rules and implementation make it less likely for the disclosure quality effects to be observed. We show that Transparency & Disclosure (T&D) scores have improved during 2003-2005 in a sample of Istanbul Stock Exchange firms and those that voluntarily adopt IFRS have significantly higher scores. However, the 2005 T&D scores for mandatory and voluntary adopters are not significantly different. Multivariate analysis shows that voluntary IFRS adoption, Corporate Governance (CG) principles, and mandatory IFRS adoption have all had significant incremental positive effects on Financial Disclosure scores and the Overall T&D scores. These findings should be of interest to researchers, policy makers, and regulators, especially in emerging markets that have recently started to adopt these best practices to increase transparency and disclosure quality.
AUDIT COMMITTEE CHARACTERISTICS AND EARNINGS MANAGEMENT
ALBERSMANN, BENJAMIN
WIEMANN, DANIELA
Category: GV = Accounting and Governance
This study investigates whether German audit committees and their characteristics are related to lower earnings management. It is motivated by theoretical reasoning on audit committee effectiveness and the increased international focus on corporate governance. In Germany, audit committees are officially recommended since 2002 and the option to form them is codified since 2009. Nevertheless, there does not exist an empirical study which examines this subject in Germany or other two-tier systems. We use a sample of 1,621 German listed companies between 2005 and 2009. Earnings management serves as a proxy for audit committee effectiveness and is measured by absolute as well as positive and negative performance-adjusted Jones model discretionary accruals. The results show that the existence of an audit committee constrains earnings management. Moreover, we find that audit committee effectiveness is further enhanced when committee size and committee meetings increase.
AN EXAMINATION OF THE MANAGEMENT CONTROL SYSTEMS OF A PROACTIVE ENVIRONMENTAL STRATEGY
ALBERTINI, ELISABETH
Category: SE = Social and Environmental Accounting
Proactive environmental strategies rely on the capabilities of a company to reduce the pollution generated by its manufacturing process and environmental innovations to have less pollutant activities or to propose ‘greener’ products to its customers. Through pollution control and prevention, these companies can reduce their ecological footprint and increase their energy efficiency. These proactive environmental companies have implemented Environmental Management Systems to control, monitor and improve their corporate environmental performance. Such management tools, measuring, reporting and auditing data through more and more precise dashboards, can be considered as Management Control System as they are formalized procedures and systems that use information to maintain or alter patterns in organizational activity. Therefore, this research analyses the Management Control Systems used to monitor or manage the proactive environmental strategy through a single case study. The results of this study show that Pollution Control and Pollution Prevention is mainly monitored through Diagnostic Control Systems and, to a lesser extent, by Interactive Control Systems; while Product Stewardship is managed through mainly Interactive Control Systems and, to a lesser extent, by Diagnostic Control Systems. Furthermore, this study shows that organizational capabilities and managerial cognition can be enhanced through the Management Control Systems used by a proactive environmental company.
DO SHAREHOLDERS WELCOME COURT INTERVENTION IN CEO PAY MATTERS?
ALBUQUERQUE, ANA M.
ALBUQUERQUE, ANA; CARTER, MARY ELLEN ; LYNCH, LUANN J.
Category: GV = Accounting and Governance
Critics of CEO compensation argue that it reflects rent extraction, not efficient contracting, favoring the CEO’s interests to the detriment of shareholders. One mechanism to rein in executive pay is through court litigation, yet little academic research has examined this. We analyze the market’s reaction to an unanticipated court ruling in a lawsuit against Citigroup claiming corporate waste with regard to CEO pay, providing insights on shareholders’ view of court intervention in cases of excess pay. We find that shareholders of firms with excess pay react negatively to the court ruling consistent with shareholders perceiving court intervention as net costly. We also find that shareholders of financial firms with weaker shareholders’ rights react positively, relative to shareholders of non-financial firms, suggesting that while court intervention in the pay setting process is generally perceived as undesirable, it might be better received in these firms that have been the subject of recent criticisms.
FINANCIAL DETERMINANTS FOR IMPROVING PUBLIC SECTOR ACCOUNTABILITY: A META-ANALYTIC STUDY
ALCAIDE-MUÑOZ, LAURA
GARDE SÁNCHEZ, RAQUEL ; LÓPEZ HERNÁNDEZ, ANTONIO M.; RODRÍGUEZ BOLÍVAR, MANUEL PEDRO
Category: PS = Public Sector Accounting
The economic crisis has highlighted the need to pay close attention to the disclosure of financial information by public administrations; this is an element contributing to control, accountability and responsibility and thus to achieving greater financial stability and sustainability. Although the disclosure of public financial information has traditionally been linked to financial variables, chief among which are financial condition and inter-governmental transfers, published results in this respect have been somewhat inconsistent, and conclusive evidence has yet to be provided regarding these factors and their influence on the level of disclosure. The present paper applies a meta-analysis statistical method to reveal the existence of a statistically significant association between certain financial variables and the disclosure of public financial information, although the strength and sign of this association will depend on the context under analysis. The results obtained reveal a variable degree of predisposition among public managers to adopt policies aimed at enhancing the disclosure of public financial information.
THE DISCLOSURE OF INFORMATION ABOUT SUSTAINABILITY AT THE REGIONAL GOVERNMENTS AND INFLUENCING FACTORS: THE CASE OF SPAIN.
ALCARAZ QUILES, FRANCISCO JOSÉ
NAVARRO-GALERA, ANDRES; ORTIZ-RODRIGUEZ, DAVID
Category: PS = Public Sector Accounting
In line with developments in the private sector, public bodies must improve their practices to disseminate information about the sustainability of their actions. Currently, the lack of doctrinal works and the small number of public entities that issue reports about sustainability, justify the opportunity and interest to conduct empirical research on government behavior in this matter. This paper examines the sustainability information disclosed by the 17 regional governments (RG) in Spain and analyzes ten factors that can play a key role in the publication of this information. Based on the GRI guidelines, we developed a questionnaire consisting of 61 items, structured in four blocks. Given the growing importance of the Internet as a means of communication between the government and the various stakeholders, and the contribution of the Internet to promote government methods to improve the availability of information, we examined the sites web of 17 (RG) Spanish verifying the information revealed by these web sites based on the questionnaire developed. We used ten possible explanatory variables for which we explained, the main reasons that have led us to think about the possibility of exercising influence on the publication of information on sustainability. Then, taking the percentages of disclosure obtained by each RG and for each blocks, we performed a cluster analysis to identify the impact of possible explanatory variables in the information disclosure on sustainability by RG.
ENGAGEMENT VIA WEB-BASED QUIZZES AND EXAM PERFORMANCE IN A BLENDED LEARNING INTERMEDIATE ACCOUNTING COURSE
ALDAMEN, HUSAM
DUNCAN, KEITH
Category: ED = Accounting Education
The study examines the impact of engagement in web-based quizzes on exam performance for students enrolled in a blended learning Intermediate Accounting course. The web-based system, WileyPLUS, allows students to take online quizzes outside of class thus enabling them to dedicate additional time on specific accounting-related topics. We posit that engagement with the course content through web-based self-testing and “time on task” improves the student’s learning and enables them to perform better on in-class exams. Our results show that gender differences in performance are related to engagement in online learning and class attendance rather than gender per se. We also show that students that take more online quizzes perform higher on in-class exams relative to other students and that online quiz performance influences mid-term exam performance but more so than for the final exam. Finally, other variables such as mid-term surprise, GPA and whether the student is a senior also influenced exam performance.
SEGMENT REPORTING IN THE UK
ALEKSANYAN, MARK
ALEKSANYAN, MARK; DANBOLT, JO
Category: FR = Financial Reporting
Segment reporting requirements for UK companies changed fundamentally twice during the last decade, with a move from SSAP 25 to IAS 14R in 2005 and the adoption of IFRS 8 from 2009. We undertake a longitudinal study of segment reporting practices of a large sample of UK firms covering all three reporting regimes, critically evaluating the merits of IFRS 8 relative to its two predecessors. We find that although the overall volume of segmental accounting information disclosed by companies is significantly higher under IAS 14R and IFRS 8 than under SSAP 25, both IAS 14R and IFRS 8 are associated with a major loss in the volume of one of the most important types of segmental information – segmental profitability. This is particularly acute for geographical segments. We argue that while the managerial approach of IFRS 8 (and, to a lesser degree, IAS 14R) may be advantageous to preparers and provide investors and analysts with some insight into the perspective of the Chief Operating Decision Maker (CODM), the significant reduction in the volume of segmental profitability data casts doubt on the effectiveness of IAS 14R and IFRS 8 in providing more useful information to investors.
REAL AND ACCRUAL EARNINGS MANAGEMENT AND IPO FAILURE RISK
ALHADAB, MOHAMMAD
CLACHER , IAIN ; KEASEY, KEVIN
Category: FR = Financial Reporting
This paper analyzes the relationship between real and accrual earnings management activities and IPO failure risk. Recent research shows that IPO firms manage earnings upward around the offer year utilizing real and accrual earnings management activities (e.g., Wongsunwai, 2012) and that these activities have severe negative consequences for future stock returns and operating performance (e.g., Cohen and Zarowin, 2010; Kothari et al., 2012). Thus, we predict IPO firms that engaged in higher levels of real and accrual earnings management will exhibit a higher probability of failure and lower survival rates. We test this hypothesis based on a sample of 570 IPO firms that went public over the period 1998-2008. We find evidence that IPO firms manipulate earnings upward utilizing real and accrual earnings management around the IPO. We also find that IPO firms with higher levels of real and accrual earnings management during the IPO year have a higher probability of IPO failure and lower survival rates in subsequent periods.
RETHINKING THE PRACTICE AND VALUE ADDED OF EXTERNAL AUDITS: THE AICPA’S AUDIT DATA STANDARDS (ADS) INITIATIVE
ALLES, MICHAEL
ISSA, HUSSEIN; VASARHELYI, MIKLOS
Category: FR = Financial Reporting
The Assurance Services Executive Committee (ASEC) Emerging Assurance Technologies Task Force of the American Institute of Certified Public Accountants (AICPA) has issued an exposure draft on the Audit Data Standard (ADS), which is a proposal describing a set of essential data that would be extracted from an audit client’s IT system and made available to auditors in a standardized format of either flat files or in XBRL-GL. The object of ADS is to reduce the obstacles to obtain data for audit purposes. The exposure draft focuses on the technical aspects of ADS but does not discuss either the best way in which such a standard should be created, or what its implications will be on the broader practice of auditing. This paper first discusses issues in the ADS approach in terms of how the taxonomy is created and what it encompasses. Then, using Elliot’s (1998) model of the information value chain, it analyzes the implications of ADS for the evolution of audit practice and the role of auditors relative to other third party analysts of business data. It concludes that ADS has the potential to be a disruptive innovation (Christensen, 1997) in auditing.
THE EFFECTS OF CORPORATE GOVERNANCE AND PRODUCT MARKET COMPETITION ON ANALYSTS’ FORECASTS: EVIDENCE FROM THE BRAZILIAN CAPITAL MARKET
ALMEIDA, JOSE ELIAS
DALMÁCIO, FLÁVIA
Category: GV = Accounting and Governance
In this paper, we investigate how the interaction between product market competition and corporate governance enhance accuracy of analysts’ forecasts and reduce forecasts’ deviation. Our results suggest that competitive industries provide incentives to increase the flow of information, but not necessarily enhancing quality. However, strong corporate governance enhances financial reporting process and consequently the analysts’ forecasts quality. Our main evidence is that analysts covering firms in competitive industries with strong corporate governance are the most accurate. We use a sample of Brazilian public firms listed on Sao Paulo Stock Exchange and control by random effects estimator and cluster regression. These results show us that competition and corporate governance are determinants to reduce institutional problems in an emerging market.
DETERMINANTS OF AUDIT COMMITTEE EFFECTIVENESS IN SAUDI LISTED FIRMS
AL-MOATAZ, EHSAN SALEH
HABBASH, MURYA
Category: GV = Accounting and Governance
Although prior research shows that audit committee effectiveness is an important monitoring mechanism of corporate governance, we know very little about the underlying determinants of audit committee effectiveness especially within a corporate governance environment that are considered different than the ones used in the previous research. A score of audit committee characteristics have been formed based on previous literature findings and publicly available quantitative signals as a proxy for audit committee effectiveness. This paper provides empirical evidence that audit committee effectiveness is associated with economic factors. Audit committee effectiveness increases with board independence and board diligence and decreases with the firm's leverage and state ownership. Moreover, there is a positive association between audit committee effectiveness and audit quality and large firm size. At the same time, a substitution effect is observed among internal control mechanisms, ownership types and audit committee effectiveness. Audit committee effectiveness increases with the supply of active and independent directors and with the demand for monitoring, and decreases with the availability of substitute monitoring mechanisms.
A STUDY OF FACTORS INFLUENCING THE CHOICE OF PRODUCT COSTING SYSTEMS IN KSA FIRMS
AL-OMIRI, MOHAMMED
ALOMIRI, MOHAMMED ; DRURY , COLIN
Category: MA = Management Accounting
This paper reports on the findings of a postal questionnaire that examines the extent to which potential contextual factors influence the characteristics of product costing systems. Prior research has mostly used the adoption or non-adoption of ABC systems to capture the characteristics of product costing systems. This research has generally been inconclusive and has been unable to establish strong links between ABC adoption and those contextual factors that have been identified in the literature and are considered conducive to the adoption of ABC systems. Instead of using only the adoption or non-adoption of ABC systems as a measure of product cost system design this research uses four different proxy measures of cost system sophistication to capture the characteristics of the product costing systems. This allows for a more robust test of the relations among the predictor variables and cost system sophistication. Results indicate that higher levels of cost system sophistication are positively associated with the importance of cost information, product diversity, cost structure, intensity of the competitive environment, size, and the type of business sector. No association was found between the level of cost system sophistication and extent of use of other innovative management accounting techniques, extent of the use of lean production techniques and The extent of the use of total quality management.
CORPORATE GOVERNANCE MONITORING EFFECTS ON CORPORATE ENVIRONMENTAL RESPONSIBILITY
AL-SHAER, HABIBA
SALAMA, ALY
Category: FR = Financial Reporting
This paper examines the impact of audit committee and board of directors on corporate environmental responsibility (CER). We measure the environmental disclosure in corporate annual reports by applying the consolidated narrative interrogation instrument (CONI from Beck et al., 2010) on a sample of UK FTSE350 companies. We also construct a composite measure to capture the joint effects of audit committee characteristics. Consistent with the literature that audit committees help to attain an effective governance oversight, our findings indicate that effective audit committees have a positive impact on corporate environmental responsibility. The finding is robust to the alternative measure of corporate environmental responsibility based on the scores published by ‘Management Today’ Britain Most Admired Companies (MAC) survey, and to the controls of board of directors’ characteristics. It highlights the role that audit committees may play in addressing corporate environmental responsibility issues and understanding the risks associated with them. This paper calls for a new role of audit committees in the relatively less regulated “comply or explain” of the UK in terms of corporate activities and accountability.
THE IMPACT OF FINANCIAL CRISIS ON MANAGEMENT REPORT DISCLOSURE. SOME EVIDENCE FROM SPAIN.
ALVAREZ, AMÉRICA
BABÍOARCAY, Mª ROSARIO; SUAREZ, OSCAR; VIDAL LOPO, ROSARIO
Category: FR = Financial Reporting
In this paper we analyze the possible impact of the economic crisis and the changes in results of continues operations on the narrative disclosure from a sample of Spanish listed companies over the period 2005-2009. The results suggest that the general economic crisis has a significant effect on the information narrative and in particular that relating to risks, intangibles and forward looking information. It should also be noted the existence of a relationship between the information disclosed and the deterioration in the results obtained by the company but limited to information relating to the future and intangibles. These findings are in line with the idea that company managers consider narrative information in general and, particularly, the information contained in management reports, as a suitable tool for communication with investors and other users of these reports and recur to this information to create a certain image of the company.
PROFITABILITY MEASUREMENT ACTIVITIES AND ATTITUDES IN ESTONIAN COMPANIES
ALVER, JAAN
ALAS, RUTH; BRANTEN, MARET
Category: FA = Financial Analysis
The paper scrutinises whether and how the Estonian companies use and analyse the profitability measures. On the one hand, the profitability measures should be a central component of the management control systems, but on the other hand, they should be linked to the wealth measurement objective. Therefore the importance of a quality analysis in companies in the aforementioned field cannot be overestimated. The activities of Estonian companies and their attitudes to profitability analysis have been considered by using the results of a survey carried out in companies with an aim of drawing attention to the areas which need improvement. It has been identified how the companies make use of the traditional income statement in the analysis process, and whether any adjustment are needed; whether profits as a manifestation of the value of a company merit attention; whether attention is accorded to the capital maintenance problem and the price of capital – hence the real growth of the wealth; whether the cash-based profit and contribution margin etc. are analysed. An accountant’s role in the analysis process is also under consideration. KEY WORDS: income statement, profitability analysis, profitability measures.
THE IMPACT OF DIFFERENT CATEGORIES OF VOLUNTARY DISCLOSURE ON INFORMATION ASYMMETRY: AN ANALYSIS FOR PORTUGUESE AND SPANISH LISTED COMPANIES.
ALVES, HELENA
ALVES, HELENA; CANADAS, NATÁLIA; RODRIGUES, ANA MARIA
Category: GV = Accounting and Governance
This paper examines the relation between corporate governance and information asymmetry, through the different categories of voluntary disclosure, using a structural equation model. Our sample consisted of Portuguese and Spanish listed companies. We built a voluntary disclosure index based on the information firms provided in their annual reports and used the turnover ratio and the bid-ask spread as proxies for the information asymmetry in the market. We divided the governance characteristics in two constructs: directors’ and supervisors’ structures and ownership structure. We analysed the impact of the different categories of voluntary disclosure on information asymmetry. The models results suggest that each category of voluntary disclosure can be insufficient in itself. However, generally, when the information is combined it provides more useful information for investors. Despite this, the results showed that strategy and future perspective are the categories of voluntary information that most influence investors.
THE EFFECT OF BOARD INDEPENDENCE ON THE EARNINGS QUALITY: EVIDENCE FROM PORTUGUESE LISTED COMPANIES
ALVES, SANDRA
Category: GV = Accounting and Governance
Agency theory suggests that independent outside board members may play an important monitoring function of the financial reporting process. As a result, boards with more independent directors have a tendency for increased monitoring and are therefore expected to insist on better earnings quality. This study examines whether board independence improves earnings quality by reducing earnings management in Portugal, a country with significantly different institutional and legal characteristics from the Anglo-Saxon countries. Using ordinary least square (OLS) and two stage least squares (2SLS) techniques to control potential simultaneity problems between board independence and earnings quality, we find evidence that independent board members improve earnings quality by reducing earnings management for a sample of Portuguese listed firms. This result suggests that strengthening the independence of boards by appointing more independent board members is a positive step toward improving earnings quality.
DO INFORMATION RELEASES INCREASE OR DECREASE INFORMATION ASYMMETRY? NEW EVIDENCE FROM ANALYST FORECAST ANNOUNCEMENTS
AMIRAM, DAN
AMIRAM, DAN; OWENS, EDWARD; ROZENBAUM, ODED
Category: FR = Financial Reporting
Prior literature documents an announcement period increase in information asymmetry for earnings announcements and management forecasts. In sharp contrast, we predict and document a decrease in information asymmetry upon announcement of analyst forecasts. We find that this decrease is more pronounced for analyst forecasts with greater information content and when analysts exert higher effort, and is less pronounced after exogenous regulatory actions that diminished analysts’ ability to obtain private information. Our predictions and evidence demonstrate the general insight that the directional effect of an information release on announcement period information asymmetry depends on whether the information is unprocessed or processed, and on how the information interacts with prior information held by sophisticated and unsophisticated investors. These findings enhance our understanding of the effects of information intermediaries in capital markets.
REAL ACTIVITIES MANIPULATION VS. ACCRUAL-BASED EARNINGS MANAGEMENT: THE EFFECT OF FINANCIAL LEVERAGE
ANAGNOSTOPOULOU, SERAINA
TSEKREKOS, ANDRIANOS
Category: FR = Financial Reporting
This study examines whether the level of financial leverage has an impact on accrual-based and real earnings management. We hypothesize that leverage may induce firms to manage earnings for several reasons, well and above avoiding the violation of debt covenants, and we testify that leverage positively and significantly affects upwards real earnings management, and negatively and significantly affects income-increasing discretionary accrual manipulation. We interpret our findings as indicative of the fact that when outside monitoring and scrutiny is stronger, for firms holding higher levels of debt, a preference for real rather than accrual based earnings management is induced, as the former can be less easily tracked or even hidden in the form of business practices. Furthermore, we find that for a given level of leverage, engaging in upwards real (as opposed to accrual-based) earnings manipulation is significantly more harmful for future operating performance. This finding is indicative of the adverse impact that departures from optimal business practices have on performance, when an effort to improve the financial picture of a firm is made through real earnings manipulation. However, the market is found to under-react to real earnings management, when compared to its reaction to. accrual earnings manipulation.
SEEKING AND SUSTAINING AUDITOR CREDIBILITY IN NEW ASSURANCE SPACES
ANDON, PAUL
FREE, CLINTON; SIVABALAN, PRABHU
Category: AU = Auditing
Focusing on the emergence and operation of the salary cap audit programs in the National Rugby League (NRL) in Australia and Canadian Football League (CFL) in Canada, this article explores the processes through which auditors compete for legitimacy in new audit spaces. According to Bourdieu, legitimacy is a scarce symbolic resource that is subject to struggle and (re)negotiation. Following the appointment and operation of two new audit roles, we document the way that the appointees sought to legitimise their positions and achieve stable networks of support by mobilising a range of social, cultural and symbolic resources to cohere with context-based expectations of key stakeholders. Further, we find the appointees employed a range of influence tactics to populate the field with new rules and standards, confer a new order within the field and impose themselves in their roles. Implications for the claims of the accounting profession to new audit spaces are discussed.
MANDATORY ADOPTION OF IFRS BY EU LISTED FIRMS AND COMPARABILITY: DETERMINANTS AND ANALYSTS’ FORECASTS
ANDRE, PAUL
DIONYSIOU, DIONYSIA; TSALAVOUTAS, IOANNIS
Category: FR = Financial Reporting
In 2005, the EU adopted IFRS for all listed companies publishing consolidated financial statements in Europe. The transition from national accounting standards to IFRS was complex and costly but the main arguments for it included the improvement in comparability across companies and improvement in capital markets' efficiency. This study focuses on the comparability of the financial statements of EU listed firms, before (2003) and after (2005 & 2010) IFRS mandatory implementation, and on its determinants and consequences. We find significant convergence in firm’s accounting practices (input comparability) after IFRS. Output comparability also significantly improves between the pre and post IFRS periods. However, neither of the two measures improves with IFRS familiarity (no significant difference between 2005 and 2010). Furthermore, we find that output comparability is not driven by the convergence in accounting choices. Our tests strongly suggest that output comparability is improved because of IFRS adoption and more comparable accruals in relation to industry peers. This suggests that more comparable accruals facilitate investors to value firms more accurately. In fact, we find that more comparable accruals facilitate lower analysts’ forecast dispersion. Finally, we find that analysts’ forecasts errors declining as output comparability increases, suggesting that output comparability increases the usefulness of accounting information.
THE INTERACTION BETWEEN INDUSTRY-SPECIFIC STANDARDS AND CORPORATE SOCIAL REPORTING. EMPIRICAL EVIDENCE FROM COOPERATIVE BANKS IN ITALY.
ANDREAUS, MICHELE
COSTA, ERICKA; PESCI, CATERINA; TAUFER, EMANUELE
Category: SE = Social and Environmental Accounting
The aim of the paper is to investigate the interaction between industry-specific standards and the extent and quality of the disclosure of Corporate Social Reporting (CSRep). The paper evaluates in detail the capability of industry-specific guidelines to capture the most significant social and environmental elements in terms of volume and quality of the disclosure. The analysis takes into account differences between various areas of the disclosures. The banking sector in Italy has been chosen as a case for this study because from 2001 (and afterwards in 2006) the Italian Banking Association (ABI) has developed a specific social and environmental standard setter for encouraging and promoting the diffusion of corporate social and environmental reporting practices among banks. The paper is based on a content analysis of 98 cooperative banks’ (CBs) CSRep in Italy in 2008/2009 and also develops a regression analysis for the purpose of the study. The findings suggest that the industry-specific standards are in general able to detect information that is mainly widespread by CBs in terms of frequency. However, when analysing the significance of disclosure, both in terms of volume and quality, the regression model demonstrates that the capability of ABI standards to effectively detect the prominence of information reported is fairly low. Differences emerge when considering the different areas of the disclosures.
ETHICAL CONDUCT OF BRAZILIANS’ ACCOUNTANTS: DIFFERENCES BETWEEN BELIEFS AND PRACTICES
ANTUNES, MARIA THEREZA POMPA
BIFI, CLAUDIO RAPHAEL; CAVALCANTE LIMA, JOÃO PAULO; MENDONÇA NETO, OCTAVIO RIBEIRO; YAYLA, HILMI ERDOGAN
Category: ED = Accounting Education
The focus of this study is the ethical conduct of Brazilians’ accountants, based on the Foucault (2001b) approach about the practice of Parrhesia. It is aimed to know how characteristics of truth-telling activity can be frame as perceived by Brazilians’ accountants according to their beliefs and identify differences between these beliefs and how they actually practices in their profession. The motivation for use this approach was due to the fact that the existence of a professional ethical code has not proven enough to curb moral deviations in professional conduct. This is an exploratory and descriptive study with a quantitative approach. A survey was made through a structured questionnaire and featured a final sample composed of 5,087 respondents. Data ware treated by descriptive analysis, Exploratory Factor Analysis (EFA) and Technical Analysis of Paired Data. Two different models were found. One for the beliefs, composed by the factors Courage, Duty and Sincerity and another for practices, composed by the factors Transparency, Competence and Critique. The analysis of the frequencies of the mode of the paired variables (beliefs versus practice) showed higher frequencies for the assertions related to practice suggesting that Brazilians’ accountants are more effective in truth-telling activity in the daily practices. Suggestions for educational institutions and professional entities were made, in order to enhance the ethical behavior based on the practices of the self.
INFORMATION IN AGGREGATE ACCOUNTING NUMBERS: A REVIEW
APOSTOLIDI, MARIA
HEVAS, DIMOSTHENIS
Category: FA = Financial Analysis
Research on the information content of accounting numbers has been crucial for understanding accounting’s role, impact and power. Literature on the informational role of aggregate accounting numbers is narrow, but it has recently been expanding, unraveling some very interesting and important aspects of accounting numbers. This paper provides a review of the current research pertaining to the relation among aggregate accounting numbers, capital markets and macro-economy. This review concludes that research has generated, and still has a long road to generate, many valuable insights and implications that might be useful to publicly listed corporations’ strategies, capital market investors’ decisions, fiscal and monetary policy setters’ measures, and finally accounting standard setters’ policies.
RATCHET EFFECT AND CONSCIENTIOUSNESS IN A DYNAMIC SETTING: A LABORATORY EXPERIMENT
ARANDA, CARMEN
ARANDA, MAMEN; ARELLANO, JAVIER; CHOIRAT, CHRISTINE ; SERI, RAFFAELLO
Category: MA = Management Accounting
Firms using past performance to identify employee’s productivity and to revise targets face an adverse incentive problem. When future targets are ratcheted up for good past performance, agency theory predicts that employees remunerated with budget-based contracts have all the same inclination to opportunism and consequently they all opt not to exert their full effort, in what is called ratchet effect. In this paper, we conduct a multi-period laboratory experiment to examine if and to what extent employees’ opportunistic reaction depends on personal traits, as documented by personality and organizational studies. We namely find that high conscientious individuals exhibit a lower ratchet effect, or equivalently, a higher level of effort and performance, than low conscientious individuals. Important implications not yet explored follow in the optimal design of incentive contracts: standardized budget-based contracts are no longer the first-best for all employees. Rather, customizing the contract’s feature to match personality traits motivates employees to do their best. In this direction, this paper finally explores some of these features that could be modified in the attempt to tailor incentive contracts.
AN EMPIRICAL ANALYSIS ON THE INCIDENCE OF FIRM LONG TERM STRATEGY OF EFFICIENCY AND TACTICAL FLEXIBILITY ON COST STICKINESS BEHAVIOR
ARGILES, JOSEP
BERBEGAL, ANGEL; GARCÍA-BLANDÓN, JOSEP
Category: MA = Management Accounting
This study performs an empirical analysis on the incidence of the strategies of efficiency and tactical flexibility on long term firms’ behavior of cost stickiness. The tradeoff between efficiency and flexibility is an enduring postulate in management literature. There is a competition over firm’s scarce resources between flexibility and efficiency. In this study we focus on tactical flexibility and efficiency as the second pole of firm long term strategy. We use a sample of industrial firms with at least 20 years of data in COMPUSTAT. We start with 37,730 year data observations and identify 140 firms with sticky cost behavior in the whole period and 608 firms with no stickiness. We find empirical evidence that firm long term strategies of efficiency and tactical flexibility significantly influence cost stickiness. The higher the volatility of sales when activity increases, the higher the pattern of cost stickiness of firms. Given that resource adjustment hinders the ability of firms to meet future increases in demand, in the long term firms with the strategic objective of tactical flexibility tend to apply lower adjustment of resources when activity decreases. We also find that the strategic aim of pursuing efficiency apply greater resource adjustment when activity decreases in the long term. They avoid maintaining slack resources despite it may curtail to take advantage of future opportunities.
INDONESIAN LOCAL GOVERNMENT FINANCIAL REPORTING COMPLIANCE: JAVA DOMINATES
ARIFIN, JOHAN
PORTER, STACEY; TOWER, GREG
Category: PS = Public Sector Accounting
Using isomorphic institutional theory this study examines the level of mandatory disclosure within financial statements of Indonesian local governments. Indonesia is the world’s largest Muslim country that has recently undergone major state financial reform. Examining the entire data set of 200 local government financial statements, the findings reveal there is a moderate level of compliance with key mandatory disclosures (69.6%). The highest level of communication is on issues relating to Financial Statement Items (91.5%) whereas the lowest level is for Non Financial Information issues (44.5%). Regression analysis shows that the mimetic (jurisdiction) and normative (political influence) isomorphism variables are positive and significant predictors of the extent of mandatory disclosure. In addition, local governments which have a higher Human Development Index and Financial Independence score have more intensive communication.
EXPLORING THE ROLE OF CALCULATIVE DEVICES IN THE TRANSFORMATION OF LOGICS: A COMPARISON OF EQUITY AND FIXED-INCOME SOCIALLY RESPONSIBLE INVESTMENT
ARJALIÈS, DIANE-LAURE
Category: MA = Management Accounting
The purpose of this paper is to explore the role of calculative devices (Callon & Muniesa, 2005) in the co-transformation of institutional logics and practices. Empirical data are based on an ethnography study of two working groups inside an asset management company that attempted to integrate new demands for Socially Responsible Investment (SRI). The paper compares how the working groups aimed to (re)design their equity and fixed-income investment processes through the introduction of new calculative devices, and explains why the fixed-income group was perceived as less successful than the equity group. Drawing on a cross-theoretical framework based on elements of practice, institutional theories and performativity, it argues that calculative devices play a key role in mediating the transformation of logics in relationship to their institutional environment and associated practices. Furthermore, it shows that the lack of relevant calculative devices can prevent the transformation of logics. Implications for research on the role of instruments in institutional change and the impact of SRI on the valuation processes of asset management are discussed.
AUDIT PARTNER SPECIALIZATION AND AUDIT QUALITY: FURTHER EVIDENCE
ARTHUR, NEAL
CHEN, YU; ENDRAWES, MEDHAT; KILGORE, ALAN
Category: AU = Auditing
This study investigates the impact of audit partner rotation on audit quality and whether industry specialization moderates such a relationship. Specifically, it examines whether audit partner rotation results in higher audit quality and, if so, whether this is conditional on audit partner or audit firm industry specialization. Multivariate regression analysis was used to test the hypotheses. The study uses a sample of 432 firm - year observations for firms listed on the Australian Securities Exchange. The results of this study show that audit partner rotation can enhance audit quality but only when both the incoming audit partner and the audit firm are industry specialists. The results of the study provide valuable insights into the effectiveness of audit partner rotation and auditor industry specialization practices, and their impact on audit quality. The results have implications for the profession as well as regulators regarding audit partner and audit firm industry specialization. This is the first study to examine the moderating effect of industry specialization on the auditor rotation – audit quality relation at the partner level. The introduction of industry specialization as a moderating factor provides additional insights into the auditor rotation – audit quality relation at the partner level.
FAMILIARITY THREAT ARGUMENT REVISITED: CONFIDENCE, TRUST AND PROFESSIONAL SKEPTICISM
ASCHAUER, EWALD
FINK, MATTHIAS; VAN BAKEL-AUER, KATHARINA; WARMING-RASMUSSEN, BENT
Category: AU = Auditing
Familiarity between auditors and their clients is discussed to threaten auditors’ independence and thus to compromise audit quality. While recent examples reported on media support this familiarity threat hypothesis, results from previous empirical research are ambiguous. We argue that the concepts of familiarity and independence are too broad and too complex to be adequately covered in an empirical study and thus focus on those dimensions that are carrying the relationship underlying the familiarity threat hypothesis. Thus, we investigate the impact of auditors’ confidence and trust in their clients on the clients’ perception of auditors’ professional skepticism. Further, we investigate the impact of the duration of the auditor/audit firm-client relationship (auditor tenure/audit firm tenure) and the provision of non-audit services (NAS). We employ OLS regression based on data collected among 230 German auditor-client dyads to test four hypotheses. We find auditors’ confidence in their clients to compromise the clients’ perception of auditors’ professional skepticism, while trust contributes to the auditors being perceived as skeptical. Further, we find a negative impact of NAS but no significant effect of auditor tenure or audit firm tenure on clients’ perception of auditors’ professional skepticism. Besides the theoretical contributes, the practical implications of our findings for (re)designing the regulations for auditing are discussed.
EARNINGS QUALITY, CORPORATE GOVERNANCE, AND EARNINGS QUALITY
ATHANASAKOU, VASILIKI
ATHANASAKOU, VASILIKI; OLSSON, PER
Category: GV = Accounting and Governance
There are two seemingly contradictive perspectives in the literature on the relation between corporate governance and earnings quality. One perspective predicts that firms compensate inherent limitations in the ability of accounting information to reflect underlying economics (i.e., poor earnings quality) with stronger governance mechanisms. The other perspective predicts that stronger governance structures constrain earnings management, leading to better earnings quality. These two perspectives have been largely examined in isolation, and empirical results are often inconsistent also within each perspective. We develop a framework to separate the innate and discretionary portions of earnings quality. Unlike traditional models that identify managerial discretion as a residual in a regression of accruals or earnings quality on firm fundamentals, we model discretionary earnings quality directly on managerial incentives. We find that poor innate earnings quality is associated with more effective governance structures, and that more effective governance structures are associated with better discretionary earnings quality. Both perspectives can thus be accommodated within a single framework, provided a valid separation of the innate and discretionary portions of earnings quality. The analysis shows how earnings quality shapes and is shaped by corporate governance, depending on its source.
THE EFFECT OF GOVERNMENT R&D INCENTIVES ON INTERNATIONAL R&D TRADE
BACHMANN, CARMEN
BAUMANN, MARTIN
Category: PS = Public Sector Accounting
In the past years, the awareness of the importance of business research and development for the economy has grown significantly. In order to encourage businesses, governments are increasingly providing tax incentives or grants to companies conducting R&D. Despite the vast literature proving the efficiency of these incentives, the impact of these incentives on interna-tional trade in R&D services has been ignored so far. An empirical analysis indicates that R&D incentives have opposing, time variant effects on international R&D trade. The findings indicate that government decisions on R&D incentives should also take the scale of R&D incentives of its major trade partners into consideration.
USE OF PROBABILITIES IN MEASUREMENT: IMPLICATIONS FOR EQUITY VALUES
BADIA, MARC
DURO, MIGUEL
Category: FA = Financial Analysis
The role of probability thresholds in accounting standards has shifted from recognition (e.g. SFAS No.5) to measurement (e.g. SFAS 143, 144). Probabilities are now embedded in expected present value calculations but are not typically disclosed. I identify a unique setting to test whether investors use and understand probability thresholds for equity valuation. This paper studies a recent regulatory change that requires Canadian oil and gas firms to disclose the breakdown of their oil and gas reserves estimates into two categories, proved and probable, dependent on the probability of eventual production. The findings support the hypothesis that investors attach different market values to each category of reserves consistently with the associated probabilities. The investors’ market value weights vary with proxies for size, information risk, and, surprisingly, idiosyncratic risk. These findings are relevant for regulators in their current deliberations on the role of probability thresholds in general and oil and gas disclosure requirements in particular.
DO INDUSTRY SPECIALIST AUDITORS IMPROVE INVESTMENT EFFICIENCY?
BAE, GIL
CHOI, SEUNG UK
Category: AU = Auditing
This paper examines whether the investment efficiency of client firms with industry specialist auditors is higher relative to that with non-specialist auditors. Using a large sample from the period1976 to 2005, we find that investment efficiency of client firms with industry specialist auditors is significantly higher than that with non-specialist auditors. Furthermore, industry specialist auditors discourage both over-investment and under-investment, although they do so more in the over-investment side relative to the under-investment side. The results are generally unaffected by the different definitions of specialist auditors, clients’ firm size, yearly regressions, differences in the market share of specialist auditors, and the potential self-selection bias.
A COMPARATIVE HISTORICAL ANALYSIS OF THE DEVELOPMENT OF THE AUDITING PROFESSION IN THE UNITED KINGDOM, FRANCE AND GERMANY
BAKER, CHARLES RICHARD
Category: AU = Auditing
The purpose of this paper is to present a comparative historical analysis of the development of the auditing profession in the United Kingdom, France and Germany. While legal requirements for external audits of company financial statements provided the basis for the development of an auditing profession in Europe as early as the mid-19th century, differences in the role and status of professions in have led to differences in the development of the auditing profession in the three countries investigated. It is only in recent years that there have been significant efforts to harmonize the regulatory structures for the auditing profession on a more international basis. The findings of this paper support the arguments of the Institute of Chartered Accountants in England and Wales (2010) to the effect that there may be limits to international regulation of the auditing profession due to historical and cultural differences among countries.
VALUE RELEVANCE OF GREENHOUSE GAS (GHG) EMISSIONS DISCLOSURES ON STOCK MARKET PERFORMANCE
BALATBAT, MARIA
KHOO, LI MING; WONG, LEON
Category: SE = Social and Environmental Accounting
This study examines the value relevance of greenhouse gas (GHG) emissions disclosed through the Carbon Disclosure Project (CDP) across 38 countries over the 2006 – 2010 (or CDP report 2007 – 2011). Evidence from both return specification and price specification value relevance approaches suggest that GHG emissions disclosures affect both stock prices and stock returns. Findings show that scope 1 emissions have a significant negative association with stock prices and stock returns. This is consistent with the notion that scope 1 emissions signify the operational inefficiency and thus a potential environmental liability for the emitters in the coming future. On the other hand, scope 2 emissions have a significant negative association with stock prices, but a positive association with stock returns. Nonetheless, an increasing awareness among investors over time results in scope 2 emissions being priced more negatively over time and hence they are less positively associated with stock returns between 2008 and 2011.
EVIDENCE OF DETERMINANTS OF AUDIT PRICING FROM MALTA
BALDACCHINO, PETER J.
ATTARD, MIRIAM CASSAR; CASSAR, FRANK
Category: AU = Auditing
Abstract Purpose The main objective of this study is to investigate factors influencing the external audit fees in a microstate environment, using Malta as a point of reference. This includes ascertaining whether client size, complexity and risk, also known as the “traditional” determinants, are applicable, as well as testing the issue of premium pricing amongst the Big 4 (if any). Of particular interest is the determination of specific factors relevant to such a market. Design/Methodology/Approach A GLM regression model is used to examine the effect of the independent factors on the amount of audit fees for a sample of audit engagements performed in the Maltese audit market. The model is further complemented by a series of semi-structured interviews with audit partners from various audit firms of different sizes. Findings Results indicate that the amount of external fees is significantly influenced by audit client size, complexity, risk, ownership control and corporate status. Additionally a fee premium has been found to accrue to the Big 4 audit firms. This research also provides evidence that there exist two significant market-specific factors, namely whether the company is government-owned and/or owned by foreign shareholders. Originality/ Value This study adds to the existing literature in that it is the first known to empirically investigate factors influencing the pricing of audit services in a microstate.
TAX INCENTIVES AS DETERMINANTS OF ACCOUNTING FOR AND SPENDING ON R&D: AN INTERNATIONAL ANALYSIS
BALLAS, APOSTOLOS
ANAGNOSTOPOULOU, SERAINA
Category: FR = Financial Reporting
This article explores the influence of tax incentives for R&D on the capitalization versus expensing methods of accounting for R&D expenditure and the level of spending on R&D. We are motivated by the fact that tax-minimizing incentives will result in a lower reported income, whereas financial reporting incentives are satisfied with a higher book income, when capitalization per se increases current-period profits. We use all listed firms from the United Kingdom, France, Germany, Italy, Spain, and the Netherlands, which prepare their financial statement using IFRS and that engaged in R&D activities for the period 2001–2008. On the issue of accounting choice, our findings indicate that R&D-related tax benefits at the country level induce firms to either capitalize or, alternatively, use a mix of expensing and capitalizing, rather than expense R&D. Our results also indicate that country-specific R&D tax benefits provide statistically significant incentives for increasing R&D expenditures, and observe this influence to be stronger among high R&D spenders. This result is robust to controlling for a number of possible determinants of corporate R&D spending, including accounting and financial constraints. Our findings are interpreted as being indicative of the influence of R&D tax incentives on accounting policies, well and above the amount of investments they are meant to induce.
THE STRAIGHT STORY WITH A TWIST: HOW HYBRID GOVERNANCE, ACTORS AND INSTITUTIONS AFFECT MANAGEMENT ACCOUNTING CHANGE
BALSLEV, LARS
BALSLEV, LARS; THRANE, SOF
Category: GV = Accounting and Governance
This paper investigates the development of management accounting in Air Greenland. The paper is longitudinal using retrospective interview methods, as well as document analysis to trace developments over the past 30 years. The societal system has in this period developed from colonial rule towards state capitalistic and market capitalistic systems of governance. The paper illustrates how Air Greenland management accounting develops both as a consequence of regulative and system changes but also as consequence of actors within the firm. The management accounting system and social structures develops from a non-accounting style over budget constrained behaviour towards more complex management accounting systems with responsibility accounting and profit conscious orientation. In order to affect changes actors initiate plans which were in direct contradiction with large shareholders interest and actors in the organization try to decrease political influence as political influence contradicted emerging norms of profit consciousness and meritocracy. We thus illustrate how the hybrid ownership and hybrid governance which governs Air Greenland induce conflicts and contradictions and how actors within the organization seek to develop and change the political and regulative structures to which they are subject.
PRINCIPLES-BASED VERSUS RULES-BASED ACCOUNTING STANDARDS:THE EFFECT OF PROPOSED AUDITOR JUDGMENT GUIDANCE IN CONSTRAINING AGGRESSIVE REPORTING
BAMBER, MICHAEL
BACKOF, ANN; CARPENTER, TINA
Category: AU = Auditing
We experimentally investigate auditors’ judgments under accounting standards that differ in their precision and whether alternative judgment frameworks help auditors constrain aggressive financial reporting. One of our frameworks is based on the Securities and Exchange Commission’s Advisory Committee on Improvements to Financial Reporting’s recommendation to use counterfactual reasoning. Another framework based on Construal Level Theory encourages auditors to think broadly about the transaction. We find that auditors are more likely to allow aggressive reporting when accounting standards are less precise. However, employing a judgment framework reduces auditors’ acceptance of such aggressive reporting. While the counterfactual framework is effective at constraining aggressive reporting when standards are less precise, auditors are least likely to allow aggressive reporting when they use the judgment framework based on Construal Level Theory, regardless of the precision of the standard. These results inform regulators, standard-setters, and auditors on how precision affects auditors’ response to aggressive reporting and on the effectiveness of different judgment frameworks in constraining aggressive reporting.
DETERMINANTS OF FIRMS’ CHOICE OF PERIODIC PROFITABILITY ANALYSIS
BANGHOJ, JESPER
PLENBORG, THOMAS; ROHDE, CARSTEN
Category: MA = Management Accounting
This paper addresses a number of hypotheses using variables which determine how a firm performs periodic profitability analysis. The study is survey based and unique Danish data on the cost allocation and performance measurement is utilized. We perform five main regressions and our main findings are that segmentation from high to low in the corporate hierarchy and number of customers highly influences the level of costs that are allocated, separately reported cost and balance sheet items that are included in the periodic profitability analysis. Furthermore, the predictability of the competition the company faces, diversification of the company’s products and the importance of information from the profitability analysis partly affects the amount of costs (variable and fixed) which are included in the periodic profitability analysis. Surprisingly, the frequency of the periodic profitability analysis and to some extent the size of the company does not affect the amount of costs which are included.
THE EFFECTS OF IFRS ADOPTION: ANALYSING THE EVIDENCE
BARONE, ELISABETTA
MCLEAY, STUART
Category: FR = Financial Reporting
This paper provides a comprehensive classification, review and discussion of the body of literature that analyses the quantitatively measureable effects of IFRS, as intended by standard setters and adopting countries. Trends in the literature are identified and implications for future empirical research are discussed, both for countries where IFRS has already been introduced and for those where adoption is planned. Further, other factors, which are also relevant for ensuring that the intended effects of IFRS are achieved, are examined across the different streams of IFRS research. While a number of potential IFRS benefits are still under-researched, and some methodological and sampling issues remain, it can nevertheless be concluded that IFRS adoption was successful in bringing about many of the expected benefits for the quality of financial reporting, the functioning of the capital markets and the efficient capital allocation worldwide. However, it must be noted that firm- and country-specific characteristics that shape the setting in which the standards are implemented also play a significant role in connection with the effectiveness of the introduction of IFRS.
CEO TURNOVER, EARNINGS MANAGEMENT & FAMILY OWNERSHIP: THE ITALIAN CASE.
BARRIOS, JOHN
FASAAN, MARCO; MACCIOCCHI, DANIELE
Category: GV = Accounting and Governance
The main aim of this paper is to study the relationship between earnings management and CEO turnover in the Italian context. The issue is relevant because it has never been tackled from an empirical perspective in the Italian context, which presents some important peculiarities when compared to other more widely studied corporate governance systems. Thusly, apart from studying the relation unconditionalyl, in the second part of the paper we focus on the relationship amongst publicly listed family firms, thus investigating it in an even more specific context. We find that, in the general Italian context, there is a positive relationship between earnings management and CEO turnover and that non-family firms drive the results. Results also suggest that family and non-family firms engage in the same level of earnings management, thus supporting the existence of two different corporate governance systems: one that prevents and one that punishes earnings management. Our results are robust to alternative explanations.
PRIVATE EQUITY IN THE PUBLIC MARKET: A GOVERNANCE MECHANISM IN A CONTEXT OF MULTIPLE LARGE SHAREHOLDERS
BARROSO CASADO, RAUL
BURKERT, MICHAEL; DÁVILA, ANTONIO; OYON, DANIEL
Category: GV = Accounting and Governance
We examine the performance implications of private equity (PE) investors, particularly focusing on expansion capital in the value of publicly listed firms. In a context of multiple significant shareholders, we address two main research questions: Is the presence of private equity investors associated with firm valuation? How does this relation change in the presence of other types of large shareholders? Our findings indicate that the presence of private equity investors is associated with higher valuation. However, in combination with other shareholders, the results are bounded by the type of shareholders they interact with. We explain those results as a consequence of divergences in agency costs, and the role of PE in reducing those costs more effectively than other types of shareholders.
TOWARDS A “NEW GENERATION” OF PARTICIPATORY BUDGETING? EVIDENCES AND REFLECTIONS FROM THE ITALIAN EXPERIENCE
BARTOCCI, LUCA
LUCENTINI, DAMIANA
Category: PS = Public Sector Accounting
Citizens’ participation is considered, in many approaches, as one of the main elements qualifying the new cultural models that interpret the evolutions of the ways in which the public sector can be administrated, with a special reference to the paradigm of public governance. This study aims to verify if the resort to the participatory practices – especially citizens’ involvement in budgeting – has a significant effect – and not merely rhetorical – considering the existence of a positive correlation between civic participation and improvement of the accountability. The work is supported by an empirical section, based on a survey carried out on a panel sample of Italian experiences. The repetition with time of this research (twice in three years time) let us show the development trends of the phenomenon. From this study it emerges that the adoption of participatory budget is often related to political aspects and finds hard to remain stable with time, although it is well appreciated by the management in charge and by the citizens. In those cases in which participatory budget is still operational, a change of the conceptual model at the base of the operational techniques is occurring, with a shift from the South American to more hybrid models. Generally speaking, the search for a “participatory structure”, where the participatory budgeting becomes a symbolic instrument, is leading to the beginning of a process in which the Municipalities analyzed are getting more accountable.
THE IMPACT OF FINANCIAL TRANSPARENCY ON ELECTORAL CYCLES: EVIDENCE FROM SPANISH MUNICIPALITIES
BASTIDA, FRANCISCO
BENITO, BERNARDINO; GUILLAMÓN, MARÍA-DOLORES; RÍOS, ANA; VICENTE-OLIVA, CRISTINA
Category: PS = Public Sector Accounting
The aim of this paper is to assess the impact of financial transparency on local political budget cycles. We employ a panel sample of the Spanish largest municipalities for 1999-2009. Although the impact of transparency on the electoral cycle has been investigated at the international and regional level, no previous studies have explored its effect at the local level. We find an electoral cycle in total spending in low financially transparent municipalities, whereas such an electoral impact on total spending does not appear in high transparent municipalities.Our results also show that the magnitude of the electoral cycle in capital spending and taxes does not diminish when financial transparency rises. In other words, incumbents increase capital spending and reduce taxes before elections, regardless of the degree of financial transparency.
EXAMINING THE EFFECT OF MANAGEMENT AND STRATEGIC CONTROLS ON ORGANIZATION PERFORMANCE
BASUONY, MOHAMED
Category: MA = Management Accounting
The paper focuses on and gauges the dimensions of both, management and strategic Control. It also defines the variables that affect the management accounting practices which will consequently affect the organization performance through management and strategic control. Furthermore, it suggests a framework which includes the elements of both management and strategic control to determine which one is more suitable to use in large organizations or SMEs. Also, this paper examines if there is any difference between product-based and service organizations in using management and strategic control.
THE EFFECT OF THE SHAREHOLDER DIVIDEND TAX POLICY ON CORPORATE TAX AVOIDANCE AND THE CONFLICTS OF INTEREST BETWEEN MANAGERS AND SHAREHOLDERS
BAUER, ANDREW
AMIRAM, DAN; FRANK, MARY MARGARET
Category: TX = Taxation
This study investigates the effects of shareholder dividend tax policies on the incentives of managers to avoid corporate taxation and to align with shareholders’ interests. In contrast to a classical tax system, a dividend imputation tax system eliminates the double taxation of corporate earnings by crediting the shareholders for the amount of taxes that the corporation pays. As a result, corporate tax avoidance is less desirable for these shareholders because tax avoidance structures are costly and do not provide additional after-tax cash flows to them. On the other hand, tax avoidance increases corporate-level net income and free cash-flows and thus may provide incentives to managers to engage in such activities. Using a difference-in-differences design we examine firms from countries that eliminate their imputation system and find that tax avoidance significantly increases after the change relative to a control group of countries that have not changed their tax policy. We also find that firms from countries with imputation systems have significantly lower tax avoidance relative to other firms. In addition, we find that firms from countries with full imputation systems avoid less tax than firms from countries with only partial imputation systems. Our findings have implications for our understanding of agency conflicts, managerial incentives to avoid tax and the debate over tax reform.
MAKEOVER ACCOUNTING: INVESTIGATING THE FINANCIAL EDUTAINMENT OF EVERYDAY LIFE
BAY, CHARLOTTA
Category: MA = Management Accounting
The ability of accounting to produce effects has been widely acknowledged in accounting literature. This paper argues however that in order for accounting to have an impact on people, its numbers needs to be interpretable by its intended users. But what happens in situations where people are considered as inhibited in reading and interpreting numbers? This paper investigates how accounting numbers are presented to individuals believed to be impaired in their ability to make sense of numerical figures. It does so by moving the empirical focus beyond the borders of the professional organisation and into the private sphere of everyday life, examining how a televised financial makeover show re-presents accounting information in order to turn its participants into financially responsible citizens. The paper’s empirical findings give reasons for problematising the conditions under which accounting is able to affect people, concluding that, without taking people’s ability to interpret numbers into account, the possibilities of the numbers having an impact on their users risk falling short.
VOLUNTARY INCOME REPORTING
BEAULIEU, PHILIP
Category: FR = Financial Reporting
This paper proposes a voluntary income reporting regime, in which firms could choose whether or not to publish an income statement. Firms choosing not to issue it would report fund flows in a cash flow statement employing the direct method, similar to the cash flow statement advocated by Ohlson et al. (2010). Voluntary income reporting is motivated by managers’ numerous motives to manipulate earnings, recent research challenging the value relevance of earnings compared to cash flows, and costs of auditing income, including litigation risk. Another motivation for voluntary income reporting is rising investor dissatisfaction with reported earnings, but unlike many critics in the investing community, the paper does not claim that earnings do not have significant information value. Rather, given recent developments, it is worth reconsidering whether the benefits of reporting accrual earnings exceed the costs for all firms. Dye and Verrecchia (1995) is used as the basis for a voluntary income reporting framework in which firms reporting cash flow only provide a baseline for judging the costs and benefits of reporting income also.
GLOBAL CLIMATE CHANGE AND FOSSIL FUEL RESERVES REPORTING
BEBBINGTON, JAN
FOX, ALISON; STEVENSON, LORNA
Category: SE = Social and Environmental Accounting
This paper explores the potential mis-match between reporting of fossil fuel reserves in annual reports and the demands of the global climate change agenda. In particular, if governance regimes developed in response to concerns over climate change dictate steep reductions in greenhouse gas emissions then the amounts of fossil fuel reserves reporting in accounts will include 'unburnable carbon'. If financial markets are not carbon literate then it is possible that they might not recognize that this constraint is value relevant and as a result stock markets might be ill informed. This paper explores through a multilayered empirical investigation the implications of this possibility.
CREATIVE PERFORMANCE IN A GROUP SETTING: THE IMPACT OF INCENTIVE COMPENSATION SCHEME AND RELATIVE PERFORMANCE FEEDBACK
BECKERS, NATHALIE
COOLS, MARTINE; VAN DEN ABBEELE, ALEXANDRA
Category: MA = Management Accounting
This paper investigates whether the presence of relative performance feedback has different effects on multiple dimensions of group performance (measured as both quantity and creativity) and on group behavior (measured as group synergy and the extent of task division among group members) when groups are compensated with a group incentive compensation scheme based on quantity only or on both quantity and creativity. Results of a two-stage computer lab experiment show that groups compensated for both quantity and creativity make a trade-off between both performance dimensions and focus on creativity. By benefiting from larger group synergy, these groups succeed in being more creative over time as compared to groups compensated for quantity only. This, however, comes at the detriment of quantity since groups working under an incentive compensation scheme based on quantity only show higher productivity levels caused by a higher division of tasks among group members. Furthermore, our findings indicate that relative performance feedback can be a helpful device in further strengthening these effects of incentive compensation schemes on group performance and behavior.
A COMPREHENSIVE RANKING OF ACCOUNTING JOURNALS
BEETS, S DOUGLAS
BEETS, S DOUGLAS; KELTON, ANDREA; LEWIS, BRUCE
Category: ED = Accounting Education
Inevitably, the career success of academicians is partially dependent on the journals in which their manuscripts are published. Accordingly, knowledge of which journals are considered elite or prestigious is critical to an academician, as well as knowledge of which journals are considered to be of dubious quality. Fortunately, several rankings of accounting journals have been published since 1990, and this study reviews the results of 23 such studies that have, by various methods, attempted to accurately compare the quality of accounting journals. While there have been several accounting journal ranking studies, however, no study has provided a quantitative combination of most of the previous studies. Correspondingly, the current study includes a qualitative and quantitative combination and overview of the rankings and conclusions of previous journal rankings in the accounting profession. To a degree, this “study of studies” confirms the findings of many other ranking studies with regard to elite journals; TAR, JAR, JAE, AOS, and CAR are ranked in the top five positions, in that order. As many academicians may not publish in those top five journals in the course of their careers, however, this study also ranks fifty accounting journals, which includes a range of publications, some of which focus on specialization, accounting practice, or international issues.
AUDIT QUALITY AND CORPORATE GOVERNANCE: EVIDENCE FROM THE MICROFINANCE INDUSTRY
BEISLAND, LEIF ATLE
MERSLAND, ROY; STROM, R. OYSTEIN
Category: AU = Auditing
This study uses a unique, hand-collected sample of microfinance institutions from 73 countries that typically are not investigated in accounting research to analyze the relationships between audit quality and governance mechanisms. We examine two measures of audit quality, namely, the use of Big Four auditors and the presence of internal auditors who report to the boards of these institutions. The empirical analysis of this study reveals that these two quality metrics are highly related, although we also demonstrate that these metrics capture distinctive aspects of audit quality. In particular, the presence of internal auditors is related to other indicators of stricter governance, whereas the use of Big Four auditors is generally unrelated to other control mechanisms. This study illustrates that there is no single association between audit quality and governance; instead, the relationships between these two characteristics are dependent on the specific mechanism that is investigated. However, for situations in which a significant relationship between audit quality and governance does exist, the sign of this relationship is always positive. Thus, our data support the complementarity view of these two traits that is espoused by prior research. We find no support for the contention that these control mechanisms function as substitutes.
EXTERNAL REPORTING OF INTELLECTUAL CAPITAL IN AN ALTERNATIVE BANKING SYSTEM: A LONGITUDINAL CASE STUDY OF ISLAMI BANK BANGLADESH (1983-2010)
BELAL, ATAUR
ALI, MOHOBBOT
Category: SE = Social and Environmental Accounting
In the context of significant erosion of trust in the conventional banking system caught in the last financial crisis Islamic banking and financing industry has emerged as an alternative form of banking and finance with strong growth potential in recent years. It can be argued that unique knowledge base in alternative banking is one of the competitive advantage of this type of institutions. Therefore, these banks are supposed to have significant intellectual capital. But how and why intellectual capital related information is disclosed in their corporate statements is not known to date. This is the first study which provides empirical evidence in this regard. For this purpose we have followed a longitudinal single case study design to understand the patterns and trends of Intellectual Capital Disclosures (ICD) over time in Islami Bank Bangladesh Limited (IBBL). We have content analyzed the ICD made within the annual reports of IBBL from its inception (1983) to the current available year (2010). While most of the previous studies found external capital as the most popular category of ICD it has been found in this study that internal capital is the most dominant category of ICD in IBBL. We argue that this is due to the unique knowledge base in IBBL which is drawn from the principles of Islamic laws (Sharia).
DISCLOSURE OF INTELLECTUAL CAPITAL: THE CASE OF FRENCH FAMILY FIRMS
BELDI, ADEL
BELDI, ADEL; DAMAK-AYADI, SALMA; ELEUCH, AMAL
Category: SE = Social and Environmental Accounting
This study examines the extent and nature of voluntary intellectual capital disclosure by listed family firms in France. The study covers the period from 2008 to 2011.Content analysis was used to measure the extent of voluntary IC disclosure in annual reports or reference documents. It differs from prior intellectual capital reporting studies in that it analyses the case of French family firms listed in the SBF 250 index. The paper finds an overall increase in ICD over the four years. The relational capital and human capital are the most categories disclosed. Employee and corporate reputation are the most subcategories reported.
BLOCKHOLDERS' OWNERSHIP AND AUDIT FEES: EVIDENCE FROM EUROPE
BEN ALI, CHIRAZ
BARROSO, RAUL; LESAGE, CEDRIC
Category: AU = Auditing
This study analyzes the impact of blockholders’ ownership on audit fees in ‘shareholder’ vs. ‘stakeholder’ corporate governance models. ‘Shareholder’ (resp. ‘stakeholder’) countries rely on public (resp. private) information to reduce information asymmetry for the shareholders (Ball et al., 2000) in a context of high (resp. low) litigation risk. As auditing is considered a mechanism to reduce information asymmetry and ownership structure affects firm’s agency costs (Jensen and Meckling, 1976), we expect a non-monotonic relationship between audit fees and blockholder’s ownership as a function of the type of corporate governance models. Based on multivariate regression analyses from 2405 firm-year observations over the period 2006-2008 in 13 European countries, our results show (1) a curvilinear (convex) relationship between audit fees and controlling shareholding for ‘shareholder’ countries; (2) a curvilinear (concave) relationship between audit fees and controlling shareholding for ‘stakeholder’ countries; and that (3) when the sample is split by size, we observe that the relation holds for smaller firms in ‘stakeholder’ countries and for larger firms in ‘shareholder’ ones. By distinguishing between ‘shareholder’ and ‘stakeholder’ countries, we shed light on previous ambiguous results (Hay et al., 2006).
BOARD EFFECTIVENESS AND THE VOLUNTARY DISCLOSURE OF CLIMATE CHANGE INFORMATION
BEN AMAR, WALID
MCILKENNY, PHILIP
Category: GV = Accounting and Governance
Recent environmental disasters have resulted in the demand for increased reporting of climate change related risks and improved corporate governance. Drawing on agency theory predictions, this paper examines the relationship between board of directors’ effectiveness and the voluntary disclosure of climate change information. Given that environmental reporting falls under the board’s responsibility, we relate board effectiveness to the firm’s decision to voluntary respond to the Carbon Disclosure Project (CDP) annual questionnaire as well as the quality of climate change disclosures over the period 2008-2011. Canada offers an interesting setting in which to examine this issue given its principles-based corporate governance regime and the managerial discretion in the reporting of climate change related risks. Our results show a positive association between board effectiveness and the firm’s decision to answer the CDP questionnaire as well as its carbon disclosure quality. We also find that firm size, profitability and NYSE cross-listing have a positive effect on the likelihood to answer the CDP questionnaire. The paper contributes to the debate on voluntary climate change disclosure for firms in a principles-based corporate governance regime. Our findings support the importance of the board of directors’ role in enhancing the transparency of climate change disclosures.
LIE TO US: WHY COMPANIES ARE CHEATING IN FORM 8-K AND PRESS RELEASES ANNOUNCING RESTATEMENT
BEN YOUSSEF, NOURHENE
BRETON, GAÉTAN
Category: FR = Financial Reporting
Lying, confusing, withholding key information, and/or delaying the release of pertinent explanations are manipulation techniques used by companies to mislead investors. This paper explores whether and why publicly held companies manipulate the restatement announcement arising from material errors and/or fraud. Merging accounting literature with Information Manipulation Theory, we developed a disclosure score that encompass the quantity, the quality, the manner and the timing of restatement information released in the Form 8-K and in the press releases (8K_PRs). Based on this score, we found companies that mislead investors tend to do so by withholding critical information (quantity), disclosing inaccurate information (quality) and presenting ambiguous information (manner) in their 8K_PRs. To understand the reasons companies mislead investors, our findings suggest that some restatement characteristics affect the likelihood of manipulating restatement information in 8K_PRs.
DIRECTOR INDEPENDENCE AND INSIDER TRADING
BENEISH, MESSOD DANIEL
MARSHALL, CASSANDRA; YANG, JUN
Category: GV = Accounting and Governance
While prior work establishes criteria for assessing director independence by scrutinizing outside directors’ professional and social connections, we examine the conditions under which outside directors’ trading and ratification decisions are incrementally useful in assessing their independence. Because crises test the independence of boards, we investigate the CEO replacement decision in firms caught intentionally misreporting earnings. We predict and find that outside directors’ selling that emulates selling by the CEO and inside directors makes them less willing to replace the CEO. Our findings derive from opportunistic rather than routine selling, and from collusive selling involving inside and outside board members rather than from selling by outside directors alone. We also predict and find that outside directors who ratify one or more value-destroying mergers in the misreporting period are less effective monitors. These results are robust to alternative measurements of opportunistic selling and to a comprehensive set of controls for the CEO replacement decision.
DIVIDEND POLICY AND OWNERSHIP STRUCTURE: A STUDY OF RUSSIAN DUAL-CLASS STOCK COMPANIES
BEREZINETS, IRINA
ALEXEEVA , LIUDMILA ; ILINA, YULIA
Category: GV = Accounting and Governance
This paper investigates the relationship between the dividend policy and ownership structure in Russian public companies. A study of the link between dividends and ownership concentration is based on the sample of public companies with dual class share structure. These shares were traded on the Russian Trading System (RTS) in the period of 2003-2009. The authors explore a broad range of factors related to the ownership concentration. This study allows making conclusions on the impact of the ownership concentration on the dividend policy. Moreover, there is evidence that this impact differs for the dividends on ordinary and preferred shares.
ACCOUNTING BASED VALUATION AND "OTHER INFORMATION" – A SIMULTANEOUS EQUATIONS APPROACH
BERGMANN, IRIS
BERGMANN, IRIS; SCHULTZE, WOLFGANG
Category: FA = Financial Analysis
This paper develops and tests a simultaneous equations model for extending accounting based valuation models used in empirical studies. Empirical evidence shows that models using analysts’ forecasts as ‘other information’ in the Ohlson (1995) model exhibit a higher explanatory power for market values than models using only historical accounting data. Instead of using analysts’ forecasts we derive forecasts of operating income based on observable data contained in the firms’ reporting, like order backlog, and other publicly available information qualifying as ‘other information’. Due to the interdependencies between the different drivers of operating income, a simultaneous equations model (SEM) is required. When comparing out-of-sample forecasts derived from the SEM with simple benchmark models, we find evidence that in years around economic changes and instability, like the year 2009, the SEM produces more accurate forecasts of operating income. Further, we find that integrating the SEM forecast as ‘other information’ in the Ohlson (1995) model increases the explanatory power for current market values compared to simpler versions without ‘other information’ or with direct proxies for ‘other information’.
SUSTAINABILITY CONTENT ON OIL AND GAS COMPANY WEBSITES
BERTHELOT, SYLVIE
COULMONT, MICHEL; THIBAULT, KIM
Category: SE = Social and Environmental Accounting
This study examines the sustainability content and the determinants underlying such content on Canadian oil and gas company websites. The website content of 68 of the largest oil firms listed on the S&P/TSX was evaluated using an index based on each of the three Global Reporting Initiative (GRI) components (environmental, social and economic). The characteristics of the firms were then regressed on the content analysis. The results suggest that the larger the firm and the greater its media exposure, the more likely it is to include sustainability disclosures on its website. Firm profitability and leverage seem to be unrelated to these types of disclosures. This study provides empirical observations that could be useful for stakeholders wishing to obtain information about firms’ sustainability practices and for various organizations involved in developing sustainability disclosure guidelines. In fact, the results tend to show that, despite the growing popularity of sustainability reporting benchmarks like the Global Reporting Initiative (GRI), the voluntary nature of sustainability disclosures has elicited a variety of disclosure practices on organizations’ websites.
STOCKHOLDER CONFLICTS AND DIVIDEND PAYOUT
BERZINS, JANIS
BØHREN, ØYVIND; STACESCU, BOGDAN
Category: GV = Accounting and Governance
This paper examines how dividend policy influences conflicts of interest between majority and minority stockholders in a large sample of private firms with controlling blockholders. We find that a higher potential for stockholder conflicts is associated with higher payout. This tendency is stronger when the minority stockholder structure is diffuse and when the minority is not on the firm’s board. Minority-friendly payout is also associated with higher subsequent minority investment in the firm. These findings are consistent with the notion that dividend policy is used to mitigate agency costs, particularly when this benefits the majority in the longer run.
TOWARDS SUSTAINABLE CAPITALISM IN THE DEVELOPMENT OF HIGHER EDUCATION BUSINESS SCHOOL CURRICULA AND MANAGEMENT
BEUSCH, PETER
Category: ED = Accounting Education
Purpose – This article provides an account of, and conceptualizes, the internal and external forces that drive and influence, but also hinder, higher education business schools as they strive to integrate sustainability issues into their curricula in the effort to achieve a more sustainable (yet capitalist) world. Design/methodology/approach – A case study approach is used for the research, which is grounded in the relevant literature, to investigate sustainable development issues in the context of a Swedish business school (university level). A review of internal documents in addition to E-mail surveys plus interviews and discussion seminars with university teachers/researchers and key administrators provide the empirical data. Findings – Two models are presented that map the various internal and external forces behind business schools’ curriculum change. A particular finding describes the working of supply and demand between business schools and business recruiters. Originality/value – The two models provide a holistic framework that adds to our understanding of the composition and interrelationship of influential forces on business schools when major changes in curricula and their management are contemplated. Keywords - Business school, business model, business school model, business school management, curriculum, higher education, sustainable development, sustainable capitalism Article type – Conceptual, with a case study
EARNINGS MANAGEMENT IN MULTINATIONAL CORPORATIONS
BEUSELINCK, CHRISTOF
CASCINO, STEFANO; DELOOF, MARC ; VANSTRAELEN, ANN
Category: FR = Financial Reporting
In this study, we examine whether corporate governance characteristics of multinational corporations (MNCs) and the institutional structure in their home-country influence earnings management by their domestic and foreign-owned subsidiaries. We perform our analyses on a large sample of both publicly traded and privately held majority-owned subsidiaries of listed MNCs across Europe. Our results are consistent with the conjecture that subsidiary-level earnings management is higher when the subsidiary-country institutional quality is weak. Further, we document that the institutional quality of the subsidiary country dominates that of the MNC home-country in explaining the extent of subsidiary-level earnings management. However, we also find that MNC corporate governance characteristics (ownership structure and analyst coverage) do affect the magnitude of subsidiary earnings management, over and above subsidiary-specific characteristics. Overall, our findings are important in that they show that incentives and opportunities of internationally diversified MNCs have contagious effects for their subsidiary-level financial reporting quality.
MUTUAL FUNDS AND CORPORATE ACQUISITIONS: EVIDENCE FROM CHINA
BI, XIAOGANG
Category: FA = Financial Analysis
In the developing Chinese capital market which dominated by individual investors and potentially suffer from more behavioral biases, we simultaneously examine the trading and monitoring role of mutual funds (as the largest institutional investor in China) in corporate acquisition activities where there are potentials for a wide disparity between institutional investors and controlling shareholders’ interests. We find the level of holding by all mutual funds is not a superiors indicator of deal quality, there are some evidence that the collective holdings by the largest fund holding companies relate to the deal quality and they also play the monitoring role in M&A event. Our paper contributes to the existing literature that “transient investors” can also gain from monitoring in the market where institutional investors has less dominant position.
SOCIAL CAPITAL AND ACCOUNTING QUALITY: A NEW PERSPECTIVE FOR AUDIT QUALITY IN PRIVATE FIRMS
BIANCHI, PIETRO ANDREA
TROMBETTA, MARCO
Category: AU = Auditing
In this paper we address the question whether social capital of auditors is positively associated with the quality of the audit. Auditors interact among each other to improve their expertise to detect and deter material misstatements in financial statements. We define what Francis and Yu (2009) call “networking/consultation opportunities” as social capital. We use three common measures of earnings management to proxy audit quality: absolute abnormal working capital accruals, absolute discretionary revenues, and earnings smoothing. We proxy social capital with the construct of structural holes (Burt [1992]). We undertake a panel analysis of private firms over a five years period from 2006 to 2010. After controlling for endogeneity, our results show that firms with higher social capital auditors present lower absolute abnormal working capital accruals, lower absolute discretionary revenues and lower earnings smoothing.
IMPRESSION MANAGEMENT AND ANNUAL REPORT NARRATIVES: THE EFFECTS OF INTERNAL AND EXTERNAL CONTROL MECHANISMS IN A NON-ANGLO-SAXON CONTEXT
BINI, LAURA
BINI, LAURA
Category: FR = Financial Reporting
This study extends impression management literature by testing whether internal control mechanisms and other external control mechanisms are effective in controlling potentially misleading disclosure in management reporting. Because agency conflicts depend on environmental settings, impression management mechanisms can differ among countries. This study enlarges previous evidence by focusing on non-Anglo-Saxon countries. Italy is worth studying due to the similarities that Italian institutional environment shows with many other countries, at least in Continental Europe. Moreover, management reporting disclosure in Italy is essentially voluntary and potentially highly discretional. I develop a composite measure of disclosure bias, based on four different techniques of impression management, to assess the level of misleading disclosure included in the area of management reporting devoted to the analysis of firm performance. The findings, based on a sample of 56 Italian listed companies, confirm the presence of self-serving disclosure in management reporting. Moreover, I find that the proportion of independent directors and the degree of foreign activity are significantly and negatively correlated with disclosure bias scores. Relevant operative implications involving the quality of management reporting disclosure in non-Anglo-Saxon countries are discussed.
INTERNAL AUDITING AND PUBLIC CORPORATE GOVERNANCE
BISCHOF, ANNA
BISCHOF, ANNA; EULERICH, MARC; THEIS, JOCHEN
Category: AU = Auditing
The purpose of this paper is to investigate the key factors associated with the role of the internal audit function (IAF) within the Public Corporate Governance in direct comparison to the private sector. Using data from the international conducted CBOK (2010) survey, the empirical examination contains the responses from CAEs of collectively 691 public respectively non-profit organizations and 1.759 privately held or publicly-traded (listed) companies. We find that the existence of a risk-based plan, a quality assurance and improvement program, an internal control framework as well as the experience of the CAE are positively associated with the role of internal auditing. The findings concerning the private sector are in accordance to the results in 2006, assuming that the CAE Certification is negatively related to the role of the IAF having in the corporate governance. Our sample is limited to the CAEs who are also IIA members and, thus the perceptions may derivate from actual practice. The identification of descriptive as well as explorative differences between the private and public sector may have practical implications for CAEs in public and non-profit-organizations. Therefore, it provides new approaches in order to increase the role for their IAFs in corporate respectively public corporate governance.
CORPORATE GOVERNANCE AND VOLUNTARY DISCLOSURE DURING CRISIS PERIODS
BISCOTTI, ANNA MARIA
D'AMICO, EUGENIO
Category: GV = Accounting and Governance
In this paper, we investigated the effects that ownership structure, board composition and the characteristics of the audit firms can have on the voluntary disclosure of firms during a period of deep financial crisis. We integrated the prevailing empirical literature by introducing a comparative analysis of the regression results found with reference to two types of disclosure index used as dependent variables: a global index based on both quantitative and qualitative disclosure and a solely quantitative voluntary index. The use of these two disclosure indexes allows us to understand whether corporate governance affects the two disclosure indexes differently. We find a positive and significant correlation between the proportion of independent directors on the board and the level of global disclosure. This relationship loses its statistical significance in the regression estimated for the quantitative disclosure index. This finding would appear to show that the independent directors are able to favour only the dissemination of qualitative information while they find it objectively difficult to influence the managers to disclose more quantitative (substantial) information. Both of the indexes (global and quantitative) have, instead, a negative and significant relationship with the percentage of the firm’s outstanding shares held by directors (not independent). This result confirms the propensity of the directors to act in their self-interest by withholding information and so take advantage of the information asymmetry with the outside investors. Moreover, we find a positive and significant correlation between the global disclosure index and the foreign investors’ shareholding. This positive and significant correlation is also found with reference to the quantitative disclosure index, demonstrating how this type of investor is interested in substantial information on the companies in which they invest.
DO MANAGERS DISCUSS PRO FORMA EARNINGS IN EARNINGS PRESS RELEASES AND CONFERENCE CALLS TO INFLUENCE STREET EARNINGS EXCLUSIONS?
BLACK, ERVIN
CHRISTENSEN, THEODORE; KIOSSE, PARASKEVI VICKY; STEFFEN, THOMAS
Category: FR = Financial Reporting
Prior research has documented the importance of street earnings to capital market participants. However, the literature provides very little evidence on the factors that affect the calculation of street earnings. Christensen et al. (2011) find evidence suggesting that managers actively influence analysts’ exclusion decisions by providing non-GAAP earnings guidance during the fiscal period to influence the street earnings figure provided by I/B/E/S at the end of the period. We contend that, in addition to earnings guidance during the period, managers have two important venues at the end of the period through which they can influence the calculation of street earnings: (1) the earnings press release and (2) post-earnings-announcement conference calls. We explore whether managers’ voluntary pro forma disclosures in earnings press releases and the discussion of pro forma exclusions in earnings conference calls influence I/B/E/S’ street earnings exclusions. The results indicate that, in addition to ex ante earnings guidance, managers are able to influence the calculation of street earnings through the discussion of pro forma earnings exclusions in press releases and conference calls. In addition, our evidence suggests that investors appear to react more to earnings announcements preceded by earnings guidance during the period and when managers provide more pro forma earnings discussion in the earnings press release. However, subsequent discussion and clarification in the earnings conference call leads to apparent skepticism and lower investor reactions to street earnings information.
IN SEARCH OF DISCLOSURE EFFECTS OF THE SIEMENS AG’S CORRUPTION SCANDAL
BLANC, RENATA
BRANCO, MANUEL; CHO, CHARLES H.; SOPT, JOANNE
Category: SE = Social and Environmental Accounting
In this study, we examine the changes in disclosure practices at Siemens AG—a large German multinational corporation, on compliance and the fight against corruption over a period of 11 years during which two significant corruption-related events occurred: (1) the issuance of the 10th principle on the fight against corruption, which can constitute an exogenous shock and thus potentially create positive adjustments to a company’s reputation; and (2) the occurrence of a major corruption scandal at Siemens in 2006, which had a negative external impact. Through a content analysis of the company’s annual reports and sustainability reports from 2000 to 2011 and under the lens of legitimacy theory and media agenda setting theory, our findings suggest that Siemens changed its compliance and corruption disclosure practices to manage its legitimacy in the wake of the 2006 corruption scandal and in subsequent years. The strategies adopted by Siemens may be described as symbolic and substantive (see Dowling and Pfeffer, 1975; Ashforth and Gibbs, 1990; Rodrigue, Magnan and Cho, forthcoming). The implications emanating from this study seem therefore relevant for several key societal stakeholders in that they could at least provide additional arguments for the need of better regulations to ensure the disclosure of relevant, reliable and consistent corporate information about important social issues such as corruption—a serious economic, social, political and moral issue (Argandoña, 2007).
THE RELATION BETWEEN SEGMENT DISCLOSURE AND EARNINGS QUALITY
BLANCO, BELEN
BLANCO, BELEN; GARCIA LARA, JUAN MANUEL; TRIBO, JOSEP
Category: FR = Financial Reporting
We investigate the relation between earnings quality and segment disclosure. Using a US sample for the period 2001-2006, we find a positive relation between earnings quality and the quantity of segment disclosures. We use lead-lag tests to examine the flow of causality, and our results show that current segment disclosure is positively related to prior levels of earnings quality, while current earnings quality scores are not related to prior levels of segment disclosure. Our results hold for both business and geographic segment disclosure.
CEO DUALITY, BOARD INDEPENDENCE, AND MALAYSIAN POLITICALLY CONNECTED FIRMS: A TEST OF JENSEN’S CONTROL HYPOTHESIS FOR DEBT
BLISS, MARK
Category: GV = Accounting and Governance
This study investigates whether board characteristics of CEO duality, and board independence, impact on the debt levels of firms in a manner consistent with Jensen’s control hypothesis for debt (1986, 1989) that posits that debt can be used to constrain management opportunism. It is argued that Malaysian politically connected (PCON) firms represent a good proxy for high agency cost firms for testing the hypothesis given that PCON firms with excess free cash flows are often not returned to shareholders but are instead allocated to inefficient PCON firms. Additionally, the literature provides evidence that these firms are considered risky and inefficient by (a) the market, (b) audit firms, and (c) lenders. In line with Jensen’s hypothesis, evidence is provided that (1) PCON firms with CEO duality are associated with lower levels of debt, and (2) more independent boards are associated with higher levels of debt, however this association is only found for non-PCON firms. This finding suggests that the independence of directors may be compromised in these PCON firms.
DOES TAX AGGRESSIVENESS REDUCE CORPORATE TRANSPARENCY?
BLOUIN, JENNIFER
BALAKRISHNAN, KARTHIK; GUAY, WAYNE
Category: TX = Taxation
This paper investigates whether aggressive tax planning firms have less transparent information environments. Although tax planning provides expected tax savings, it can simultaneously increase the financial complexity of the organization. And, to the extent that this greater financial complexity cannot be adequately communicated to outside parties, such as investors and analysts, transparency problems can arise. Our investigation of the association between a newly developed measure of tax aggressiveness and information asymmetry, analyst forecast errors, and earnings quality suggests that aggressive tax planning decreases corporate transparency. We also find evidence, however, that managers at tax aggressive firms attempt to mitigate these transparency problems by increasing the volume of tax-related disclosure. Overall, our results suggest that firms face a trade-off between financial transparency and aggressive tax planning thereby potentially explaining why some firms appear to engage in more conservative tax planning than would otherwise be optimal.
KEEPING ONE OR TWO SETS OF BOOKS? - EVIDENCE FROM LARGE GERMAN COMPANIES WITH CROSS-BORDER ACTIVITIES
BOLL, FELIX
BOLL, FELIX; DILLER, MARKUS
Category: TX = Taxation
We investigate the application of one and two sets of books in the field of transfer pricing by large German companies. Using data from a confidential online survey from 2012, we test hypotheses on the relationship between the likelihood of adopting two sets of books and a multitude of soft and hard facts. Moreover, we analyze the extent of transfer pricing adjustments in tax audits with regard to the use of one and two sets of books. We find a significant positive relationship between the internal integration of a company and the likelihood of using two sets of books. Our analysis also reveals a significant negative relationship between the importance attached to the use of international tax differences when setting transfer prices and the likelihood of running two sets of books. In addition, we find a significant positive relationship between the importance attached to managerial incentivization when setting transfer prices and the likelihood of using two sets of books. Finally, we find that participating companies that keep two sets of books experience significantly greater transfer pricing documentation adjustments and double taxation than those running one set of books.
ALL IN THE FAMILY: EARNINGS MANAGEMENT THROUGH NON-LISTED SUBSIDIARIES
BONACCHI, MASSIMILIANO
CIPOLLINI, FABRIZIO ; ZAROWIN, PAUL
Category: FA = Financial Analysis
We find evidence consistent with the hypothesis that non-listed subsidiaries engage in accrual and real earnings management when their listed parent is reporting small annual profit. Our evidence is important, because it shows that business groups manage earnings differently from single firms. In particular, to avoid reporting annual losses, the parent company drives earnings management of the subsidiary.
REVIEW OF THE FINANCIAL REPORTING VERSUS THE PROBABILITY OF FISCAL CONTROL, UNDER FINANCIAL SOPHISTICATION
BONACI, CARMEN GIORGIANA
LITAN , CRISTIAN M.; VÂJU, SORINA C.
Category: TX = Taxation
Our paper provides a model of strategic interaction between the Internal Revenue Service (IRS) and the companies, that analyzes the impact of the increasing financial sophistication, and respectively, of the book profits reporting and its review by the Securities and Exchange Commission (SEC), on tax compliance and fiscal control. In this simple framework we describe basic scenarios in which decreasing IRS audit rates and weaker fiscal discipline appear endogenously, that is, when growing financial sophistication is paralleled by changes in the information on book profits available to the tax authority, or by changes in the distribution of the book profits. We propose the consideration of a substitution effect under certain circumstances, the review of the financial reporting process impacting the probability of fiscal control and thus offering an alternative explanation to that of IRS budget constrains. Our paper contributes to the literature on taxation and financial reporting by proposing a theory that portrays the SEC providing a monitoring mechanism for higher quality reporting and therefore impacting tax enforcement.
THE INFLUENCE OF COUNTRY- AND FIRM-LEVEL GOVERNANCE ON FINANCIAL REPORTING QUALITY: REVISITING THE EVIDENCE
BONETTI, PIETRO
MAGNAN, MICHEL; PARBONETTI, ANTONIO
Category: FR = Financial Reporting
Using a large sample of European firms that have mandatory adopted IFRS, this paper assesses how firm-level governance, as proxied by board attributes, and country-level enforcement interplay in affecting financial reporting quality. Financial reporting quality is assumed to have three dimensions: earnings informativeness, accruals management, and real earnings management. Three key findings emerge from our analyses. First, IFRS adoption per se does not seem to affect financial reporting quality. Second, in countries characterized by weak enforcement, strong board-level monitoring appears to enhance financial reporting quality, thus suggesting a substitutive effect between firm- and country-level governance. Third, in countries characterized by strong enforcement, firms with strong board-level monitoring exhibit a higher level of financial reporting quality than firms with weak board-level monitoring, thus suggesting that country- and firm-level governance are complementary. Overall, our findings help bridge the gap in the debate about the effects of country- and firm-level governance on the quality of financial reporting and provide further nuance of prior IFRS adoption research.
THE RELEVANCE OR IRRELEVANCE OF ENVIRONMENTAL CONTINGENCIES: A PRELIMINARY STUDY IN BRAZILIAN COMPANIES
BORBA, JOSÉ ALONSO
FERREIRA, DENIZE DEMARCHE MINATTI ; GUZZO, EDER JOSÉ ; ROSA, CAROLINA AGUIAR DA ; VICENTE, ERNESTO FERNANDO RODRIGUES
Category: SE = Social and Environmental Accounting
Companies are facing new challenges with regard to compliance with ethical, labor and environmental standards. To get reputation, social and environmental aspects are essential to convey transparency and reliability in actions. News on Brazilian media has revealed that some companies were fined for environmental damage, with significant values. This study attempts to identify the significance of contingent liabilities and environmental provisions evidenced in companies that trade their shares on the Brazilian Stock Exchange (BM&FBOVESPA). The relevance of this proposal is based on the social and environmental literature that shows the key importance of high impact and low impact industrial sectors on the nature and extent of environmental disclosure as the peculiarity of Brazilian market. What is surprising is that while some companies that did not show monetarily its provisions and contingencies likely possible that mandatory disclosure, other show remote qualitative contingencies, this considered voluntary disclosure, since there is no requirement for such disclosure probability of occurrence. Regarding to the total significance of environmental contingencies of all companies analyzed, even if it cannot be stated, the degree of polluting activities is a factor that may explain the variability of significance of environmental contingencies.
STRATEGIC PRIORITIES AND THE USE OF SUBJECTIVITY IN INCENTIVE CONTRACTS
BORMANN, SARA
Category: MA = Management Accounting
This paper examines the relationship between strategic priorities and subjectivity in incentive contracts. In particular, I study the relation between pursuing different differentiation strategies or pursuing a joint strategy (i.e., a strong focus on both cost leadership and differentiation strategies) and the use of three different types of subjectivity: subjective performance measures, subjective weighting and discretion. Analyses of survey data of 156 firms reveal that the identified differentiation strategies are all positively associated with the use of all three types of subjectivity. However, as an additional low cost strategy is followed, the picture changes: Firms following a joint strategy are associated with a decreased used of subjective weighting and discretion, depending on the particular joint strategy combination. In particular, firms following a ‘quality/service - low cost’ joint strategy combination are associated with a decreased reliance on subjective weighting. Likewise, firms following a ‘flexibility – low cost’ joint strategy combination are associated with a decreased use of discretion. Even though it has been argued that subjectivity is particularly useful in complex situations, where managers need to adapt to changing conditions, it seems that the multiple, potentially conflicting goals inherent to joint strategies require the clarity and explicitness associated with more objective and formulaic reward systems.
DIFFERING PATHS IN THE BSC’S IMPLEMENTATION - THE MULTILEVEL EXPERIENCE WITHIN AND HEALTHCARE ORGANIZATION
BOSA, IRIS
Category: MA = Management Accounting
The BSC has had a significant impact on practice. However, it has had both favorable and unfavorable reviews in the literature, some author arguing the benefits of a more collaborative environment through the adoption of the BSC, other highlighting the limitation of this managerial tool, particularly in its implementation. However, while there are considerable paper identifying strengths and weaknesses of this implementation tool, there is a considerable lack of insight in the implementation experience. This paper looks into the implementation of the Balanced Scorecard (BSC) within a healthcare organization and reflects on the implementation process experienced. The relevance of the case study is the emergence of the often uneven spread that the tool has in a complex organization. The characteristics of this sector makes particularly relevant to take time to read through this article, as it allows insights that often have been over seen in existing literature or handled with light touch, missing to provide the critical insight that helps to interpret the performance that organization seem to portray. It is of strong relevance the importance of motivational factors in the BSC that impinges on its success. While the BSC design may be promoted as ‘standard’, its implementation process cannot proceed successfully without factoring in the unique elements that constitute the scenario of the adopters. There steps that need to be followed in the implementation of the document as the human factor can never been underestimated in light of the ‘rationality’ and easiness of the BSC tool. From the study emerges also the central role that communication has in the success of the BSC.
DISCLOSURE DISSEMINATION AND INVESTMENT DECISION
BOULLAND, ROMAIN
Category: FA = Financial Analysis
This paper examines how disclosure dissemination affects firms’ investment policy. We find that continental European firms that disseminate their disclosures through English-speaking wire services exhibit higher sensitivity of their investment to growth opportunities. This finding suggests that higher dissemination of firm-imitated disclosures results in lower asymmetry between managers and investors and higher investment efficiency. Cross-sectional analyses show that the effect of disclosure dissemination on investment is magnified for firms with higher level of disclosure and for firms operating in countries with higher standard of disclosure. This paper provides evidence that disclosure dissemination acts as a complements to higher financial reporting quality by improving investment decision within the firm.
NON-EXECUTIVE EMPLOYEE OWNERSHIP AND CORPORATE RISK TAKING
BOVA, FRANCESCO
KOLEV, KALIN; THOMAS, JACOB; ZHANG, FRANK
Category: FR = Financial Reporting
Prior empirical evidence suggests that corporate risk is negatively related to stock held by senior executives. Here we investigate the relation between risk and non-executive stock-holding and find a robust negative relation. This result is consistent with the view that non-executives, being risk averse and having their human capital also tied closely to their employer’s fortunes, seek to reduce corporate risk as their stockholding increases. Not only do non-executives hold substantial amounts of stock, they are also able to influence decisions relating to firm risk. A second robust result is that this relation becomes more negative with increases in option-based executive compensation. Our findings suggest that corporate risk is affected by the incentives created by both executive and non-executive compensation, as well as interactions between those effects.
CROSS-LISTING AND FIRM INFORMATION ENVIRONMENT: DOES SOX SECTION 302 HAVE ANY MATERIAL EFFECT?
BOZZOLAN, SAVERIO
BONETTI, PIETRO
Category: FR = Financial Reporting
Previous literature documents an increase in the quality of the firm information environment following cross-listing and motivates this result with the bonding effect. This paper disputes the idea that the cross-listing per se enhances the quality of the firm information environment. We challenge this idea considering whether the quality of the information environment for cross- listed firms depends on an effective or a mimicking adoption of stricter rules. As research setting, we use the Section 302 of the Sarbanes-Oxley act that requires to disclose any discovered internal control deficiency on internal controls over financial reporting. Our findings support the idea that the quality of the firm information environment increases following cross-listing only when cross-listed firms effectively commit themselves to higher levels of corporate transparency, and not merely in name just mimicking the adoption of stricter rules. Our results are robust to the endogeneity of cross-listing decision, to unobservable factors related to internal control deficiency, to some measurement issues and to the inclusion / exclusion of some overrepresented countries in the sample.
THE ADDED VALUE OF AUDITING IN BELGIUM: DOES AUDIT REMAIN IF NO LONGER MANDATORY?
BREESCH, DIANE
DE MUYLDER, JAN; HARDIES, KRIS
Category: AU = Auditing
ABSTRACT In Belgium, all “large” companies are legally required to appoint a statutory auditor. The thresholds of the criteria to be considered “large” are, however, not that large. Consequently, many relative small companies in Belgium are legally required to appoint a statutory auditor. The evidence on the added value of auditing in small companies remains to date, however, rather scant and is often contradictory. In this study, we, therefore, tried to assess if companies in Belgium would still appoint an auditor if they would no longer be required to do so. Additionally, we also examined which factors would contribute to the voluntary appointment of auditors by companies in Belgium. Our results (based upon an email questionnaire, n = 288)show that the majority (nearly 65 %) of companies in Belgium would still appoint an auditor if they would no longer be required to do so. The most important reasons why companies would keep on hiring an auditor (i.e., the added value of the audit) are the fact that audits improve the credibility of financial statements, the fact that audits improve the internal control systems of companies, and because audits impose financial discipline on a company. Furthermore, our study indicates that larger companies, companies with more shareholders,and listed companies are more inclined to voluntarily appoint an auditor.
TELLING THE PRIVATIZATION STORY: A SEMIOTIC ANALYSIS OF THE PRESIDENT'S LETTER
BRETON, GAETAN
GENDRON, DENIS
Category: GV = Accounting and Governance
We aim to catch public managers' reaction when facing privatization. The paper use some semiotic tools which appear to be appropriate as folktale structures are used to create an atmosphere rather tahn providing figures and facts. We sampled presidents'letters of Canadian State-owned enterprises (SOE) privatized between 1985 and 1995. The transformation (going from state A to state B) and the actantial structure had been used to characterize the nessage of the letters. We found that storytelling is used by management to legitimize privatization and therefore influence the perception of the readers about the decision.
THE VALUE OF REPORTED R&D FIGURES: THE IMPACT OF OWNERSHIP CONCENTRATION IN INSIDER VERSUS OUTSIDER COUNTRIES
BREUER, MATTHIAS
Category: FR = Financial Reporting
This study investigates the differential agency effects of controlling owners on the valuation of R&D investments in ‘insider’ versus ‘outsider’ oriented economies. On the one hand, R&D investments are key determinants of a firm’s future growth and present value. On the other hand, they are plagued by high degrees of uncertainty and information asymmetries. High quality financial reporting is seen as a means to bridge these informational gaps. However, in order to be useful for investors to assess the value of a firm’s R&D investments, the management has to have incentives to depict the true economic value of the firm via external reporting. Blockholders can provide such incentives by monitoring the management and aligning it with the shareholders’ interests. This, however, also depends on the blockholders’ incentives which are shaped by the institutional setting. Accordingly, this study shows that the existence of a blockholder increases the valuation attached to research spending and even more so the value attributed to capitalized development costs in ‘outsider’ systems. On the contrary, the existence of a blockholder in an ‘insider’ economy appears to deteriorate the valuation attached to research expenditures and especially the value attributed to capitalized development costs. In an ‘insider’ system, the blockholders’ incentives to monitor seem to be outweighed by their desire to extract private benefits and expropriate minority shareholders.
A LONGITUDINAL STUDY OF AICPA LEADERS’ DISCOURSE IN TIMES OF PUBLIC TRUST, CRISIS MANAGEMENT AND TRUST REPAIR
BRIVOT, MARION
CHO, CHARLES; KUHN, RANDY
Category: MA = Management Accounting
This paper examines the communications from the leaders of the American Institute of Certified Public Accountants (AICPA) to its members during the 1997-2010 period. Based on Bourdieu’s sociolinguistic theory, we argue that before 2001, the AICPA’s communications are indicative of an alignment of certified public accountants’ linguistic habitus with the dominant language (marketing) of the economic context in which they operated, namely globalized consumerist capitalism. Following the Enron scandal (2002-2004), however, the marketing language was abruptly abandoned in favor of a celebration of Parrhesia: “speaking the truth” no matter what commercial risks were involved. Yet, the marketing language surrounding the AICPA’s “Vision Project” prior to Enron reemerges after 2005, but it is juxtaposed to the language of “classic professionalism” and Parrhesia. AICPA leaders are thus capable of speaking the language of the dominant players in the field (i.e., marketing) as well as speaking the declassed language of the dominated (i.e., serving the public interest). We argue that this multi-linguistic habitus is symptomatic of the difficulty AICPA leaders have in renouncing the symbolic profit that they derive from aligning their linguistic habitus with that of the most powerful players in the field, including the international public accounting firms, large corporate clients of accounting/auditing services, and competing producers of business services.
MANAGEMENT ACCOUNTING SYSTEM IN ITALIAN SMES: SOME EVIDENCES AND IMPLICATIONS
BROCCARDO, LAURA
GASTALDI, GIULIA
Category: MA = Management Accounting
In the last years more attention was given to the performance measurement systems (PMSs) in the small and medium-sized enterprises because, from conducted researches, it emerged that appropriate managerial tools have an important influence in the firms’ management and also to improve financial management in these firms. This research investigated not only about the diffusion of management accounting system in Smes but also about its influence on investments and internationalization of these entities. The research was conducted using survey tool and the sample is represented by 226 Italian Smes. The study shows a positive correlation between the size and the diffusion of management accounting tools, and it reveals also a positive correlation between the use of structured management accounting system and the propensity to investment and the firm internationalization.
CAUSES AND CONSEQUENCES OF LINGUISTIC COMPLEXITY IN NON-U.S. FIRM CONFERENCE CALLS
BROCHET, FRANCOIS
NARANJO, PATRICIA; YU, GWEN
Category: FR = Financial Reporting
We examine the determinants and capital market consequences of linguistic complexity in conference calls held in English by non-U.S. firms. We find that linguistic complexity is positively associated with the language barrier in the firms’ home country. Also, linguistic complexity in firms’ conference calls affects the extent to which the capital market reacts to the information releases. Firms with more linguistic complexity in their conference calls show less trading volume and price movement following the information releases, after controlling for the actual earnings news. Further, the capital market’s response to linguistic complexity is more pronounced when there is greater implicit (as captured by the presence of foreign investors) or explicit (as captured by how actively analysts ask questions) demand for the English conference calls. This suggests that the form in which financial information is presented can impose additional processing costs by limiting investors’ ability to interpret the reported financials.
AUDIT FIRM TENURE AND AUDIT QUALITY: EVIDENCE FROM U.S. FIRMS
BROOKS, LI
CHENG, C.S. AGNES ; REICHELT, KEN
Category: AU = Auditing
The PCAOB recently solicited comments on a 10-year mandatory audit firm rotation requirement for the largest 100 S&P firms. We propose that audit quality is likely to increase in the earlier years due to a dominant Learning Effect and in later years it decreases due to a dominant Bonding Effect. Adopting a quadratic model to empirically estimate the turning point, we find that the average turning point is between 12 to 16 years for a large sample of U.S. firms. With an average tenure of 9 years in our sample, these findings imply that mandatory auditor firm rotation may not be necessary. Further, we find that the turning point varies by auditor - it is longer for non-Big N auditors, non-specialist auditors, and auditors with high client importance, and the deterioration of audit quality exists in low litigation industries only, consistent with the Bonding Effect explanation. Moreover, we find that after the Sarbanes-Oxley Act of 2002 (SOX, hereafter) was enacted, the turning point gets longer, implying that SOX may have mitigated the Bonding Effect. Our results have implications for the current debate on whether audit firm rotation should be mandatory for the U.S. companies.
AN ORGANIZING PARADOX - MANAGEMENT CONTROL AND FOUR FORMS OF EMPLOYEE EMPOWERMENT
BROWN, DAVID
NASH, RACHAEL ; SUTTON, NICOLE
Category: MA = Management Accounting
The objective of this research is to identify the components of the organising paradox created by pressure for both employee empowerment and management control in organisations, and to explain how management control systems both create and mitigate this tension. Employee empowerment has presented significant challenges to researchers due to the ambiguities in existing definitions and applications. By distinguishing between two distinct perspectives on empowerment, structural and psychological, this research identifies four distinct forms of empowerment which can occur in practice. The dynamic equilibrium model of organising developed by Smith and Lewis (2011) is used to explore the different kinds of tension inherent in each of these four types, and to develop an understanding of the implications of this variation for the design and use of management control systems. Accountability provides an important link between the two competing elements, as the manner in which accountability relationships are established and enacted within the organisation will affect the extent to which employees feel empowered and the extent to which they feel controlled.
OWN CREDIT RISK IN LIABILITY MEASUREMENT: INTERNATIONAL EVIDENCE ON ACCOUNTING EFFECTS
BRUGGEMANN, ULF
BISCHOF, JANNIS; DASKE, HOLGER
Category: FR = Financial Reporting
This paper provides empirical insights related to the standard-setting debate on the inclusion of credit risk into fair value measurement of liabilities. Using a comprehensive global sample, we present three main findings. First, only 416 of our 1,397 sample banks use the fair value option for liabilities (FVOL). The extent to which the option is used (that is, the fraction of liabilities designated at fair value relative to total assets) varies considerably across firms (with a mean of 1.89% and a median of 0.12%). Second, disclosed debt value changes due to own credit risk have generally little impact on net income and various accounting ratios. In particular, the relatively small accounting effect does not correspond to the huge attention that this topic received in public media or in the standard-setting debate during the crisis. Third, in a few firm periods – particularly during the financial crisis in 2008 – own credit risk changes lead to substantial gains that turn a negative net income or comprehensive income into a profit. In most cases, the change in sign vanishes if we use the estimated full fair value income rather than the reported income numbers as a benchmark. This finding is consistent with simulations in Barth et al. (2008) and suggests that potentially counterintuitive signals are due to limitations of current reporting practice (that is, the use of a mixed measurement model) rather than to the recognition of own credit risk changes per se.
ASYMMETRIC INFORMATION AND CORPORATE SOCIAL RESPONSIBILITY
BUCHHOLZ, FRERICH
KASPEREIT, THOMAS; LOPATTA, KERSTIN
Category: SE = Social and Environmental Accounting
We investigate the relationship between asymmetric information and corporate social responsibility for US firms listed in the MSCI World Index during the period 2004 to 2011. In contrast to current studies that focus on measuring the connection between the cost of capital or firm value and corporate social responsibility, our analysis focuses on the direct relationship between corporate social responsibility and information asymmetry that is revealed by abnormal returns around insider trades. Applying the event study methodology and a cross-sectional analysis we find that firms with a higher degree of corporate social responsibility make more effort to reduce information asymmetries. Our investigation is based on a micro level and enhances the current literature by explaining the results at a more aggregated level of cost of capital as well as at the fully aggregated level of firm value.
THE IMPACT OF EXECUTIVE COMPENSATION ON CORPORATE SOCIAL PERFORMANCE: AN EMPIRICAL ANALYSIS OF HDAX FIRMS
BÜCHNER, STEFFEN
GIETL, SIMON; GÖTTSCHE, MAX
Category: SE = Social and Environmental Accounting
Increasing resource scarcity and eco-regulatory risks force corporations to focus on sustainable business development. This study examines whether management is monetarily incentivized for this goal by establishing a link between CSP and executive compensation. CSP is measured by utilizing the comprehensive GRI rating. Our sample consists of German HDAX firms over a five year time span. Utilizing various statistical models, we find that executive compensation is mainly dependent on firm size instead of profitability. CSP ratings show no significant influence on financial performance and executive compensation. Compensation itself appears to only have a small effect on CSP, leading to the conclusion that German executives do not seem to be efficiently incentivized in regard to CSP.
CHANGING PERCEPTIONS ON PPP GAMES: DEMAND RISK IN IRISH ROADS
BURKE, RICHARD
BURKE, RICHARD; DEMIRAG, ISTEMI
Category: PS = Public Sector Accounting
This study is based on three Irish operational toll road Public Private Partnership (PPP) case studies including interviews with 38 key stakeholders. Our findings show that the Irish Government’s treatment of risk and its transfer to the private partner in PPPs are changing over time. The goalposts in Irish PPPs are changing in favour of the private partner at the expense of the taxpayers who are the losers in the PPP game: the Government are willing to step in if projects experience financial difficulty, and the Special Purpose Vehicle (SPV) assumes that this may occur in their bid for the PPP project. Pricing of demand risk also differs from the Government’s rhetoric that it is being priced realistically. In practice, we find that it is priced aggressively by the SPV in order to win PPP contracts. The paper discusses the possible implications of these findings for Value for Money (VFM) and ultimately tax payers.
SOCIAL CHANGE IMPLICATIONS FOR RESEARCH PERFORMANCE: AN INSTITUTIONAL PERSPECTIVE
CADEZ, SIMON
Category: ED = Accounting Education
Contemporary academic environment can be characterized by an overwhelming trend toward enhancing research productivity. While the “publish or perish” convention has a long tradition in Anglo-Saxon countries, it is becoming increasingly embraced in emerging countries. The purpose of this study is to examine the impact of radical social change on research performance in business and economics science in Eastern Europe. Using a longitudinal study we find that research productivity is increasing significantly, however we note dilemmas pertaining to the content, international relevance and quality of publications. From a theoretical perspective, the employment of an institutional framework advances our understanding of the interaction between the wider social and organisational pressures on individual research behaviour. We find that radical social change was not mirrored by such change in researchers’ values, beliefs and behaviour thus changes in regulatory institutions were required to instigate “appropriate” behaviour as assumed by international research standards. Implication for accounting education is that relatively low research quality may entail also deficient competences for excellence in teaching.
NEWS SENTIMENT, ACCRUALS QUALITY, AND LIQUIDITY VOLATILITY
CAHAN, STEVEN
CAHAN, ROCHESTER; LEE, TAN (CHARLENE); NGUYEN, NHUT
Category: FA = Financial Analysis
Investors prefer predictable liquidity so they are not forced to transact at inopportune times. In this study, we examine how the sentiment conveyed in news items affects the variability of liquidity. We expect that news sentiment will affect liquidity volatility because it reduces information uncertainty. We also examine whether accruals quality affects the relation between news sentiment and liquidity volatility. We expect that accruals quality will moderate this relation since firms with high accruals quality have less information uncertainty to start with. Using a measure of news sentiment from Thomson Reuters News Analytics database, we find that both positive and negative news sentiment reduce liquidity volatility. Further, we find a positive and significant coefficient for the interaction between news sentiment and accruals quality, consistent with news sentiment having a smaller impact when information asymmetry is low. Our results suggest that investors’ interpretations of the news are conditioned on a firm’s accounting quality.
DISCLOSURE QUALITY, COST OF CAPITAL AND FIRM PRODUCTIVITY
CAI, WEIYI CYNTHIA
Category: FR = Financial Reporting
This research investigates the link between disclosure and cost of capital in a production-based economy via several stylized models. Specifically, I examine how the presence of ‘real effects’ of disclosure might affect a firm’s cost of capital relating to different time periods, namely the post-disclosure cost of capital (the cost of capital subsequent to disclosure), the pre-disclosure cost of capital (the cost of capital for the period leading up to disclosure) and the overall cost of capital (the cost of capital across both periods). There are three key findings of this research. First, I demonstrate that, in a production-based economy both the overall cost of capital and the investors’ ex ante welfare can be affected by disclosure quality. Second, I show that a firm’s profitability of existing and new production are critical factors in determining whether cost of capital increases or decreases in disclosure quality. Third, I show that when disclosure affects the interrelated firm’s production decision, the disclosing firm’s overall cost of capital changes with disclosure quality, even when the marginal (unconditional) distribution of the disclosing firm’s cash flow is not affected by the disclosure.
MANDATORY AUDITOR ROTATION: EVIDENCE FROM THE ITALIAN EXPERIENCE
CAMERAN, MARA
FRANCIS, JERE R.; MARRA, ANTONIO; PETTINICCHIO, ANGELA K.
Category: AU = Auditing
Mandatory rotation was recently proposed for the European Union and is also under consideration in the United States: however there is little rigorous published research into either the benefits or costs of rotation that could inform intelligent policy making. Our paper helps fill this gap by examining Italy where mandatory rotation of auditors has been required since 1975. We used proprietary data on audit engagement hours and audit fees provided to us by the Big 4 accounting firms for estimating incremental audit costs of mandatory rotation during the sample period 2006-2009. Outgoing auditors do not shirk on effort (or quality), but we do find that final year fees are 6 percent higher than normal which suggest some price gouging. Incoming auditors have more engagement hours in the first year (16 percent), but fees are discounted by 8 percent, suggesting a lowballing amount of 24 percent. However, this amount is recovered through abnormally higher fees in the future. Thus the direct cost of mandatory rotation appears to be small in Italy. An implicit cost of rotation occurs if there is a decline in the quality of audited earnings around the rotation event, and we find evidence of lower quality audited earnings in the first three years following rotation, relative to later years of auditor tenure. Since the quality of audited earnings improves with auditor tenure, the evidence does not support the case for mandatory rotation as rotation will induce more “short tenure” audits.
THE INTRODUCTION OF THE ‘INCURRED LOSS’ MODEL FOR CREDIT LOSSES IN IAS 39
CAMFFERMAN, KEES
Category: FR = Financial Reporting
The financial crisis has focused attention on impairment of amortized-cost financial instruments. The view has become widespread that IFRS, because it is based on a so-called incurred-loss approach, has led to significant overstatement of financial assets by placing tight restrictions on the recognition of loan losses. The IASB is considering the introduction of an alternative expected-loss model in its standards. This paper provides a reconstruction of the introduction of the incurred loss model in IAS 39. As a matter of historical interest, it highlights how the relevant provisions of IAS 39 were developed, between 1998 and 2003, at a time when it was not yet common to view the issue in terms of a clear-cut dichotomy of incurred-loss versus expected-loss models. This leads to the more general conclusion that the way in which a standard setter and its constituents form their understanding of an issue, as well as the evolution of the concepts used to analyze and debate it, can be important elements of the standard-setting process that merit more attention from researchers.
INTEGRITY OF FINANCIAL INFORMATION AS A DETERMINANT OF THE OUTCOME OF A BANKRUPTCY PROCEDURE
CAMPA, DOMENICO
CAMACHO-MIÑANO, MARÍA-DEL-MAR
Category: FR = Financial Reporting
The outcome of a bankruptcy procedure – ‘liquidation’ or ‘reorganization’ – has many legal, economic and social consequences for stakeholders of financial distressed companies. The objective of this paper is to show whether financial information integrity is a determinant for a ‘liquidation’ or ‘reorganization’ decision. Two measures of earnings management as proxies for financial reporting integrity are used on a matched sample of 2,064 Spanish bankrupt and healthy companies. The results indicate that only firms which receive a ‘liquidation’ decision manipulate earnings more than their pairs. This study helps to shed light on the consequences of earnings management during a bankruptcy procedure.
HOW ARE BIG 4 AUDITS VALUED AROUND THE WORLD? THE NON-LINEAR RELATIONSHIP BETWEEN THE VALUE OF AUDIT QUALITY AND THE INVESTOR PROTECTION QUALITY
CANO RODRIGUEZ, MANUEL
NÚÑEZ-NICKEL, MANUEL; SÁNCHEZ-ALEGRÍA, SANTIAGO
Category: AU = Auditing
Although audit quality is expected to be positively valued by the users of financial information, that value can vary with the level of investor protection. However, previous literature on this issue is controversial: while some papers defend that audit quality and investor protection are complementary (that is to say, audit quality is valued higher in those countries with a strong investor protection), other papers defend that both are substitutes (and, thereby, audit quality is valued higher in those countries with weaker investor protection). In this paper, we reconcile these two competing views by showing the existence of a non-linear relation between the value of audit quality –proxied by the interest rate premium of Big 4 auditors’ clients– and the quality of creditor protection. Our results show that Big 4 auditors’ clients pay, on average, a lower cost of debt, thereby confirming the positive value of audit quality over the world. The relation between that interest rate premium and the creditor protection quality is U-shaped, that is, the maximum premium is observed for the countries with intermediate levels of creditor quality.
COMPANY REPUTATION AND THE COST OF EQUITY CAPITAL
CAO, YING
CAO, YING; MYERS, JAMES; MYERS, LINDA; OMER, THOMAS
Category: GV = Accounting and Governance
n this study, we investigate whether companies benefit from reputation by considering the cost of equity financing. Using a sample of 9,956 large U.S. companies from 1987 through 2010 and the reputation rankings from Fortune’s “America’s Most Admired Companies List”, we find strong evidence that companies with higher reputation scores enjoy a lower cost of equity capital even after controlling for other factors that determine the cost of equity capital. In addition, we find that the effect of reputation on the cost of equity increases with the degree of uncertainty in the information environment. We also find that increases (decreases) in reputation are associated with subsequent increases (decreases) in the company’s investor base. These results suggest that better reputation reduces the cost of equity because reputation is a signal of company quality. This reduces information asymmetry between the company and its shareholders and increases investor recognition, resulting in more efficient risk sharing. We contribute to the cost of capital literature by identifying a unique determinant of the cost of equity capital, and to the reputation literature by demonstrating an important benefit that derives from creating and maintaining a high reputation.
IPSAS AWARENESS BY BRAZILIAN MUNICIPALITIES
CARDOSO, RICARDO
AQUINO, ANDRE
Category: PS = Public Sector Accounting
It is an exploratory analysis on how Brazilian municipalities are aware about the implementation of the International Public Sector Accounting Standards (IPSAS). We assessed IPSAS awareness on two perspectives: directly asking the accountants responsible for each municipality about their involvement and efforts dedicated to understand IPSAS’s principles and requirements; and indirectly, assessing the accounting policies adopted by individual municipalities associated to Accrual Financial Reporting (Guthrie, 1998). Data were collected through a survey applied to every 5,564 Brazilian municipality. The questionnaire was structured as a maturity matrix based on Guttman scale - inspired by Elwyn et al. (2004), Rhydderch et al. (2006), National Audit Office (2009a; 2009b). We find that Brazilian municipalities are poorly aware about the convergence process, and financial accounting policies are (still) highly biased by compliance with budgetary and fiscal rules. Results can be useful for policy makers and watchdogs that care about the compliance with standards enacted by accounting and fiscal authorities; as well as, for auditing firms, software developers and other professionals that offer services on accounting information for local governments. The academic audience may benefit from this study on adjusting governmental accounting curricula and developing further research on Accrual Financial Reporting.
FAIR VALUING OF FINANCIAL LIABILITIES AND OWN CREDIT RISK: WHAT DOES IT MEAN AND WHEN DOES IT MAKE SENSE FROM AN ACCOUNTING PERSPECTIVE?
CARDOSO FONTES, JOANA
PANARETOU, ARGYRO; PEASNELL, KEN
Category: FR = Financial Reporting
The extension of fair value accounting to financial liabilities, by requiring changes in own credit risk (hereafter OCR) to be separately labeled in the accounts, has been highly controversial. The fact that an entity would report a gain when the entity’s OCR deteriorates has been raised as the main critic. Although the OCR gain is consistent with the wealth transfer predicted by the economic theory, there is no consensus about the economic rationale underlying the inclusion of OCR in the fair value measurement of financial liabilities. We use a comprehensive perspective of fair value accounting to show that, in order for the economics underlying the wealth transfer effect to be recognized in the accounts, changes in liabilities’ fair values arising from changes in OCR should be included in net income. Failing to reflect the OCR effect leads to a misrepresentation of net income. On the other hand, we conclude that the opposition to include OCR in liabilities’ fair value measurement is warranted, if some conditions are not met. We raise three critical issues, which we suggest standard setters to address in further development of accounting for financial liabilities.
ACCOUNTING IN THE TRANSITION FROM A MEDIEVAL TO A MODERN STATE -- THE CASE OF SPAIN (1490-1510)
CARMONA, SALVADOR
CARMONA, MIGUEL ; CARRERA, NIEVES
Category: SE = Social and Environmental Accounting
This paper examines the role of accounting in the transition from a medieval to a modern society. In this respect, we draw on Bourdieu and Elias’ frameworks to focus on the case of the Spanish army during the period of 1490-1510. In particular we investigate the wider contexts of the promulgation of the Military Ordinances of 1494, 1496 and 1503 and their impact on the organization of the Spanish army that fought the wars of Naples (1494-1498; 1500-1504). The ordinances enforced administrative reforms that encompassed substantial accounting and accountability requirements. Drawing on primary sources, our study comprises a three-tier level of analysis. First, our understanding of the social field comprises two institutional actors: the monarchy as representative of the incipient national state, and the army. Second, we address how the administrative reforms affected the interactions between institutional actors. Finally, we examine how accounting and accountability requirements mediated the relationship between key individual actors, such as King Ferdinand and the commander of the Naples mission. The results of our study indicate that administrative reforms implemented accounting and accountability practices, which exerted a lasting influence in the relations between institutional actors and instilling change in medieval understandings of the army and the state at large. In Bourdieu’s and Elias terms, accounting shaped the distribution of power within the field. We also showed how accounting was used as mechanism of surveillance and control –allowing the accumulation of coded information used to administer the activities and behavior of individuals.
AUDIT COMMITTEES’ INTERLOCKS AND FINANCIAL REPORTING QUALITY
CARRERA, NIEVES
CARMONA, SALVADOR; SOHAIL, TASHFEEN
Category: GV = Accounting and Governance
This paper examines the social ties of the audit committee (AC) members, AC interlocks, impact on financial reporting quality. Using a sample of 13,065 (US) firm-years for the period 2003-2010, we find that the ACs interlocks are statistically significantly associated with the quality of financial reporting. That is, the more social ties AC members have, the lower is the quality of a firm’s financial reporting. Such association is not found for the sample of board members who do not serve on the AC. We adopt two theoretical perspectives to examine the effectiveness of ACs: resource dependence perspective and agency theory. According to the resource dependence perspective, AC members who serve in multiple boards gain experience and reputational capital, and therefore, are more effective in overseeing financial reporting quality. On the other hand, insights from the agency theory suggest that AC members who serve in multiple boards may not have the time and resources required for an effective monitoring. In addition, such individuals may be less independent due to their social networks. Our results support the agency theory hypothesis. This study offers insights to the ongoing policy discussions about the effectiveness of ACs. Given the negative consequences that AC social networks’ have on financial reporting quality, regulatory institutions may consider the enforcement of regulation limiting the number of directorships of AC members as a mechanism to enhance AC effectiveness.
A NON-ADDITIVE ACCOUNTING VALUATION MODEL BASED ON THE AGGREGATION OF INTERACTING ASSETS
CASTA, JEAN-FRANÇOIS
PAUGAM, LUC; STOLOWY, HERVÉ
Category: FA = Financial Analysis
We introduce a non-additive accounting valuation model that explains the creation and measures the value of synergies between assets in place. Our model is based on the idea that firm value is affected by interactions between assets used in combination to conduct business. We use Choquet capacities, i.e. non-additive aggregation operators, to measure the interactions between assets, and apply our model on a sample of industrials firms, uncovering their underlying asset structure. In order to test the validity of our model, we examine the relations between synergies – captured by Choquet capacities – and market-to-book ratio. We find consistent results as synergies between assets vary with market-to-book ratio in a predictable manner. Our model has three possible applications: (1) valuation of private firms given that it only requires balance sheet data, (2) valuation of firms based on a learning sample of industrial peers, (3) partial explanation of the so-called market-to-book “black box”.
THE ROLE OF LIFE CYCLE ON CAPITAL STRUCTURE
CASTRO, PAULA
AMOR-TAPIA, BORJA; TASCON, MARIA T.
Category: FA = Financial Analysis
In this paper we adopt a dynamic standpoint to contribute to the debate on how and why firms choose their capital structure. Using the Dickinson’s (2011) life cycle stages of firms, based on the distinction between operating, investing and financing cash flow types, we examine the different behavior of the traditionally found explanatory variables across the stages. Taking a wide sample of public companies form UK, Germany, France and Spain, we find that the capital structure explanatory factors evolve across the life cycle stages, changing or rebalancing the prevalence of the static models in play/place, ie. trade‐off, pecking order, or market timing.
WHAT IS GOOD PERFORMANCE? PERFORMING INDEPENDENT PERFORMANCE AUDITING
CATASUS, BINO
ÖHMAN, PETER ; SVÄRDSTEN, FREDRIK
Category: AU = Auditing
This paper reports from a study of how performance is stabilized by the Swedish National Audit Office (SNAO) in the audit reports. The paper builds on all (206) the reports published by the SNAO between its inauguration in 2003 and 2010 and analyzes the (28) reports that relate to an audit of substance (Pollitt, Girre et al. 1999). By investigating in which ways the SNAO make it possible to answer the question of what is good performance in the public sector, the paper suggests that the audit institution passes through three phases. In phase one the controversy that has to be handled is the definition of performance and, in phase two, this definition is put to the test by creating evidence. In the third phase the auditors mobilize benchmarks as a means to argue for good (or poor) performance. That is, differently from the arguments posed by the International Organization of Supreme Audit Institutions about good performance being something commonsensical, the audit report includes arguments about “good” emanating from other actors. The analysis of the paper builds on some analytical tools from Actor Network Theory. In specific, the idea of a linguistic actor is developed and used as a means to show how the concept of ”independence” both helps the audit institution to become Mr. Somebody but also impedes the possibilities to produce an answer to the question of what good performance is.
THE DETERMINANTS OF CEO INSIDE DEBT AND ITS COMPONENTS
CEN, WEI
Category: GV = Accounting and Governance
“Inside debt” refers to executive defined benefit pensions and deferred compensation. It can be used to alleviate the agency problem of debt (Jensen and Meckling (1976)). In this paper, I use the new SEC disclosure rule of 2006 to examine the determinants of CEO inside debt. I find that CEOs defer a larger fraction of their compensation when their cash compensation is high, firm liquidity is high, firm default risk is low, and when executive personal wealth is high. These findings are consistent with CEOs choosing to defer compensation when they least need the money and when they do not expect the firm to default. In contrast to previous studies, I find a non-linear inverted U-shape relation between firm leverage and CEO inside debt. In particular, CEOs reduce their inside-debt when the firm is highly levered.
INDUSTRY EFFECTS ON VOLUNTARY DISCLOSURE BY SMALL PRIVATE COMPANIES
CEUSTERMANS, STEFANIE
BREESCH, DIANE
Category: FR = Financial Reporting
This paper examines the influence of company and industry-specific characteristics on the decision of small Belgian companies to withhold or voluntarily disclose financially sensitive information. Empirically testing hypotheses on voluntary disclosure by small private companies is very difficult, because of the absence of capital market incentives and lack of settings in which financial disclosures are voluntary. Small companies in Belgium have to publish and file abbreviated financial statements, by which they have the option to withhold sales and cost of sales. This paper uses a sample of 3 000 Belgian SMEs to determine whether industry-specific characteristics have an impact on the decision to disclose annual sales. The results of the logistic regression showed that the type of industry (manufacturing, retail/wholesale and services) and the industry concentration (based on the average number of employees) have an impact on the disclosure decision of small private companies. The contribution of this paper is twofold. First, it complements the literature on voluntary disclosure by focusing on small private companies in a Continental European environment, whereas the majority of the previous studies relates to large listed companies. Second, we provide empirical evidence on the effect of industry variables on the disclosure decision. To date, research on industry variables remain rather scant and are often contradictory.
BREAKING THE MYTH OF THE LONG-TERM COMPENSATION
CHAKHOVICH, TERHI
NIIVA, TYTTI
Category: GV = Accounting and Governance
Much of prior research equates “share-based compensation” with “long-term compensation”. The present study terms this relation “the myth of the long-term compensation”. In the study, share-based compensation is investigated in one case company. The in-depth data consists of interviews with executives, board members, analysts following the company, and representatives of owners possessing a stake in the company, as well as archival data on the performance measurement and compensation practices of the company. It is shown that multiple features of share-based plans, characteristics of the management in question, and contextual factors of the company and its governance affect whether such compensation can be considered long-term oriented. Multiple contradictions and irregularities within the literature on share-based compensation are found and analyzed. It is proposed for the terms “share-based compensation” and “long-term compensation” to be separated from each other for analytical and practical purposes. By relying on the work of Barthes on mythology, it is shown how the long-term share price is a myth contributing to the wider-reaching myths of ownership and capitalism.
ANALYSTS’ CONSENSUS FORECASTS: A SOCIAL CONSTRUCT
CHAMBOST, ISABELLE
Category: FA = Financial Analysis
While it is often asserted that “the financial markets think…”, the markets, a chain or network with unclear boundaries, remain difficult to grasp as a reality. This fleeting view is nonetheless materialised in an eminently tangible way in stock market prices, and also through the “analyst consensus”. Intended primarily for investors, the consensus provides an overview of the opinions issued by securities analysts in the form of figures. This objective of this paper is to analyse how this representation in figures fulfils a role as a “cognitive artefact” for the analysts themselves, and is part of an “economic agencement”. The dialectic of this tool is underlined, as the creation of the consensus results from interactions between actors, who "model" it, each in their own way. But once rolled out, the consensus produces a representation in itself, presenting objectivised characteristics and disciplining behaviours. As an information instrument, a benchmark, a standard, these “management tools” lead the analyst to pay attention to ‘what the market thinks”, “why it thinks so”, and also “what the analyst himself should think”.
THE ROUTE OF ACCOUNTING CONVERGENCE IN AUSTRALIA: A JOURNEY OF TRIUMPH OR GRIPES?
CHAND, PARMOD
HAN, YINGYING
Category: FR = Financial Reporting
We conducted a survey on accounting practitioners in Australia to reveal the problems they still encounter in applying the current suite of International Financial Reporting Standards (IFRS). The attitudes expressed by accountants could highlight new dimensions to the inherent problems in IFRS. We included 25 statements regarding various anomalies in the interpretation and application of the Australian equivalents of IFRS and accountants were asked to express their opinions on each statement. The accountants indicated that there are several innate problems in IFRS and referred to the fact that the IFRS do not provide ample and apposite guidelines for interpreting and applying the standards in an unswerving manner. Scant attention has been given to this issue so far, hence the empirical evidence provided by our study has many implications for the practice of accounting and likewise for the quality of the current suite of IFRS.
CHANGES IN MANAGEMENT ACCOUNTING SYSTEMS: THE IMPORTANCE OF THE LOCAL CONTEXT
CHANEGRIH, TAREK
Category: MA = Management Accounting
This study combines the quantified cultural values of Hofstede (1980, 1991, 2001) with consideration of France’s historical, sociological and institutional background to investigate the volume of MACS changes, and their location, nature, and perceived success. It compares changes observed in France, Canada, Malaysia and Singapore. The study highlights significant differences between these countries. The first contribution of this paper is the explanation of these differences by historical, sociological, economic, institutional and cultural factors. The results show that to better understand similarities and differences, researchers should combine Hofstede’s cultural dimensions with analysis of the historical, sociological and institutional background of their focal countries. Furthermore, the frequency of changes observed in MACS questions the degree of coherence and consistency of Hofstede’s framework (1980, 1991, 2001), and this is the second contribution of this research.
THE EFFECT OF CULTURE, PERCEIVED TARGET ACHIEVABILITY, AND SOCIAL COMPARISON ON INDIVIDUALS’ AVERSION TO PENALTY-BASED CONTRACTS
CHANG, LINDA
CHENG, MANDY; DINH THI , TAMI ; KANG, HELEN
Category: MA = Management Accounting
Prior research shows that when given a choice between a bonus-based and a penalty-based contract that are economically equivalent, individuals prefer bonus-based contracts, and have a general aversion to penalty based contracts. This paper studies how three contextual factors, culture (individualistic vs. collectivistic), perceived target achievability, and social comparison will affect individuals’ aversion to penalty-based contracts. Results from our study show that individuals from individualistic cultures have lower aversions to penalty-based contracts than individuals from collectivistic cultures. We also find that individuals who perceive that the achievability of performance targets is high will have lower aversions to penalty-based contracts than those who perceive the target achievability is low. Finally we show that individuals will have lower aversions to penalty-based contracts to avoid appearing worse-off that their peers.
DOES ELIMINATING THE FORM 20-F RECONCILIATION FROM IFRS TO U.S. GAAP IMPROVE THE QUALITY OF FINANCIAL REPORTING?
CHAO, CHIA-LING
HORNG, SHWU-MIN
Category: FR = Financial Reporting
This paper compares accounting-quality metrics for a broad sample of firms in 28 countries that crosslist on U.S. exchanges before and after the SEC shifted from requiring foreign issuers comply with U.S. GAAP reconciliations to permitting the use of IFRS in financial reporting. Empirical results reveal that foreign issuers applying IFRS exhibit more income smoothing and less timely recognition of losses than do foreign firms filing U.S. GAAP reconciliations in the IFRS reporting period. However, the results also show that accounting amounts are more value relevant for IFRS firms than their counterparts. Differences in accounting quality between the two sets of firms in the U.S. GAAP reconciliation period do not account for the IFRS reporting-period differences. Overall, the combined evidence suggests that application of IFRS by non-U.S. firms has not enhanced financial reporting comparability with firms filing U.S. GAAP reconciliations.
STATUTORY-BACKED CONTINUOUS DISCLOSURE REGIME AND CORPORATE DISCLOSURE BEHAVIOUR – DOES CORPORATE GOVERNANCE MATTER?
CHAPPLE, ELLIE (LARELLE)
TRUONG, THU PHUONG
Category: GV = Accounting and Governance
Since 1 December 2002, the New Zealand Exchange’s (NZX) continuous disclosure listing rules have operated with statutory backing. To test the effectiveness of the new corporate disclosure regime, we compare the change in quantity of market announcements (overall, non-routine, non-procedural and external) released to the NZX before and after the introduction of statutory backing. We also extend our study in investigating whether the effectiveness of the new corporate disclosure regime is diminished or augmented by corporate governance mechanisms including board size, providing separate roles for CEO and Chairman, board independence, board gender diversity and audit committee independence. Our findings provide a qualified support for the effectiveness of the new corporate disclosure regime regarding the quantity of market disclosures. There is strong evidence that the effectiveness of the new corporate disclosure regime was augmented by providing separate roles for CEO and Chairman, board gender diversity and audit committee independence, and diminished by board size. In addition, there is significant evidence that share price queries do impact corporate disclosure behaviour and this impact is significantly influenced by corporate governance mechanisms. Our findings provide important implications for corporate regulators in their quest for a superior disclosure regime.
THE NORMATIVITY AND LEGITIMACY OF CSR DISCLOSURE: EVIDENCE FROM FRANCE
CHAUVEY, JEAN-NOEL
CHO, CHARLES; GIORDANO-SPRING, SOPHIE; PATTEN, DEN
Category: SE = Social and Environmental Accounting
In 2001, France became one of the few countries to require corporate social responsibility reporting through its Nouvelles Régulations Économiques #2001-420 (NRE). However, initial compliance with the statute was low, a factor implying the law lacked normativity. In this exploratory study, we attempt to determine whether there is movement toward normativity by examining the change in corporate social responsibility (CSR) disclosure from 2004 in comparison to 2010 for a sample of 81 publicly traded French firms. We measure both the space and the quality of corporate social responsibility disclosures, including in the latter a measure based on informational quality attributes as discussed by the International Accounting Standards Board, the Financial Accounting Standards Board and the Global Reporting Initiative. We find significant increases in the space allocated to CSR disclosure, as well as some evidence of increased quality, although the informational quality of the disclosures remains quite low and fewer firms are including negative performance information in their reports. Finally, we document that differences in disclosure space and quality in 2004 appeared to be associated with legitimacy-based variables and that those relations remain largely unchanged in 2010. As such, it appears that the NRE’s goals of increased transparency remain unmet.
CEO DUALITY AND ASYMMETRIC SENSITIVITY OF CEO COMPENSATION: THE ROLE OF THE BOARD
CHEN, CHAO-JUNG
CHU, YA-CHING
Category: GV = Accounting and Governance
The aim of this paper is to examine whether the companies would consider punishment provision in the compensation contract resolve the ex post settling up problem (that means asymmetry sensitivity of compensation and unrealized gain and loss). We examine the asymmetry effect whether will be less in firm with CEO duality and more significant under the board effective operation. Using data from 2006-2010 in Taiwan, empirical results indicate that CEO compensation has different sensitivities to unrealized gain and unrealized loss when considering CEO duality. We find that CEO compensation is less sensitive to unrealized loss for firms with CEO duality consistent with agency theory. We also find that compensation of duality CEO is more sensitive to unrealized loss in firms with effective board consistent with board monitoring ability. In sum, our results suggest that CEO compensation is not punished for CEO duality firm with poor performance, but in firms with strong internal control mechanism have.
SPILLOVER EFFECTS OF RESTATEMENTS ON THE FINANCIAL REPORTING BEHAVIOR OF BOARD-INTERLOCKED FIRMS
CHEN, CHIH-YING
GOH, BENG WEE; LIN, YU-CHEN; WU, GUAN-SYUN
Category: GV = Accounting and Governance
This study examines the spillover effects of restatements on the financial reporting behavior of firms that share common directors with the restating firms (“interlocked firms”). Using a sample of firms that restate earnings from 1997-2006, we find that interlocked firms suffer stock price decline when the restatements are disclosed, and this decline is exacerbated when these firms have higher industry-adjusted accrual. This result suggests that restatements trigger investors’ concerns over the financial reporting among interlocked firms. We find that these reporting concerns induce the directors associated with the restatement (“tainted directors”) to improve the financial reporting quality at the interlocked firms. Specifically, interlocked firms exhibit lower discretionary accruals in the year after the restatement events than do control firms, and this effect is more pronounced when the tainted directors also sit on the audit committees of the interlocked firms or when the tainted directors continue to serve in the interlocked firms in the year following the restatement. Our study extends the literature on the consequences of restatement and the governance implications of board interlocks.
THE DOMINANT STAKEHOLDER’S STRATEGIC MANAGEMENT OF THE LONDON CONGESTION CHARGE THROUGH POWER, LEGITIMACY, AND URGENCY
CHEN, JASON
Category: SE = Social and Environmental Accounting
This study drew on Mitchell et al.’s (1997) stakeholder typology to examine Transport for London (TfL)’s strategic management of the London Congestion Charge (LCC). Specifically, this study investigated how and why TfL managed the LCC via stakeholders’ attributes of power, legitimacy, and urgency. Extant assessments of the LCC are inconclusive. Additionally, there lacked a theoretically grounded case study to examine factors beyond the common financial and quantitative analyses addressed in articles over the LCC. Relying on Yin’s (2009) methodological approach, I analyzed publicly available data to examine why TfL strategically managed the LCC and how TfL achieved its strategic management of the LCC over stakeholders. Results indicated that TfL constantly managed the LCC to ensure its success and viability. TfL primarily used tactics to maintain the legitimacy of the LCC and supplemented these tactics with authoritative power and fears of unproven urgency to influence stakeholders throughout the discreet stages of the LCC. These results have practical implications to policy makers contemplating new policy reforms and potentially help expand both empirical and theoretical understanding to researchers who are interested in the latent factors in policy management and maintenance. Summary and discussions with propositions for future research on policy reforms conclude this study.
THE INFORMATIVENESS OF PRO FORMA FINANCIAL STATEMENTS AS REQUIRED BY SEC REGULATION S-X ARTICLE 11: EVIDENCE FROM THE IPO PROSPECTUS
CHEN, JERRY
Category: FR = Financial Reporting
Are pro forma financial statements as required by SEC Regulation S-X Article 11 informative? Do investors incorporate this information into stock prices? To test these questions, I perform valuation-relevance analysis on an IPO sample from 1997 to 2007. I focus on the IPO prospectus because it provides pro forma financial statements that are not available from other sources; other SEC filings (e.g., 8-Ks, 10-Ks) provide pro forma financial statements that might be accessed by investors from other sources (e.g., company websites, press releases), making interpretation of valuation-relevance analysis results difficult. I find that while future long-term earnings are correlated with pro forma earnings adjustments, IPO stock prices are not. I also find that pro forma earnings adjustments are able to predict post-IPO stock returns. Collectively, my findings suggest that investors fail to fully extract future earnings information captured by pro forma earnings adjustments in the IPO prospectus.
ACCOUNTING EXPERTS, INFORMATION COST, AND IMPLIED COST OF EQUITY CAPITAL
CHEN, KEN Y.
HUNG, SHENGMIN; YUE, HENG
Category: GV = Accounting and Governance
This study mainly examines the effect of the functioning of accounting financial experts in an audit committee, on the cost of equity capital by controlling for the costs of acquiring information about the firm. We find that the negative relation between audit committee financial expertise and the implied cost of equity capital is generally strengthened (moderated), as the number of the analyst following and the inverse of the dispersion of analyst forecasts (the analyst forecast error) increases (decreases). Our empirical results suggest that the effectiveness of accounting financial experts in audit committees depends on the cost of acquiring information about the firm.
DOES FOREIGN FIRMS’ SHORTCUT TO WALL STREET CUT SHORT THEIR FINANCIAL REPORTING QUALITY? EVIDENCE FROM CHINESE REVERSE MERGERS
CHEN, KUNCHIH
CHENG, QIANG; LIN, YING CHOU; LIN, YU-CHEN; XIAO, XING
Category: FR = Financial Reporting
We find that Chinese reverse merger (RM) firms exhibit lower financial reporting quality than U.S. RM firms, which in turn have poorer financial reporting quality than U.S. regular firms. These results indicate that the use of RM process is associated with poor financial reporting quality and the weak legal enforcement on Chinese RM firms exacerbates the problem. Moreover, the financial reporting quality of Chinese RM firms is inferior to that of other Chinese firms listed in the U.S. Compared with other Chinese firms listed in the U.S., Chinese RM firms exhibit lower bonding incentives and poorer corporate governance. Overall, the results indicate that the RM process provides foreign firms that exhibit low bonding incentives and poor governance with a “shortcut” to Wall Street, leading to poor financial reporting quality.
A GROUNDED THEORY MODEL OF BANK INTANGIBLES
CHEN, LEI
DANBOLT, JO; HOLLAND, JOHN
Category: FR = Financial Reporting
This paper provides a new way of rethinking banking models by using qualitative research on intangibles. The banking sector has been transformed significantly by the changing environment over the past two decades. The 2007-2009 financial crisis also added to concerns about existing bank business models. Using qualitative data collected from interviews with bank managers and analysts in the UK, this paper develops a grounded theory model of bank intangibles. The model reveals how intangibles and tangible/financial resources interact in the bank value creation process, and how they actively respond to environmental changes. Grounded theory provides the means to search for ways to improve the financial intermediation, information intermediation and risk management roles of banks and hence further develop bank models as business models and theoretical models. Such development is critical to the understanding of banks and the market for information, and for bank regulation and further research.
THE EFFECT OF FINANCIAL INCENTIVE FRAMING AND DESCRIPTIVE NORMS ON INTERNAL WHISTLEBLOWING
CHEN, XIAOLING
NICHOL, JENNNIFER ; ZHOU, FLORA
Category: MA = Management Accounting
Recent regulations promoting external whistleblowing heighten the need for internal whistleblowing programs to encourage whistleblowing within firms. However, it remains controversial how firms should provide financial incentives for internal whistleblowing. Drawing on social psychology research, we argue that framing financial incentives for internal whistleblowing as a penalty is more effective at communicating injunctive norms than framing them as a reward, and that consistency between injunctive norms and descriptive norms leads to greater injunctive norm salience, which, in turn, results in greater internal whistleblowing. We test our hypotheses experimentally using a 2x2 between-subjects design that manipulates the framing of financial incentives promoting whistleblowing (Reward vs. Penalty) and social norms supporting or opposing whistleblowing (Norms For vs. Norms Against). As predicted, we find an ordinal interaction effect between financial incentive framing and descriptive norms such that descriptive norms for whistleblowing will increase internal whistleblowing to a greater extent when financial incentives for whistleblowing are framed as penalties than when these incentives are framed as rewards.
ANALYSTS’ FORECASTS IN THE EXTRACTIVE INDUSTRY
CHEN, XIAOMENG
CHEN, XIAOMENG; WRIGHT, SUE; WU, HAI
Category: FA = Financial Analysis
This study examines the relations between the intensity of reported exploration activity by extractive companies and analysts’ private information search activities and their forecast accuracy. Specifically, we examine whether greater intensity of exploration activity motivates analysts to acquire and process relatively more private information to meet investor demand and whether this affects the accuracy of analysts’ consensus forecast. We find that the proportion of private information contained in analysts’ forecasts and the accuracy of analysts’ consensus forecast increases with the levels of exploration and evaluation (E&E) expenditures. Our finding is consistent with the notion that the overall information environment of firms with greater exploration intensity is enriched by analysts’ private information acquisition. Furthermore, we investigate the effect of capitalization of E&E expenditures on analysts’ information environment and find that the capitalization can convey information about the future economic outcomes of exploration investments, allow analysts develop more private information and improve the accuracy of their forecasts.
THE ROLE OF VISUAL ATTENTION ON MANAGERIAL JUDGMENT IN BALANCED SCORECARD PERFORMANCE EVALUATION: INSIGHTS FROM USING AN EYE-TRACKING DEVICE
CHEN, YASHENG
CHEN, YASHENG; JERMIAS, JOHNNY; PANGGABEAN, TOTA
Category: MA = Management Accounting
This study investigates the role of visual attention on managerial judgment in Balanced Scorecard performance evaluation. Using the Locarna eye tracker to collect data on the amount of time superiors fixated on cues presented to them, we hypothesize and find that superiors focus their attention more on the strategically-linked performance measures than on the strategically non-linked measures in evaluating their subordinates. Furthermore, we predict and find that superiors who spend more time fixating on strategically linked performance measures are more likely to make decisions that are consistent with the achievements of the subordinates’ strategic objectives. This study contributes to the BSC literature by providing important insights into the influence of visual attention on judgment and decision making.
FINANCIAL REPORTING QUALITY IN REVERSE MERGERS: THE CASES BY CHINESE FIRMS
CHEN, YENN-RU
LIU, KUANG-LONG WILLIAM
Category: FA = Financial Analysis
This paper is to investigate the financial reporting quality of firms reversely merged by private firms in China. A reverse merger (RM) is a method allowing a private firm to become publicly traded one without going through the process of public offering. The private company becomes public by buying an inactive listed firm (the shell) without meeting the listing requirements and being reviewed by SEC. The increasing number of Chinese private companies going public in the U.S through reverse mergers raises concerns to investors in investing the Chinese reverse-merged firms. By examining Chinese reverse-merged firms and Chinese ADR firms listed in the US market from 2000 to 2011, we find that Chinese reverse-merged firms have poorer financial reporting quality than Chinese ADR firms, consistent with our expectation. Although prior studies show that information risk is a nondiversible factor for pricing (Easley and O’Hara, 2004; Francis et al. 2005), we do not find that the U.S capital market take into account the fact of the poorer financial reporting quality of Chinese reverse-merged firms in determining the prices of their stocks. This finding indicates that the US investors would face more information risk when they invest in Chinese reverse-merged firms but the information risk they faced does not offer them extra return.
PERFORMANCE CONSEQUENCES OF RATING COMPRESSION AND RATING LENIENCY: THE ROLE OF RELATIVE TEAM PERFORMANCE FEEDBACK
CHEN, YU-LIN
Category: MA = Management Accounting
Few empirical works have examined the performance implications of rating leniency and rating compression, and they have not any widely accepted conclusions. This study investigates the relative team performance feedback as an important contextual factor affecting the leniency effects and compression effects in subjective performance evaluations. This research employs unbalanced panel data analysis and shows several key findings. First, lenient ratings can improve performance when providing relative moderate and high team performance feedback to subordinates. However, lenient ratings can deteriorate performance when providing relative low team performance feedback to subordinates. Second, compressed ratings can decrease performance when providing relative high team performance feedback to subordinates, and when providing relative low team performance feedback to below-average performers. However, compressed ratings can increase performance when providing relative moderate team performance feedback to subordinates, and when providing relative low team performance feedback to above-average performers.
DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE AND THE COST OF EQUITY
CHEN, ZHIHONG
LI, OLIVER; ZOU, HONG
Category: FR = Financial Reporting
We investigate how investors perceive directors’ and officers’ (D&O) insurance by examining its association with firms’ cost of equity using data from Canada. We find that D&O insurance is positively associated with firms’ cost of equity and that a change in the cost of equity follows, but does not precede, a change in D&O insurance. Further analysis suggests that this positive association is more pronounced in firms cross-listed in a more litigious environment and in firms with a large wedge between directors’ and officers’ voting and cash flow rights. The high cost of equity associated with D&O insurance adversely affects firms’ ability to raise capital through seasoned equity offerings. We conclude that D&O insurance is associated with incentive problems and that investors penalize firms carrying a high level of D&O insurance by charging a high cost of equity.
INSTITUTIONAL DISCIPLINE OF INSIDER TRADING THROUGH SHAREHOLDER LITIGATION
CHENG, CS AGNES
CHENG, C.S. AGNES; HUANG, HENRY HE ; LI, YINGHUA
Category: GV = Accounting and Governance
This paper examines whether and how private securities litigation led by institutional and individual investors elicits changes in subsequent stock trading by corporate insiders. We hypothesize that compared with other lawsuits, lawsuits with institutional lead plaintiff likely have stronger deterrence effects on opportunistic insider trading through their ability to impose larger financial penalties and improve defendant firms’ governance. Using a large litigation sample from 1996 to 2009, we find significant decreases in volumes of insider stock sales following shareholder litigation when institutional investors (especially public pension funds) serve as lead plaintiffs. Further analysis indicates that the decreases mainly come from opportunistic insider selling and are conditional on the governance strength of the defendant firms. We also find that institutional lead plaintiffs are able to more effectively use the evidence of insider selling during class period to litigate against defendant firms and obtain larger settlements. Our paper provides first evidence that institutional investors impose effective discipline on insider trading through shareholder litigation.
DIRECTORS AND OFFICERS LIABILITY INSURANCE, CORPORATE GOVERNANCE AND AUDITOR OPINIONS
CHIANG, HSIANGTSAI
HE, LIJEN; LIN, SHULIN
Category: GV = Accounting and Governance
We used corporate governance characteristics and auditor traits to analyze the effect of the purchase of directors and officers liability insurance (D&O insurance). The results indicate that companies without insurance have superior corporate governance mechanisms compared to those with insurance. Although the corporate governance of companies with insurance is comparatively weaker, these companies compensate for the inadequacy of their governance mechanisms by inviting industrial specialists and the Big 4. The empirical results suggest that D&O insurance can strengthen external governance. Auditors provide superior evaluations of the financial statements prepared by companies with D&O insurance.
JOINT AUDIT AND AUDIT QUALITY: A MATTER OF SIZE AND/OR SENIORITY?
CHIHI, HAMIDA
MHIRSI, NADIA
Category: AU = Auditing
The paper examines the impact of both audit partner tenure and audit size on audit quality. Our sample consists of 891 French listed companies from SBF 250. The French context offers a unique setting to observe the tenure of both joint auditors. Our results show that the best audit quality is performed by a Big 4 audit firm paired with non-Big 4. Earning management is better controlled in case of partners’ staggered tenures. Indeed, audit quality is slightly when the lag tenure is inferior to four years.
BIFURCATION OF COMPOUND FINANCIAL INSTRUMENTS IN THE BRAZILIAN FINANCIAL MARKET
CHIQUETO DA SILVA, FERNANDO
G. CARVALHO, L. NELSON; MARIS VIEIRA DE SOUZA, ESTELA
Category: FR = Financial Reporting
In the last decade, Brazilian companies raised BRL390 and BRL340 billion through stock and debenture markets, respectively. However, in 2011 stock and debenture transactions moved, respectively, BRL1.6 and BRL0.07 trillion in the secondary market (SM). The objective is to analyze the low liquidity effects when applying the residual amount method at initial recognition of compound financial instruments, as established by IAS32. The sample represents 97% of the Brazilian debt SM in 2011. The regression model in panel data has an adjusted R-squared of 0.5865. The credit spread was regressed based on rating, type of guarantee, industry sector, size and indebtedness (all statistically significant at the 0.05 significance level). The results show that the debenture SM is essentially concentrated on AAA-rated financial institutions. The key parameters of option pricing models can be obtained from stock markets with high liquidity, as the Brazilian stock market. The true and fair view override (TFVO) allows entities to depart from compliance with a requirement in the rare circumstances. As the application of IAS32 may contradict the economic logic of granting a call option in exchange for lower offer rate – leading to results such as a negative equity component (EC) or the EC equals to zero, as some Brazilian companies has disclosed – it is concluded that, in these extreme cases, the use of option pricing models to measure the EC could be consistent with the TFVO concept.
CSR REPORT ASSURANCE IN THE UNITED STATES: AN EMPIRICAL INVESTIGATION OF DEMAND AND STAKEHOLDER BENEFITS
CHO, CHARLES
CHO, CHARLES H.; MICHELON, GIOVANNA; PATTEN, DENNIS M.; ROBERTS, ROBIN W.
Category: SE = Social and Environmental Accounting
In contrast to the growth in CSR assurance worldwide, assurance of stand-alone CSR reports in the U.S. remains rare. We investigate, first, factors that appear to lead U.S. companies to obtain assurance and, second, whether assurance on CSR reports in the U.S. leads to stakeholder benefits. We find that industry membership and disclosure extensiveness appear to influence a company’s choice to obtain CSR report assurance. Our results also indicate that assurance is not associated with higher market values for CSR report-issuing companies. Firms with CSR report assurance are more likely, however, to be included in the Dow Jones Sustainability Index and to be perceived as more ‘green’. We conclude that CSR report assurance in the U.S. may provide stakeholder benefits only in specific settings that focus more directly on the relative assessment of CSR performance and reporting. This may help explain its low rate of adoption in the U.S.
AUDITOR COMPETITION AND AUDIT QUALITY IN LOCAL MARKET
CHOI, JONG-HAG
KIM, JEONG-BON; WANG, ZHENG; ZANG, YOONSEOK
Category: AU = Auditing
This study examines the association between the intensity of competition in the local audit market and audit quality. Audit market has witnessed dramatic market structure changes since late 1980s. Frequent auditor mergers causes regulators in various countries worry about the potential negative effect of the concentrated audit market structure on auditor competition and thus audit quality and audit fees. Prior studies on the issue, mostly use Hefindahl index to proxy for the level of auditor competition, generally yield mixed findings. In this study, we proxy for the intensity of auditor competition by the proportion of auditor switches in a local audit market. Using the measure, we investigate whether the level of auditor competition is related to audit quality, measured by clients’ abnormal accruals and auditors’ tendency to issue going-concern audit opinion. Our results suggest that audit quality improves as the auditor competition increases in the local market. Furthermore, we document that the association between the level of auditor competition and audit quality is more pronounced in large local market and when the client is relatively less important to the auditor.
BIG4 REPUTATION AND MARKET PREMIUM: EVIDENCE FROM KOREA MARKET
CHOI, KWON IL
CHOI, KWONIL; PARK, SUNGJIN; PARK, YEONHEE; SONG, INMAN
Category: AU = Auditing
Researches on the relationship between auditor size and audit quality have been carried out for a long time. But the consistent results have not been provided. Further the researches, whether companies audited by Big4 are highly valued in the market or not, have been barely performed. In this study, we will first verify whether audit quality of Big4 is high or not and then examine whether market premium is formed by audit quality of Big4 in the main analysis. In addition, we verify whether Big4 premium is higher than their audit quality. The results show that Big4’s audit quality was higher in the KOSPI market, but there is no difference in audit quality between Big4 and Non-Big4 in the KOSDAQ market. The larger companies and the greater cash flow from operating activities is the higher audit quality. On the other hand, the smaller debt ratio (and return on assets, the growth rate) is the higher audit quality. Regression analysis reveals that stock market, premium of companies audited by Big4 were higher. The market premium is influenced by Big4’s reputation as well as their audit quality. Such difference is not found in the KOSDAQ market. However, in the analysis using the cost of capital, companies audited by Big4 pay lower interest expenses in both KOSPI and the KOSDAQ market. This means that there are incentives for companies to utilize Big4 auditors even in the KOSDAQ market.
MANAGERIAL ABILITY AND EARNINGS QUALITY: AN INTERNATIONAL ANALYSIS
CHOI, SUNHWA
BOK, BAIK; FARBER, DAVID; ZHANG, JINGJING
Category: FR = Financial Reporting
In this paper, we use an international setting to examine an unresolved issue in the literature on the relation between managerial ability and earnings quality. We also examine whether the strength of a country’s investor protection system impacts this relation. Using multiple measures of earnings quality and managerial ability, we report that earnings quality is negatively associated with managerial ability. We also find that a strong system of investor protection mitigates this negative relation. Overall, our study adds to the literature on the impact of managerial characteristics on financial reporting decisions.
FIRST VOLUNTARY DISCLOSURE: IS IT LESS OPPORTUNISTIC?
CHOI, YOUNG-SOO
YOUNG, STEVEN
Category: FR = Financial Reporting
Financial Reporting Standard No. 3: Reporting Financial Performance allows UK firms the option of reporting customized earnings per share (EPS) constructs alongside GAAP EPS on the face of their income statement. We focus on the first voluntary non-GAAP EPS disclosure due to possible noise in subsequent disclosures because firms are required to disclose non-GAAP EPS in a consistent basis once they start to disclose it. Consistent with our predictions, we find that the duration of the adjusted EPS disclosure is not more sensitive to negative transitory items and operating transitory items, after controlling for the incidence and magnitude of losses, earnings changes, and earnings surprises together with some other firm-specific characteristics. Our findings indicate that management’s opportunistic incentives are not the dominant drivers for the first disclosure of non-GAAP EPS. However, firms seem to disclose non-GAAP EPS more opportunistically in the practice of subsequent disclosure.
MANDATORY IFRS REPORTING AND CHANGES IN ENFORCEMENT
CHRISTENSEN, HANS BONDE
HAIL, LUZI; LEUZ, CHRISTIAN
Category: FR = Financial Reporting
In recent years, a number of countries have made reporting under International Financial Reporting Standards (IFRS) mandatory. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study presents new evidence that aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects are not only concentrated in the European Union (EU), but limited to five EU countries that also made substantive changes in enforcement concurrent with the introduction of IFRS. There is little evidence of liquidity benefits around IFRS adoption in countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Our analyses indicate that changes in reporting enforcement play a critical role for the liquidity benefits around the introduction of IFRS, and that we have to be careful about attributing the effects to the change in accounting standards alone.
CORPORATE GOVERNANCE: EXPLORING THE CONCEPT OF THE CHANGING GOVERNANCE CONTROL PARADIGM AND ITS IMPLICATIONS FOR THE AUDITING PROFESSION
CHRISTOPHER, JOSEPH
Category: GV = Accounting and Governance
The study applies a multi-theoretical perspective to an international comparative study of seven public universities to demonstrate the concept of a changing governance control paradigm as a more holistic approach to governance and its implications for the auditing profession. The findings confirm the concept of the changing control paradigm informed by multiple theories and suggests that good governance entails monitoring the extended range of controls arising from this changing governance control paradigm. This is in contrast to the limited range of controls of an agency-oriented control paradigm. These findings imply that the theoretical foundations of audit should now also be aligned with a multi-theoretical approach to governance as opposed to an agency approach to achieve its role of enhancing governance. The findings have policy implications for management and auditing practitioners in redefining the governance control paradigm and scope of controls to be monitored respectively.
DO OPTION PRICES EFFICIENTLY ANTICIPATE STOCK PRICE VOLATILITY AROUND EARNINGS ANNOUNCEMENTS?
CHUNG, SUNG GON
LOUIS, HENOCK
Category: FA = Financial Analysis
Prior studies document a sharp increase in stock return volatility around the earnings announcement date. We examine whether the change in stock price volatility around earnings announcements is efficiently incorporated into option prices. Extant studies suggest that option traders tend to overweight current stock price volatility and, consequently, to misprice options. Given that earnings announcements create huge inter-temporal variations in stock price volatility, it is plausible that the inefficient option pricing is related, at least partly, to traders‟ failure to fully adjust option prices for earnings announcement related changes in stock price volatility. The empirical evidence is consistent with this conjecture. It indicates that option prices do not fully impound the implications of forthcoming earnings announcements for stock price volatility.
AGENCY WITHIN CONSTRAINTS: EXPLORING THE EFFECTS OF ORGANIZATIONAL STRUCTURAL ARRANGEMENTS ON ‘BUSINESS PARTNER’ ROLE OF CONTROLLERS
CIESLAK, KATARZYNA
Category: MA = Management Accounting
The literature about roles of controllers has been growing in the last years, but research focused more on descriptions and labeling of these roles, and still not enough is known about the drivers of the different roles of controllers (Byrne and Pierce, 2007, Hartmann and Maas, 2011, Graham et al, 2012). Lately Hartman and Maas (2011) investigated quantitatively a link between controllers’ roles and uncertainty. By focusing on organizational context they developed previous research that ascribed explanatory power mainly to individual characteristics of controllers or ‘interplay’ with other organizational members (Sathe, 1983, Mouritsen, 1996, Pierce and O´Dea, 2003, de Loo, 2011). The current study also focuses on organizational context, in particular on different aspects of organizational structure. However, it uses a case study method to explain, based on a case company from a paper packaging industry, how different organizational arrangements can enable/constraint the ‘business partner’ role of controllers. The theoretical contribution is threefold. First, the study suggests ‘agency within constraints’ perspective to understand controllers’ roles, where organizational circumstances cannot be downplayed. Second, the study outlines a number of organizational enablers/constraints of the ‘business partner’ role of controllers. Third, it provides a sketch of a possible mechanism of an impact of the ‘business partner’ role on creating value in organizations.
THE FUNDAMENTALS OF MISREPRESENTATION OF FINANCIAL INFORMATION
CIMINI, RICCARDO
Category: ED = Accounting Education
This paper aims to draw a clarifying theoretical framework of the misrepresentation of financial information, offering a novel classification of the instruments used by insiders to carry out both earnings management and impression management. Scholars that studied them with empirical analyses focused and contributed to the literature just on specific aspects, according to the model used in their research (e.g. single accruals manipulation, the use of graphs, etc). Stating the fundamentals of misrepresentation of financial information, this work would like to systematize their contributions and would like to suggest to standard setters which are the rooms for improvement the standards – by amending them or by issuing new ones – in order to reduce misrepresentation.
TIME DRIVEN ACTIVITY BASED COSTING IN HOSPITALS TO MANAGE LIMITED RESOURCES AND INCREASING DEMANDS
CINQUINI, LINO
CAMPANALE, CRISTINA; TENUCCI, ANDREA
Category: MA = Management Accounting
Purpose: The purpose of this paper is to discuss the potentialities of innovative accounting tools in supporting “transparency” and “resource allocation” in public hospitals, by describing the implementation of a pilot project of TDABC. Methodology: An interventionist research approach has been adopted: two medical doctors, three financial controllers and three researchers have been involved. Collection of data used to implement the accounting model is based on hospital databases and interviews. Findings: Information produced may allow a higher coherence between resources and activities. TDABC may enhance transparency and support decisions toward a better organization of work and informed allocation of resources. Research limitations: Further studies are required to analyze decisions following the implementation of the TDABC model Original value: Accounting literature lacks of case studies describing the application of TDABC in hospital settings, despite good informative potentialities and limited investments are required. Moreover the use of the IR approach and the involvement of medical doctors may help to get coherence between accounting data and clinical work, and may support further diffusions and development of this costing model in hospitals.
CORPORATE GOVERNANCE AND SECURITIES DISCLOSURE ENFORCEMENT LITIGATION
CLOUT, VICTORIA
CHAPPLE, ELLIE ; TAN, DAVID
Category: GV = Accounting and Governance
The aim of this study is to investigate the governance attributes of Australian firms that have been subject to securities litigation. This paper is motivated by the recent sizable increase in the number of firms being subject to litigation in Australia by investors due to the disclosure policy adopted by management of the firms. The study commences with a sample of Australia listed firms that have been subject to investor class actions, typically due to disclosure breaches. This sample was matched on industry and size to a control group of firms that have not been sued. Firstly, we examine and compare the compliance culture of the sample of litigated firms, to examine their record of the frequency of queries by the Australian Securities Exchange (ASX). We expect that the litigated firms to have higher frequency of queries compared to the control sample firms. Secondly, we use regression analysis to investigate whether firms sued by their investors for disclosure breaches exhibit a corporate governance culture that is systematically weaker than the control sample of non-litigated firms. In this study, we find that the sample of interest has a statistically significantly higher rate of queries. This study contributes to understanding the increasing trend in lawsuits against Australian companies as a result of their disclosure breaches and the currently scant non-US focussed literature on securities class actions.
BEHAVIORAL STYLES IN THE ACCOUNTING PROFESSION: IMPLICATIONS FOR IMPLEMENTING IFRS IN BRAZIL
CODA, ROBERTO
CESAR, ANA MARIA; CUSTÓDIO, ISAÍAS; DA SILVA, DIRCEU
Category: ED = Accounting Education
This study identifies Accountants’ behavioral styles, using Motivational Orientation and Mobilization Style concepts, created based on the M.A.R.E. diagnostic, according to Erich Fromm’s personality theory. It applies a quantitative approach to a sample of 412 professionals in the Accounting field, and it compares the findings with those from another sample composed of 4,980 cases related to other professions collected nationwide in Brazil. The researched behavioral styles are named Collaborator, Negotiator, Competitor, Conqueror, Achiever, Maintainer and Specialist and the results show a predominance of the Maintainer (concerned about continuity, methods and norms) and the Specialist styles (concerned about quality and rationality), in terms of accountant’s preferred work behavior patterns. The results are compatible with other studies that have utilized the MBTI as a personality indicator, but different from the Brazilian sample, in which a balance between the style compositions are observed. The qualitative approach of the study deals with the identification of the major challenges facing Accountants for implementing IFRS in their organizations. Implications of the quantitative results obtained towards supporting this goal are discussed, providing subsidies for the staffing, development and education of Accountants.
FULL COST PRICING AND PROFIT MAXIMIZATION
COLLINI, PAOLO
COLLER, GRAZIANO
Category: MA = Management Accounting
Full-cost pricing appears to be a widespread pricing practice among firms, in spite of its lack of theoretical support. Previous research has analyzed the ability of full-cost pricing to provide profit maximizing prices, assuming that firms choose a markup close to the profit maximizing markup. However, these studies do not explore the conditions under which a maximizing markup could actually be set by the firm. In this paper, we develop an analytical model with the aim of understanding the conditions under which full-cost pricing can either guarantee or approximate a profit-maximizing performance. Furthermore, through a computer simulation, the loss in profit associated with the choice of an arbitrary markup is estimated. Together, the analytical model and the simulations provide many insights on why full-cost pricing can be considered to be a satisfactory approach in a high number of cases, and therefore, it is widely adopted by firms in real life.
REGULATORY FAILURE IN THE BRITISH REGULATORY STATE: THE EQUITABLE AFFAIR
COLLINS, DAVID
DEWING, IAN; RUSSELL, PETER
Category: GV = Accounting and Governance
The Equitable Life Assurance Society (Equitable) is the UK's oldest life insurer and a crisis occurred as a result a legal judgement in 2000 which created major additional liabilities, estimated at £1.5 billion. Many policyholders suffered significant losses and questions were raised about the adequacy of processes for the regulation of insurers, the accountability of regulators and compensation for policyholders suffering losses because of regulatory failure. The Equitable affair generated a series debates, investigations and inquiries about the origins of, and lessons to be learned from the crisis which has stretched over a decade. The literature on regulation tends to focus on the successful 'co-production' of regulation by an ever increasing range of regulatory actors (for example, Black, 2002; Baldwin & Black, 2008; Black & Baldwin, 2010) but this literature often fails to deal with the case of regulatory failure. This paper draws attention to the problem of the co-production of regulatory failure, and in particular considers the range of additional actors and mechanisms that may be subsequently drawn into regulatory processes following a failure, by analysing key reports on the Equitable affair including: a judicial inquiry conducted by Lord Penrose (2004), an investigation by the UK Parliamentary Ombudsman (2008) and an inquiry by a Committee of the European Parliament (2007).
SHAPING AUDIT COMMITTEE OVERSIGHT PRACTICE: THE UNSUNG ROLE OF THE AC CHAIRMAN
COMPERNOLLE, TIPHAINE
COMPERNOLLE, TIPHAINE; RICHARD, CHRYSTELLE
Category: GV = Accounting and Governance
Building on Adam Smith’s concept of the impartial spectator, our study examines how audit committee (AC) directors exercise oversight in practice. We show that the questions-and-answers game matters, and that it is an oversight practice primarily directed by the AC Chairman. By drawing on 53 interviews with AC actors from 23 French CAC 40 listed companies, we document how the AC is able to exercise oversight both during official meetings (disciplining effect) and outside those meetings (partnership of control), and show that this depends on how accessible and proactive the AC chairman is. Following Beattie et al. (2011), our research thus provides an in-depth explanation of the strategies used by AC chairmen to play their role, a role that is presently not clearly defined by codes of good governance. It suggests that AC chairman impartiality can reach its full potential only in the context of a socially constructed relationship.
MANAGEMENT CONTROL FOR STIMULATING DIFFERENT TYPES OF CREATIVITY: THE ROLE OF BUDGETS
COOLS, MARTINE
STOUTHUYSEN, KRISTOF ; VAN DEN ABBEELE, ALEXANDRA
Category: MA = Management Accounting
In this paper, we examine the role of budgets, as a central instrument within the management control system, in a creative context. In particular we investigate whether Simons’ (1990, 1991, 1995) claim that stimulating creativity requires an interactive use of management controls, holds when differences in the kind of creativity are taken into account. We hereby distinguish between expected creativity (for open, self-discovered problems) versus responsive creativity (for closed, presented problems) (Unsworth, 2001). Based on a comparative study involving four creative organizations, we find indications that creative firms being mainly characterized by expected creativity use their budgets in a more interactive way. In creative firms in which responsive creativity is most important, the budgets are used in a rather diagnostic way. This study makes an important contribution to the management control literature by acknowledging that a diagnostic use of budgets does not per se stifle creativity. Instead, it is important to understand that the specific creative context might have implications for the way in which management control instruments are used to sustain the creative process.
AMATEUR SPORTS CLUBS: CAPACITY AND FINANCES
CORDERY, CAROLYN
BASKERVILLE, RACHEL ; SIM, DALICE
Category: PS = Public Sector Accounting
Many amateur sports clubs struggle financially and their ongoing operations are threatened. Some cut expenditure to meet cash resources, preferring to reduce dependence on external resource-providers; others reduce vulnerability to environmental fluctuations by seeking new sources of funding (Miller, Veltri, & Combs, 2002). Nevertheless, financial capacity does not of itself ensure sustainability. In order to develop financial, human resource and structural capacity, sports organisations depend on funders (including members), volunteers, staff, and physical resource providers (Hall et al., 2003). Capacity building through increased resource dependence is a common tactic in the nonprofit sector, yet analysis of the interdependencies between different capacities is rare. This research ascertained which sport management capacities are least prevalent in sports clubs that are deemed financially vulnerable (using the schema developed by Cordery, Sim, & Baskerville, 2012) and therefore what capacities financially healthy clubs display that financially vulnerable clubs do not. It also analyses the inter-dependencies between different capacities using both subjective and objective measures. The findings are important because clubs that are financially vulnerable must build capacity if they are to survive and thrive. Further, identifying the capacities that affect or are impacted by clubs’ financial health should also improve the teaching and practice of sports management.
SUCCESS AND POWER IN ACCOUNTING EDUCATION: MOTIVATIONAL FACTORS
CORNACCHIONE, EDGARD
CUNHA, JACQUELINE V. A.; DE LUCA, MARCIA M. M.; OTT, ERNANI
Category: ED = Accounting Education
The objective of this study is to compare motivational factors for success, affiliation and power of students in Accounting programs. The sample included 847 Brazilian students (769 undergraduate and 78 graduate students). Findings are compared to Rego et al. (2005), based on Portuguese participants. Gender was a protagonist of surprise: male students are focused on power, while female students tend to focus on success and affiliation. Differences between undergraduate and graduate students are discussed. Findings are relevant based on number of holders of graduate degrees in Accounting in Brazil and the increasing demand for such professionals to accommodate the nation’s economic outlook and transitions due to the accounting standards harmonization process. This study contributes to program administrators as this type of evidence helps to improve designing or redesigning content and instructional strategies to become more aligned with their students’ motivational drivers.
EARNINGS MANAGEMENT TO AVOID DELISTING
ČORNANIČ, ALEŠ
Category: FA = Financial Analysis
Managers of firms which are facing the threat of being involuntary delisted have high incentive to manipulate accrual in order to boost their stock price and avoid the delisting. In this paper, we test this incentive on firms experiencing stock price per share below $1.00 for 30 consecutive trading days by which they do not comply the minimum bid price requirement over period 1998 – 2011 as another capital market motivation for earnings management. The discretionary accruals are estimated based on standard modified Jones model and also controlled for performance bias using performance matching procedure. We provide the significant evidence that performance-matched discretionary accruals of firms which are facing the danger of being delisted are more likely income–increasing compared to control group. In addition, we also find evidence that firms facing the threat of delisting and afterwards continued listing will more likely manipulate the discretionary accruals. Our results also support the importance of performance matching in case of earnings management study focused on firms in financial distress. The results based on performance-matched discretionary accruals tend to emphasize the income-increasing effect for threatened firms that continue listing and tend to weaken the income decreasing effect in case of delisting-threatened firms.
ORGANIZATIONAL DISCOURSE AND MANAGERS' DISCOURSES AROUND SUSTAINABILITY: PERFORMATIVITY AND CONTRADICTION IN A CONFRONTATIONAL SETTING
CORREA, CARMEN
ALBELDA, ESTHER
Category: SE = Social and Environmental Accounting
The research raises the issue of “understanding sustainability”. Focusing on the analysis of contradiction, reflexivity and inconsistency at an interactional level (Whittle et al, 2008), the paper analyses managers’ discourses to illuminate the way in which they enact, reproduce and make sense of the formal organizational discourse of sustainability -revealed in the corporate disclosures and instilled by sustainability manager- within their own realm of action or professional jurisdiction. Despite the existence of a strategic approach to sustainability, and the performativity of this strategy to enhance the dissemination of the formal organizational discourse into the different managerial jurisdictions, the case also unveils contradiction and inconsistencies between the formal sustainability organizational discourse and managers’ individual understandings of sustainability.
ARE SECURITIES CLASS ACTION LAWSUITS SUPPLEMENTAL TO SEC ENFORCEMENT? AN EMPIRICAL ANALYSIS
CORREIA, MARIA
KLAUSNER, MICHAEL
Category: GV = Accounting and Governance
We examine the “supplemental” role of securities class action lawsuits with respect to SEC enforcement in terms of targeting and penalties imposed on individual defendants. We find some evidence that the targeting of class actions is adversely affected by the incentives of plaintiff’s lawyers, but still takes into account the merit of the cases, as measured by different accounting variables. We find that individual defendants rarely pay in class action lawsuits, but face other ancillary costs. CEOs, CFOs and other officers experience an increased likelihood of turnover, and conditional on leaving the firm, have a lower probability of finding a comparable position in a public company.
CONSIDERING REAL OPTIONS IN SHORT-TERM DECISION MAKING
CRASSELT, NILS
LOHMANN, CHRISTIAN
Category: MA = Management Accounting
Decision rules for short-term operating decisions such as the choice of operating mode of a flexible machine typically make use of information on revenues and costs in the decision period only. However, if switching between operating modes is costly and future revenues and costs are uncertain, the current choice strategically interacts with future decisions. Such decision problems can be characterized as complex real options problems with multiple compound options. For an optimal long-term solution short-term decision rules must account for the value of these options. In this paper we first show how the optimal long-term decision path can be derived for a chain of short-term decisions using a real options framework. We contrast these results with the traditional decision rule based on current contribution margin and illustrate our findings with a simulation analysis providing for a rich set of environments characterized by different levels of uncertainty and different switching costs. A major drawback of the real options-based rule is the necessity to estimate option values at every decision point drawing on information from all future periods. We therefore analyze how a simplified options-based decision rule that looks ahead only one period (“rolling forecast rule”) performs against the benchmark rule. In an extension of the simulation analysis we find that the simplified decision rule serves as a good heuristic and improves decision-making similar to the benchmark rule.
IMPLEMENTING SUSTAINABILITY STRATEGIES THROUGH ACCOUNTING CONTROLS: AN EXPLORATION OF PRACTICES IN SEVEN MULTINATIONAL CORPORATIONS
CRUTZEN, NATHALIE
SCHALTEGGER, STEFAN
Category: SE = Social and Environmental Accounting
The accounting and management control literature demonstrates the key role of management control to support strategy implementation (Anthony, 1965; Simons, 1990; Langfield-Smith, 1997; Chenhall, 2003; Malmi and Brown, 2008; Ferreira and Otley, 2009). However, despite several calls in the social and environmental accounting research (Parker, 2000; Chung and Parker, 2008), to date, very few studies have explored how management controls support the implementation of a sustainability strategy in practice (Norris and O’Dwyer, 2004; Epstein and Wisner, 2005; Durden, 2008; Morsing and Oswald, 2009; Perego and Hartmann, 2009; Riccaboni and Leone, 2010). With reference to Malmi and Brown model (2008), this paper explores if and to which extent seven multinational corporations have developed accounting controls to implement their sustainability strategy. Our explorative research shows that, although skepticism has been underlined in the literature (Norris and O’Dwyer, 2004; Gond et al., 2012), multinational corporations have developed a selection of accounting controls to support the implementation of their sustainability strategy. However, some of these controls are "primary" mechanisms ; most firms have not developed a complete package of controls and these controls are generally kept separate from the “package” of the mainstream management control systems. This paper fills in a gap identified in the literature and proposes interesting insights for practitioners.
THE IMPACT OF INTANGIBLES ON VALUE CREATION: COMPARATIVE ANALYSIS OF THE GU&LEV METHODOLOGY FOR THE UNITED STATES SOFTWARE AND HARDWARE SECTOR.
CRUZ BASSO, LEONARDO FERNANDO
A. SALIBA, JULIANA; F. C. BASSO, LEONARDO; KIMURA, HERBERT; S. BRAUNE, ERICA
Category: FA = Financial Analysis
This article compared the proposal for measuring intangibles of Gu&Lev for the sectors of software (classified in services) and equipment and technology for computing (classified in industry) in the United States. The idea of comparing the sectors arose from the discovery in two previous papers of a discrepancy in the results mainly for the indices proposed by Gu&Lev to measure intangibility and their impact on value creation. The database used was Thomson-Reuters collected in Datastream, with information covering the period from 2001 to 2010. Gu&Lev (2003, 2011) present a proposal that aims to calculate a variable, comprehensive value, which encompasses the tangible and intangible assets of the company and are therefore a proxy for their market value. If this variable explains the market value, it is a solution to a problem that afflicts accountants, which is how to account for intangibles in the balance sheet. They also propose two other variables, one that is a proxy for the flow of intangibles (Intangibles-Driven-Earnings- IDE), and another that is a proxy for the stock of intangibles (Intangible Capital -IC). They present a set of hypotheses that relate traditional variables linked to intangibility (research and development expenditures - RD, selling, general and administrative expenses - SGA, and investment in fixed capital - CAPEX) with the flow (IDE), stock of intangibles (IC) and intangibility indicators that explain the shareholder return.
THE IMPACT OF FUNCTIONAL DECENTRALISATION AND EXTERNALISATION ON THE TRANSPARENCY OF LOCAL GOVERNMENTS
CUADRADO-BALLESTEROS, BEATRIZ
GARCÍA-SÁNCHEZ, ISABEL-MARÍA; PRADO-LORENZO, JOSÉ-MANUEL
Category: PS = Public Sector Accounting
The aim of this paper is to extend the little empirical evidence there is concerning the relationship between the modes of public services delivery and transparency in local governments. For this purpose, we have selected a sample of the 110 most important Spanish cities, for which “International Transparency Spain” has published information regarding their level of transparency for the years 2008, 2009 and 2010. The results show that the introduction of the private sector (externalisation and mixed companies) does not affect the level of transparency of Spanish municipalities, as well as the fact that functional decentralisation has a positive effect on this transparency. Precisely, the most transparent municipalities prove to be the most decentralised in public service delivery through the creation of public companies and foundations. In addition, the less corrupt governments as far as corporative information and their relationship with the citizens are concerned, have created more autonomous organizations for the delivery of local public services.
A SOCIOLOGICAL ANALYSIS OF THE ASIAN DEVELOPMENT BANK’S FUNDING OF INDONESIAN GOVERNMENT ACCOUNTING EDUCATION (2004-2011)
CUMMINGS, LORNE
DYBALL, MARIA; PALUPI, ADE
Category: ED = Accounting Education
This paper agrees with assertions (Cooper, et.al 2005, Neu, et.al 2001, and Cooper, 2002) that academics do, can and should support or influence public policy decision making processes. The paper examines how accounting technology influences social thought by studying the interaction among the Asian Development Bank (ADB), central government agencies and universities/academics to develop a government accounting education program in Indonesian universities during the period from 2004 to 2011. The paper uses Bourdieu’s concepts of field, capital and habitus (Bourdieu and Wacquant, 1992; Bourdieu, 1986; Bourdieu, 1990), to explore the facilitators and barriers among these groups to effectively implement the program. This study finds that the interaction among the agents in developing a government accounting education program from 2004 to 2011 in Indonesia represented a dynamic social network. It also finds that the project intersected between the political and academic field, which had different levels of capital domination. The project delivered by the ADB and Indonesian government focused predominantly on material benefits, and less on the empowerment of ground level agents who had to maintain the production of cultural capital beyond the stated project’s period. Finally, this study concludes that implementing accounting technology within an educational and practiced based context is ultimately a socio-political, as opposed to purely a technical exercise.
INFLUENCE OF CHARACTERISTICS AND ACTIONS OF INTERNAL AGENTS OF CORPORATE GOVERNANCE IN THE QUALITY OF FINANCIAL STATEMENTS: A BRAZILIAN PERCEPTION
CUNHA, PAULO ROBERTO DA
CUNHA, PAULO ROBERTO DA; FERNANDES, FRANCISCO CARLOS
Category: GV = Accounting and Governance
The objective of this study is to identify characteristics and actions related to (i) size, (ii) formation/composition, (iii) independence, (iv) interference/relationship with audit, (v) remuneration/compensation and (vi) adoption/disclosure of financial statements, of the various internal agents of corporate governance may influence the quality of financial statements. It was conducted an exploratory research, predominantly qualitative. The techniques of data collection were focus group, structured interview and survey. The participants of the focus group and interviews were senior professionals who have experience as members of some corporate governance board and simultaneously act as professors or researchers. The survey was conducted with a sample of 31 associate members of the Brazilian Institute of Corporate Governance. The conclusion was that the characteristics and actions related to independence and interference/relationship with audit have more influence on the quality of the financial statements. The research showed that from the total of 35 questions of all categories, 15 presented consensus about the characteristics and actions of internal agents of corporate governance that reflect in the quality of financial statements. Most of these 15 questions are related to the categories independence and interference/relationship with audit. The 20 remaining questions could not be confirmed nor denied, because of the detected higher level of information entropy.
FUNDING STRATEGIES AND EARNINGS QUALITY IN THE BANKING SECTOR
DAENZER, KAI
Category: FA = Financial Analysis
In this paper, we examine whether private a bank’s financial reporting quality is shaped by its debt capital structure. Taking advantage of the idiosyncratic diversity of debt funding modes in the banking industry, we compare the quality of accounting numbers produced by three different types of banks – those with private funding only, i.e. customer and interbank deposits, those with short-term debt funding at the money market, and those with long-term debt funding at the bond market. Relative to privately funded banks, we find that banks with exposure to the money market exhibit lower financial reporting quality proxied by conservatism, earnings persistence and earnings predictability. In contrast, we find that financial statements prepared by banks with exposure the bond market are of higher financial reporting quality. In particular, we show that incentives for high quality financial reporting accruing from funding at the public debt market differ significantly across instruments. In an additional analysis, we study the robustness of our results in a setting where the funding structure of a specific group of banks (German Landesbanken) undergoes a major change.
REVIEW OF AN APPROACH TO ENHANCE THE INTERPERSONAL SKILLS OF ACCOUNTING STUDENTS
DAFF, LYN
Category: ED = Accounting Education
Communication skills are critical for accountants’ workplace success, however accounting educational research to date has mainly focused on writing and presentation skills. Research on developing accounting students’ interpersonal skills has received scant attention. The paper provides an example of how to incorporate communication skills into the accounting curriculum. Details are given on how to execute it effectively to promote positive outcomes that will aid students in developing the necessary interpersonal skills for their future careers as accounting professionals. Examining students’ responses to the initiated program, expressed in the form of reflective journals, highlights potential problems associated with teaching interpersonal skills to accounting students. Educators may then use this information to avoid common potential problems and facilitate positive student outcomes. The study finds that initial apprehension and concern were apparent in students’ responses to practising interpersonal skills development. However as time lapsed, confidence grew, class dynamics changed and a significant improvement in student communication and attitude was evident. In addition it suggests the need to instil in students early on, the importance of undertaking communication training for their future career as accountants.
INTANGIBLES AND BANK PERFORMANCE: TESTING THE RESOURCE-BASED THEORY USING MIXED METHODS
DANBOLT, JO
CHEN, LEI; HOLLAND, JOHN
Category: FR = Financial Reporting
Empirical testing of the resource-based view (RBV) is still in its embryonic stages. This paper aims to explore potential ways of testing the RBV by combining quantitative and qualitative methods together, with particular interests in the European banking sector. Both the quantitative and qualitative approaches produce evidence in support of the resource integration idea as part of the RBV theory, and the importance of top management human capital (HC) in superior bank performance. Moreover, the qualitative study provides the means to explore ways of improving intangible proxies and identifying new measures of strategic resources. This paper contributes to the strategy literature by providing tentative empirical evidence on some specific aspects of the RBV in the critically important banking sector. It also contributes to the methodological development of management research by providing an example of how mixed methods can enhance the testing of the RBV.
WHEN ARE DIRECTORS’ PURCHASES A CREDIBLE SIGNAL IN CORPORATE ACQUISITIONS?
DARGENIDOU, CHRISTINA
DARGENIDOU, CHRISTINA; TONKS, IAN; TSOLIGKAS, FANIS
Category: FA = Financial Analysis
Directors’ purchases of their firms’ shares have been considered as a credible signal of their commitment to shareholders’ value maximisation as well as a signal of overconfidence. Using the context of the announcement of a major investment decision, i.e. corporate acquisitions, we find that directors’ purchases accompanied by income increasing discretionary accruals are penalised by market participants as a sign of overconfidence. On the other hand, when the underlying acquisition involves a significant diversion of resources, directors’ purchases accompanied by income decreasing and typically, reserves’ building discretionary accruals are rewarded as a credible signal of insiders’ commitment.
MANDATORY SUPERVISORY DISCLOSURE, VOLUNTARY DISCLOSURE, AND RISK-TAKING OF FINANCIAL INSTITUTIONS: EVIDENCE FROM THE EU-WIDE STRESS-TESTING EXERCISES
DASKE, HOLGER
BISCHOF, JANNIS
Category: FR = Financial Reporting
We use the EU-wide stress-testing exercises and the concurrent Eurozone sovereign debt crisis as a setting to study consequences of supervisory disclosure of proprietary bank-specific information (i.e., credit risk xposures and stress-test simulations). First, we analyze how onetime supervisory disclosures interact with banks’ subsequent voluntary disclosures and, thus, bank opaqueness. Second, we analyze whether stress-test disclosures may induce a change in banks’ risk-taking behavior, thus mitigating industry-wide risk exposure and uncertainty in financial markets. We find a substantial and relative increase in stress-test participants’ voluntary disclosure of sovereign credit risk exposures subsequent to the mandated release of credit risk related disclosures. Such a commitment to increased disclosure is accompanied by a decline in bank opaqueness, as measured by the bid-ask spread. Our findings further show that negative stress-test results are associated with a subsequent reduction in sovereign risk-taking. The latter finding highlights that the efficacy of supervisory disclosure as a macro-prudential tool hinges on whether it indirectly contributes to a decrease in financial market uncertainty by providing disciplining incentives for banks to reduce their level of exposure.
ACCOUNTING CONSERVATISM AND THE INFORMATION CONTENT OF FINANCIAL REPORTING
D'AUGUSTA, CARLO
BAR-YOSEF, SASSON; PRENCIPE, ANNALISA
Category: FA = Financial Analysis
Accounting regulators and standard setters, in both the US and Europe, are increasingly opposing the accounting conservatism principle (also referred to as “principle of prudence”), which has characterized accounting practice for centuries. Their opposition is based on the view that conservatism has a negative economic effect on the stock markets, by reducing the informativeness of accounting reports. In this paper, we present empirical results supporting an alternative view. Analyzing stock market reaction to earnings announcements made by US listed companies between 1980 and 2009, we find that: i) announcements of unexpected gains made by conservative firms elicit a larger reaction in terms of absolute abnormal returns; ii) conservatism is associated with reductions in bid/ask spread during the announcement days; iii) earnings’ increases announced by conservative firms are more predictive of future states, and earnings’ decreases have higher tendency to revert; iv) investors perceive conservatism and audit quality as alternative mechanisms to ensure the relevance and credibility of accounting information. Our findings suggest that regulators’ attempts to mitigate conservatism in the accounting practice may have an unintended negative impact on the economics of equity markets.
IS THE INTERACTIVE USE OF MANAGEMENT CONTROL SYSTEMS REALLY DRIVEN BY STRATEGIC UNCERTAINTIES
DE HARLEZ DE DEULIN, YANNICK
SARENS, GERRIT
Category: MA = Management Accounting
Drawing on the Galbraith’s generic notion of uncertainty in a hospital setting, this study aims to empirically examine the relationship between uncertainty and the use of management control systems (MCS) in control and decision-making context that emerges from either a change in strategy or from stability in the strategy. Based on data collected from top-level hospital managers in Belgium, the results support the hypotheses that the interactive use of PMS is as useful in times of stability as in times of change to deal with strategic uncertainties and that paying a close attention to the decision and control contexts is essential to understand the impact of uncertainty on the use of MCS.
UNDER SIEGE: THE CURRENT PARADIGM IN THE FIELD OF FINANCIAL STATEMENT ANALYSIS
DE KLERCK, STEVEN
ANNAERT, JAN; DE CEUSTER, MARC
Category: FA = Financial Analysis
Nissim and Penman (2001) refer to Security Analysis by Graham and Dodd (1962) as one of the historical cornerstones in the field of financial statement analysis. A careful reading of the original 1934 edition of this work results in the identification of fundamental differences with the current vision on the implementation of a financial statement analysis. We discuss the fundamental differences, we advance four investment techniques that embody these fundamental distinctions and assess the effectiveness of the four investment techniques. Based on our empirical findings we raise doubts about whether the new paradigm introduced in the field of financial statement analysis and equity valuation since the beginning of the 1960s can actually be qualified as a true advancement.
WHO IS BEING LEFT BEHIND? A DECADE OF DROPOUT AMONG ACCOUNTING AND BUSINESS ADMINISTRATION STUDENTS IN BRAZIL
DE LUCA, MARCIA
AUGUSTO SAMPAIO FRANCO DE LIMA, GERLANDO; CORNACCHIONE, EDGARD; OTT, ERNANI; VENEROSO ALVES DA CUNHA, JACQUELINE
Category: ED = Accounting Education
The general aim in this study is to seek evidence about identifying the dropout and extended completion behavior in Accounting and Business Administration programs at Brazilian Higher Education Institutions in the period of 2001 to 2010. In addition, dropout rates are investigated per academic organization form of the institution, besides determining an ideal conclusion period indicator for the courses, which is associated with the dropout rate. We use Simple and Multiple Analysis of Correspondence, and Analysis of Variance to test the hypothesis. Descriptive statistics show higher dropout levels for Business Administration when compared to Accounting, with lower overall levels if compared to findings from other authors. In general terms, findings suggest that Accounting programs present lower dropout in Universities and University Centers, and Business Administration programs show higher dropout rates in Colleges, Schools, Institutes and Centers of Technological Education. However, it should be stressed that such findings cannot be generalized, but unveil characteristics of rankings adopted in this study.
THE ROLE OF AGENCY COSTS IN THE VOLUNTARY ADOPTION OF XBRL-BASED FINANCIAL REPORTING
DE MARTINIS, MICHAEL
KHEDMATI, MEHDI; NAVISSI, FARSHID
Category: FR = Financial Reporting
This study examines whether a firm’s information asymmetry/agency costs played a significant role in their decision to participate in the SEC’s Voluntary Filing Program (VFP), which encouraged adoption of the eXtensible Business Reporting Language (XBRL) based financial reporting format during the period 2005 to 2011. Derived from an agency based theoretical framework and using a sample of firms from the population of VFP participants, we predict and obtain evidence that firms with lower information asymmetry/agency costs were more likely to voluntary adopt the XBRL-based financial reporting format. These results suggest that given a firm’s level of information asymmetry/agency costs, regulators and policy makers can, in advance, confidently identify whether they are likely to comply with new financial reporting initiatives.
INFORMATION QUALITY AND THE COST OF DEBT FINANCING OF EUROPEAN SMALL AND MEDIUM-SIZED ENTERPRISES
DE MEYERE, MICHIEL
VAN CAUWENBERGE, PHILIPPE; VANDER BAUWHEDE, HEIDI
Category: FA = Financial Analysis
This study empirically examines whether the quality of SMEs’ financial statements is priced by creditors. Using a large dataset of SME financial statements over the 1997-2010 period, we show that accruals quality (i.e., our proxy for information quality) is negatively related to SMEs’ effective interest cost. This relationship is not only empirically, but also economically significant. This finding indicates that creditors price the quality of SMEs’ financial statements, and suggests that the quality of these statements is economically relevant.
THE EXPECTATIONS GAP: TWO REMEDIES INVESTIGATED
DE MUYLDER, JAN
BREESCH, DIANE; HARDIES, KRIS
Category: AU = Auditing
In this paper, we test the effectiveness of an expanded auditor’s report vis-à-vis an audit course in narrowing the expectations gap. We compared two auditor’s reports in a between-subjects design: the ISA 700 report and an expanded auditor’s report. We also examined if explaining audits to users is (more) effective in reducing the expectations gap (compared to expanding the auditor’s report). Belgian economics students participated in an experiment where the first group read a standard auditor’s report and the second read a manipulated auditor’s report. Moreover, a third group of students who already had taken an audit course, contrary to the two other groups, did not read any of the two auditor’s reports. Through a questionnaire survey, we elicited the students’ perceptions on different dimensions of the responsibilities of the auditor and the signaling power of the auditor’s report. Overall, a more thorough explanation of technical audit concepts in the auditor’s report does not significantly narrow the expectations gap. Students who already had an audit course, however, showed more reasonable expectations towards the auditor’s role and responsibilities, leading to a significant smaller expectations gap.
COMBINED ASSURANCE, A CHALLENGE FOR ORGANISATIONAL GOVERNANCE: CASE STUDY EVIDENCE
DECAUX, LOÏC
SARENS, GERRIT
Category: AU = Auditing
The objective of this study is to explore a recommended organisational practice that has emerged in the updated South African Corporate Governance Code. The Code deals with the coordination of different assurance providers in an organisation within a combined assurance framework. This study enters the conversation in corporate governance literature accompanying the shift of focus from a shareholder-centric approach to a stakeholder-centric approach. More precisely, it contributes to the identification of a new accountability mechanism to protect the interests of a broader range of stakeholders by describing the combined assurance framework. From a practical point of view, this paper also investigates combined assurance in organisations as a potential road to ‘good’ organisational governance, given the limited number of organizations applying this framework. In 2011–2012, we carried out an in-depth study of six large multinational organisations in Europe, South Africa and Australia that were at different stages with respect to their combined assurance framework. Semi-structured interviews were conducted with key participants in the implementation of combined assurance. The aim of this paper is to identify: (1) How organisations understand combined assurance, and is this consistent with the literature?; (2) Why do organisations implement a combined assurance framework?; and (3) What are the benefits of implementing combined assurance? This paper suggests, as the literature
DOES MANDATORY IFRS ADOPTION AFFECT CRASH RISK?
DEFOND, MARK
HUNG, MINGYI; LI, SIQI; LI, YINGHUA
Category: FR = Financial Reporting
We examine the impact of mandatory IFRS adoption on firm-level ‘crash risk,’ defined as the frequency of extreme negative stock returns. An important feature of our study is that we separately analyze non-financial firms and financial firms because IFRS adoption is likely to affect crash risk for these firms through different mechanisms. We find that crash risk decreases among non-financial firms after the adoption, especially among firms in poor information environments and in countries with large GAAP changes. In contrast, although the evidence is somewhat weaker, we also find that crash risk increases for financial firms, especially among banks with more fair value exposure and less restrictive regulations. Overall, our results are consistent with IFRS decreasing crash risk among non-financial firms by improving transparency, and with IFRS increasing crash risk among financial firms through its fair value provisions.
OH WHAT A BEAUTIFUL MORNING! THE EFFECT OF TIME OF DAY ON THE TONE OF MANAGERIAL COMMUNICATIONS
DEMERS, ELIZABETH
CHEN, JING; LEV, BARUCH
Category: FR = Financial Reporting
Using textual analysis software, we examine whether and how the tone of the question and answer (“Q&A”) portion of earnings-related conference calls varies with the time of day. We find that, for calls initiated later in the day when managers and analysts participating in the calls are likely to be suffering from greater physical and mental fatigue, the tone of the conversations between analysts and managers is significantly more negative than for earlier calls. Furthermore, this conversational tone has economic consequences: more negatively toned conversations are associated with more negative abnormal stock returns during the call period. Further analyses show that there is negative drift during the 15-day post-call period for both morning and afternoon “bad news” calls, but that there is relatively higher positive abnormal returns over the subsequent 45 trading days (i.e., days (16, 60) relative to the t=0 call day) for afternoon calls. The combined results suggest that there is an initial and negative over reaction to both bad news earnings information and, incrementally, to negative tone and to calls initiated in the afternoon, that eventually (at least partially) reverses. To the best of our knowledge, this is the first study to document the effects of human physiological factors on corporate communications with analysts and to provide evidence regarding their impact on the firm’s stock price dynamics.
BUDGET SLACK: SOME META-ANALYTIC EVIDENCE
DERFUSS, KLAUS
Category: MA = Management Accounting
Budget slack is a controversial issue in the budgeting literature that still attracts considerable research attention. However, field research is inconclusive so that it neither adds up into a coherent body of knowledge nor offers reliable guidance to practitioners. In consequence, this study uses meta-analysis to consolidate results for 16 relations of frequently analyzed variables with budget slack. The findings show that slack is reduced by the ability to detect it, but increased by decentralization and business unit strategy. These results generalize across settings and thus are reliable components of theoretical models. Other relations are affected by considerable non-artifactual between-study variance which can be partially explained by the measurement of budget slack and of performance. Measurement of budget-based evaluations, incentives, and participation as well as differences in journal quality, sampling procedures, and industry exert no systematical moderating influence.
TAX AGGRESSIVENESS, REPUTATION, CORPORATE SOCIAL RESPONSIBILITY: FAMILY AND NON-FAMILY FIRMS
DESLANDES, MANON
LANDRY, SUZANNE
Category: TX = Taxation
Management generally attempts to minimize tax expenditures that significantly affect the firm’s operating results and financial position. Aggressive tax planning may allow shareholders to maximize their wealth, but the cost of a loss of reputation may adversely impact a firm’s value. Based on the assumption that a firm has a social responsibility to pay its fair share of taxes, our study verifies whether socially responsible firms are less tax aggressive in order to preserve their reputation, i.e., whether their talk and actions are aligned. Overall, our results indicate that family firms are less tax aggressive than non-family firms. They also suggest that the relationship between tax aggressiveness and social responsibility varies across corporate social responsibility dimensions and ownership structure. More specifically, relationships between tax aggressiveness and CSR dimensions are found for non-family firms but not for family firms.
THE SUB-CONSOLIDATED FINANCIAL STATEMENTS OF DIRECTED LISTED SUB-HOLDINGS: WHERE IS THE RELEVANT ECONOMIC ENTITY?
DI CARLO, EMILIANO
Category: GV = Accounting and Governance
Often listed companies are holdings of business groups and in some cases their direct controlling parties are parent companies of wider groups. Therefore, these listed sub-holdings are consolidated by their parents and their consolidated are actually sub-consolidated financial statements. Moreover, the decision-making power of listed sub-holding’s boards could be strongly influenced by the parent companies’ board, in the interest of the wider group. However, so far literature on corporate governance seems not to have considered this aspect as well as the impact of that influence on the listed companies’ financial performance. The main objective of this paper is to fill this gap understanding why this phenomenon is relevant, giving some suggestions on how to interpret the ownership structure, board composition and the financial performances of the directed listed sub-holdings. In order to answer to those research questions, we use a descriptive statistics on a sample of Italian listed compa-nies controlled and consolidated by other companies. The analysis shows that 71.4% of Italian non-financial listed companies are consolidated by the respective controlling entities. In addition, following the Italian group Regulation, 24.1% of these listed sub-holdings declare to be directed by their parents. Thus, the effort to study the relationship between corporate governance variables and firm performance could be strongly biased.
THE QUALITY OF COMPREHENSIVE INCOME AS PERFORMANCE MEASURE: EVIDENCE FROM ITALIAN LISTED COMPANIES
DI CARLO, FERDINANDO
INCOLLINGO, ALBERTO; LUCCHESE, MANUELA
Category: FR = Financial Reporting
The issue of the IAS 1 revised has introduced in the financial statement a new measure of the firm performance: the comprehensive income. This kind of measure has always been intended by the literature as more predictable of future performances than the simple net income, as its components represent part of the next firm earning, giving it a role of guide for investors. At the same time it should be a more volatile index than the net income and all the ratios built with it should suffer the short term variation of its components, often dependents on the fluctuation of the market. For these reasons, in this study, firstly we investigate empirically whether comprehensive income and its components are able to predict future cash flows. Secondly, we observe if there is a relationship between single OCI components and future cash flows of Italian listed companies. At the same time it’s important to underline that comprehensive income has been considered since its born strongly subject to a high volatility and as the later part of the research we try to understand if there is a real higher volatility of comprehensive income, compared to the simple net income, using the standard deviation of the two measures during the period examined in the sample. The sample analyzed includes financial statements of Italian listed companies for the years 2007-2010, excluding financial institutions.
HONORING ONE'S WORD: CEO INTEGRITY AND ACCRUALS QUALITY
DIKOLLI, SHANE
DIKOLLI, SHANE; MAYEW, WILLIAM; STEFFEN, THOMAS
Category: FR = Financial Reporting
In this study, we define integrity as honoring one’s word and propose a linguistic-based measure of CEO integrity derived from the extent of causation words used in CEO prose. We begin by validating our linguistic-based integrity measure via a proprietary survey dataset that solicits employee perceptions of CEO integrity. We document a positive association between (1) the extent of causal words in CEO responses to open-ended survey questions and (2) employee perceptions regarding the extent to which the CEO honors their word, suggesting the linguistic-based score is linked to the construct of integrity. In a large archival sample, we then derive CEO integrity scores based on unexpected use of causation words in the annual shareholder letter, our source of CEO prose. Accruals represent a CEO’s word as a placeholder for cash flows, and as such we expect high integrity CEOs will have better accrual quality. We document a positive association between the linguistic-based integrity score and both an accrual-based and a market-based measure of accrual quality. This study adds to the literature on identifying manager-specific attributes that influence financial reporting outcomes.
INVESTOR ATTITUDES, INVESTMENT SCREENING TOOL USAGE, AND SOCIALLY RESPONSIBLE INVESTMENT BEHAVIOR
DILLA, WILLIAM
JANVRIN, DIANE; PERKINS, JON; RASCHKE, ROBYN
Category: SE = Social and Environmental Accounting
Given the diversity of environmental attitudes among nonprofessional investors, we extend prior research by examining how these attitudes affect investors’ use of socially responsible investment (SRI) screening tools and their propensity to hold SRIs. We find that four out of five components of the New Ecological Paradigm (NEP) scale, a measure of basic environmental attitudes, are associated with specific attitudes towards environmentally responsible investment. These specific attitudes in turn are positively associated with use of SRI screening tools. In turn, use of these tools is positively associated with the percentage of investors’ portfolio held in SRIs. There is also a significant direct relationship between specific environmentally responsible investment attitudes and SRI holdings. Our results suggest that there is a complex, multi-dimensional relationship between investor attitudes, their use of SRI screening tools, and investment behavior. We make suggestions for future research which more fully examines the factors which mediate the association between investors’ environmental attitudes and their investment behavior.
ANALYSIS OF THE EFFECTS OF TRANSACTION-RELATED TAXATION ON THE PRICING OF GERMAN PRIVATE COMPANIES
DILLER, MARKUS
THEELEN, THOMAS
Category: TX = Taxation
By modeling the tax effects of a transaction under German law we show theoretically that a partnership representing an asset deal can sell for a purchase price premium compared to a share deal in the shape of an acquisition of a corporation. Furthermore, we prove theoretically that a changing book value should have a much stronger price effect in the case of an acquisition of a corporation than with an acquisition of a partnership. The theory is tested by comparing transaction multiples, for which we use a sample of matched acquisitions of partnerships and privately owned corporations. We find only limited evidence that the organizational form influences the purchase price, yet significant evidence of the stronger influence of a changing book value in the case of an acquisition of a corporation.
DETERMINANTS AND MODES OF CONTROL IN PRIVATE EQUITY AGREEMENTS: EXPLORING DIFFERENTIATED PATTERNS OF SOCIAL CONTROL
DITILLO, ANGELO
BEDFORD, DAVID
Category: MA = Management Accounting
Private equity firms take an active role in the control of invested organizations. While prior literature has examined the antecedents and consequences of contractual and corporate governance arrangements there has been almost no investigation into the organizational mechanisms used to manage the relationship with portfolio organizations. Through multiple case study analyses this study explores how control is exercised by private equity firms. The study finds that while contracting and formal governance structures are important, so too are many control mechanisms. The choice of which control to use is found to be dependent on the equity arrangement and the cognitive orientation of portfolio firm managers. Based on these determinants a framework is constructed to explain the choice of control structures. The paper also examines the interface between formal and social control mechanisms and finds differentiated patterns of social interaction depending on how formal controls are activated.
THE EFFECTS OF ULTIMATE CONTROLLING OWNERSHIP TO THE RELATED PARTY TRANSACTION AND EARNING MANAGEMENT
DIYANTY, VERA
ROSSIETA, HILDA ; SIREGAR, SYLVIA VERONICA ; UTAMA, SIDHARTA
Category: GV = Accounting and Governance
The aim of this research is to investigate the effect of expropriation incentive from the ultimate controlling owner to the amount of related party transaction and earning management. Furthermore, this research also investigate the moderating role from the variable of family ownership and the implementation of corporate governance to the amount of related party transaction and the earning management as well. We argue that companies with families as controlling shareholders may have a higher agency conflict between the controlling shareholders and non-controlling shareholders and may result an entrenchment. Families controlling shareholders can indirectly influence the amount of related party transactions and earning management. The practice of corporate governance (GC) is required to help the external parties of capital market to oversee the management as well as to protect the shareholders right which also include non-controlling shareholders. This research proved that the entrenchment effect, i.e. incentive of expropriarion from ultimate controlling shareholders positively affect the amount of related party transaction and earning management. This research also proved that the alignment effect has negative effect to the amount of related party transaction and earning management. It was proven that family ownership even strengthened the entrenchment effect, to the amount of related party transaction and earning management. Strong and solid corporate governance mechanism could effectively reduce the negative impact of entrenchment effect of controlling shareholders on both related party transaction as well as on earning management.
EXTENDED AUDIT REPORTING. AN INSIGHT FROM THE AUDITING PROFESSION IN POLAND
DOBIJA, DOROTA
CIEŚLAK, IWONA; IWUĆ, KATARZYNA
Category: AU = Auditing
The audit-reporting model has been on the agenda of researchers for a long time. The recent consultation papers, discussion and research reports on audit reporting have intensified the discussion whether the current standard audit report communicates the appropriate information to the users of the report. The new regulations proposed in the EU and in the US aim at decreasing not only the expectation, but also the information gap. The Polish auditing model is an interesting case to study in the context of audit reporting. Poland already has a long experience in the preparation of an additional audit report. The paper seeks to address two questions. The first one is to what extend the Polish extended audit report contribute to the reduction of the expectation and information gap and the second question is about possibilities of improvements of the audit report in general. Based on our interview findings we conclude that the auditors perceive the audit report to be generally useful for its users. However, the analysis of data provides mixed evidence with regard to the extended audit report. Auditors acknowledge the usefulness of the extended audit report to report on additional issues and concerns, but at the same time the standard form of the extended audit report is found to have little information value to its users.
THE INTEGRATED REPORT IN THE SOUTH AFRICA MINING COMPANIES LISTED ON THE JOHANNESBURG STOCK EXCHANGE (JSE): ANALYSIS OF NON-FINANCIAL INFORMATION AND IMPACTS ON EXTERNAL DISCLOSURE
DONI, FEDERICA
GASPERINI, ANDREA; PAVONE, PASQUALE
Category: FR = Financial Reporting
The aim of this study is to check the elaboration of a new report, called Integrated Report, which is able to link financial information to the nonfinancial one disclosed by the companies, with a particular focus to the items of environmental and social sustainability and to corporate governance. We have analysed the nature and extent of non-financial disclosures in the Integrated Reports of 20 mining companies listed on the JSE. The choice of the sample is justified by the obligation (2011) of the adoption of the Integrated Report. The methodology approach is the content analysis and the lexical/textual analysis of the Corpus of data that have been carried out through the TaLTaC2 software (Bolasco, 2010). We have selected 9 semantic categories about the key components of the integrated report (Deloitte, 2012), for example: group profile, scope and boundary, key features, strategy vision values, etc. The purpose is to point out a benchmarking analysis between the mining companies referring to both the quantity and the quality of the non-financial information disclosed. The results obtained do not allow us to highlight positions of absolute importance: the overall judgement does not detect a homogeneous behavior among companies: nevertheless it can be noted that the higher incidence of particular issues may be due to the correspondence with some areas pointed out in the criteria themes of the SRI index.
HOW SYSTEM EXTERNALITIES IN COMPLEX SYSTEMS AFFECT COST ESTIMATION PROCESSES: A CANADIAN HEALTHCARE PERSPECTIVE
DOWNEY, ANGELA
EDWARDS, NANCY; KALAGNANAM, SURESH
Category: MA = Management Accounting
Based on a five-year study this paper describes the development of a conceptual model to improve our understanding of the potential implications that system level externalities have on costs. This knowledge should facilitate an improved ability to better estimate the cost of the implementation and spread of evidence-based innovative Best Practice Guidelines (BPGs) in complex systems like the Canadian health care system. More specifically it addresses the limitations of a monotonic extrapolation of costs in one organizational unit within a complex system to other organizational units within the same complex system. The proposed model is an improvement over the current methods of estimating costs as it moves beyond the organizational level, with its structural and executional cost drivers and the current cost hierarchy, to include system externalities that could have large impacts on implementing and spreading innovations and costs. The paper outlines four types of externalities: (1) Paradigmatic leadership, (2) Alignment and shared vision, (3) Permeation plans and (4) Supporting and reinforcing structures. The paper includes descriptions and examples related to a health care environment and suggests a simple metric that might be used to quantify the level of system externalities. Limitations and suggestions for future research are outlined.
THE VALUE RELEVANCE OF R&D EXPENDITURES IN GERMANY – DOES CORPORATE GOVERNANCE MATTER?
DREFAHL, CHRISTIAN
ENGELEN, CHRISTIAN ; TRAN, DUC HUNG
Category: GV = Accounting and Governance
Using data on the largest German quoted firms in the years 2006 to 2010 we examine the accounting of R&D expenditures under IFRS in the value relevance framework. In contrast to earlier studies we find expensed R&D to be significantly positively associated with stock prices whereas capitalized R&D, nominally indicative of future economic benefits, is not significantly value relevant. Thus, investors seem to mistrust capitalized R&D, but associate general (expensed) R&D activity with improved prospects. We explain this result with the subjectivity inherent in the capitalization criteria for development costs (IAS 38.57), thereby making the application of this standard prone for erroneous judgments as well as opportunistic earnings management leading to a decrease in reliability of the R&D accounting information. To this end, we also research the impact corporate governance has on the value relevance of R&D. We find the role of corporate governance to depend on whether the firm is classified as an expenser or capitalizer, respectively. While for expensers stronger governance is associated with higher value relevance, results for capitalizers are mixed and indicate the existence of conflicting interests and a general doubtfulness of their R&D reporting. Our findings shed further light on the R&D capitalization issue and, more generally, the apparent trade-off between relevance and reliability by highlighting the importance of firm-level corporate governance factors.
DEVELOP A NEW MANAGEMENT CONTROL SYSTEM WITHIN PUBLIC ORGANIZATIONS: ROLES OF TECHNOLOGICAL CONTROVERSIES
DREVETON, BENJAMIN
Category: PS = Public Sector Accounting
This research analyzes the implementation process of a balanced scorecard in public organizations. The study is based on a research-action realized over a period of two years with a public organization (the national center for distance learning). The research used the translation theory. This framework allows to study the human issues of the implementation process. Specifically, based on a case study, this research analyzes the role played by objects in the sharing process of individuals. The analysis of a technological controversy that appeared during the BSC construction allows to involve the introduction to a real process that allows the structuration of the device and to illustrate the creation of a new social space that gradually brings the managerial innovation within the organization.
THE ROLES OF SUBSIDIARY BOARDS IN MULTINATIONAL ENTERPRISES
DU, YAN
DELOOF, MARC; DU, YAN; JORISSEN, ANN
Category: GV = Accounting and Governance
To date little research has investigated the different roles subsidiary boards actually play in multinational enterprises (MNEs). Using survey data from a sample of MNE subsidiaries operating in Belgium with headquarters in 14 different countries, we find that a subsidiary board performs the four roles identified in the literature: control, strategy, service and coordination. These roles are associated with the context of the subsidiary (strategy, ownership structure, the country in which the headquarters are located), the characteristics of subsidiary directors (subsidiary directors being on headquarters boards; local nonexecutive directors), subsidiary CEO power and the frequency of subsidiary board meetings. Moreover, our findings suggest that the execution of the control and coordination roles of subsidiary boards are best understood in combination with other mechanisms that serve to control and coordinate foreign subsidiaries in MNEs.
THE EFFECT OF AUDIT PARTNERS’ INDUSTRY EXPERTISE ON REAL ACTIVITY EARNINGS
DUH, RONG-RUEY
HSU, AUDREY W.H; LIAO, CHIH-HSIEN
Category: AU = Auditing
This study examines whether audit partners’ industry specialization could reduce a firm’s real activity earnings management (RM). We argue that the extent to which auditors can constrain RM depends on whether the type of RM can affect accrual quality. We also argue that partner-level specialists may constrain RM better than national-level or city-specific industry specialists. Our results show that individual audit partners’ industry expertise is negatively associated with the level of RM through overproduction, and the negative association is primarily driven by the expertise of the lead auditor rather than by the concurring auditor. Nevertheless, we do not find evidence that partners’ industry specialization reduces firms’ abnormal reduction of discretionary expenditures. The results suggest that auditors do not intervene managers’ business discretion when the actions do not affect accrual quality.
TIMING THE ADOPTION OF THE NEW CANADIAN GAAP FOR PRIVATE ENTERPRISES – INSIGHTS FROM THE DIFFUSION OF INNOVATION AND REASONED ACTION THEORIES
DUROCHER, SYLVAIN
FORTIN, ANNE
Category: FR = Financial Reporting
Prior research into the adoption timing decision of organizations in relation to newly promulgated accounting standards focused exclusively on public enterprises and used economic cost-benefit frameworks as a main method of analysis. The current study draws on the theories of organizational diffusion of innovation and reasoned action to identify the factors that influence the adoption timing decision of private firms respecting the new set of standards for private enterprises published in 2009 in Canada. The survey findings show that knowledge, relative advantages, compatibility, complexity and subjective norms play a significant role in managers’ adoption behavior, as do sponsorship, managerial tenure and work groups. The study provides relevant insights for private enterprise managers, financial statement users, standard setters and academics.
R&D COSTS CAPITALIZATION AND VOLATILITY OF EARNINGS
DUSCHER, IRINA
MEYER, MATTHIAS
Category: FR = Financial Reporting
We examine the impact of accounting choice for R&D costs on volatility of earnings. In contrast to previous research, we measure year-based volatility to explicate the effect of uncertainties on financial reporting. We predict that introduction of an uncertain asset to financial reporting increases the volatility of earnings. After substantial extension, we use a simulation model from previous research which matches stages of a typical drug R&D project and annual financial reporting. We apply it to a sample of existing innovative biotechnological R&D projects. We find that the increase in volatility of earnings due to capitalization occurs, with the highest impact in the phase of clinical testing III with almost 1.5 to 3.5 times more volatile earnings than in other development phases. However, accounting choice impacts the difference in volatility of earnings only in the development stage. In the market stage, accounting choice for R&D costs has no effect on volatility of earnings. Additionally, our results indicate that it is important to take therapeutic indication into account as there are differences as to how volatility of earnings of different therapeutic fields responds to the impact of accounting choice.
GENDER-BASED AUDITORS’ JUDGMENTS IN INDONESIA
DWITA, SANY
MUNIR, RAHAT; PATEL, CHRIS
Category: AU = Auditing
One objective of this paper is to reject the simplistic assumption of homogeneity in accounting judgments within and between Islamic countries by focusing on significant within-countries differences in judgments between two important ethnic groups in Indonesia, namely Javanese and Minangkabau. Another objective is to provide evidence that the influence of organisational culture on professional auditor’s judgments is more powerful compared to that of national culture by including judgments of accounting students in one hypothesis of this study. Especially, this paper examines the influence of client-gender and auditor-gender on accounting students’ and professional auditors’ judgments of Javanese and Minangkabau, in relation to unverified clients’ explanations regarding overstated inventory balance. Data was collected using a survey questionnaire distributed to auditors and students in Jakarta and Padang. The questionnaire comprised an inventory obsolescence scenario in which the participants were asked to assume the role of an audit manager and to evaluate whether client-provided explanations would resolve a potential inventory overvaluation problem. Findings of this study provide evidence that ethnicity has significant influence on accounting students’ judgments. The findings also provide evidence the influence of organisational culture of accounting firms had reduced differences in gender-based judgments among Javanese and Minangkabau professional auditors.
IS SEGMENT REPORTING USEFUL FOR CREDITORS? DISCRETION IN AGGREGATING INFORMATION
EBERT, MICHAEL
EBERT, MICHAEL; SIMONS, DIRK; STECHER, JACK
Category: FR = Financial Reporting
In recent years, both the Financial Accounting Standards Board and the Interna- tional Accounting Standards boards adopted a management approach to segment reporting. Firms now base their reporting segments on their internal operating segments, rather than on geography or industry. Our purpose in this article is to persuade you that the implicit discretion in the new approach informs capital markets about the riskiest firms in risky populations. This is accomplished with a fairly small number of segments. For all other firms, the benefits of segmentation are negligible, and segment reporting may even be harmful if it falls short of full disaggregation. These results explain the empirical findings that segment reports have become more informative without appreciably increasing in their number or granularity. The key is that segment reporting achieves what is sometimes assumed to be the aim of conservatism: it makes it incentive compatible to provide more information about the worst cases during already bad times.
IMPLIED COST OF CAPITAL UNDER HETEROGENEOUS EXPECTATIONS
ECHTERLING, FABIAN
EIERLE, BRIGITTE
Category: FA = Financial Analysis
Implied cost of capital has been a research method to measure ex-ante market risk premia using analysts' forecasts and observable share prices. Despite its theoretical appeal, commonly used firm level as well as portfolio level implied cost of capital methods reveal different empirical results. Criticism is provided by Hughes et al. (2009) who show in their theoretical model that implied cost of capital may be misspecified up to three percent (in both directions) from the true cost of capital when considering stochastic components in the underlying valuation formulas. In this paper we develop an econometrically motivated and implementable approach for calculating company values with common discounted cash flow and residual income techniques by considering more realistic heterogeneous expectations of market participants regarding the expected cost of capital and cash flows. Therefore, we use a theoretically consistent distribution for the discount factor and derive company values by integrating over their resulting skewed distributions. With this approach we are able to provide stylized facts which clearly show the one-directional impact of heterogeneous expectations explaining the inconsistent results from firm level as well as portfolio level implied cost of capital estimates reported by previous research. Our approach reveals new insights for company valuation highlighting new parameters that need to be considered in future implied cost of capital research.
CONSTRUCTING THE DIVERSE ACCOUNTANT: AN EXAMINATION OF THE LOGICS INFLUENCING DIVERSITY DISCOURSES AND PRACTICES
EDGLEY, CARLA
ANDERSON-GOUGH, FIONA ; SHARMA, NINA
Category: AU = Auditing
This paper examines and constructs an interpretation of the macro institutional logics that shape the diversity agenda and the increase in diversity efforts and discourses displayed by professional accounting firms. The paper draws on information disseminated on UK and US websites of the Big Four professional accounting firms to explore the way in which information about diversity is being presented and disseminated. The paper considers the tensions that may exist between logics that frame public disclosures about diversity compared with backstage constructions of the relationship between the firm and the individual. Our findings indicate that the Big four firms are increasingly taking pro-active steps and disclosing information in the public domain. The discourses and practices in the name of diversity appear to be a strong step away from the logics of homogeneity that were apparent in earlier studies. The analysis highlights how logics of fairness and flexible patterns of working are associated with interpretations of diversity. Similarly, logics surrounding the diversity efforts appear to integrate inclusivity and the business case for diversity, with an aim of recruiting and retaining the most talented individuals, who are increasingly from diverse backgrounds. Discourses about inclusivity are increasingly dominant, and imply shifts towards valuing heterogeneity.
PERMANENTLY REINVESTED EARNINGS AND THE PROFITABILITY OF FOREIGN CASH ACQUISITIONS
EDWARDS, ALEXANDER
EDWARDS, ALEXANDER; KRAVET, TODD; WILSON, RYAN
Category: TX = Taxation
Current U.S. tax laws create an incentive for some U.S. firms to avoid the repatriation of foreign earnings as the U.S. government charges additional corporate taxes upon repatriation of foreign earnings. Under ASC 740, the financial accounting treatment for taxes on foreign earnings exacerbates this effect. It increases the incentive to avoid repatriation by allowing firms to designate foreign earnings as permanently reinvested earnings (PRE) and delay recognition of the deferred tax liability associated with the U.S. repatriation tax resulting in higher after-tax income. Prior research suggests that the combined effect of these incentives leads some U.S. multinational corporations to delay the repatriation of foreign earnings and, as a result hold a significant amount of cash overseas. In this study, we investigate the effect of PRE held as cash on U.S. MNCs foreign acquisitions. Consistent with expectations, we observe firms with high levels of foreign earnings designated as PRE and held as cash make less profitable acquisitions of foreign target firms using cash consideration than firms without high levels of PRE held as cash. The AJCA of 2004 appears to have reduced this effect by allowing firms to repatriate foreign earnings held as cash abroad at a much lower tax cost.
“THE METHOD OF BOOK-KEEPING, DEDUCED FROM CLEAR PRINCIPLES”
EDWARDS, JOHN RICHARD
Category: ED = Accounting Education
The inter-related purposes of this paper are three-fold: to introduce James Dodson FRS as an actor in the history of accounting worthy of study; to show how Dodson’s text on double entry bookkeeping was influenced by the scientific revolution that was in full swing at the time he wrote; to explore Dodson’s ideas on profit measurement and asset valuation, with a particular focus on his contribution to the limited early accounting literature on farming operations. The study is based principally on the contents of early accounting treatises, newly available electronic data and secondary sources drawn from beyond the accounting literature. It researches Dodson’s writing within the context of the scientific revolution when complete obedience to the scriptures and classical authorities was replaced by the systematic pursuit of knowledge based on reasoning, critical questioning, and the establishment of clear relationships between cause and effect. It is shown that James Dodson FRS endeavours to develop a new way of teaching double entry bookkeeping based on deductive logic. The paper advances knowledge of accounting history through a greater appreciation of diversity in the history of accounting thought and by revealing how pedagogic methods can be influenced by new ways of thinking within the wider contemporary environment.
COMPLIANCE COST ESTIMATES: SURVEY NON-RESPONSE AND TEMPORAL FRAMING EFFECTS
EICHFELDER, SEBASTIAN
Category: GV = Accounting and Governance
According to empirical research, compliance costs of accounting and tax regulations are a considerable burden for private businesses. However, compliance cost estimates might be biased due to survey non-response and questionnaire framing effects. Using a unique data set of repeated cross sections of Belgian businesses, I investigate the impact of survey response on the estimated compliance burden. I do not find any evidence for non-response bias. By contrast, framing effects of survey instruments might be much more relevant for compliance cost measurement. My results suggest that temporal framing effects might alter cost estimates by up to 50%. That holds especially for small self-employed businesses with limited information capacities and accounting obligations.
ON THE RATIONALE BEHIND THE MARKET PREMIUM (DISCOUNT) FOR MEETING OR BEATING (MISSING) ANALYSTS’ EARNINGS FORECASTS
EINHORN, ETI
Category: FR = Financial Reporting
Research on security analysts provides strong empirical evidence of a market valuation premium (discount) for firms whose earnings reports meet or beat (miss) prior analysts’ forecasts, after controlling for the earnings news. The present study suggests a theoretical foundation for this seemingly anomalous pricing pattern. The study is based on the argument that the observed pricing effect of analysts’ earnings forecasts might be the rational consequence of the practice of earnings management, rather than the cause of earnings management activities as conventionally perceived in the literature. This argument is established by demonstrating that the market premium (discount) associated with meeting or beating (missing) analysts’ earnings forecasts might be simply an adjustment that the market applies to the reported (managed) earnings in order to extract the underlying true (unmanaged) earnings measure.
DESIGNING ENVIRONMENTAL DISCLOSURE QUALITY MEASURES: DOES IT MAKE A DIFFERENCE?
EKARA HELFAYA, AKRUM
ROBERTS, CLARE ; WHITTINGTON, MARK
Category: SE = Social and Environmental Accounting
Assessing the quality of information disclosed by companies is a complex task. Accounting studies usually rely on analysing the content of corporate reports using measures to obtain a proxy for the information reported by companies. But there is no consensus about the best design for these measures. The objective of the current paper is to investigate if there are significant differences in the results generated from seven alternative measures for assessing the quality of FTSE100 environmental reporting. We use three uni-dimensional measures including two “Quantity measures” and one “Scope measure” that measure the volume and width/coverage of information respectively. Three compound measures are adopted from the literature and the final measure is a multi-dimensional quality model, based on the results of a questionnaire ascertaining the perceptions of both preparers and users of annual reports (AR) and/corporate responsibility reports (CRR). While the results of the empirical analysis indicate that the measures are correlated, this does not imply that the measures are interchangeable. Indeed, the choice of method can result in very different ranking of companies. Hence, the evidence presented indicates that the choice of measure matters.
ARE LOAN LOSS PROVISIONS VALUE RELEVANT? EVIDENCE FROM ISLAMIC AND CONVENTIONAL BANKING
EL NAHASS, MARWA
ABD-ELSALAM, OMNEYA; ELNAHASS, MARWA; IZZELDIN, MARWAN
Category: FR = Financial Reporting
This study examine the extent to which stock markets perceive the aggregate level of Loan Loss provisions (LLPs) as value relevant information for Islamic banks (IBs) and conventional banks (CBs). We decompose LLPs into discretionary (DLLPs) and non-discretionary (NLLPs) components to test for differential valuations between listed IBs versus CBs. We utilize the Ohlson (1995) price-level valuation model. The study sample comprises 630 bank-year observations for listed IBs and CBs in the MENA region for the period of 2006-2011 inclusive. Empirical analyses follow a two-stage approach, consistent with (Beaver and Engle, 1996). Our results show that, in line with predictions, LLPs have positive and incremental value relevance on average to investors in both banking sectors. Investors in IBs and CBs price DLLPs, conditional on NLLPs information, as information that is favourable to enhancing bank value. Investors in CBs place relative higher valuations on DLLPs, than investors in IBs. Listed stock markets for both sectors interpret an increase in NLLPs as irrelevant valuation information. Our results are robust, that investors in both IBs and CBs differentially price the two components of LLPs. Findings support the increased attention given to shifting the accounting treatment for LLPs under the proposed IFRS 9. Furthermore, there are important implications for the economic stability of Islamic banking and the emergence of Islamic banking indices.
MATTERS OF CONCERN: HYPE OF SUPPLY-CHAINS AND HOPE OF MANAGEMENT ACCOUNTING
EL SAYAD, SAMAR
WICKRAMASINGHE, DANTURE
Category: MA = Management Accounting
Purpose: The concern of this paper is epistemological. It explores whether and how the emerging post-bureaucratic forms in organisations have presented a new organizational ontology and developed “matters of concern” among the researchers regarding the suitability of prevailing management accounting practices. Focusing on management accounting within supply-chains, the paper aims to unpack the researchers’ concerns over the ambiguity of management accounting roles therein. Methodology: This is based on a state-of-art review. It evaluates the researchers’ “matters of concern”, highlights the discursive effects of supply chains on the conventional wisdom of management accounting and articulates how researchers have raised the issues of ambiguity being imposed on management accounting’s calculative regimes. Findings: Researchers focus not only on the issues within management accounting per se but on the complexities embedded in the supply-chains and the reciprocal presence between management accounting and such complexities. The “matters of concern” have been raised around seven interrelated aspects: supply-chain relationships, performance measurements, decision-making, trust and accountability, supply-chain risk, reverse logistics, and sustainability. These were taken to speculate an ambiguity the roles of management accounting and create a “condition for possibility” for revisiting the “relevance lost” thesis of management accounting.
SERVING GLOBAL CLIENTS WITHIN CHANGEABLE REGULATORY FRAMEWORK: HOW DO THE BIG 4 AUDIT FIRMS WORK?
ELDALY, MOHAMED KHALED
ABDEL-KADER , MAGDY
Category: AU = Auditing
This study aims to identify strategies that have been emerged by the big 4 firms to protect their leading reputations and to react to the new regulatory requirements of the global independent. A grounded theory methodology was followed and the analysis was extended to identify the main themes of the identified strategies. Thirty two interviews were conducted with partners in the big 4 firms and with audit regulators at the top management level in the UK and Egypt. The emerged grounded theory identifies six main strategies. The global networks of the big 4 firms developed these strategies to manage the global challenges of the audit environment. Standardization, centralization, specialization, and fast communication are the main themes of the identified strategies by which the big 4 achieve their objectives.
CORPORATE GOVERNANCE, CORPORATE ENTREPRENEURSHIP AND ORGANISATIONAL PERFORMANCE: EVIDENCE FROM UK
ELGHARBAWY, ADEL
ABDEL KADER, MAGDY
Category: GV = Accounting and Governance
It has been argued that there is a need to broaden corporate governance beyond compliance to a set of rules and laws, to include the performance aspects of governance that focus on strategy and value creation. In other words, governance should not only focus on monitoring managerial performance to ensure accountability to shareholders, but also on mechanisms that motivate management to optimise shareholders’ wealth. This study aims to develop a contingency framework for the relationship between corporate governance and corporate entrepreneurship in the UK. This framework examines the inter-relationships between compliance with the Combined Code on Corporate Governance (CCCG), corporate entrepreneurship and the ultimate effect on organisational performance. The results provide evidence in favour of the regulatory framework of corporate governance in the UK and suggest no conflict between corporate governance and corporate entrepreneurship.
RELATED PARTY TRANSACTIONS: LITERATURE REVIEW AND DIRECTIONS FOR FUTURE RESEARCH
ELHELALY, MOATAZ
Category: GV = Accounting and Governance
Several recent accounting scandals have brought attention to accounting manipulations that arise from Related Party Transactions. This paper reviews the related party transactions literature. A lot of RPTs studies were conducted in US and Asian countries. Although, the European continent was not free from accounting scandals that were attributed to RPTs, but up to this point in time RPT research in Europe is extremely scarce. The aim of this paper is to highlight the importance of RPT research through providing a comprehensive review of prior studies. This review also highlights research gaps, limitations and challenges of RPTs. This paper shows that more research is needed to link RPTs to one of the theoretical views which scholars are debating about the relevance of RPTs to one of them. Also, more research about RPTs in Europe is essential to quantify the presence of RPT and their negative outcomes in the continent. Finally, this paper presents some recommendations for future research in the area that should contribute to the literature of RPTs.
BP BOARDROOM COMPENSATION 2001 - 2010 – A CASE STUDY
EL-SAYED, NADER
EL-SAYED, NADER ; GWILLIAM, DAVID
Category: GV = Accounting and Governance
Issues as to the suitability of executive compensation packages have obtained an ever increasing profile in recent years. Whilst there has been quite extensive quantitative investigation of relationships between compensation and performance there has been less focus on case study based analysis. This paper seeks to add to the relevant literature by means of a longitudinal case study of remuneration at BP – a major multinational oil company - over a ten year period. Within the context of a variety of theoretical and institutional perspectives the study investigates how boardroom executive remuneration in BP has been determined over the last ten years and speculates as to potential explanations for the outcomes uncovered. The primary methodology employed in the study was qualitative based on review of BP’s annual reports in particular the Directors Remuneration Reports - but this was supplemented by content analysis utilising NVivo software. The outcomes of the study suggest that it is difficult to find significant support for a pure agency theory approach whereby shareholders seek to align their interests with those of their managers as a driver of executive compensation packages. There is more evidence suggestive of a managerial power/hegemony perspective and also significant indicators of the importance of personal relationships and influence at boardroom level. The conclusions also reflects on the role of the remuneration committee and its nature as an institutional construct and considers whether it constrains, obscures, or adds pseudo legitimacy to boardroom compensation.
CEO’S DIVIDEND INCOME AND ITS ROLE IN COMPENSATION DECISIONS
ELSILÄ, ANNA
Category: GV = Accounting and Governance
This study examines whether boards of directors take into account dividends received by CEOs in determining the level of the CEO’s cash compensation. Using a sample of dividend-paying US corporations over 1992-2005, I find a negative relation between the level of CEO’s annual dividends and components of her cash compensation. In addition, the CEOs surrendering dividends due to the absence of dividend protection of stock options receive a premium in terms of higher cash compensation. The endogenous relation between dividend and executive compensation policies is addressed using an external shock, namely the Jobs and Growth Tax Relief Reconciliation Act of 2003, which altered the relation between the after-tax value of dividend income and the after-tax value ordinary income from the CEO’s perspective. The evidence presented in the paper supports the notion that individual tax rates affect the executive compensation design, because the substitution of CEO’s cash compensation with dividends became more pronounced in the period of more favourable taxation of dividend income relative to ordinary income.
DETERMINANTS OF QUANTITY AND QUALITY OF KEY PERFORMANCE INDICATORS (KPIS) REPORTING BY UK NON-FINANCIAL FIRMS
ELZAHAR, HANY
HUSSAINEY , KHALED ; TSALAVOUTAS, IOANNIS
Category: GV = Accounting and Governance
Abstract Purpose – This paper contributes to the disclosure literature by exploring the determinants of KPIs reporting by UK non-financial firms. Methodology –Manual content analysis is employed to identify the quantity and quality of KPIs reporting in companies’ annual reports. Our sample consists of the annual reports for 103 FTSE 350 non-financial UK firms over a five year period (2006-2010). A research instrument is first developed to score the quantity and evaluate the quality of KPIs disclosure. The quantity of KPIs disclosure is measured by counting the number of KPIs disclosed in the annual reports. The measurement for the quality of KPIs captures all qualitative attributes of KPIs information presented by the Accounting Standards Board (ASB) Operating and Financial Review (OFR) (2006). Panel regressions are employed to examine the determinants of KPIs reporting. Descriptive analysis shows a variation in quantity and quality of KPIs reporting among the sample firms. Moreover, our analysis highlights the variation in KPIs reporting among industries in terms of disclosures quantity and quality. In addition, we find that KPIs reporting quality is correlated with the quantity of KPIs reporting. Furthermore, we provide empirical evidence on the impact of CG mechanisms on KPIs quantity and quality. The study questions the use quantity of disclosure as a proxy of its quality.
CORPORATE GOVERNANCE AND PRODUCT-RELATED VOLUNTARY DISCLOSURE. AN ANALYSIS OF BIOTECH FIRMS.
ENACHE, LUMINITA
PARBONETTI, ANTONIO
Category: GV = Accounting and Governance
The paper analyzes how board of directors composition affects US biotech corporate disclosure. US biotech companies provide a vast heterogeneity in the level of disclosure and the paper provides evidence that directors’ background and experience matters in orienting product-related voluntary disclosure and explaining such heterogeneity. Particularly, the results show that support specialists enhances overall disclosure and the disclosure of future information, but as their presence in the board increases the disclosure of early stages product decreases. Community influentials enhance disclosure when drugs are in the preclinical phase of development thus increasing the competitive costs.
IS ACCOUNTING STILL A LOCAL DISCIPLINE? EVIDENCE ON INTERNATIONAL CO-AUTHORSHIPS IN LEADING ACCOUNTING JOURNALS
ENDENICH, CHRISTOPH
HOFFJAN, ANDREAS; TRAPP, ROUVEN
Category: ED = Accounting Education
Despite claims to be globally oriented, previous bibliometric research suggests that accounting research is a local discipline. We extend this stream of literature by analyzing international co-authorships and further authorship patterns of nine leading accounting journals from the US, Europe and Oceania over a period of 20 years. For this reason, we introduce several bibliometric measures into accounting research. We find that the relative weight of contributions from foreign authors is increasing for all journals during the period studied. International coauthorships are also intensifying, particularly those between scholars from the Anglophone world and researchers from Asian countries. While these findings suggest that accounting research is slowly becoming more internationally oriented, we also find evidence indicating that accounting research is still locally anchored. As we focus on leading accounting journals that primarily publish research on management accounting as well as on financial accounting and auditing, we expect that these findings are of particular interest for these research communities.
THE EFFECTS OF INTERNAL AND EXTERNAL GOVERNANCE ON MANAGERIAL EFFORT – GERMAN EVIDENCE ON AGENCY COSTS
ENGELEN, CHRISTIAN
Category: GV = Accounting and Governance
Based on a sample of the German quoted firms in the period 2006 to 2010 I measure the im-pact of internal and external corporate governance in the form of ownership structure and concentration, board size and compensation on Asset Turnover as an agency cost proxy of managerial effort and entrenchment strategies. Increasing board size is associated with higher agency costs; variable compensation components fulfil their role of aligning the incentives of management and shareholders in that they are associated with higher Asset Turnover. Con-cerning ownership, there is no evidence of a disciplinary effect of ownership concentration, and only slight evidence with regard to owner identity. In contrast, dual class shares are found to facilitate lower managerial effort, i.e. higher agency costs. Both dividend payout and debt maturity structure appear to be credible bonding mechanisms, which is in accordance with their theoretically derived role. Generally, these results provide evidence on the usefulness of internal and external governance mechanisms in mitigating agency conflicts. Furthermore, this study suggests that the importance of certain aspects (e.g. role of blockholders, executive compensation) of the German corporate governance bundle may be changing, whereas others seem to have kept their relevance (banks).
TAX-LOSS SELLING ON THE GERMAN STOCK MARKET! - AN EMPRICAL EXAMINATION
ENGELHARD, CHRISTOPH
BRAEHLER, GERNOT
Category: TX = Taxation
The tax-loss selling hypothesis posits that individual investors tend to sell depreciated stocks held in private property especially towards tax year-end in order to reduce their current tax liability. Hence it predicts a selling pressure for those stocks prior to year-end. The paper establishes proof that tax-loss selling occurs on the German capital market. We contribute to the literature in four points: a) Contrary to other examinations of the German capital market on implications of the capital gains taxation to which tax-loss selling belongs to we test the tax-loss selling hypothesis on the German capital market as a year-end effect. b) The focus is on the tax system which came into force in Germany in 2009, while former studies of the German capital market referred to the characteristics of the previous tax system. c) We test directly for tax-loss selling and do not implicitly assume that an abnormal turnover and return development is due to a selling activity. d) The change in the German tax law of 2009 enables us to employ a new approach to evaluate institutional window dressing against individual tax-loss selling.
BENCHMARKING FOR ROUTINES AND ORGANIZATIONAL KNOWLEDGE
EPURE, MIRCEA
Category: MA = Management Accounting
This paper scrutinizes firm outcomes and their relationship with organizational routines from management and accounting perspectives. It starts from best practice benchmarking and proposes a dynamic model that steps into the micro-foundations of firm routines to study changes in performance and link them to the corresponding shifts in organizational knowledge investments. The usefulness of the research design is illustrated via a profit-oriented analysis of the U.S. technology industry during 2000-2011. Employed indicators include frontier analysis measures that provide benchmarking information jointly with accounting ratios and proxies for knowledge investments. Findings reveal that industry revival following economic distress comes along with wider gaps between best and worst performers. Second stage analyses show that increasing intangibles stocks is positively associated with fixed target benchmarking, while enhancing R&D spending is linked with local frontier progress. The discussion also develops managerial interpretations of the benchmarking measures that are suitable for incentives and control mechanisms.
QUALITATIVE CONSTRUCTS IN FINANCIAL REPORTING STANDARD-SETTING – A CASE STUDY OF THE RISE AND FALL OF RELIABILITY
ERB, CARSTEN
PELGER, CHRISTOPH
Category: FR = Financial Reporting
Qualitative characteristics of financial reporting, written down in conceptual frameworks, are supposed to guide accounting standard-setters in their endeavour to create or revise standards. However, in the literature doubts have been raised regarding a uniform understanding of specific characteristics and the consistency of their application in standard-setting processes. The present paper carries out a case study which scrutinises the rise and fall of one of the most important properties of accounting: reliability. While reliability was introduced in the accounting discourse prior to the publication of SFAC 2, in the revised conceptual framework for financial reporting, which was published by IASB and FASB in September 2010, it has been replaced by representational faithfulness. The aim of the present paper is to shed light on the boards’ decision to drop reliability by an historical analysis of how the construct appeared and a detailed process-tracing of its abandonment. Our study reveals that reliability was introduced in the accounting discourse due to its ability to combine traditional objectivity notions with the more recent concept of faithful representation. Its abandonment seems to be mainly due to its role as a hindrance of a further move towards fair value accounting.
EVIDENCE ON THE IMPACT OF ADOPTING ENGLISH AS AN EXTERNAL REPORTING LANGUAGE ON FOREIGN INVESTMENT, ANALYST FOLLOWING, AND LIQUIDITY
ERKENS, MICHAEL
JEANJEAN, THOMAS; STOLOWY, HERVE; YOHN, TERI LOMBARDI
Category: FA = Financial Analysis
This study investigates whether adopting English as an external reporting language is associated with increased foreign investment, analyst following, and/or liquidity in non-English speaking company’s stock. Specifically, we examine a sample of companies that initiate the issuance of an annual report in English in addition to the local language annual report. Using a difference-in-difference design with a propensity score matched control sample, we find that foreign ownership, analyst following, and liquidity increase significantly around the adoption of English as an external reporting language. We also find that the benefits in terms of increased foreign ownership, decreased zero return days, and increased analyst following are more pronounced for companies incorporated in countries whose language is more pervasive and that the benefit in terms of decreased bid-ask spreads is more pronounced for companies in countries whose local language has more limited use. Finally, we perform a time-series analysis and find that adopting English as a reporting language is associated with decreases in information asymmetry (bid-ask spreads and zero return days) in the year of adoption, increases in analyst following in the year after adoption, and increases in foreign ownership two years after adoption. These results suggest that the economic benefits of adopting English as an external reporting language first become evident through decreased information asymmetry.
LEAD AUDITOR EXPERTISE, AUDIT QUALITY, AND AUDIT FEES
ERNSTBERGER, JUERGEN
KOCH, CHRISTOPHER; TAN, HUN-TONG
Category: AU = Auditing
This study investigates the effects of lead auditors’ attributes, including their technical knowledge, managerial knowledge and problem-solving ability, on audit quality and audit fees. The German institutional environment enables us to track auditors over their careers and measure their various personal attributes. We find that lead auditors with greater managerial knowledge receive higher audit fees; however, lead auditors with greater technical knowledge produce higher quality audits. Problem-solving ability is associated with improved audit quality in some settings. Our findings are robust to the use of fixed effects and change models. Additional tests using interaction models indicate that the effects of expertise are strongest in the settings in which they are expected to matter most. The findings enhance our understanding of the nature of expertise in auditing and demonstrate the value of lead auditor identification as currently discussed by the PCAOB and the IAASB.
NEGOTIATING UNDER UNCERTAINTY: THE INFLUENCE OF ACCOUNTING INFORMATION AND MONITORING CONTROL ON NEGOTIATION BEHAVIOR AND OUTCOMES
ESSA, SAMY
DEKKER, HENRI; GROOT, TOM
Category: MA = Management Accounting
Outsourcing relations generally face numerous coordination and control problems. At the root of these problems is uncertainty, which complicates the specification and achievement of desired negotiation outcomes. While prior experimental studies have shown that refined accounting information and monitoring control can enhance negotiation processes and outcomes, these studies have ignored the influence of uncertainty which can exacerbate negotiation problems. We develop an experiment in which 175 dyads of buyers and suppliers participate to investigate how uncertainty interacts with accounting information and monitoring control to affect negotiation behavior and outcomes. We find that uncertainty reduces negotiators’ use of integrative tactics relative to distributive tactics, which in turn negatively impacts joint profit. Refined accounting information (i.e., total cost of ownership information) and third party monitoring of the negotiations weaken this negative impact of uncertainty on negotiation behavior, which in turn positively influences joint profit.
THE IMPACT OF MEDIA PRESSURE ON THE SUSTAINABILITY REPORTING AND SUSTAINABILITY STRATEGIES OF A LEADING PORTUGUESE CEMENT COMPANY
EUGÉNIO, TERESA
BRANCO, MANUEL; LOURENÇO, ISABEL; MORAIS, ANA
Category: SE = Social and Environmental Accounting
This study examine the sustainability reporting practices and sustainability strategies of a leading Portuguese cement company. Based on a content analysis of media articles, sustainability reports and semi-structured interviews, we identify the strategies the company used to defend itself and downplay sustainability performance as well as the company’s response to media pressure. We rely on legitimacy theory. We conclude that the company faces media pressure with respect to two major controversies: co-incineration and the Outão plant location. The aggregate findings of the analysis support the legitimacy argument. This study adds to the scarce research available on sustainability in Portuguese companies.
VOLUNTARY DISCLOSURE QUALITY, OPERATING PERFORMANCE, AND STOCK MARKET VALUATIONS
EUGSTER, FLORIAN
WAGNER, ALEXANDER
Category: FR = Financial Reporting
We document that firms with better voluntary disclosure quality (VDQ) have better operating performance and exhibit higher valuation ratios. These results hold controlling for firm fixed effects as well as with an instrumental variables approach. Thus, the evidence provides support for the hypothesis that VDQ is causally linked to value generation, adding to the previously established effects of information transmission that occur when managers use VDQ to convey privately known good news about future firm results. However, stock prices do not appear to fully incorporate the value of higher disclosure quality; specifically, VDQ and excess returns (beyond those available through passively investing in popular styles) are slightly positively related in the full sample. Here, the analysis adds to existing work by showing that, consistent with mispricing, the positive relationship between VDQ and excess returns is most pronounced among opaque firms (such as those with little analyst coverage), for which previous literature has shown that equity prices are slower to reflect any benefits or costs of a characteristic than for better-known firms.
THE INTERNAL AUDIT FUNCTION IN THE GERMAN TWO-TIER SYSTEM
EULERICH, MARC
THEIS, JOCHEN; VAN UUM, CAROLIN
Category: AU = Auditing
This study investigates the integration of the internal audit function in the organizational governance structure of the German two-tier system. The research results are based on 21 semi-structured interviews, which were conducted with Chief Auditing Executives and Internal Auditors of six DAX-listed German companies and one organization from the public/governmental sector. In addition to the organizational integration, this study also analyzes the relationships and collaborations between the internal audit function and other corporate governance bodies, such as the board of directors, the supervisory board, the audit committee, the risk management or the external auditor. Based on the research results best practices regarding potential ways of organizing and integrating the internal audit function within businesses shall be identified. These best practices provide an adequate benchmark and support practitioners as well as scholars in creating an effectively working audit unit.
THE IMPACT OF IFRS 8 OPERATING SEGMENTS ON SEGMENT DISCLOSURE PRACTICES AND ANALYSTS’ INFORMATION ENVIRONMENT: AUSTRALIAN EVIDENCE
EVANS, ELAINE
HE, LIYU; HE, RONG
Category: FR = Financial Reporting
The recent adoption of International Accounting Standard 8 (IFRS 8) Operating Segments brought major changes to segment disclosure practices by requiring companies to identify segments and report segment information using a management approach. Addressing the controversy around the issuance of IFRS 8, this study aims to find out the effectiveness of IFRS 8 on improving segment disclosure practices and analysts’ information environment. Using two years data of 173 companies listed on the Australian Stock Exchange (ASX), this study finds that the implementation of IFRS 8 (equivalent to AASB 8) had a significant impact on the way in which companies report their segment information: after the adoption of the new standard a considerable number of the sample companies redefined their reporting segments; companies reported more disaggregated information (i.e., number of reporting segments); and companies tended to report fewer line items for each reporting segment and for each geographical area, due to the flexible requirements of the new standard. These significant changes in segment disclosure practices have reduced analysts’ forecast error but not forecast dispersion.
EARNINGS MANAGEMENT IN THE CONTEXT OF FAIR VALUE ACCOUNTING: ADJUSTING THE MODIFIED JONES MODEL TO FAIR VALUE ACCOUNTING
EWELT-KNAUER, CORINNA
Category: FR = Financial Reporting
Over the last decade, the Financial Accounting Standards Board (FASB) has intensified fair value accounting. Until today, the models for measuring earnings management do not consider fair value at all. In detail, these models typically classify accruals resulting from changes in fair value as discretionary under all circumstances. Beyond this background this paper points out, that – with respect to the fair value hierarchy under FAS No. 157 – only those instruments recorded at fair value can be used for earnings management ranging on level 3 of the hierarchy. Conclusively, earnings related to instruments recorded on the first and on the second level can be characterized as nondiscretionary since they are subject to a strict market orientation. On this basis the Modified Jones Model (MJM) of Dechow et al. (1995) is adjusted by adding earnings related to level 1 and level 2 instruments as explanatory variable to nondiscretionary accruals, resulting in the so called Fair Value Adjusted Modified Jones Model (FVAMJM). This model results in significantly different discretionary accruals and is at least as well specified as the MJM and has even a slightly better power to detect earnings manipulation.
WHAT DETERMINES THE VALUE RELEVANCE OF MANAGEMENT CASH FLOW FORECASTS?
FAN, YUN
Category: FR = Financial Reporting
Prior research on the value relevance of management guidance focuses almost exclusively on earnings forecasts. In recent years, managers have increasingly provided additional guidance in the form of cash flow forecasts. Yet relatively little is known about the impact of these forecasts and their incremental value relevance beyond earnings forecasts. In this study, I show that management cash flow forecasts are generally informative to investors and financial analysts beyond existing management earnings forecasts. More importantly, these cash flow forecasts are increasingly value-relevant for firms 1) with bad news in contemporaneous earnings forecasts, 2) in financial distress, 3) with higher growth opportunities, and 4) with higher value relevance of reported cash flows relative to that of reported accruals. In addition, analysts appear to incorporate the information in management cash flow forecasts into their earnings forecasts. Analysts revise their earnings forecasts to a larger extent when management cash flow forecasts are accompanied by contemporaneous bad news in management earnings forecasts and when firms reported cash flows are relatively more value-relevant. This study contributes to the understanding of management guidance by investigating the impact of a relatively new form of disclosure. I provide evidence that the impact varies predictably with firm characteristics.
FORECAST REPORTING - EMPIRICAL EVIDENCE FROM THE LARGEST BANKS IN EUROPE
FEHR, JANE
LÖW, EDGAR
Category: FR = Financial Reporting
According to principal-agent-theory forecast reporting is of great importance for reducing information asymmetries between entities and users of financial statements, thereby, lowering cost of capital. Prior research, however, has provided evidence that entities from different industries listed on various indices are reluctant to disclose entity-specific, quantitative, and medium-term forecasts. We extend this research by analyzing forecast reporting of European largest banks exclusively since we are not aware of any study having such focus. Our analysis reveals that banks concentrate mainly on macroeconomic and industry-specific issues, but less so on bank-specific issues when providing forecasts. All banks of the sample provide forecasts for the next fiscal year, but only a minority of banks provides medium-term forecasts. In this context qualitative and comparative forecasts prevail. Since our sample comprises of banks that apply IFRS as accounting system we find that voluntary forecast reporting does not provide users with decision useful prospective information. This result may also affect the reliability of financial reporting according to IFRS in general since major recognition and measurement rules base on expectations about future development. In that respect our findings seem particularly policy-relevant as requested by Schipper (1994). Finally, we provide a suggestion for improving quality of forecast reporting.
DECISIONS ABOUT INVESTMENT AND PROFITABILITY: AN EMPIRICAL STUDY WITH GENERALIZED LINEAR MIXED MODELS IN NON-FINANCIAL BRAZILIAN COMPANIES
FERNANDES DA SILVA, ALDY
NAVARRO, AUGUSTO; PARISI, CLAUDIO; SILVA, ALDY; VIEIRA, AFRÂNIO
Category: MA = Management Accounting
Investments are strategic decisions taken by companies that should be regarded as important information for shareholders. We studied empirically the relation between past investment and profitability (measured by ROA and Tobin´s q), using five scenarios with different periods of investment. Data from the financial statements of non-financial companies listed on Brazilian Stock Exchange were collected (2001-2011), resulting in the unbalanced sample of 1,484 firm-years observations. We use a wide class of statistical models (generalized linear mixed models – GLMMs), which enabled consider a correlation structure for the profitabilities observed over time. We use a different probability distribution for the ROA and Tobin´s q. With regards the ROA, the results show a positive relation between contemporary investment and profitability, and negative between past investment and profitability. The relation of past investment with the profitability (Tobin´s q) was positive. These relations were weakening, which suggests that investment has their reduced profitability over time.
THE DRIVERS OF MANAGEMENT ACCOUNTANTS’ INVOLVEMENT IN THE STRATEGIC MANAGEMENT PROCESS: THE ROLE OF CREATIVITY AND SKILLS
FERREIRA, ALDONIO
FERREIRA, ALDONIO; MOULANG, CARLY
Category: MA = Management Accounting
This study examines the role of creativity and skills in management accountants’ involvement in the strategic management process (MAISMP). Prior research suggests that the role of management accountants (MAs) is changing to include more strategic decision-making activities, but there is little indication of how individual attributes and skills influence this move. Drawing upon role theory, this paper investigates the relationship between MAISMP and both MAs’ creativity and skills set (analytical, communication, and interpersonal). We also examine how breadth of work experience and skills set influence MAs’ creativity. We surveyed members of CPA Australia and obtained 279 usable responses that were used to test the hypotheses using a PLS path model. We find that MAs’ creativity is a factor that influences MAISMP, although this effect is only prevalent under differentiation and hybrid strategies. Skills have mixed effects on MAISMP – while analytical and communication skills contribute towards greater involvement, unexpectedly, interpersonal skills have a detrimental effect on MAISMP. Finally, we find that two dimensions of breadth of work experience have different effects on creativity. While work experience in ‘senior managerial tasks’ has a positive effect on MAs’ creativity, experience in ‘common managerial tasks’ no effect. The findings have implications for human resource management practices, professional bodies, and accounting education.
IS COGNITIVE BIAS REALLY PRESENT IN ANALYSTS’ FORECASTS? THE ROLE OF INVESTOR SENTIMENT
FERRER, ELENA
CORREDOR, PILAR; SANTAMARÍA, RAFAEL
Category: FA = Financial Analysis
We analyse four key European markets (France, Germany, Spain and the UK) to ascertain whether the optimism in analysts’ forecasts is mainly strategic or whether cognitive bias is really present in these markets. Despite the fact that forecast errors lack the explanatory power to account for a significant percentage of the relationship between market sentiment and future stock returns, the results from the tests based on selection bias (SB1 and SB2), in conjunction with the analysis of abnormal trading volume, confirm the presence of both cognitive bias and strategic behaviour in analysts’ forecasts. These results indicate that, although regulation can reduce analyst optimism, the benefits of regulation will be more limited because part of this optimism is associated with a cognitive bias.
THE IMPACT OF CRISIS ON DETERMINANTS OF LEVERAGE: EUROPEAN EVIDENCE
FILIP, ANDREI
JOH, GUN; KRIVOGORSKY, VICTORIA
Category: FA = Financial Analysis
This paper investigates the role of institutions and macroeconomic indicators of economic health in determining firms’ leverage before and after the financial shocks in Europe in 2008. The importance of this investigation stems from the current state of the global economy, where market confidence has been severely impacted in virtually every area. In light of this, estimation of the risk associated with a firm is more challenging now than at any time in recent history. We go about our examination using cluster analysis and find a significant reduction in the use of debt from the pre- to post 2008 period. Among country specific variables, direct foreign investment into firms, maturity of credit laws, availability of bank funds and GDP growth ratio gain significance in their bearing on using both bank loans and bonds after 2008. The public deficit ratio and national variations in use of debt vs. equity significantly impact only the use of bonds after 2008. We also document evidence that country risk and inflation impact companies’ financing decisions.
THE EXPLANATORY FACTORS OF SYNERGY VALUE DISCLOSURE IN M&A CORPORATE REPORTS
FIORENTINO, RAFFAELE
GARZELLA, STEFANO
Category: FR = Financial Reporting
Prior studies found that synergy is one of the most important motives of M&As. However, studies generally overlooked the investigation of the use and reporting of synergy value. The purpose of this study is to assess the disclosure practices and to analyse different factors behind the disclosure of synergy in M&A corporate reports. First of all, we defined the information needed to effectively assess the synergy value. The following empirical analysis was performed in two stages: analysis of the data obtained through content analysis of M&A reports; analysis of the factors that influence the disclosure of synergy using a dependency model. Several variables were introduced to represent the features of companies and deals. Companies usually report information regarding valuation models and synergy types. Information about synergy flows, timing and likelihood of achievement is seldom reported. The results show a significant relationship between the listing status, the involvement of strategic advisors and the disclosure on synergy value. The findings emphasize that the companies characterized by higher disclosure pressure typically disclose information needed to effectively assess the synergy value. Moreover, the results suggest that companies utilize information on synergy value as a mechanism to persuade external stakeholders on the effectiveness of M&As. However M&A corporate reports have poor relevance as helpful instruments in decision-making.
THE DEBATE ON RENTED ASSETS: EFFECTS ON THE ANALYSIS OF FAMILY FIRMS
FITÓ, ANGELS
MOYA, SOLEDAD; ORGAZ, NEUS
Category: FR = Financial Reporting
International accounting regulators wish to include “rented” assets and future payment commitments in balance sheets. This paper shows the effect of this proposal on family enterprises. Since the literature on family firms shows that they have particular finance structures and tend to avoid excessive debt levels, a significant effect is expected. We build on the capitalization method and look for consequences on firms’ business analyses. Additionally, we run a regression analysis to determine the “family nature” effect. The results show that family firms would be heavily penalized, especially with respect to leverage. The retail sector would be affected particularly heavily.
THE BIG 4 PREMIUM: A LONG GONE PHENOMENON? EVIDENCE FROM EUROPE
FLEISCHER, ROUVEN
GOETTSCHE, MAX; SCHAUER, MAXIMILIAN
Category: AU = Auditing
The market for audit services has strongly changed over the past years. Consolidation of audit firms, increasing internationalization and an advancing organization of second-tier auditors in international networks suggest that competition among auditors has gained more importance. In light of these developments, this study gives an up-to-date analysis on the existence of a Big 4 premium as well as fee cutting. We affirm the existence of fee cutting for firms changing their auditor and provide first time evidence that in years following an auditor change, the fee increase is stronger for switching firms than for non-switching firms. In terms of a Big 4 audit fee premium, our results also show differentiated pricing behavior for switching and non-switching firms. For non-switchers we still find a Big 4 audit fee premium, for switchers, though, our results show that a Big 4 premium no longer exists; rather we find a Big 4 discount. Compared to prior research, this study is not based on data from a single market but uses a multinational dataset of all listed German, Italian, Belgian and Finnish firms for the years 2007 – 2010. Also, in contrast to prior research, our results are not based on regression analysis, but we use a nearest neighbor matching approach, based on Abadie and Imbens (2002).
FINANCIAL REPORTING AND DISTRIBUTIVE JUSTICE
FLOWER, JOHN
Category: SE = Social and Environmental Accounting
This paper analyses the crisis that currently confronts mankind and argues that the principal cause is that the economic system places too much emphasis on production and neglects distribution. It argues that financial reporting, as currently practised, is partially responsible for this crisis because it is based on the wrong paradigm. It identifies the present paradigm as the capitalistic theory of the firm, which is criticised for emphasising production (which is one of the causes of the present crisis) and neglecting the justice of distributions. The paper argues that financial reporting should be based on the stakeholder theory of the firm and that its principal objective should be the promotion of distributive justice. The implications of adopting this revised objective are briefly analysed.
BIASED EFFECTS OF TAXES AND SUBSIDIES ON PORTFOLIO CHOICES
FOCHMANN, MARTIN
ACKERMANN, HAGEN; MIHM, BENEDIKT
Category: TX = Taxation
We study how taxes and subsidies affect portfolio choices in a laboratory experiment. We find highly significant differences after intervention, even though the net income is identical in all our treatments and thus the decision pattern of investors should be constant. In particular, we observe that the willingness to invest in the risky asset decreases markedly when an income tax has to be paid or when a subsidy is paid. If we combine both a tax and a subsidy, this effect intensifies.
VEILS OF AMBIGUITY: PROFESSIONAL'S CATEGORIZATION OF OIL AND GAS RESERVES
FOX, KENNETH
COOPER, DAVID ; LEFSRUD, LIANNE; TAMINIAU, YVETTE
Category: FR = Financial Reporting
We examine how accountants and engineers redefine categories of oil and gas reserves. This is a story of an industry in flux; categorical meanings are reconstructed and re-embedded through emerging practices and regulatory review. While attempting to create greater clarity in the processes for categorizing reserves, these professions also maintain double veils of ambiguity, first, between each other’s scope of practice and, second, between themselves and consumers/users. These veils reflect contradictions. First, there are those professionals who want more convergence and standardization used in the various terms, definitions, and categories regarding the assessment of reserves. Yet, the engineering and accountancy professions both seek to maintain inherently ambiguous scopes of practice connected to what they see as their superior access to specialist knowledge. Thus, these professions attempt to mutually reinforce their jurisdictions while protecting themselves from being usurped by the other. Second, while the SEC revised its rules to improve the transparency and reliability of reserves reporting, there are companies who prefer to maintain and even increase ambiguity by creating their own terms, since more and vaguer terms enable more room for manoeuvering. In making sense of professionalization and inter-professional collaboration and competition, we contribute to an enriched understanding of the role of ambiguity and contradiction in the categorization literature.
CITY-LEVEL HUMAN CAPITAL AND AUDIT MARKETS
FRANCIS, JERE
BECK, MATHEW; GUNN, JOSHUA
Category: AU = Auditing
This study investigates how human capital in United States cities affects the local audit market in each city. Human capital is measured in the urban economics literature as the average educational level in a city, and we argue that this will affect the quality of labor in the local audit market. We predict and find evidence that audit quality is positively associated with the level of human capital in an audit office’s local labor market, and that this association is stronger for smaller (non-Big 4) audit firms than for the larger Big 4 audit firms, which are less reliant on local labor markets. All else equal, public companies are more likely to choose a non-Big4 auditor when the level of human capital in the audit office’s local labor market is high. Further, audit quality, as measured by clients’ abnormal accruals, total working capital accruals, and accrual estimation errors, improves as human capital increases and this relationship is stronger for non-Big 4 auditors. Finally, we show the audit fees earned by non-Big 4 audit firms, but not Big 4 audit firms, increase in the level of local human capital. Together, these results suggest that small auditors’ greater reliance on local labor markets affects their ability to compete in the public company audit market.
TRENDS IN FEMALE EXECUTIVES’ PAY AND INCENTIVE GAPS
FRANCO, FRANCESCA
CARTER , MARY ELLEN ; GINE , MIREIA
Category: MA = Management Accounting
Prior research has documented a pay gap between female and male executives. We document recent trends in the gender pay gaps and explore the relative effect of concurrent changes in female executive responsibilities, female appetite for compensation risk, and female board representation. Using data from the 1993-2010 period, we find evidence that female executives’ pay are gradually converging towards their male counterparts, but that the wedge between genders still exists because females still cover lower-tier positions and accept contracts with lower equity compensation incentives. However, we also find evidence that female representation on boards, and compensation committees in particular, has significantly contributed to mitigating the gap.
DO EUROPEAN BANKS USE SUSTAINABILITY REPORTING TO IMPROVE THEIR CORPORATE IMAGE?
FRANCOEUR, CLAUDE
BEN RHOUMA, AMEL
Category: SE = Social and Environmental Accounting
Reporting about the sustainability issues of firms’ activities is an important instrument in the dialogue between business and society. Legitimacy theory predicts that, in a context of crisis, companies are expected to exhibit greater concern to improve the corporate image through SR. This study examines the influence of the recent financial crisis on the sustainability reporting (SR) of the largest European banks. We use the Global Reporting Initiative (GRI) guidelines to develop an analytical scenario of SR. Eight categories of SR are analyzed: governance, commitment and dialog, economic performance, environmental performance, social performance, human rights, product responsibility, society and financial sector-specific (FSS) issues insustainability. Results show that European banks have increased their SR in the three years following the financial crisis. But, only the French and Italian banks have increased their FSS reporting, which indicates that country specific context and regulations affect European banks’ SR practices. This research makes two important contributions to corporate SR research. First, it extends prior research to the banking industry, which is often excluded from sample companies due to the sector’s more stringent regulatory regime. Second, it constructs a grid of analysis of SR sector-specific sustainability issues that are particularly relevant to banking institutions and their stakeholders.
ACCOUNTING KNOWLEDGE AS LIVED EXPERIENCES AND REFLEXIVE QUESTIONING: A CASE FOR REINVENTING UNDERGRADUATE ACCOUNTING EDUCATION
FRANDSEN, ANN-CHRISTINE
GRACIA, LOUISE
Category: ED = Accounting Education
At the centre of this paper is how we conceptualise, enact and learn ‘accounting’ as ‘disciplinary knowledge’ (Hoskin & Macve 1986, Hoskin 1998) within higher education (HE). Research in the critical accounting field challenges the construction of accounting knowledge as a stable object and practice, including the use of problem based learning PBL (Milne and McConnell, 2001); tangible thinking (Boyce, 2004); emancipatory approaches to learning; and the promotion of critical and imaginatory thinking (Chabrak and Carig, 2011). Although inspired by these attempts, we argue that questioning of the relation between the ontological and the ontic is often overlooked or weakly addressed. Our aim is to discuss how a stronger emphasis on the ontological boundaries of accounting knowledge within undergraduate HE might enable students to construct and enact alternative, more nuanced framings of accounting as a mutable and limited object and practice. Anchored in the learning, reflective-self and critical accounting literatures we outline a model of learning where the boundaries of what accounting knowledge ‘is’ and how it is formed become central to the learning experience. Emphasis is placed on experiential learning through reflexive and critical [accounting] boundary questioning that uses fundamental questions to prioritise epistemological and ontological issues. The model builds on ideas drawn from PBL to embed learning in the questioning and experiences of students. This reinvention
DISCLOSURE REGULATION AND ENFORCEMENT
FRANKE, BENEDIKT
ZHANG, LI
Category: FR = Financial Reporting
In this paper, the level of mandatory disclosure regulation is modeled as an endogenous parameter which is determined by a democratic deliberation process within an economy. By adding imperfect enforcement to settings, we are able to analyze theoretically how an enforcement parameter affects the level of disclosure regulation through the process of democratic participation. We thereby identify two mechanisms which leads to an increase of disclosure regulation in the presence of increasing enforcement: First, imperfect enforcement results in price protection by investors against firms' potential non-disclosure. Second, imperfect enforcement aligns voting preferences among high and low quality firms which would otherwise be totally separated groups of firms within the deliberation process. This alignment mechanism provides a new theoretical explanation of empirical findings suggesting that disclosure regulation appears to be more prevalent in economies with strong enforcement parameters.
INNOVATION AS PART OF THE MANAGEMENT CONTROL SYSTEM
FREZATTI, FABIO
CAPUANO DA CRUZ, ANA PAULA; DE CAMARGO MACHADO , MARIA JOSÉ ; DE SOUZA BIDO, DIOGENES
Category: MA = Management Accounting
The objective of this research is to study the relationship between management control systems and the innovation process, taking into account the model from Simons (1995). The study is descriptive and quantitative and uses survey data that are analysed utilising structural equation modelling. The main contribution of this research is the identification of the influences exerted by the following: external stimuli and dynamic tensions on the direction of innovation strategies, dynamic tensions on the structure of the interactive control system, and the interactive control system on the structure of the diagnostic control system and on innovation intensity. No impact from the catalyst and obstructor elements on innovation process was confirmed. The influence of interactive system on the diagnostic was expected from literature but not confirmed. This find might consider that the efforts to maintain management control systems must be sensitive to the variables treated in the study.
BOARD OF DIRECTORS AND ETHICS CODES IN DIFFERENT CORPORATE GOVERNANCE SYSTEMS
FRIAS-ACEITUNO, JOSE-VALERIANO
GARCÍA-SÁNCHEZ, ISABEL MARIA; RODRÍGUEZ-DOMÍNGUEZ, LUIS
Category: SE = Social and Environmental Accounting
Business ethics is one of the most significant demands made by institutional and individual investors, who usually require the participation of the board of directors in the planning and implementation of ethical behaviour in corporations. This is done by drawing up an ethics code and then monitoring its fulfilment. This study has a dual objective: first, to analyse the role played by the composition of the board of directors, and by that we mean its independence and the diversity of its members, on the implementation and scope of an ethics code, and, second, to detect whether the corporate governance system moderates the level of involvement of the board in ethical issues. Previous empirical evidence regarding the new responsibilities of this monitoring body is limited, and furthermore is focused on transversal analyses at country level and time period, which circumscribes the conclusions that may be derived from their findings. In this work, the analysis is undertaken with a sample of 760 listed companies from 12 countries for the years 2003 to 2009, using panel data procedures. The findings obtained show that the largest companies with large-sized and diverse boards are the most ethically active. Nevertheless, the extent of involvement of the independent directors is conditioned by the level of shareholder orientation characteristic of the system of corporate governance in the corporation’s country of origin.
SOMETIMES GOOD GUYS DON'T WEAR WHITE: COUNTERVAILING INCENTIVES AND MANAGERIAL POWER
FRIEDMAN, HENRY
FRIEDMAN, HENRY
Category: GV = Accounting and Governance
I model an agency where reporting and productive tasks are separated, which is a ubiquitous feature of organizations including firms and their divisions. I examine the effects of power that the productive agent may have to pressure the reporting agent. The productive agent's power may be public knowledge prior to contracting or it can be her private information at the contracting phase. The main result is that when the productive agent has private information about whether she is able to pressure the reporting agent, countervailing incentives make it possible for both powerful and non-powerful productive types to earn information rents. The ability to earn rents depends on the organization's operating and reporting environment and the degree of power that the productive agent may exercise, leading to interesting interactions between environmental and intra-managerial factors.
MANAGEMENT ACCOUNTING IMPLEMENTATION AND ENGINEERS' NETWORKING: MITSUBISHI ELECTRIC, 1921-1932
FUJINO, MASAFUMI
Category: MA = Management Accounting
This paper seeks to demonstrate the role of engineers in the implementation process of management accounting within a group company of Japanese conglomerate during the interwar period. Drawing on a historical case study of a Japanese manufacturing company, Mitsubishi Electric, we examine the relationship between implementation of management techniques and reinforcement of network of the engineers. Engineers at Mitsubishi Electric played a key role in implementing production management techniques in 1922, discussing design details of the budgeting system in 1928, and facilitating the cost reduction project in 1930. They assimilated overseas management knowledge from books and magazines and, at the same time, put the knowledge into action, which had something in common with their experience in education. Through the implementation process, engineers of the process control section, sales engineers and design engineers had been connected to the network. This paper illustrates the interaction between the management accounting implementation and engineers’ networking. By describing the micro process of engineers’ implementation efforts, this paper studies the possible conflict inherent in the educational approach and the decentralisation of the Mitsubishi conglomerate. The findings of this study can provide additional evidence for the diffusion and adaptation of management accounting into non-western countries.
THE INFLUENCE OF INFORMAL INSTITUTIONS ON IMPAIRED ASSET WRITE-OFFS: SECURING FUTURE AND CURRENT PIES FOR PAYOUT IN JAPAN
FUJIYAMA, KEISHI
Category: FR = Financial Reporting
The international comparison research on earnings attributes suggests that financial reporting outcomes are determined partly by reporting incentives. Moreover, studies have argued that current-period accounting income tends to be viewed as the pie for stakeholder payouts in countries with stakeholder governance and that, because of the payout preferences of stakeholders, managers reduce income volatility either by using their discretion or through real activities. This paper focuses on accounting for fixed asset impairment to (indirectly) investigate the influence of reporting incentives created by an economy’s institutional structure on financial reporting outcomes. This study uses data from Japanese firms to examine the association between impaired asset write-offs and increases in earnings. It also examines whether this association is different for stable and increased dividend firms (SI firms) and no and decreased dividend firms (ND firms). Unlike a study using data from US firms, it finds that, on average, impaired asset write-offs are positively associated with unexpectedly high increases in earnings, suggesting that reporting incentives in the US and Japan affect write-offs. This study also finds that write-offs for SI firms are positively associated with unexpectedly high increases in earnings, whereas this is not the case for ND firms. The importance of dividends for Japanese firms thus appears to lead to this association.
AUDIT PARTNERS' PERSONAL KNOWLEDGE AND AUDIT FIRMS’ ORGANIZATIONAL KNOWLEDGE
FUKUKAWA, HIRONORI
KARUBE, MASARU
Category: AU = Auditing
This study develops a conceptual framework of auditors’ knowledge, measures three primary constructs in the conceptual framework using archival data, and preliminarily test whether the three measures of engagement partners’ personal knowledge as well as audit firms’ organizational knowledge affect audit fees. In the conceptual framework, auditors’ knowledge is considered to be comprised of auditors’ personal knowledge and audit firms’ organizational knowledge. As three primary constructs of the former knowledge, the depth of knowledge, the width of knowledge, and industry expertise are proposed. As a result of preliminary analysis, we find that an engagement partner with deeper knowledge can provide audit service more efficiently. Also, partners’ wider knowledge leads to more efficient audits and their industry expertise is associated with higher fees, but only for Big 4 audits.
ONE HAND OR TWO? IFRS MEETS GUANXI
FÜLBIER, ROLF UWE
BALFOORT, FERDINAND ; BASKERVILLE, RACHEL F.
Category: GV = Accounting and Governance
We hypothesize that IFRS are socioeconomic and cultural artefacts reflecting a specific Anglo-American context: Largely a market-oriented financial reporting environment with regulatory systems underpinned by classical and neo-classical contracting theories. Although accounting is regularly shaped by and embedded in a socioeconomic environment, it is the IASB’s ambition to develop “globally accepted” accounting standards which may be challenged by our hypothesis. Our study offers a two-pronged literature review, illustrating that (1) the IASB has developed a primarily market-oriented financial reporting system based on the belief in the efficacy of the "invisible hand" and of market as well as trilateral governance structures. Thus, (2) the IFRS adoption in economies dominated by relational transactions such as China may provoke country-specific frictions. To support the different (relational) character of economic activities in China we refer to the role and function of Guanxi as a typical Chinese culture element. Our results may alert regulators to possible underlying causes of some types of implementation issues when IFRS are transferred to other jurisdictions.
CRONYISM AND ACCOUNTING OPACITY: THE CASE OF FRANCO’S AUTOCRACY
GAGO-RODRIGUEZ, SUSANA
GAGO-RODRÍGUEZ, SUSANA; NUÑEZ-NICKEL, MANUEL
Category: SE = Social and Environmental Accounting
When governments need to privilege its supporters to maintain their political power they cutback economic information since this disclosure might help identify their level of cronyism and, what is worse, their cronies. For this reason, despite the proclaimed “official line” of transparency, governments not only withhold basic economic information, but also they impede, in the measure of its possibilities, that other institutions can voluntary disclose whichever information that would permit to obtain the same conclusions. Resting on laws, government documents and publications, we support this general idea by analyzing a special case: the Spanish newspaper industry during the autocracy of General Francisco Franco (i.e., from 1939 to 1975). This documentation provides us with evidence that, while cronyism existed in this sector, this political regimen makes all possible to hinder the disclosure of newspaper circulation because this information could easily permit to identify the favors that the sector, in general and certain newspapers in particular were receiving. Disclosure of this information was only authorized after 1966, when this kind of privileges was suppressed.
CO2 EMISSIONS VARIATION AND CORPORATE PERFORMANCE: AN ANALYSIS OF THEIR RELATIONSHIP
GALLEGO ALVAREZ, ISABEL
GARCÍA-RUBIO, RAQUEL; MECAJ, ARJOLA
Category: SE = Social and Environmental Accounting
The purpose of this study is to analyze the impact that CO2 emissions variation (2007-2008) can have on corporate performance in three time periods: 2008, 2009 and 2010, taking two variables as a measure of firm performance, ROE and ROA, and considering a time period affected by a financial crisis, all under the perspective of the resource-based theory. The empirical analysis carried out was performed in two stages: (i) analysis of the data obtained through content analysis and (ii) analysis of the factors that influence corporate performance using a dependency model, a multiple linear regression. Several variables were introduced to represent: emission variation, size of the companies, leverage, public pressure, capital intensity, firm growth rate. Also, dummy variables have been incorporated: activity sector in which the company operates. The results obtained show that variations in the emissions of CO2 do not affect corporate performance according to either ROE or ROA, and therefore the hypotheses posed could not be confirmed. Nonetheless, other variables such as capital intensity, size, firm growth rate, and activity sector have a positive and statistically significant effect on ROE and ROA. The findings of this work can be considered of great interest on the international level because on the one hand they show a reduction in greenhouse gas emissions by firms pertaining to strategic sectors in this sense, and on the other a dependence model is established to test how the variation in emissions affects firm performance under the RBV theory. Furthermore, certain control variables are considered, such as capital intensity, public pressure, and firm growth rate, which until now have been analyzed very little in this context.
BANK EXECUTIVE OVERCONFIDENCE AND DELAYED EXPECTED LOSS RECOGNITION
GALLEMORE, JOHN
BLACK, DIRK
Category: FR = Financial Reporting
While prior work shows that delayed expected loan loss recognition is related to lending propensity (Beatty and Liao, 2011), bank risk (Bushman and Williams, 2011), and bank risk taking (Bushman and Williams, 2012), we provide evidence that executive overconfidence is a potential driver of delayed expected loan loss recognition. We find that overconfident bank CEOs and CFOs recognize lower loan loss provisions and incorporate current and future deterioration in nonperforming loans in their loan loss provisions less than other bank CEOs and CFOs. Our evidence of delayed expected loss recognition is driven primarily by CFOs, consistent with CFOs being closer to the financial reporting function than CEOs. The study is important because it demonstrates that manager characteristics can have meaningful economic consequences for financial institutions through the reporting of asset risk.
AUDIT PARTNER TENURE AND AUDITOR INDEPENDENCE: A PANEL DATA INVESTIGATION OF THE SPANISH MARKET
GARCIA BLANDON, JOSEP
ARGILÉS, JOSEP MARIA
Category: AU = Auditing
The necessity to strengthen auditor independence has motivated a great deal of research and led to numerous policy initiatives in many jurisdictions around the world. This article investigates whether lengthy audit partner tenures impair auditor independence with a sample of Spanish companies for the period: 2002-2009. The main motivation is the lack of research examining the relationship between tenure and auditor independence at a partner level. Available published research has limited to the analysis of the issuance of going-concern modified opinions to financially stressed firms. This approach presents two shortcomings: The lack of generalization, on the one hand, and the inability to address the main role of the audit firm, which is not bankruptcy prediction, on the other. Besides, the cross-section estimations performed by these articles are particularly vulnerable to exogeneity problems, and therefore reported results might be biased. To overcome these limitations, we have extended previous research by using a panel data approach. Three different types of analysis have been performed. Firstly, we have studied the whole sample of firms and audit qualifications and then we have performed two segmented studies by type of qualification. The same result has been obtained in each of the three analyses performed, showing that long partner tenures do not impair audit independence. Unlike previous research we have controlled for situations of superficial partner rotation.
PERMANENT EARNINGS VS. REPORTED EARNINGS: DOES THE AVERAGE DIFFERENCE APPROXIMATE ZERO?
GARCIA LARA, JUAN MANUEL
GRAMBOVAS, CHRISTOS; OHLSON, JAMES; WALKER, MARTIN
Category: FA = Financial Analysis
This paper evaluates the hypothesis that the difference between reported earnings and permanent earnings approximates zero, on average. We measure a firm’s permanent earnings using its stock price, and the short term interest rate determines the permanent earnings to price relation. The hypothesis corresponds to the idea that a firm’s capitalized reported earnings minus the stock price equals some “noise” which on average approximates zero. In valuation terms, the hypothesis depends on growth and risk cancelling each other, on average; our modeling does not depend on, or imply, risk-neutrality. US data supports the hypothesis: reported earnings exceed permanent earnings in about half of all cases. However, the proportion of pluses vs. minuses can deviate materially from 50% in any year, and there is marked time-series correlation. The “zero average” holds only because we evaluate several decades of data. The permanent earnings hypothesis will not hold if the accounting approximates fair value accounting. Such accounting is in line with Hick's concept of economic earnings, and it differs from traditional GAAP accounting. Per theory, economic earnings should exceed permanent earnings, on average. We consider this angle to the 50-50 proposition by examining financial firms. Earnings for such firms should to some extent tilt towards Hick’s earnings concept. The data supports the hypothesis: reported earnings exceed now permanent earnings significantly more than 50% of the time.
DIFFERENTIAL INFORMATION CONSEQUENCES OF REAL VERSUS ACCRUALS EARNINGS MANAGEMENT
GARCÍA OSMA, BEATRIZ
GARCÍA LARA, JUAN MANUEL; PENALVA, FERNANDO
Category: FR = Financial Reporting
Real and accruals earnings management differ across a number of dimensions such as their level of visibility, accountability and also, their associated costs. Real earnings management is generally predicted to be more difficult to monitor by outsiders, who may struggle to estimate deviations from optimal behaviour. However, real actions are hardly opaque, and hence, expert users of financial statements should be able to undo them with relative ease. Despite this purported visibility, it is unclear the extent to which market participants fully understand these strategies and how they affect the firm information environment, and whether unravelling the bias introduced by real earnings management is truly a simple exercise, given the opacity of certain strategies. In this paper, we look at the differential information consequences of these two earnings management techniques. Consistent with our expectations, we find that both types of earnings management garble the earnings signal, but our evidence suggests that real earnings management is easier to undo for expert financial statement users, such as analysts.
CORPORATE GOVERNANCE AND FINANCIAL LEVERAGE: THE ROLE OF BANK DIRECTORS
GARCÍA-MECA, EMMA
LÓPEZ-ITURRIAGA, FELIX; TEJERINA-GAITE, FERNANDO
Category: GV = Accounting and Governance
We study the relation between the capital structure decisions of Spanish listed firms between 2004 and 2010 and institutional directors, making a distinction between those ones who keep business relations with the firm in whose board they sit, and institutional investors whose business activity is not related to the company in which they hold a directorship. We also check the robustness of the results by analyzing the effects of institutional directors on bank debt and the influence of institutional directors in the audit committee. We find that institutional directors have diverse incentives to engage in corporate governance. Consistent with the importance of business relations, we find that directors representing pressure sensitive investors (i.e., banks and insurance companies) have a preference for lower financial leverage, while pressure resistant directors (i.e., mutual funds and pension funds) do not seem to have a significant effect. Nevertheless, when analysed separately, bank and insurance firm representative directors show different attitudes: bank representatives increase both the financial leverage and the banking debt. We also find a sort of risk aversion among directors representing banks, so that the higher the fraction of shares they own, the more the companies refuse both financial leverage and banking debt.
INSTITUTIONAL ENVIRONMENT AND CSR TRANSPARENCY
GARCIA-SANCHEZ, ISABEL MARIA
CUADRADO-BALLESTEROS, BEATRIZ; FRIAS-ACEITUNO, JOSE-VALERIANO; MARTINEZ-FERRERO, JENNIFER
Category: SE = Social and Environmental Accounting
The present study, based on institutional theory, aims to determine the effects of the institutional context – i.e. socio-economic, cultural, legal and corporate characteristics – on the significance and comparability of the information contained in sustainability reports. This parameter is analysed in terms of the compliance of the report with Global Reporting Initiative guidelines. Accordingly, we examine a sample of companies from 20 countries in Europe, North America and Japan for the period 2004-2010. The analysis of an unbalanced sample of 1598 international companies, using a Tobit model for panel data, highlights the strong impact made by the cultural, legal and corporate system on the disclosure of comparable information on sustainability issues. This paper makes a significant contribution to the literature in at least two ways. First, by conducting an inter-country analysis, we offer additional evidence on the determinants of relevant CSR disclosure information. While various studies have examined the determinants of these practices using data from a single country, by jointly considering 20 countries, we are able to differentiate among institutional systems, which is impossible when examining one country alone. As a result, the identification of these country-level mechanisms could usefully inform the decisions taken by policymakers with respect to improving social responsibility.
PERFORMANCE MEASUREMENT CHALLENGES IN A NGO—WHY STAFF MEMBERS WANT TO BE HELD ACCOUNTABLE AND THE DRIVE TOWARD AN INTERMEDIATE POSITION BETWEEN UPWARD AND DOWNWARD ACCOUNTABILITY
GÅRSETH-NESBAKK, LEVI
TIMOSHENKO, KONSTANTIN
Category: GV = Accounting and Governance
This case study deals with performance measurement in a non-governmental organization (NGO), addressing the following research question: What challenges does a NGO encounter in measuring its performance, making it desirable to be held accountable? An accountability perspective represents the theoretical frame. Data were collected through interviews and documents. The following major challenges were unveiled throughout the research: high employee turnover, highly contextualized/ heterogeneous measurement project settings (herein bringing about multiple performance forms and demands—creating an administrative burden and making comparisons/benchmarking difficult to carry out), and finally, the difficulty of exercising control at a distance. In this paper we make three contributions. Firstly, we explain why (contrary to conventional wisdom and accountability literature) NGO field workers may desire to be held (upward) accountable. Secondly, we challenge the established “new truth” and views in the accountability literature on NGOs where so-called functional accountability is being severely criticized and where the “obvious” solution is (supposedly) to (principally) hold NGOs downward accountable or socially accountable. Thirdly, we suggest a theoretical solution to the impasse in the accountability literature where a dichotomy is found between either being upward (i.e. vis-à-vis the donors) or downward (vis-à-vis the beneficiaries) accountable as an NGO.
STUDENTS' AND AUDITORS' UNDERSTANDING AND PERCEPTIONS OF TRUE AND FAIR VIEW
GARVEY, ANNE MARIE
GONZALO ANGULO, JOSÉ ANTONIO; PARTE ESTEBAN, LAURA
Category: ED = Accounting Education
This paper examines the understanding of the true and fair view (TFV) and its overriding principle in Spain by means of the perceptions observed from the results of a survey conducted on students (pre and postgraduate) and auditors. The intention is to detect if students correctly assimilate this concept in their studies by understanding that in order to obtain a true and fair view it is not enough to follow the accounting standards strictly but that in certain cases it may be necessary to override the accounting rules to obtain the final objective of the financial information. In the case of auditors the aim is to test the practical application of the TFV objective in their profession as well as the differences in perception noted in the student groups. The results show that, while the goal of reaching the TFV is fully integrated into the Spanish accounting system, the implications of such an objective are far from what would be expected. Most of the participants think that TFV is achieved simply by following the accounting standards. Both students and auditors plea for a more detailed written definition of TFV and the auditors disagree with the existence of penalties and fines in the case of non-compliance. These results could be interpreted as a practical rejection of the overriding aspect associated with the TFV notion in the EU Directives, logical in a country that prefers detailed legislation with little room for flexibility. On the other hand, the study detects an important learning effect in the perception of the groups, whose opinions change as a result of maturity and professional experience.
HOSPITAL ACCOUNTING AND THE INSOLUBLE PROBLEM OF HEALTH EXPENDITURE
GEBREITER, FLORIAN
Category: PS = Public Sector Accounting
Amid discourses on ageing populations and increasingly costly medical technologies, the problem of health expenditure is perceived as one of the most significant socio-economic challenges facing Britain and other developed societies. The “need” for ever more elaborate hospital accounting systems is often expressed with reference to this problem. This paper aims to further our understanding of the problem of health expenditure, and of its relationship with hospital accounting, by examining the conditions under which it emerged. Drawing on textual data from government reports and professional journals, the paper argues that the nationalisation of the British health services, the compilation of national health accounts and changing conceptions of the nature of disease transformed perceptions of health expenditure in the mid-20th century – from a “profitable” investment in the productive capacities of the nation to an “insoluble” socio-economic problem threatening to bankrupt the country. The paper furthermore links this transformation to the introduction of the first national hospital costing system in 1957. Building on these suggestions, this paper proposes that present day concerns regarding health expenditure are not an inevitable consequence of demographic and technological change but contingent upon conceptions of the nature of disease as well as healthcare funding and accounting arrangements which emerged in the mid-20th century.
BOARD COMPOSITION AND VALUE: THE CASE OF QUALITY EXCELLENCE
GEORGIOU, IFIGENIA
CHARITOU, ANDREAS; SOTERIOU, ANDREAS
Category: GV = Accounting and Governance
We empirically investigate the relationship between board composition and the likelihood of attaining quality excellence. Since the composition of the board is a reflection of the firm’s strategy, and strategy plays a pivotal role in attaining quality excellence, we propose and test whether board composition and the likelihood of attaining quality excellence are related. We focus on board composition with respect to directors’ expertise. Specifically, we examine the role of i) inside directors, ii) directors - experts on the main object of business operations, and iii) directors with management expertise. We use a conditional logistic model to assess the relationship between board composition and the likelihood of achieving quality excellence. We proxy quality excellence by the winning of a Malcolm Baldrige Quality Award. The dataset consists of a unique, hand-collected sample comprising of 63 first time award winners during the time period 1996- 2006 and a matching sample of 63 firms. Empirical results show that the number of directors with expertise on the main object of business operations of the firm is positively related to the likelihood of being awarded. This study contributes to the literature by shedding light on the corporate governance of firms that take the leap to go beyond survival and pursue excellence; furthermore, it highlights the strategic role of the board by demonstrating that board composition and quality excellence are related through these roles.
COMPETING RATIONALITIES: UK INVESTORS' AND ANALYSTS' PERSPECTIVES ON FAIR VALUE ACCOUNTING
GEORGIOU, OMIROS
Category: FA = Financial Analysis
In this paper we explore practitioners’ perspectives on the usefulness of Fair Value Accounting (FVA) drawn mainly from interviewing 28 investors and analysts based in London. We attempt to make sense of intricacies of acceptance and resistance to FVA by analysing investors’ and analysts’ views through the concept of ‘competing rationalities’ and in particular the four Weberian rationalities - theoretical, practical, formal and substantive - that coalesce and compete with each other guiding individuals’ perceptions and actions. It is contended here that economic rationales for the functionality (formally rational elements) of FVA only partially impinge on investors’ and analysts’ views and actions. Whether such elements of acceptance and resistance will continue to cause tensions and change is also explored. Findings show that financial statement users’ perspectives are embedded in a social web of beliefs, interests and values that causes them to resist the use of fair values in financial reports.
CORPORATE SOCIAL RESPONSIBILITY AND INTERNAL AUDITING
GERRITSEN, DANIELA
EULERICH, MARC; KAMP, TILL
Category: SE = Social and Environmental Accounting
In 1981 the researcher Elmer B. Staats wrote an article about the challenges auditing will have to face in the 21st century. While recognizing that the range of activities are getting broader he also suspects that by the year 2000 internal auditors will perform tasks that can be categorized under the term social accountability (Staats, 1981:6). Nowadays, corporate social responsibility as well as sustainability are major topics in wide parts of the economy and science. This development suggests that corporate social responsibility should also be relevant for internal auditing in some way. Surprisingly, the CBOK study for internal auditing of 2010 does not comply these expectations. Only few internal auditors perform social or sustainability audits. This paper aims to examine how the link between corporate social responsibility and internal auditing has developed in the past 31 years and what functions internal auditing could adopt regarding corporate social responsibility. To investigate this issue, a literature review based on 65 scientific papers was carried out. In this context, it is determined that although the subject is discussed in scientific literature it has not reached the mindset of internal auditors yet.
TASK COMPLEXITY, EXPERTISE AND ACCURACY OF EARNINGS FORECASTS
GHOSH, DIPANKAR
OLSEN, LORI
Category: FA = Financial Analysis
Financial analysts’ forecasts serve as a proxy for market earnings expectations. The judgment and decision-making (J/DM) literature suggests that those with more expertise will not perform better when tasks exhibit either extremely high or low complexity. It is for tasks between these two extremes where expertise is expected to contribute to superior performance. The current research partitions firms on forecasting complexity. Results indicate that expertise is not an explanatory factor for forecast accuracy when the forecasting task’s complexity is extremely high or low. However, when task complexity falls between these two extremes, expertise is a significant explanatory variable of forecast accuracy.
GLOBAL FINANCIAL CRISIS, COST MANAGEMENT TOOLS AND ”GREEN” PRODUCT DEVELOPMENT: AN EXPLORATORY STUDY IN ITALY
GIANNETTI, RICCARDO
MARELLI, ALESSANDRO
Category: MA = Management Accounting
An exit strategy from the global financial crisis can be also identified in the sustainable development of “green” innovation, as it can generate economic, environmental and social positive impacts. The literature on performance measurement in Research and Development (R&D) has included topics such as the selection of indicators best suited to R&D activities, the choice of the performance dimensions, and the organization of metrics. In this paper, the role played by cost management tools in new product development (NPD) activities is studied. This paper is based on a survey of 65 companies working in Italy. The sample has a small dimension but it is interesting because as a reaction to the economic slowdown, in Italy firms have modified their strategies to deal with increased competition and price stagnation, hence even a small size can be helpful in understanding the emerging strategies. The study shows how firms respond to the global financial crisis by developing new green products and services mainly in order to satisfy needs of loyal customers, acquire new customer in the same market and increase profitability of sales. The findings show a significant strategic orientation towards sustainability and a considerable implementation of cost management tools on development activities focusing on Activity-Based Costing/Management and Life Cycle costing. Other contextual factors are tested to highlight the possible significance of relationship with cost management tools in NPD.
“(HOW) SHOULD COMPANIES PROVIDE INFORMATION REGARDING THEIR SUSTAINABILITY ACTIVITIES?” – AN ACCOUNTING-BASED APPROACH
GIETL, SIMON
GOETTSCHE, MAX; HABISCH, ANDRE; WEISS, CHRISTOPHER
Category: SE = Social and Environmental Accounting
In our paper we use an accounting-based approach to assess whether companies which report under the regulations of the IFRS (International Financial Reporting Standards) Foundation need to provide a CSER (Corporate Social and Environmental Responsibility) report. In our view, such a CSER report is a necessity due to decision usefulness reasons, as numerous researchers have found evidence that CSER measures and CSER reports themselves have a statistically significant impact on companies’ values. Furthermore, we examine whether the sustainability framework of the Global Reporting Initiative (GRI), the world’s most widely adopted framework, meets the expectations on the IFRS reporting guidelines. Therefore, we compare the reporting principles of the IFRS framework to those of the GRI reporting guidelines. Although not all principles match exactly, we do find an overall correspondence. As a result, we conclude that there is a need for CSER reporting for IFRS adopters, ideally in alignment with the GRI.
UNCERTAINTY AND INFORMATION ASYMMETRY IN BUDGET NEGOTIATIONS
GILLENKIRCH, ROBERT
ARNOLD, MARKUS C.; GILLENKIRCH, ROBERT M.
Category: MA = Management Accounting
Participative budgeting processes are an important element of management control systems. In practice, budgets are typically set through a negotiation process. This study investigates the effects of uncertainty and information asymmetry on budget negotiations. Unlike the prior literature, it distin-guishes between information asymmetry, or one-sided uncertainty, where only the superior is uncertain about potential output, and common uncertainty, where both the superior and the subordinate face uncertainty. While both kinds of uncertainty have equivalent economic effects, they may strongly differ with regard to the psychological effects on conflict in budget negotiations. We conduct a laboratory experiment to disentangle these effects. We find that the psychological effect, but not the economic effect, increases conflict in budget negotiations and hurts performance. Specifically, superiors are more contending under one-sided than under common uncertainty. As a consequence, negotiation failures are more frequent. Furthermore, we find that superiors, when setting budgets following negotiation disagreement, account for the risk of losing the subordinate’s motivation under common uncertainty but not under one-sided uncertainty. Finally, after controlling for financial incentives, subordinates’ negative performance reactions to negotiation disagreement is particularly large under one-sided uncertainty.
UNDERSTANDING ENFORCEMENT FROM THE GAP BETWEEN ACCOUNTING STANDARDS AND THEIR USE
GILLQVIST, ANNA-STINA
Category: AU = Auditing
Enforcement has, in both research and practice, been suggested as an important tool for creating accounting of high quality and for achieving comparability amongst financial reports. Drawing on Wittgenstein’s Philosophical Investigations (1953), and its discussion of the relationship between a rule and its implications, this paper argues that ambiguities of accounting standards must be taken into account in our understanding of enforcement. Rather than perceiving enforcement as an objective and mechanic tool for detecting and sanctioning accounting errors, it is argued that enforcement must be understood as a co-constituter of “compliance”. Empirically, the paper shows how the gap between accounting standards and their use render judgments a necessary step for settling the issue of “compliance” in specific enforcement decisions.
ROME WASN'T BUILT IN A DAY BUT WHEN IT FELL IT BURNED IN ONE: REFLECTING ON TIME, VALUE CREATION AND VALUE DESTRUCTION
GIULIANI, MARCO
Category: MA = Management Accounting
In the accounting field, analyses, measurements and tools try to take into account, more or less explicitly, the temporal dimension. In analysing a firm’s future perspectives and its drivers a particular role is played by intangibles as they are considered to be one of the main lever to create value. Studies about intangibles tend to be focused on their role within the value creation process, overlooking their potential to destroy value. Moreover, both in the studies about the positive effects of intangibles and in the ones about the negative consequences, the temporal dimension is rarely considered explicitly and this implies that some of the proposed analyses can be temporally incorrect or misleading. The aim of this study is to investigate if and how intangibles are perceived to influence the value creation and destruction processes adopting a temporal lens. In other words, this paper is dedicated to understand, from a temporal perspective, the dynamics of the value creation and destruction processes, i.e. if a company destroys value in the same way it creates it and with the same timing. The main findings are the following. First, this study shows that intangibles affect the value creation process in different ways. Second, it emerges that the time-lags within the value destruction process tend to be shorter than the ones related to the value creation process, that is, “rome wasn't built in a day but when it fell it burned in one”.
EFFECTS OF MANAGEMENT CONTROL MECHANISMS: A HOLISTIC ANALYSIS
GOEBEL, SEBASTIAN
WEIßENBERGER, BARBARA E.
Category: MA = Management Accounting
Recently, there has been an increasing number of calls to examine management control systems from a more holistic and integrated perspective in order to avoid potential spurious findings of individual control mechanisms analyses. However, empirical studies on this topic are still scarce. Our study contributes to current management control literature by analyzing distinct relative effects of alternative management controls on organizational-level outcomes. More specifically, we examine how different management control mechanisms are related to control system effectiveness and organizational commitment and how these two outcomes subsequently affect overall organizational performance. Based on a cross-sectional survey among 295 senior management accountants, our results suggest that particularly more informal control mechanisms are strongly associated with beneficial outcomes. We can therefore support the growing importance of informal means of control as fundamental elements in contemporary organizations.
THE EFFECT OF CORPORATE TAX AVOIDANCE ON THE COST OF EQUITY
GOH, BENG WEE
LEE, JIMMY; LIM, CHEE YEOW; SHEVLIN, TERRY
Category: FR = Financial Reporting
This paper examines the relation between tax avoidance and cost of equity. Based on the model developed by Lambert et al. (2007), we predict that tax avoidance can lead to a (i) higher cost of equity if investors perceive tax avoidance as involving complex transactions that increases firm opacity and facilitates managerial opportunistic rent-seeking, or (ii) lower cost of equity if cash savings from taxes can be redeployed to more productive uses and risk-neutral investors prefer risk-averse managers to engage in risky tax planning activities that create value. Our empirical results show that greater tax avoidance is associated with a lower cost of equity. This effect is economically significant: a one standard deviation increase in our measure of tax avoidance is associated with 20 basis points to 26 basis points reduction in the cost of equity. Further analyses show that the effect is stronger for (i) firms with better outside monitoring, (ii) firms that likely realize higher marginal benefits from tax savings, and (iii) firms with better information quality. Our study is the first large-sample study that directly examines how investors perceive corporate tax avoidance and our findings suggest that tax planning is a value-enhancing activity that investors appreciate in general.
MANAGEMENT CONTROL SYSTEMS AS DRIVERS OF THE RELATIONSHIP BETWEEN INTERNATIONALIZATION AND ORGANIZATIONAL PERFORMANCE. AN EMPIRICAL ANALYSIS.
GÓMEZ CONDE, JACOBO
GONZALEZ-SANCHEZ, MARIA BEATRIZ; LOPEZ-VALEIRAS, ERNESTO
Category: MA = Management Accounting
Several previous studies argue that existing research examining the link between internationalization and performance has overlooked potential intermediate variables. In this sense, an inadequate control of the relationship with foreign companies can impair performance of international operations. Therefore, there is the need to adopt management tools to build and improve these relationships. Hence, management control systems (MCS) providing information both internal and external becomes a tool that potentially could enable internationalization to generate competitive advantage. This paper aims to provide a better understanding of the nature of this relationship. Information was collected through a survey data gathered from senior managers of 231 firms with ten or more employees. The use of diversity MCS is considered as an overall measure that comprises three individual control systems widely used in practice. The results reveal support for the research question suggesting that diversity of MCS mechanisms help to facilitate the impact of internationalization on organizational performance.
THE EFFECT OF GROUP PERFORMANCE REPORTS ON COOPERATIVE EFFORT
GOMEZ-RUIZ, LAURA
CARDINAELS, EDDY; NARANJO-GIL, DAVID
Category: MA = Management Accounting
Team-based incentives often trigger free-riding behavior. If team members observe free-riding, they can follow free-riders or they can try to adapt free-riders to the social norm of cooperation. Accounting literature has extensively analysed the control mechanisms that can reduce free-riding behaviour, but few studies has focused on how informational features of performance reporting influence team members´ adaptation to social norms. In this paper we compare two types of group performance reports in either an aggregated form (which shows only aggregated outcomes) or in a more detailed form (which disaggregates the aggregated outcome to the level of individual effort of each team member) under different levels of social identity. While both reports allow people to form ideas about the level of effort of their teammates (free-riding), results show that providing detailed information is not necessarily good news. Our findings suggest that performance report influences team members´ behaviour directly and indirectly via the social comparison process. A performance report in a detailed form may increase the negative effects of social comparison process, which in turn increases free-riding behaviour compared to a report in aggregated form. Furthermore, our results show that, only team members with high team identity and aggregated feedback maintain high levels of effort across periods.
COMPARING THE USEFULNESS OF HISTORICAL-COST INCOME AND FAIR-VALUE BASED INCOME
GONCHAROV, IGOR
WIRTZ, DIETER
Category: FR = Financial Reporting
While IFRS permits firms to recognize unrealized gains and unrealized losses of non-financial fixed assets, U.S. GAAP forbids firms to report unrealized gains but requires firms to report impairment losses in financial statements once the depreciated book value is not recoverable. The asymmetric treatment under U.S. GAAP is due to the FASB’s concern that firm managers overstate the value of assets based on unobservable inputs. In turn, impairments and unrealized losses are expected to inform investors about bad news equally well. We subject these arguments to an empirical test and argue that impairments are reported in nonroutine setting, which reduces their informativeness relative to unrealized losses. We also predict that unrealized gains explain the higher informativeness of fair-value based income over historical-cost income. We test our predictions using the real estate setting and contrasting U.S. GAAP impairments of investment property and U.K. unrealized property gains and losses reported under IFRS. We find that unrealized gains in the U.K. contain value relevant and timely information. Furthermore, unrealized losses are a better signal of the significant property market downturn and are more informative than impairments. Overall, this study provides evidence that reporting of unrealized gains and unrealized losses explains makes historical-cost income more useful in explaining share prices and market returns.
DELEGATION, PERFORMANCE MEASUREMENT, INCENTIVE COMPENSATION AND PERFORMANCE: AN EMPIRICAL ANALYSIS
GONG, MALEEN Z.
FERREIRA, ALDÓNIO; GONG, MALEEN Z.
Category: MA = Management Accounting
This study examines the impact on firm performance of theoretically-consistent relationships between three management control systems (MCS) design choices — delegation, performance measurement, and incentive compensation. Based upon the ‘three-legged stool’ model and agency theory, it hypothesises that theoretically-consistent MCS design choices are associated with enhanced firm performance. Using survey data from large Australian firms, the findings largely support the hypotheses, suggesting that an appropriate MCS design is a determinant of firm performance. The study contributes to the literature by moving beyond a focus on the antecedents of three key MCS design choices to the consequences of alignment of those choices.
EFFECT OF INTERACTIVE USE OF MANAGEMENT CONTROL SYSTEMS ON INNOVATIVE AND FINANCIAL PERFORMANCE
GONZÁLEZ SÁNCHEZ, Mª BEATRIZ
LÓPEZ-VALEIRAS, ERNESTO ; RIPOLL FELIU, VICENTE; RODRÍGUEZ-GONZÁLEZ, ESTEFANÍA
Category: MA = Management Accounting
Papers within the framework of accounting literature that study the relationship between the use of Management Control Systems, innovative capability performance (ICP) and financial performance present ambiguous results. The aim of this paper is to contribute new empirical evidence to expand knowledge of the nature of this relationship. For this, first, starting from the proposal by Bisbe and Otley (2004), other types of ICP not previously considered are incorporated into that model. In the accounting literature, estimation of ICP has focused on the study of product innovation, ignoring other types of innovative output. Second, a sample of firms belonging to a single industry is used. In contrast to previous studies which use only multi-industry samples, the consideration of a single industry permits extraction of only those aspects of a strictly entrepreneurial character that can better discriminate the results. From a sample of 247 firms, the results obtained suggest that the interactive use of Management Control Systems (iMCS) favours product, process and organisational innovation. However, contrary to expectations, only process innovation acts as a mediator variable between iMCS and financial performance. Nor do we find evidence of the potential moderator effect of iMCS between ICP and financial performance.
THE JOINT EFFECT OF AUDITOR TENURE AND AUDITOR TYPE ON AUDIT QUALITY IN THE GOVERNMENTAL NONPROFIT ORGANIZATIONS
GONZÁLEZ-DÍAZ, BELÉN
GARCÍA-FERNÁNDEZ, ROBERTO; GONZÁLEZ-DÍAZ, BELÉN; LÓPEZ-DÍAZ, ANTONIO
Category: PS = Public Sector Accounting
Over the last few decades the relationship between auditor tenure and audit quality has been constantly debated by researchers and thus far the topic has still not been fully. This paper provides fresh empirical evidence which adds to the debate as it explores whether or not there is a relationship between different auditor characteristics which may affect audit quality, measured as the likelihood of an auditor issuing a qualified opinion. Specifically, we investigate whether there is an interaction effect between auditor type and auditor tenure. The paper also examines whether audit quality is influenced by additional factors. In order to carry out the research, different logistic regression models were estimated using a sample of 211 audits of Spanish Governmental Nonprofit Organizations (GNPOs) over the years 2003 to 2009. The results do not suggest such a relationship to exist but they indicate the influence of auditor tenure on audit quality. In this respect the research reveals that the longer auditor tenure in GNPOs lasts, the lesser the likelihood that their audit reports will give a qualified opinion. Additionally, it also be concluded that opinions received by GNPOs in their audit reports from the previous year plus sector and year are all relevant factors in audit quality.
MAY EXPERTISE MITIGATE UNINTENTIONAL BIAS IN AUDITING?
GONZALO, JOSE ANTONIO
GURIRAL, ANDRÉS; RODGERS, WAYMONG; RUIZ BARBADILLO, EMILIANO
Category: AU = Auditing
Because the auditing profession has been associated with much of the well-publicized corporate misconduct and consequent regulatory reform, it is important for both academics and practitioners to understand how biases influence auditing opinions, as well as how we might counteract those biases. According to moral seduction theory, auditors’ judgments may be morally induced by conflicts of interest in an unconscious manner. We combined a cognitive model with moral seduction theory to demonstrate in a laboratory experiment that expertise may help to mitigate auditors’ unconscious reporting bias. In particular, we examined the most controversial and complex task in auditing: the evaluation of the client’s ability to continue in existence and the dilemma of the so called “self-fulfilling prophecy” effect.
REVISITING THE EFFECTS OF INDUSTRY EXPERTISE ON AUDIT PRICING
GOODWIN, JOHN
WU, DONGHUI
Category: AU = Auditing
Several studies report an audit fee premium for auditor industry expertise measured at the office-level. We extend this line of research by examining whether there is a fee premium for auditor industry expertise measured at the partner level. We show that the coefficient for partner-level industry expertise is highly significant and economically important. This is consistent with industry knowledge or expertise residing in the human capital of individual engagement partners. Inconsistent with prior research, we show that there is no auditor industry expertise fee premium at the audit office level when expertise at the partner-level is controlled for. Consistent with prior research we find little evidence of a fee premium at the national level. In sum, our results show that the auditor industry expertise fee premium is mainly a partner-level phenomenon, casting doubt on the belief that industry knowledge or expertise is distributed across engagement partners within an audit office.
EARLY EVIDENCE FROM CANADIAN FIRMS’ CHOICE BETWEEN IFRS AND US GAAP
GORDON, ELIZABETH
BURNETT, BRIAN; GORDON, ELIZABETH; JORGENSEN, BJORN; LINTHICUM, CHERYL
Category: FR = Financial Reporting
We study the unintended consequences of Canada abandoning Canadian Generally Accepted Accounting Principles (GAAP) and adopting International Financial Reporting Standards (IFRS) as the dominant accounting standard for fiscal years starting on or after January 1, 2011. Researchers and US regulators should be particularly interested in Canada’s recent experience due to strong similarities in the standards and financial reporting incentives of US and Canada and because Canada de facto allowed firms to adopt US GAAP in lieu of IFRS. Hence, some Canadian firms opted to use US GAAP, others transitioned to IFRS. First, we examine Canadian firms that before 2011 were considered foreign private issuers by the U.S. Securities and Exchange Commission, which were more likely to adopt US GAAP. We document that more Canadian firms report under US GAAP after Canada’s adoption of IFRS. As a result of this choice, 15% of foreign private issuers previously reporting under Canadian GAAP opted to voluntarily switch to US GAAP. We find that the firms more likely to choose IFRS are larger, in the developmental stage, or have fewer US operations. Second, we analyze the capital market effects of the adoption of either IFRS or US GAAP finding no or limited market reaction to Canada’s adoption of IFRS. Third, we investigate whether liquidity changed for Canadian firms around their adoption of either IFRS or US GAAP. Consistent with an increase in information asymmetry around IFRS adoption, bid-ask spreads increased for Canadian firms, that are not listed in the US, especially smaller firms.
STUDENTS AS SURROGATES FOR MANAGERS: EVALUATING THE CONCLUSIONS FROM A REPLICATED ACCOUNTING EXPERIMENT
GORDON, IRENE M.
TROTTIER, KIM
Category: ED = Accounting Education
The use of students as surrogates for managers in experiments is commonplace, yet the validity of this practice has not been established. This paper contributes to our understanding of the appropriateness of using student samples by replicating a manager based experiment with undergraduate students and comparing the outcome. The result is that student responses are significantly different from manager responses, but both samples lead to the same conclusion with respect to the research question in the experiment. This suggests that having some disassociation between students and the target population they are meant to represent does not necessarily have an adverse effect on inference. Student characteristics are then examined to identify subgroups that are most similar to managers. The findings are that students with work experience, average grades, and a background suited to the experiment are the best surrogates for managers. This insight informs our limited understanding of when students are appropriate proxies for managers in research experiments.
REVERSE MERGERS AND EARNINGS QUALITY
GOTTI, GIORGIO
CHEN, CHU; SCHUMANN, KATHRYN
Category: FR = Financial Reporting
We test for differences in financial reporting quality between companies that went public through a reverse merger (RM) vs. other public companies and IPO firms. Moreover we test whether audit quality (Big 4), foreign incorporation, and seasoned equity offering (SEO) play a role in the earnings quality of RM firms, above and beyond reverse mergers. The presence of a Big 4 auditor does appear to enhance reporting quality and contribute to the survival for firms audited by one of the Big 4 auditors. The rate of survival is significantly higher (almost twice as much) than the rate of survival for firms that went through RM with a non-Big 4 auditor. Furthermore, contrary to popular beliefs, we find evidence of earnings management in both U.S. and international RM companies. Finally, we find that earnings management is pervasive at all RM firms, especially those that need to raise capital through an SEO after the merger.
THE PRIVATE FINANCE INITIATIVE (PFI) IN THE ENGLISH NATIONAL HEALTH SERVICE (NHS): POWER (IM)BALANCE AND MUTUAL (IN)DEPENDENCE FROM A RESOURCE DEPENDENCE PERSPECTIVE
GOUGOUMANOVA, ZLATINKA
KHADAROO, IQBAL; MALAGUEÑO, RICARDO
Category: PS = Public Sector Accounting
This research studies the Private Finance Initiative (PFI) in the English National Health Service (NHS) from a resource dependence theory (RDT) perspective (Pfeffer and Salancik, 1978, 2003). It also examines the approximate configurations of power (im)balance and mutual (in)dependence between the public and private sectors in operating acute NHS PFIs (intra-PFI and inter-PFI relationships). Additionally, the issue of how these relationships become more power balanced and more mutually dependent is examined. The study uses mixed methods of research – semi-structured interviews with managers involved in the NHS PFI across England and quantification of interview data in the form of dependency dyads. The study concludes that intra-PFI dependency configurations are more diverse than inter-PFI dependency configurations. The relationships examined may become more power balanced and more mutually dependent via standardisation of PFI contracts, via simplification of the PFI processes, and via negotiation, among others.
MANAGEMENT EARNINGS FORECASTS AND LONG RUN PERFORMANCE IPOS
GOUNOPOULOS, DIMITRIOS
GOUNOPOULOS, DIMITRIOS; KOUSENIDIS, DIMITRIS; NEGAKIS, CHRISTOS
Category: FR = Financial Reporting
Companies making initial public offerings in Greece were obliged to include next year‟s profit in prospectuses until the regulation changed to voluntary status. This study takes advantage of these two regulatory regimes and analyzes the long-term performance of 303 IPOs over 36 months of secondary market performance. Findings indicate behavioural change, as positive three years return during the mandatory era turn negative in the voluntary period. The comparison of these two regimes suggests that mandatory regulatory environment by forcing firms to provide earnings forecast delivered better investors returns. Instead, the results reveal that existence of a regulation penalizing IPOs for providing highly inaccurate earnings affects long term returns as it creates unsecure investment environment. Opportunities for good long term performance improves for IPOs going public in a mandatory earnings setting during a „cold‟ period with low given ownership and high oversubscription. It is noteworthy that luck of experience and high associated cost prohibits a number of IPOs from providing earnings forecast during the voluntary period.
PROBLEMATIZING THE INTERPLAY BETWEEN MANDATORY AND VOLUNTARY DISCLOSURES: BALANCING FRAMES AND CONTROLLING OVERFLOWS
GRAAF, JOHAN
Category: FR = Financial Reporting
The aim of this study is to contribute to the understanding of the interplay between mandatory and voluntary disclosure. The paper displays two examples of firms which developed off-balance sheet models of resources that could not be explained through mandatory reporting practices yet so important that the firms developed their own disclosures. By focusing on earnings conference calls, this study contributes with a deeper knowledge surrounding the boundaries of mandatory reporting and the circumstances with which voluntary disclosures gain relevance. Drawing on Callon’s (1998, 1999) theory of the framing of markets, and the subsequent adaption of this theory by Mouritsen (2003, 2004, 2009), this paper tries to show voluntary reporting as a way of controlling overflow without being restricted by the frames of financial reporting. Findings show that voluntary reporting should be seen as something which enables the firm to account for important matters without having to internalize them completely because, although sounding contradictory, the moment they are put in the financial statement, they lose the purpose for which they were disclosed in the first place.
THE USE OF E-LEARNING IN THE TEACHING OF ACCOUNTING - THE CASE OF POLAND
GRABINSKI, KONRAD
KĘDZIOR, MARCIN; KRASODOMSKA, JOANNA
Category: ED = Accounting Education
Nowadays, universities increasingly exploit the potential of the internet implementing e-learning as a key feature of modern education. The paper examines the impact of applying e-learning in academic education process with respect to accounting. It is focused on quality, benefits and drawbacks of e-learning courses with respect to students, lecturers and academic institutions. On the basis of literature review and previously performed empirical studies the authors have developed four research hypotheses. In order to verify them, a survey has been conducted among students at Cracow University of Economics in Poland. The sample consists of 441 students who participated in blended learning courses on International Accounting and Bank Accounting in academic year 2010/2011 and 2011/2012. The results of the survey indicated that e-learning is generally positively perceived by students with previous experience of e-classes and those who appreciate the flexibility of timetable. Additionally, the results show that male students have a more positive attitude towards e-learning than female students. Contrary to what was expected, third-year external students perceive e-learning less positively than first-year full-time students. The main drawbacks of e-learning accounting course pointed out by the students include the impossibility to ask questions as they arise, no direct contact with the lecturer, the need for independent organization of education.
FAIR VALUE ACCOUNTING REFORMS IN CHINA: TOWARDS AN ACCOUNTING MOVEMENT THEORY
GRAHAM, CAMERON
BEWLEY, KATHRYN; PENG, SONGLAN
Category: FR = Financial Reporting
How do accounting principles become generally accepted? This study develops an analytical framework for the process of general acceptance based on research into social movements. Social movement theory (SMT) has its roots in management and sociology research. We draw on SMT to develop a framework adapted to the highly institutionalized field of accounting. Looking at the stop-start process that began in 1997 and eventually led to the acceptance of fair value accounting (FVA) in China, we show that SMT-based factors can explain the success and speed with which a new accounting principle like FVA is introduced into practice. The initial failure of Chinese FVA proponents to introduce it in 2000, followed by the success of their efforts a few years later, offers us a unique opportunity to come to grips with the factors that lead to general acceptance. This study provides a theory-based analysis of processes that in some respects are unique to the Chinese setting, offering us a glimpse of accounting in an emerging economy. However, because the field of Chinese financial accounting shares many institutional features with the rest of the world, the theoretical model we develop can also provide insights into accounting standards setting in other jurisdictions.
RELATIONSHIP BETWEEN INTERNAL AND EXTERNAL AUDITING AND ITS EFFECT ON FINANCIAL REPORTING QUALITY
GRAS, ESTER
ANTON, MARCOS; GARCIA, DOMINGO; MARIN, SALVADOR
Category: AU = Auditing
The internal audit function (IAF) has taken on a major role in the regulation of corporate governance. In this sense, it is fundamental in the financial information quality, as a supervisor of the reliability of financial reporting. This paper examines whether the relationship between the IAF and the external audit (EA) affects financial reporting quality. We have analyzed the internal audit departments of Spanish banks, using a sample of 47 entities. Our results show that when the relationship between the IAF and external audit is greater, with more regular meetings and greater collaboration in preparing the annual audit, banks have higher quality of financial reporting.
EARNINGS QUALITY AND INTERNATIONAL FINANCIAL REPORTING STANDARDS IN EUROPE: THE PERSISTENCE OF CULTURAL INFLUENCES
GRAY, SIDNEY
KANG, TONY; LIN, ZHIWEI; TANG, QINGLIANG
Category: FR = Financial Reporting
We study the effects of national culture on earnings quality as captured by the degree to which managers exercise accounting discretion (i.e. earnings management) subsequent to the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union. Our main interest is in investigating whether the adoption of high quality accounting standards across jurisdictions reduces the effects of an important country-specific institutional factor that is known to influence financial reporting, i.e. national culture. We find that the relationship between national culture and earnings discretion varies pre and post-IFRS, and that this relationship is more pronounced in the post-IFRS period. At the same time, this relationship is mitigated somewhat by the extensiveness of national disclosure regulations. These results suggest that the setting of uniform high quality standards is but one step towards achieving accounting harmonization.
OWNERSHIP TYPES, CORPORATE GOVERNANCE AND DISCRETIONARY IMPAIRMENT OF ASSETS. AN INTERNATIONAL COMPARISON
GRECO, GIULIO
ALLEGRINI, MARCO; FERRAMOSCA, SILVIA
Category: GV = Accounting and Governance
In this paper, we investigate whether and how ownership types and corporate governance mechanisms are associated to the manipulation of impairment losses on long-lived assets (goodwill, PPE, intangibles). We partition the impairment losses into expected non-discretionary and unexpected discretionary components. We explore whether ownership structures and corporate governance affect the magnitude of discretionary losses, comparing three different corporate governance environments: United Kingdom, Germany and Italy. Consistently with predictions by agency theory and political theory, we find that insider ownership and state ownership are positively associated to the magnitude of discretionary impairment losses, whilst institutional investors ownership and the strength of governance mechanisms have a negative effect. The findings are distinctive for each setting examined. Our study show that ownership types and corporate governance are intervening variables in the assets impairment decision-making process. The results also suggest interdependencies among ownership structures and corporate governance in influencing this accounting decision. On the one hand, the ownership types influence on discretionary assets write-offs appear to be facilitated or constrained by the governance system; on the other hand, ownership structures can prevent effective monitoring by governance mechanisms. The results may be of interest to market participants and audit firms.
THE INFORMATIVENESS OF DISCLOSURES UNDER AUSTRALIA'S NATIONAL GREENHOUSE AND ENERGY REPORTING ACT
GREEN, WENDY
COULTON, JEFF; TAO, TARA
Category: SE = Social and Environmental Accounting
This study documents that greenhouse gas (GHG) emissions reported under the first mandatory GHG emissions reporting scheme in Australia, the National Greenhouse and Energy Reporting Act (NGER), are informative. Value relevance tests also suggest that the market does not treat the reported GHG emissions as unbooked liabilities, contrary to expectations. In the majority of our tests, GHG emissions are positively associated with market prices. Our information content (price and volume reaction tests) suggests that the release of NGER data does not cause traders to significantly alter their priors, likely due to the long lead time between the reporting of the emissions data by companies, and its release by the government.
CONTEMPORARY PROFESSIONALISM AND COMPETING INSTITUTIONAL LOGICS: THE IMPACT OF ANTI-AVOIDANCE TAX LEGISLATION ON THE ACCOUNTING PROFESSION
GRIFFIN, SUSAN
PIERCE, AILEEN
Category: TX = Taxation
The objectives of this two-phase study are to examine (i) the initial perceived resistance of the accounting profession to regulation of its taxation services between 1989 and 2010, in the form of anti-avoidance tax legislation, in Ireland and (ii) the subsequent impact which increased regulation post 2011 has had on the attitudes and work practices of accountants. The first phase uses interviews and documentary evidence to examine the counter-intuitive finding on how regulatory pressures from state agencies appear to have been ineffective in bringing about substantive change in the work practices of accountants. The second phase uses interviews to explore the attitudes of accountants to tax avoidance post 2011 and the impact which it has had on the provision of tax services to their clients.
PERFORMANCE MEASUREMENT ATTITUDES AND TEAM LEARNING EXPLAINED AFTER CO-DEVELOPING TEAM PERFORMANCE MEASURES
GROEN, BIANCA
EVERS, FRANK ; GRAVESTEIJN, MARIANNE; MOLENVELD, MARTIJN; SCHOPMAN, MIKE; VEERBEEK, RENS
Category: MA = Management Accounting
Developing team performance measures together with the employees of a team whose performance will be measured may have many advantages for organizations. In this triangulated mixed-methods longitudinal action study we show how our intervention process shaped the acceptance of the resulting performance measures; and how this process has contributed to establishing team learning practices. In a period of two years, various team performance measures were crafted through a process involving all the members of the work-floor of a human-resource administrative call center of a large bureaucratic public-sector organization. Before and after our low-cost intervention we employed a survey and collected team performance and qualitative data with which we were able to support most of the hypotheses. Consistent with similar other studies, after the performance measures had been developed in a bottom-up fashion, we found a significant improvement in employee attitude toward performance measurement as well as in team performance. Moreover, we found employee professionalism; balanced leadership; and team psychological safety to explain employee attitude toward performance measurement and team learning practices. We will discuss the derived qualitative insights and lessons learned that are in accordance with these findings.
NON-PRACTICES OF NONFINANCIAL COMMUNICATION
GROTTKE, MARKUS
Category: FR = Financial Reporting
The present exploratory interview study investigates what actors do not when writing and auditing annual reports and when extracting information out of annual reports. For this purpose I draw on the methodology employed by Michel Foucault in order to characterize rationality from the perspective of madness. The identified non-practices provide insights into what are the power relations which shape the impact of individual actors in the course of an annual report. For accounting research, among other things, the insights provide new interpretations and competing explanations on the theory of information (-inefficiency) of capital markets, the thesis of the expectation gap of auditors work and the thesis that the production of annual reports results in hyperrealities produced by bullshitters.
FRIENDS IN NEED ARE FRIENDS INDEED: THE EFFECTS OF SOCIAL TIES BETWEEN FINANCIAL ANALYSTS AND MUTUAL FUND MANAGERS
GU, ZHAOYANG
LI, GUANGQING; LI, ZENGQUAN; YANG, GEORGE
Category: FA = Financial Analysis
We investigate how social ties developed at workplace between financial analysts and mutual fund managers lead to their biased behavior. We show that, for stocks held by mutual funds, analysts socially connected with the fund managers issue more optimistic recommendations than unconnected analysts. This effect holds after controlling for other ties between analysts and fund managers such as ownership of analysts’ brokerages in the funds or allocation of trading commission fees by the funds to the analysts’ brokerages. In return, analysts are more likely to be voted as star analysts when a larger proportion of voters are connected fund managers. Analysts’ brokerages are also likely to obtain larger trading commission fees from funds with connected managers. Collectively, these results suggest that social ties play an important role in the business decisions of financial analysts and mutual fund managers.
WHAT DETERMINES ANALYSTS’ REACTIONS TO EARNINGS MANAGEMENT
GUAN, YUYAN
Category: FR = Financial Reporting
This study examines the determinants of analysts’ reactions to firms’ earnings management when analysts revise their earnings forecasts in response to earnings announcement. We expect that analysts revise their forecasts according to their forecast errors and adjust for the reporting biases (i.e., earnings management) embedded in reported earnings. I hypothesize that the relationship between forecast revisions and reporting biases can be affected by analysts’ forecasting ability, the inherent uncertainty of whether reporting biases have occurred, as well as analysts’ incentives. The empirical results show some evidence that well-experienced analysts adjust more for earnings management while analysts following a great number of industries adjust less for earnings management. I also find that analysts adjust less for earnings management when: 1) the past volatility of discretionary accruals is high; and 2) the firm has a great propensity to smooth earnings. Moreover, analysts adjust more for earnings management in the post-Reg FD period than in the pre-Reg FD period.
BUDGET FORECAST DEVIATIONS IN MUNICIPAL GOVERNMENTS: DETERMINANTS AND IMPLICATIONS
GUILLAMÓN, MARÍA-DOLORES
BASTIDA, FRANCISCO; BENITO, BERNARDINO; RÍOS, ANA; VICENTE, CRISTINA
Category: PS = Public Sector Accounting
The credibility of policy decisions depends on reliable budgets that are consistently enforced. This paper empirically analyses the determinants of Spanish municipalities’ budget forecasts quality. The aim is to draw conclusions that can be useful to decision makers and legislators. We show an opportunistic behaviour influenced by the electoral cycle. Specifically, we identify two manipulation strategies. First, incumbents overestimate revenues, which allows them to spend more as they match budgeted revenues to budgeted expenditures. In a second step, actual expenditures exceed budgeted expenditures to get more popularity and electoral support. These budget deviations may imply that legislation stipulating a balanced budget ought to be reassessed in light of the tools politicians use to manipulate the budget. Legal punishments should be enacted to prevent budget deviations aimed to manipulate. Finally, our results suggest that the budget forecast procedure should be made transparent and externally audited/monitored.
MANAGING RISK WITH SOCIALLY RESPONSIBLE ACTIONS IN FIRMS INVOLVED IN CONTROVERSIAL ACTIVITIES AND EARNINGS MANAGEMENT
GUILLAMON SAORIN, ENCARNA
BLANCO, BELEN; GUILLAMON-SAORIN, ENCARNA; GUIRAL, ANDRES
Category: SE = Social and Environmental Accounting
In this study we analyze the association between corporate social performance and firm’s risk in firms involved in controversial activities, and the role of earnings management in this association. Using a US sample for 2004-2008, we find that involvement in controversial issues increases risk of firms despite their engagement in social activities. Additionally, we find that firms involved in controversial activities that manage their earnings upward, increase levels of risk, no matter if they engage in social activities or not.
CAN EXCELLENCE IN CORPORATE SOCIAL PERFORMANCE IMPROVE INVESTORS’ FINANCIAL ASSESSMENTS AND CREDIBILITY OF MANAGERS’ FORECASTS?
GUIRAL, ANDRES
CHOI, HYUNJUNG ; GUIRAL, ANDRES ; MOON, DOOCHEOL
Category: FA = Financial Analysis
In contrast to the extensive archival research on the relation between corporate social performance (CSP) and financial performance, behavioral studies are very scarce. We respond to a recent call for further experimental research on this issue by exploring to what extent excellence in CSP affects investors’ judgments of financial assessments (i.e., future profitability, liquidity and financial risk) and credibility of management’s forecasts. Following recent research suggesting that the CSP-financial performance link is U-shaped, we define excellence in CSP as the case of a firm simultaneously showing high and permanent social performance and being provided with professional assurance on social reporting. We design a 2x2x2 experiment by manipulating CSP (high vs. low), assurance (present vs. absent) and order of evidence, in which investors are asked to provide their judgments on the financial status of the firm. Our results indicate that CSP excellence has an impact on both investors’ financial assessments and their reliance on management forecasted information. Therefore, we find support for the argument that only the combination of superior and permanent CSP and reliable CSR disclosure pays off.
SITUATED TIMELINESS – UNRAVELING A CLASSICAL MANAGEMENT INFORMATION QUALITY
GULLBERG, CECILIA
Category: IS = Accounting and Information Systems
Inspired by the growing interest in the micro foundations of organisations, this paper puts forward the idea of situated timeliness. Timeliness has long been viewed as a vital, yet often lacking, quality of management accounting systems. Contemporary information systems, promising real-time information, make it even more pronounced. However, most studies focus on firm level relationships between timeliness and e.g., strategy or performance. This has left us with an aggregated understanding, ignoring the local context of timeliness, e.g., what kind of information that needs to be timely, to what type of manager, and in what control situation. Therefore, I argue that timeliness needs to be explored in detail. Building on a case study of a construction firm, this paper decomposes timeliness into a number of dimensions, and situates it in a variety of managerial contexts. The findings indicate that frequency and speed of information do not always equal timeliness; fast retrieval, fast interpretation, and fast measuring and entering of in-data are also vital - sometimes compromising the completeness of the information. The importance of timeliness varies across managerial contexts such as financial follow-up and monitoring of customers, indicating a need for both periodic information, and close-to-real-time information. Decomposing and situating timeliness enable a closer look on the origin of timeliness related problems, and to what extent information systems can remedy those.
ENHANCING DYNAMIC PERFORMANCE MEASUREMENT SYSTEMS THROUGH INFORMATION SYSTEMS INTEGRATION
GULLKVIST, BENITA M.
Category: IS = Accounting and Information Systems
This article contributes to contemporary research on dynamic performance measurement systems (DPMS) by investigating how the level of corporate information systems (IS) integration affects the extent of dynamism in PMS through information quality. Data was collected through a survey questionnaire, which was distributed to Finnish business controllers and Chief Financial Officers (CFOs). The results of the Partial Least Squares (PLS) test (n=111) provide significant support for the proposed model explaining approximately 33 per cent of the variance in DPMS. The results indicate that a higher level of data integration and communication networks integration will positively and significantly attribute to information quality which in turn significantly will affect the extent of DPMS. The results show, however, only direct effects of the flexibility dimension of communication networks integration on DPMS. The implications of the results as well as future research will be discussed.
AN EXAMINATION OF THE RELATIONSHIP BETWEEN ORGANIZATIONAL CULTURE AND MANAGEMENT CONTROL SYSTEMS
GÜNTHER, THOMAS
HEINICKE, ANJA; WIDENER, SALLY K.
Category: MA = Management Accounting
This study examines the effect of organizational culture on management control systems in small and medium sized enterprises (SMEs). We use a structural equation model to investigate whether the extent a firm emphasises a flexible culture is related to the beliefs, boundary, diagnostic and control systems contained in the Levers of Control framework. We also examine whether two key contingency variables, size and uncertainty, affect our proposed model. Using survey data from 267 top managers, we find, as expected, a direct relationship between the extent a firm emphasises a flexible culture and the emphasis they place on the beliefs system. We find that the direct relationship between the extent of em¬phasis on a flexible culture and the use of an interactive performance measurement system is conditional on uncertainty and size. When there is high environmental uncertainty or when the SMEs are smaller, a significant positive relation exists. Interestingly, when the SMEs are smaller, the more they emphasize a flexible culture, the less focus they on the diagnostic system relative to larger SMEs. We also hypothesize and find that the emphasis placed on the beliefs system influences both the emphasis placed on the boundary system and the use of an interactive measurement system, and that the influence is greater in larger SMEs relative to smaller SMEs. These results show that the beliefs system is crucial to the work¬ings of control in SMEs that emphasize a flexible culture.
PSYCHOMETRIC EVALUATION OF THE STUDENT AUTHORSHIP QUESTIONNAIRE: A CONFIRMATORY FACTOR ANALYSIS APPROACH
GUO, XIN
BALLANTINE, JOAN; LARRES, PATRICIA
Category: ED = Accounting Education
Abstract This study is carried out in response to a call from Pittam et al. (2009) to provide more evidence about the psychometric properties of their Student Authorship Questionnaire (SAQ). In so doing this research adds to the literature on authorial identity and its potential to minimise the incidence of unintentional plagiarism. Exploratory and confirmatory factor analysis (EFA and CFA) are employed to investigate the measurement properties of the scales which comprise the SAQ using data collected from 588 accounting students. The results provide limited psychometric support in favour of the factorial structure reported by Pittam et al. (2009). Comparisons are made between the findings in the current study and those reported by Pittam et al. (2009) and further research in the area suggested. Keywords: Authorial Identity, Unintentional Plagiarism, SAQ, Discipline, Voice, Accounting Education
QUALITY OF INTELLECTUAL CAPITAL INFORMATION IN ANALYST REPORTS: AUSTRALIAN EVIDENCE
GUTHRIE, JAMES
ABHAYAWANSA, SUBHASH
Category: FA = Financial Analysis
This paper explores qualitative characteristics of intellectual capital (IC) information disclosed by sell-side financial analysts in initiating coverage reports written on Australian companies. Through the use of a multi-dimensional coding framework, it examines the format, news-tenor and time-orientation of disclosure relating to IC (i.e., relational, human, structural capital and subcategories within them). We find that the proportions of IC information disclosed differ by format, news-tenor and time orientation not only in relation to the main IC categories but also subcategories. Although IC disclosures in the main were found to be more discursive than numerical, positive than negative and forward-looking than past-oriented, differences in this pattern are observed for IC categories and subcategories highlighting the importance of understanding not only types of IC disclosed but also their quality. Analysts provide comparatively more numerical IC disclosures than has been found to be provided by companies in prior studies. In the context of analyst optimism bias our findings suggest that analysts’ disclosure of IC information may not be any less positive than what can be expected of companies. The findings of this study have broader implications for improving corporate reporting to the investment community and for preparation of guidelines for reporting of IC.
CHIEF EXECUTIVE PERSONALITY AND THE USE OF CONTROL IN SMALL FIRMS: THE ROLE OF THE CEO’S INTERNAL LOCUS OF CONTROL
HAAS, NORA
SPECKBACHER, GERHARD
Category: MA = Management Accounting
Existing research has shown that CEO personality plays an important role particularly within relatively small firms. This paper analyzes how the CEO’s locus of control – i.e. the individual belief to have a great degree of control over personal fate – influences his/her use of controls to influence the behavior of subordinate managers and employees. Drawing on the upper echelons perspective we argue for an association between CEO personality and the types of control mechanisms used. While arguing for a high influence on delegation, subjective performance evaluations, control tightness, cultural control and personnel control, we expect no significant impact on objective performance evaluation or the degree of formalization. Our hypotheses were tested using survey data from a sample of small manufacturing firms.
THE EFFECTS OF INCOME TAXATION ON M&A TRANSACTION PRICES - EMPIRICAL EVIDENCE FROM INVESTMENTS IN GERMAN CORPORATIONS
HABBEN, SIEBELT CHRISTIAN
OESTREICHER, ANDREAS
Category: TX = Taxation
This paper examines the impact of income taxation on transactions prices in mergers and acqui-sitions. Based on both market data relating to M&A transactions conducted in Germany over the years 1997 to 2008 and financial information on the companies concerned, we test the price ef-fect of possible tax consequences resulting from the transaction on the part of the acquirer and the vendor. We find that both tax cost on the part of the vendor and tax benefits on the part of the acquirer result in an increase of the transaction price negotiated between the acquirer and vendor. The results indicate that the effects of income taxation on M&A transaction prices are substantial. However, removing capital gains taxation (i.e., tax cost at the part of the vendor) as was the case with the German tax reform 1999/2000/2001 shows an ambiguous effect on M&A transaction prices.
MANAGEMENT’S PERCEPTION ON THE ASSURANCE AND THIRD PARTY COMMENT IN SUSTAINABILITY REPORTING IN JAPAN: EVIDENCE FROM QUESTIONNAIRE SURVEY
HAIDER, MOHAMMAD
KOKUBU, KATSUHIKO
Category: SE = Social and Environmental Accounting
There has been a significant growth in the number of sustainability reports published over the last two decades as such it becomes a common phenomenon among the world’s leading companies. Along with the development in reporting, there has also been an increasing trend in the adoption of assurance in such reporting in order to enhance the credibility of the reported information. The objective of this paper is to understand the management’s perception on the assurance and third party comment in sustainability reporting in japan. It is based on a questionnaire survey on the Nikkei 500 companies (highly liquid companies registered in Tokyo Stock Exchange). Findings show that although there are agreements among the management about the importance of third party comment, they differ with regard to the importance of assurance in sustainability reporting. The study also identifies the determinants, stakeholders’ influence for the adoption of assurance and third party comment and barriers in adopting assurance. While the extant literature concentrates on the European practice, this is the first known study that informs the adoption of assurance and third party comment in sustainability reporting in Japan, which is the leading country in the world to publish such reports.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS
HAIL, LUZI
TAHOUN, AHMED; WANG, CLARE
Category: FR = Financial Reporting
This paper examines changes in firms’ dividend payouts following an exogenous shock to the information environment. Economic theory predicts that the more is commonly known about a firm and its competitors in the marketplace, the less private information managers will have to reveal themselves via costly dividend signals or cash disbursements. To test this prediction, we analyze the dividend payment behavior for a global sample of firms around the mandatory adoption of IFRS and around the initial enforcement of new insider trading laws. Both events serve as proxies for a general improvement of the information environment in the economy. We find that following the two events firms are less likely to pay (or increase) cash dividends, but more likely to cut (or stop) such payments. The changes in dividend policy occur around the time of the informational shock and only in countries and for firms subject to the regulatory change. In further analyses we find that the information content of dividends, measured as three-day absolute announcement returns, is lower after the informational events. The findings underscore that firms’ payout policies, among other things, depend on the extent of information about all firms in the economy.
CAUSES AND CONSEQUENCES OF A VOLUNTARY TURN AWAY FROM IFRS TO LOCAL GAAP
HALBERKANN, JÉRÔME
FIECHTER, PETER; MEYER, CONRAD
Category: FR = Financial Reporting
This paper investigates the causes and economic consequences of a voluntary turn away from IFRS to Swiss GAAP. As companies are permitted to switch from IFRS to Swiss GAAP in Switzerland, we can exploit this unique setting to observe potential capital market effects associated with the switch. Prior literature on mandatory IFRS adoption generally finds a decrease in information asymmetry associated with increasing levels of disclosure. Accordingly, turning away from IFRS is expected to increase the information asymmetry. However, the empirical results from a difference-in-differences design do not support this prediction. We interpret this finding as evidence that the disclosure level of Swiss GAAP is sufficient to meet the informational demand for information of the switching companies’ investors. By providing evidence that—for certain companies—a switch away from IFRS does not necessarily induce negative economic consequences, the findings contribute to the current discussion on whether IFRS fits for small- and medium-sized companies.
BALANCING SCHOOL PERFORMANCE MANAGEMENT: AN EVIDENCE FROM ESTONIAN PUBLIC SCHOOLS
HALDMA, TOOMAS
PLOOM, KRISTI
Category: PS = Public Sector Accounting
This study investigates ways in which the performance management at different school management levels contributes to the performance of public schools in the Estonian general education system. The study is based on the balanced performance management approach and focuses on performance management patterns in Estonian general education schools. At the individual, operational, and strategic performance management levels, the primary performance determinants are analysed. The study uses empirical survey data gathered from 164 Estonian public secondary schools. The research shows that a pupil’s academic performance as the most common indicator of a school’s performance influences individual goals, such as satisfaction with the quality of education and teaching in the school and the pupils’ further choices and opportunities in education. The satisfaction of other interested parties such as teachers, parents, board members and school council members is influenced by the school’s strategic as well as operational performance management measures. Therefore, a school’s performance management system must operate as a balanced system integrating the individual, operational and strategic performance management levels of the school. The paper contributes to the limited knowledge about the implementation of performance management practices in public schools.
AUDITOR SPECIALISATION AND EARNINGS MANAGEMENT: THE ROLE OF INVESTMENT OPPORTUNITIES
HAMILTON, JANE MAREE
GODFREY, JAYNE
Category: AU = Auditing
We examine whether the firm’s Investment Opportunity Set (IOS) moderates the association between an industry specialist auditor and discretionary accruals, as a proxy for earnings management, using a national and office level framework for industry specialisation. Prior research suggests that there is a negative association between national and local industry specialist auditors and the size of discretionary accruals. Using Australian data, we find results that support the hypothesis that the association between specialist auditors and higher earnings quality increases as firm IOS increases. The results are strongest at the local office level. These results provide evidence that deep industry knowledge at the office level is associated with higher audit quality when IOS is increasing, suggesting that local auditor industry expertise is relevant in auditing higher IOS firms where accounting and auditing issues are more complex.
DISCLOSURE QUALITY: DOES DIVERSITY ON BOARD AND ON TOP MANAGEMENT MAKE THE DIFFERENCE?
HANEN, BEN AYED-KOUBAA
BEN AYED KOUBAA, HANEN; SAINT-MICHEL, SARAH
Category: GV = Accounting and Governance
This study aims to verify the impact of gender diversity on the board of directors and on the upper echelons of management on the quality of disclosure quality. More precisely, we will explore the impact of the proportion of women on boards of directors and management committees on the accuracy of analyst’s forecasts. We also verify the impact of the employee representation on the board on the disclosure quality. Based on a sample of industrial and commercial enterprises that were affiliated with the SBF 120 index between 2005 and 2007, the presence of women on upper echelons of management as well as the employee representation on the board seems to indicate a negative effect on corporate governance and on the disclosure quality. We will consider these results from the perspective of Kanter’s theories (1977).
SUBJECTIVE PERFORMANCE EVALUATION, IMPLICIT CONTRACTING AND THE PROBLEM OF COMMON UNDERSTANDING
HANSEN, ALLAN
FRIIS, IVAR
Category: MA = Management Accounting
Subjective performance evaluation is often proposed to be an essential component in effective performance measurement systems in management accounting research. Subjective measures, subjective ex post corrections and subjective weights can improve performance contracts by reducing manipulation, restoring fairness, adjusting for uncontrollable factors, and mitigating distortion. In research, the costs of subjective evaluations have primarily been analysed from an implicit contracting perspective emphasizing that subjective performance evaluation cannot be verified by an outside third party and enforced by law. Consequently, the focus in research has been on the incentive problems of subjective performance evaluation and on how other enforcement mechanisms such as organizational devices and reputation mechanisms substitute law enforcement and prevent violation by the supervisor. In this paper we extend the discussion of the costs of subjective evaluations and go beyond the incentive and enforcement problems highlighted in research by addressing the information problem that arises from lack of common understanding between the parties involved with the subjective performance evaluation. We contribute to research by exploring some of the key issues that arise from lack of common understanding and discussing the ways in which common understanding can be created in organizations.
FIRM AND OFFICE LEVEL EFFECTS ON AUDIT QUALITY: A MULTILEVEL APPROACH
HARDIES, KRIS
KOCH, CHRISTOPHER
Category: AU = Auditing
Data in auditing research are typically hierarchical in nature. That is, audit firms consist of multiple audit offices in which multiple audit partners are auditing several client firms. Findings of prior auditing research suggest that characteristics of the different units—the audit firm, the audit office, and the audit partner—matter for audit quality. Statistically, that means that the observations for each unit are clustered and dependent. Ignoring the dependency of observations creates potential statistical problems like deflated standard errors. We introduce multilevel modeling as a means for auditing researchers to address the potential statistical problems that can arise from analyzing hierarchical data with traditional “single-level approaches” (such as OLS). More importantly, we demonstrate that multilevel modeling enables the examination of new research questions by treating the clustering in the data as an interesting phenomenon per se. Using a large dataset from the U.S. audit market, we re-examine the effects of firm-wide and office-specific industry specialization on audit quality. Our results show that even despite serious clustering of local offices within audit firms, most OLS estimates are reliable and valid. The results also show that most of the variance in audit quality is situated at the audit firm level; that is, stems from differences between audit firms rather than from differences within audit firms (i.e., between local offices).
COORDINATION STRATEGY IN DE-INTEGRATED NEW PRODUCT DEVELOPMENT: LESSONS FROM THE BOEING 787 CASE
HARRIGAN, FIONA
Category: IS = Accounting and Information Systems
The purpose of this paper is to contribute to the new product development (NPD) literature by studying the collaboration and conflict inherent in a specific NPD relationship, that of a new aircraft model. Agency theory is used to examine the quality of interaction between the manufacturer and suppliers over the project, as increasingly, manufacturers outsource design and production of components to the supply base, forming networks of agency relationships. Literature suggests a wide range of factors that may impact on agency relationships in networks. In particular, aerospace supply chains are complex and subject to intense cost pressures, creating the impetus for close integration between agents and principals. Empirical evidence suggests that these networks suffer from coordination weaknesses, which may prevent them from reaching their full potential. Power imbalance, risk capacity and competence assessment appear relevant in establishing the success of a project based on an agency network. A case study approach was used, based on the 787 aircraft project by Boeing Commercial Aircraft Group (BCAG). Results revealed considerable problems within the project network, in spite of goal congruence, repeated transacting and sophisticated controls. Given that the 787 project had an inherently high degree of outcome uncertainty, supplier competence was gravely affected by over-optimism, political factors and the lead manufacturer’s strategy of re-absorbing problematic work. Furthermore, while there may be good visibility of the upper tiers of the supply chain, the lower layers may be more problematic. Networks of agency relationships, it would seem, are only as strong as their weakest link.
DOES BENCHMARK-BEATING DETECT EARNINGS MANAGEMENT? EVIDENCE FROM ACCOUNTING FRAUD
HARRIS, DAVID
SHI, LINNA ; XIE, HONG
Category: FR = Financial Reporting
We examine the association between slightly meeting or beating earnings benchmarks (benchmark-beating) and accounting fraud, the most extreme and certain case of earnings management, and whether benchmark-beating appears to motivate firms to commit accounting fraud. For a sample of fraud firms that restate earnings, we compare their first-reported earnings with restated earnings in terms of meeting or beating three prominent earnings benchmarks: (1) earnings of the same quarter last year, (2) zero earnings levels, and (3) consensus analyst earnings forecasts. We also compare the fraud sample with a control sample where earnings are not restated. We find that (1) the percentages of first-reported earnings of the fraud sample that slightly meet or beat the three benchmarks are all significantly higher than their respective percentages of restated earnings, (2) the percentages of first-reported earnings of the fraud sample that slightly meet or beat the three benchmarks are all significantly higher than their respective percentages of reported earnings of the control sample, (3) benchmark-beating is useful for explaining the probability of accounting fraud incremental to discretionary accruals, arguably the most widely used predictor for accounting fraud, and the F-score (Dechow et al. (2011)), arguably the most powerful predictor of accounting misstatements, (4) benchmarkbeating ties with and sometimes outperforms discretionary accruals for explaining the probability of accounting fraud in a one-on-one horse race, and (5) the amount of earnings misstatement for the fraud sample is positively associated with the amount of earnings needed to slightly meet or beat an earnings benchmark. Overall, our findings suggest a link between slightly meeting and beating an earnings benchmark and earnings management and thus substantiate the use of benchmark-beating as a proxy for earnings management.
ACCOUNTING FOR CARBON AND FRAMING DISCLOSURE: A BUSINESS MODEL APPROACH
HASLAM, COLIN
ANDERSSON, TORD; BUTLIN, JOHN; MALAMATENIOS, JOHN
Category: SE = Social and Environmental Accounting
This paper contributes to the research in accounting and the debate about the nature of carbon footprint reporting in society. Our aim in this paper is to explore the difficulty in sustainability accounting for carbon footprint at a national, meso and micro level of analysis. Using a middle ground approach this paper utilises numbers and narratives to explore changes in carbon footprint based on UK national carbon emissions data for the period 1990 to 2009, six year (2006‐2011) carbon footprint data for the FTSE 100 group of companies and case focussing on the UK mixed retail sector. Our analysis reveals that macro aggregates conceal one off structural adjustments that cannot easily be replicated. We can only obtain carbon emissions data for 62 companies listed in the FTSE 100 for the period 2006 to 2011 and that the carbon footprint for this group of firms is unchanged over the period covered. Our case study on the UK mixed retail carbon footprint is one of ‘smoke and mirrors’. Although reported carbon emissions per square foot of retail space are down the overall carbon footprint is up. We employ our review of the accounting literature and results from our analysis to construct an alternative business models approach to help inform carbon footprint disclosure. This business model conceptual framework is grounded in accounting and employed to argue a case for carbon‐material stakeholder disclosures. This approach: increases the visibility of carbon intensive stakeholder interactions and avoids some of the arbitrary aspects of defining entity boundaries associated with the scope 1, 2 and 3 carbon footprints disclosures.
ORGANIZATIONAL POWER, GOVERNANCE AND VOLUNTARY DISCLOSURE BY UAE LISTED CORPORATIONS.
HASSAN, MOSTAFA
Category: GV = Accounting and Governance
The paper examines the relationship between corporate governance mechanisms and extent of corporate voluntary disclosure (CVD) in an emerging market economy, the United Arab Emirates (UAE). It utilizes the agency theory and organizational power literature to generate testable hypotheses and augment the analysis of the empirical results. The paper applies multiple regression analysis on a sample of 95 annual reports published by UAE listed corporations to test the relationship between governance variables (the CEO duality, CEO power, board size, board committees, external auditor and foreign ownership) and CVD, while controlling for corporations-specific variables (size, age, length of listing, industry type, debt finance and assets in place). The regression analysis shows that external auditor type and board committees significantly influence CVD. It also shows that corporate age, length of listing and external financing significantly influence CVD. Other variables were insignificant. The paper’s findings assist UAE regulators and international business community with insights concerned with governance-disclosure relationship in the UAE. The paper’s incorporation of organizational power perspective adds to the conceptual foundation of governance-disclosure relationship.
WHO BEARS THE TAX BURDEN? - A PANEL DATA ANALYSIS OF GERMAN PROPERTY AND TRADE TAX CAPITALIZATION
HAUSSMANN, KATRIN
BRAEHLER, GERNOT; SCHWEINBERGER, ANDREAS
Category: TX = Taxation
A tax capitalization exists when future tax payments are reflected in the current evaluation of options of economic subjects. To what extent different regional taxes (property and trade taxes) influence real estate prices is controversial. In the following paper a panel data analysis is used to analyze whether different tax rates are reflected in the price of real estate in Germany, as the theory of tax capitalization would predict. In contrast to a plurality of international studies, no tax capitalization of property tax can be evidenced in Germany. The economic tax burden remains with the purchaser or tenant of a real estate object. However, it can be demonstrated empirically that the rate of the trade tax influences rents for certain office real estate. Thereby, the owner of the real estate also bears at least part of the tax burden in this case.
EVALUATING THE EVIDENCE ON THE BIG FIRM PREMIUM
HAY, DAVID
Category: AU = Auditing
This paper uses meta-regression analysis to take stock of the results of research examining the premium charged by the Big audit firms. It shows that the Big firm premium is overstated in research taken as a whole, as a result of the publication bias that is inherent in the system of research publication. The evidence of publication bias shows that the Big firm is generally overstated, but is not so strong as to completely eliminate the remaining premium. Greater publication bias is in some cases associated with higher quality publications and higher status researchers The small remaining Big firm premium is more consistent with product differentiation explanations for the premium than with oligopolistic pricing explanations, because the premium is more prevalent in private sector settings than in the public sector, is negatively associated with the extent of investor protection measures in the jurisdiction concerned and is not associated with Big firm concentration. The evidence also shows that the premium does not apply in the public sector; is negatively associated with investor protection measures. Meta-regression analysis has potential to lead to revised views of many areas of accounting and auditing research.
AUDITOR INDUSTRY SPECIALIZATION, AUDIT EXPERIENCE, AND ACCOUNTING RESTATEMENT
HE, LI-JEN
CHIANG, HSIANGTSAI; CHIN, CHEN-LUNG
Category: AU = Auditing
The impact of auditor industry specialization on audit quality has been extensively discussed in accounting and auditing studies and specialist auditors tend to produce higher-quality audits. While audit experience should be an important component for determining industry auditor specialization, most of prior empirical studies ignores the role of audit experience in forming expertise and. Therefore, the purpose of this study is to explore empirically the influence of experience on auditor specialization. This study expects that, compared to companies that are audited by less experienced specialists, companies that are audited by more experienced specialists will be less likely to experience financial restatements. The empirical results reveals that industry experience of auditors is significantly negatively associated company accounting restatements. Furthermore, for the influence of industry specialist experience, this study find that, support our hypothesis, the impact of industry specialization on audit quality will be more significant for more experienced industry specialist auditors while the influence of audit firm specialization is decreasing by auditor industry specialist experience. However, we do not find the evidence for the effects of specialist auditors with less specialist experience in a specific industry on audit quality increases with industry experience.
OPPORTUNITY PROVIDED IN IAS 41 FOR EARNINGS MANAGEMENT: AUSTRALIAN EVIDENCE
HE, LIYU
EVANS, ELAINE; WRIGHT, SUE
Category: FR = Financial Reporting
Earnings management needs not only incentives but also opportunities. In the principle based IFRS, opportunities are provided by the discretion and flexibility within the standards. This study focuses on the opportunity provided in the IAS 41 - Agriculture and examines whether managers use the opportunity inherent in the application of fair value accounting to the agricultural sector to manage earnings. Under IAS 41, firms are required to include any changes in fair value of biological assets (either realized or unrealized) in an income statement and managers have discretion to estimate fair value if active markets do not exist. Using Australian data in the period from 2001 to 2011, we find that reported agriculture gains are relatively larger while pre-agriculture earnings are low, or inferior to the prior level. This is consistent with managers being aware of the opportunity and also using the discretion to manage earnings. We also find that earnings management mainly exists in the Level 3 fair value measurement where managers themselves have the chance to estimate fair value. To achieve this goal, we find that firms choose discount rates in a wide range. Also, firms selecting high discount rates tend to report extremely large agriculture gains. This finding supports the story that managers are aware of the insignificant incremental benefits brought by large agriculture gains when the upper bound bonus is reached and therefore decided to ‘save’ the gains for future.
MANDATORY IFRS ADOPTION AND ANALYSTS’ SALES FORECASTS
HE, WEN
HE, WEN; LU, CHIEN-JU
Category: FR = Financial Reporting
This study uses mandatory adoption of IFRS as a setting to investigate why financial analysts issue supplementary sales forecasts. The demand explanation proposes that analysts issue supplementary forecasts if earnings are not informative and thus investors demand additional accounting information. The supply explanation posits that analysts are more likely to issue sales forecasts if these forecasts are more accurate and will not cause reputation damage. Based on recent evidence that mandatory IFRS adoption improves earnings informativeness and analysts’ earnings forecast accuracy, these two explanations have different predictions on analysts’ sales forecasts after mandatory IFRS adoption. We empirically test these predictions and find that analysts are more likely to issue sales forecasts after firms mandatorily adopted IFRS. Post the adoption, analysts’ sales forecasts are more accurate and less dispersed. The effect of mandatory IFRS adoption is stronger in countries with strong law enforcement and large difference between local GAAP and IFRS. Overall, our results support the predictions of the supply explanation.
SOCIAL MOTIVES FOR REVENUE MANAGEMENT - AN EMPIRICAL STUDY
HEESE, JONAS
KRISHNAN, RANJANI; MOERS, FRANK
Category: PS = Public Sector Accounting
Considerable research in accounting has explored earnings management by firms to meet a desirable income threshold. We explore a distinct type of revenue management that (a) does not increase costs, (b) does not reverse in future years, and (c) is driven by social motives. We use data from the hospital industry and examine revenue management via “upcoding”, i.e., classifying an ailment as more severe than it actually is to earn higher revenues without incurring commensurate costs. We identify two social motives for the use of revenue management by upcoding. These social motives include charity care and medical education. In addition, we also control for the traditional pecuniary motives to manage revenues, i.e., to meet an income benchmark, and to obtain additional incentive compensation. Archival analysis based on 1,438 hospital-year observations for the period 1999-2007 finds systematic evidence of variations in upcoding based on social motives.
STANDARDIZATION IN MANAGEMENT ACCOUNTING: A FIELD STUDY ON SAP AND ITS INFLUENCE ON ACCOUNTING
HEINZELMANN, RAFAEL
Category: MA = Management Accounting
The paper investigates standardization of management accounting practices by the means of an ERP implementation. Specifically, it addresses the role of SAP in standardizing accounting practices in accordance to the headquarters’ view on how accounting should be understood, systematized and practiced. We study a midsized European company diffusing and implementing idiosyncratic Germanic accounting practices using SAP throughout its subsidiaries in the UK and France. The paper draws on a practice-based view (cf. Ahrens 2009, Jørgensen and Messner 2010) in order to understand the effect of ERPs on accounting practices and vice versa. The paper contributes to the accounting literature by shedding light on how SAP standardizes, enables and legitimates specific practices in organizations. More specifically, we show how a close “fit” between the realization of accounting in SAP and prior HQ-accounting understandings provide a powerful alliance to standardize practices close to the SAP standard. This expands our knowledge on ERPs in organizations regarding centralization and standardization, the specific design characteristics of SAP accounting modules, and their role in reshaping the relationship between HQ and subsidiaries.
DOES GOODWILL REPORTING MATTER TO FINANCIAL ANALYSTS? TWO EXPERIMENTAL STUDIES ON THE IMPACT OF CORPORATE ACQUISITIONS UNDER IFRS ACCOUNTING ON FINANCIAL ANALYSTS’ EQUITY VALUATION JUDGMENTS
HELLMAN, NICLAS
ANDERSSON, PATRIC; HELLMAN, NICLAS; PALM, EMELIE
Category: FR = Financial Reporting
The accounting for business combinations changed dramatically about a decade ago, first under U.S. GAAP and subsequently under IFRS. Weaker recognition criteria for identifiable intangibles were introduced so that less of the acquisition premiums would be allocated to goodwill. This was expected to enhance the decision-usefulness to users of financial statements. Adopting an experimental approach, this paper investigates how professional financial analysts evaluate the effects of corporate acquisitions under the new accounting regime. The results from Stage 1 of the experiment are consistent with the idea that analysts take the reported IFRS numbers into account, but treat the information in a potentially misleading way. Allocation of the premium to goodwill was interpreted as value-enhancing by the analysts, whereas allocation to identifiable intangibles decreased their equity value judgments. In Stage 2, the analysts were exposed to a discounted cash-flow (DCF) analysis where pre- and post-acquisition values were identical. As predicted by finance theory, the difference between analysts from Stage 1 then disappeared. However, 62.5 % of the analysts kept their initial assessment in Stage 2. They considered fewer information screens and used less time to solve the task compared to the analysts who changed their opinions in Stage 2. The research design also includes a follow-up study on actual analysts of the acquirer in the case used, which adds further insight and validity.
THE IMPACT OF GENDER DIFFERENCE ON THE INTERPRETATION OF UNCERTAINTY EXPRESSIONS: THE CASE OF CHINESE AUDITORS
HELLMANN, ANDREAS
HAN, WENQI ; LU, MEITING
Category: FR = Financial Reporting
This study is an empirical examination of Chinese auditors’ interpretation of selected key uncertainty expressions, namely virtually certain, probable and unlikely, included in Chinese Accounting Standards. It examines the impact of gender difference on the interpretation of uncertainty expressions. The results show two major findings. First, there are significant differences between female and male auditors in the interpretation of virtually certain and probable with female auditors interpreting them more conservatively. Second, both female and male auditors’ interpretation of unlikely is similar across the various contexts in which the term is used. The results of this study suggest that gender difference can affect the numerical probability that auditors’ assign to uncertainty expressions used in Chinese Accounting Standards. This may lead to different application of professional judgments between male and female auditors. To avoid this possibility, Chinese Accounting Standards should provide more specific guidance as to how uncertainty expressions have to be interpreted.
DOES THE SEC BREAK BAD HABITS? EVIDENCE OF EARNINGS QUALITY IN RESTATING FIRMS
HERLY, MARIE
BARTHOLDY, JAN; THINGGAARD, FRANK
Category: FA = Financial Analysis
The objective of this paper is to examine if US firms required to restate financial statements improve their earnings quality following the Securities and Exchange Commission (SEC) enforcement. We compare the earnings quality of the restating firms with the quality of a matched control group. Using a wide portfolio of accounting quality metrics grouped by factor analysis, we predict and find that the earnings quality of restating firms seems to be poorer than that of the control group, already in the years before the restatement. Some of these differences remain even after the restatement. Using a difference-in-difference research design, we also find that the restating firms improve the quality of their financial statements, but surprisingly not significantly more than the control group. However, when partitioning the sample based on the stock market reaction to the restatement announcement, restating firms in fact improve significantly more than the control group. It thus appears that the restatement event itself does not prompt an improvement, but the punishment of the capital markets does. The findings shed light on the educational role of the SEC and capital markets, and hold when allowing restating firms a time-lag to improve, and they are not caused by a positive intra-industry contagion effect.
THE EFFECT OF BOARD AND AUDIT COMMITTEE EFFECTIVENESS AND BANK MONITORING ROLE ON FINANCIAL DISTRESS
HERMAWAN, ANCELLA
SARUMAHA, SYLVIA
Category: GV = Accounting and Governance
The objective of this research is to examine the effectiveness of board and audit committee, and the role of bank monitoring as corporate governance mechanisms on the financial distress. The effectiveness of board and audit committee is measured by determining a score based on certain board and audit committee characteristics, such independence, activity, size, and competence. The role of bank monitoring is measured by the proportion of loan acquired from bank with a good monitoring quality. Hypotheses testing is carried out by logit regression model using 130 samples consists of 65 financially distressed firms and 65 non financially distressed firms which listed in Jakarta Stock Exchange during 2009 until 2011. The empirical results show that the effectiveness of board and audit committee and the quality of bank monitoring have significant negative impact on the probability of firm experienced financial distress. Furthermore, the additional test result show that all the characteristics assumed to be important to increase the board and audit committee effectiveness, i.e. independence, activities, size, and competence, reduces the probability of financial distress.
AUDIT MARKET REGULATION AND SUPPLIER CONCENTRATION AROUND THE WORLD: EMPIRICAL EVIDENCE
HESS, BENJAMIN
STEFANI, ULRIKE
Category: AU = Auditing
In the ongoing debate on audit regulation, the key issues of auditor independence and a high level of audit market concentration have become apparent. However, there is the concern that regulations intended to improve independence (i.e., restrictions on the joint supply of audit and non-audit services, audit firm rotation, joint audits, etc.) might further increase audit market concentration. We address this issue with an empirical analysis. Based on a cross-country study for the years 2001 – 2010, we investigate whether a country’s audit regulation is connected to the combined market share of the four largest audit firms (Concentration Ratio), the inequality in the market share distribution (Hirschmann-Herfindahl-Index), and the number of audit firms per client (Auditor-Client Ratio). Our final sample consists of 141’190 firm-year observations of listed companies with a total of 2’439 audit firms, taken from 29 countries. The results of our country-fixed-effects models indicate that regulators should take the connections between potentially conflicting goals into account: Whereas the existence of a proportionate liability system and the prohibition of the joint supply of audit and non-audit services significantly decrease audit market concentration, joint audits and the mandatory audit firm rotation significantly increase audit market concentration. Thus, our study highlights the need to take into account clients’ and audit firms’ adaptive strategies to new regulations.
DO FIRM-SPECIFIC CHARACTERISTICS OF ACCRUALS AND OPERATING CASH FLOWS PREDICT EARNINGS PERSISTENCE AND STOCK PRICES?
HEWITT, MAX
CALL, ANDREW; SHEVLIN, TERRY; YOHN, TERI
Category: FA = Financial Analysis
Research on the differential persistence of accruals and operating cash flows generally employs cross-sectional analyses. However, financial analysis is generally performed at the firm level, and prior research suggests time-series estimates of firm-level differential persistence of accruals and operating cash flows cannot be exploited for forecasting or trading purposes. We mathematically decompose earnings persistence into three firm-specific characteristics of accruals and operating cash flows: differential persistence, the relative size, and the relative sign of these components. Using a large sub-sample of observations where the persistence of operating cash flows is greater than the persistence of accruals, we find that a model that combines these three firm-specific characteristics improves forecasts of earnings persistence relative to forecasts of earnings persistence based on historical aggregate earnings. We also find that trading strategies based on our model’s firm-specific forecasts earn abnormal returns, and that these returns do not diminish over time, unlike the returns from the cross-sectional accrual anomaly. Our study demonstrates that historical firm-specific estimates of differential persistence can be used to improve forecasts of year-ahead earnings persistence and identify equity mispricing.
AGENCY AND STEWARDSHIP ATTITUDES OF SALARIED CHIEF FINANCIAL OFFICERS IN PRIVATE COMPANIES
HIEBL, MARTIN R. W.
Category: GV = Accounting and Governance
This paper aims at exploring attitudes of salaried Chief Financial Officers (CFOs), which can be associated with agency theory and stewardship theory. CFOs’ attitudes are investigated because they may face additional agency conflicts as they ultimately oversee the finance and accounting functions, which are usually responsible for the production of numerical information used as a basis for incentive compensation. A qualitative field study of 14 large privately-held Austrian manufacturing companies was conducted. The findings, relying on information retrieved from 18 semi-structured interviews, reveal a number of contextual factors that influence stewardship and agency attitudes of salaried CFOs. CFOs, who mainly report to the owners in formalized ways, perceive more control by the owners. Short-term management appointments appear to facilitate agency-like behavior, whereas the existence of owner-managers as well as the CFO’s higher personal age and wealth seem to nurture stewardship attitude. The paper concludes with concrete avenues for further research.
IMPLICATIONS OF THE FRAUD TRIANGLE FOR EXTERNAL AUDITORS
HIGSON, ANDREW
KASSEM, RASHA
Category: AU = Auditing
In recent years the role of the external auditors in relation to the detection of fraud has come under scrutiny. In an effort to give guidance, the auditing standard-setters have employed the “fraud triangle” (which originated from Cressey’s work [1950]) setting out pressures, opportunity and rationalisation behind frauds. Traditionally, it could be said that external auditors have focussed on opportunity (i.e. through the assessment of internal controls). Since the mid-1990s auditors have looked at high level risks and so have been considering pressures on management. However, the third aspect of the fraud triangle, namely rationalisation, seems to have been ignored. The point is that two people may experience the same pressures and have the same opportunity to commit a fraud, but depending on how they rationalise the situation, one may commit it whilst the other may not. The under appreciation of this aspect of the fraud triangle may mean there is a weakness in the external auditors’ approach.
DOES ACCOUNTING CONSERVATISM IMPEDE CORPORATE INNOVATION?
HILARY, GILLES
CHANG, XIN; KANG, JUN-KOO ; ZHANG, WENRUI
Category: FR = Financial Reporting
We examine the impacts of accounting conservatism on corporate innovation. We find that firms with a greater accounting conservatism create fewer patents and patents citations. They engage less in R&D activities but our results hold after controlling for this lower activity. Moreover, the cash-flows generated by firms with more conservative accounting have shorter horizons. The negative effects of accounting conservatism on innovation are more pronounced when firms’ need for innovation is higher (i.e., firms operating in innovation industries or whose stocks displaying a lottery-like feature), when the principal is less informed about the behavior of the managers, when the product development cycle is longer, when managers face higher performance pressure or have shorter investment horizons, or when managers are under heavier pressure from short-term institutional investors.
HUMAN CAPITAL RISK AND CEO COMPENSATION
HILLEGEIST, STEPHEN
CHANG, WOO-JIN; HAYES, RACHEL
Category: MA = Management Accounting
We examine how human capital risk affects CEO compensation. We use the firm’s ex ante risk of financial distress to proxy for one aspect of human capital risk. CEOs experience large reductions in the value of their human capital when their firms become financially distressed, seemingly irrespective of their performance. In order to disentangle the joint effects of performance on compensation and distress risk, we restrict our analysis to new CEOs. As predicted, we find that new CEOs receive significantly more compensation when financial distress risk is higher even after controlling for numerous CEO ability measures. This result is driven by more equity-based compensation, not cash compensation. We also find pay-performance sensitivity is positively associated with distress risk. Our results indicate that human capital risk is an economically important determinant of CEO compensation.
THE MARKET REACTION TO CORPORATE LAYOFFS IN THE CONTEXT OF THE GERMAN CORPORATE GOVERNANCE SYSTEM
HIMME, ALEXANDER
Category: GV = Accounting and Governance
Corporate layoffs are an important way to manage and reduce costs. Several studies exist that examine whether investors assess the announcement of corporate layoffs positively or negatively. However, despite considerable attention to the issue of employee layoffs in academia and practice, little research has been carried out on this topic outside of the US and the UK. Most of the studies of Anglo-American firms find a negative stock market reaction to corporate layoff announcements. In contrast to that, this study examines the stock market reaction to corporate layoffs in Germany. Based on a sample of 115 layoff announcements of large German firms (listed at the German stock index DAX) from 1999 to 2009, layoff announcements are associated with a positive and significant 2.18 % cumulative abnormal return (event window (-10,0)). A natural candidate to explain this difference to results from Anglo-American countries is the distinct German corporate governance (e.g., two-tier board, strong unions). Differences in the governance structures of Anglo-American and German firms and their implications for stock price reactions to corporate layoffs are therefore discussed. In addition, this study examines the impact of product market competition on the market reaction to corporate layoffs. The results indicate that higher product market competition is associated with greater positive market reactions.
THE BUSINESS PRESS AS AN INTERMEDIARY OF ACCOUNTING INFORMATION
HITZ, JOERG-MARKUS
Category: FR = Financial Reporting
This paper presents exploratory evidence on the role of the business press as information intermediary with respect to accounting information. For a sample of large listed German firms, I analyze press coverage by three daily newspapers pertaining to the release of annual financial statements. Findings, consistent with theory, indicate that the press assumes an aggregation role by broadcasting accounting information to the investment public. The evidence, however, also raises concerns with the quality of this aggregation, as non-GAAP pro forma earnings are not sufficiently covered, which potentially results in detrimental communication to retail investors. The findings also indicate that the press assumes the role of enhancing reported information by providing additional content, but with substantial variation between newspapers. Taken together, the results shed light on the informational role of newspapers in the financial markets, point out limitations, and indicate potential for future research.
WHAT DRIVES SELL-SIDE ANALYST TARGET PRICE DISAGREEMENT?
HO, TUAN QUOC
STRONG, NORMAN; WALKER, MARTIN
Category: FA = Financial Analysis
We study the determinants of analyst target price disagreement for a sample of 2,016 US listed non-financial companies from 1999 to 2010. We find that while disagreement in short-term earnings and in long-term earnings growth forecasts are significant determinants of target price disagreement, recent 12-month idiosyncratic return volatility has the strongest explanatory power for target price disagreement. The findings suggest that differences in analyst opinions about the impact of recent firm-specific events on value drivers beyond short-term future earnings and long-term growth are the primary determinants of target price disagreement.
THE EFFECTS OF VOLUNTARY INTERIM AUDITOR REVIEWS ON AUDIT FEES AND EARNINGS QUALITY
HOEHN, BALTHASAR
Category: AU = Auditing
The interim reporting process provides decision-useful information to investors and market participants. However the external audit or review and the legal circumstances differ worldwide. A mandatory review rule in the US opposed to a contrary decision of the German legislator raises the question of the cost-benefit-relation of auditor reviews. Using a German sample of 1,023 firm-year observations from 2007 to 2010, we extract the costs and the benefits of voluntary semi-annual reviews. The unique German legal environment makes it possible to split the cost effect of a review in the price effect (included in audit-related fees) and a possible reduction of audit fees resulting from an improved year-around audit process. We observed a significant increase of audit and audit-related fees of around 14.5% (total fee effect). We can provide evidence on declining audit fees for a reviewed matched sample in comparison to the non-reviewed firms. The effect of an interim review on the quarterly earnings quality – using discretionary accrual as an earning management proxy –shows no significant influence.
TIMELINESS VERSUS ACCURACY AND INFORMATION EXTERNALITIES
HOFMANN, CHRISTIAN
ROTHENBERG, NAOMI
Category: MA = Management Accounting
In this paper, we employ a sequential production setting in order to study the tradeoff between timeliness and accuracy of a signal about productivity. An information externality arises because the upstream agent’s information is disseminated to the downstream agent, and affects production decisions and incentives. The signal can be produced early, before both agents choose effort, in which case the signal is less accurate, or the upstream agent can produce a more accurate signal based on effort, but before the downstream agent chooses effort. When the signal can be verified, as with public information, the principal’s preference for an early versus a late signal depends on the effect of the upstream agent’s effort on the outcome of the signal. For the upstream agent, the tradeoff involves generating an early, inaccurate signal useful for decisionmaking, while a late signal is more accurate, but is only useful for performance evaluation. If either the incentive problem is insignificant or the use of the late signal as a performance measure is diminished, the principal will prefer an early signal. For the downstream agent, the signal is always pre-decision, and an early, inaccurate signal may be less costly because of stronger incentives with better quality information. With private information, the upstream agent must be paid information rents with both an early or late signal. The information rents dampen the use of the late signal as a performance measure.
EARNINGS MANAGEMENT AND CORPORATE TAX RATE CHANGE: EVIDENCE FROM THE FINNISH 2005 TAX REFORM
HÖGLUND, HENRIK
Category: TX = Taxation
The Finnish 2005 tax reform included, among other things, a reduction of the corporate tax rate from 29% to 26% and a partial taxation of dividends. The reduction in the corporate tax rate created a strong incentive for the firms to shift earnings from the period prior to the tax reform to the period after the tax reform. There are a number of previous studies where the results are unambiguous in that firms manage their earnings downwards prior to a decrease in the corporate tax rate. The results in this study suggests that firms that do not pay dividends in the year prior to the tax reform engage in income decreasing earnings management prior to the tax reform and that the earnings management reverses the year after the tax reform. For the firms that have paid dividends in the year prior to the tax reform there is only weak evidence of similar earnings management behavior as for the firms that have not paid dividends.
DISCLOSURE, AUDITING AND DEBT CONTRACTS: EVIDENCE FROM PRIVATE FIRMS
HOMBACH, KATHARINA
BREUER, MATTHIAS; MÜLLER, MAXIMILIAN
Category: FR = Financial Reporting
This paper examines the effects of increased disclosure and auditing requirements on trade credit and financial reporting quality of private firms. We test a common assertion that information asymmetries between private firms and their key contracting parties – lenders – are mainly resolved via private information channels. EU accounting and company law, however, mandates increased disclosures and audits for private firms based on different size cutoffs. It is an open question how this regulation affects firms’ lending structure and financial reporting quality. We investigate these questions for firms just above and below the cutoff and argue that firms lack control of just missing these cutoff values. This creates a randomized assignment of treatment with increased disclosures and financial statement verification. We find that increased disclosure and auditing requirements have a positive effect on credit provided by arm’s length lenders, and provide evidence consistent with higher financial reporting quality being a channel through which this effect occurs. The results of this powerful and transparent way of estimating the effects of this regulation should be of interest to regulators, firms and their stakeholders.
DIVERGENCE OF CASH FLOW AND VOTING RIGHTS, OPACITY, AND STOCK PRICE CRASH RISK: INTERNATIONAL EVIDENCE
HONG, HYUN
HONG, HYUN; KIM, JEONG-BON; WELKER, MICHAEL
Category: GV = Accounting and Governance
This study investigates the cross-sectional relation between corporate ownership structure and stock price crash risk, using a unique and comprehensive panel data set of 446 firms with a dual-class equity structure in 19 countries during the period of 1995¬¬_2007. We find a positive relation between the likelihood of stock price crash risk and the deviation of voting rights from cash flow rights at dual-class firms, which we call the ownership-control wedge. We also find that this positive relation between the ownership-control wedge and stock price crash risk is attenuated in countries with stronger anti-self-dealing regulations and for larger firms and firms followed by more financial analysts. The interaction of the ownership-control wedge and accounting opacity, measured using the past three years of absolute abnormal accruals, is also positively related to stock price crash risk. These results provide support for the central prediction of Jin and Myers (2006) that stock price crash risk arises in situations where an agency conflict, combined with opacity, engenders incentives for asset expropriation. Finally, we test of the effects of International Financial Reporting Standards (IFRS) adoption in countries where IFRS is mandated during the sample period. We find that the positive link between the ownership-control wedge and stock price crash risk is reduced by IFRS adoption, consistent with the notion that IFRS adoption increases transparency.
INTERNAL CONTROL DISCLOSURES: A CROSS-COUNTRY STUDY OF THE EFFECTS OF NATIONAL CULTURE
HOOGHIEMSTRA, REGGY
EMANUELS, JIM; HERMES, NIELS
Category: FR = Financial Reporting
This study examines the association between national culture and the amount of internal control information that listed companies disclose in their annual reports. Based on an extended view of the voluntary disclosure literature and relying on agency theory to explain how national culture affects the cost-benefit trade-off managers make in their disclosure choices, this study builds on the notion that culture affects managers’ and investors’ perceptions of agency problems and, consequently, may drive managers’ disclosure choices. Using unique hand-collected data from a sample of 4,370 firm-year observations for 1,559 firms from 29 countries for the period 2005 to 2007, we find that national culture directly affects such disclosures. Moreover, we show that national culture also indirectly affects disclosures via the level of investor protection in a country. This article is the first to examine cultural determinants of internal control disclosure using an extensive cross-national data set and to demonstrate that culture not only directly but also indirectly, via investor protection, influences managers’ disclosure choices.
RELATIONAL COORDINATION AND THE COMMUNICATION BETWEEN THE CHIEF AUDIT EXECUTIVE AND SENIOR MANAGEMENT: EXPERIMENTAL EVIDENCE
HOOS, FLORIAN
D'ARCY, ANNE; SARENS, GERRIT
Category: AU = Auditing
The purpose of this paper is to provide experimental evidence on the behavioral dimension of internal auditing and its influence on the internal audit function’s (IAF) effectiveness. Research so far focused on organizational factors such as IAF size, resources, maturity or reporting lines, but we know very little about the behavioral dimensions that drive IAF effectiveness. Based on a 2x2 between-subjects experiment with 156 internal auditors (of which 93 possess CAE experience), we investigate the influence of two important interpersonal factors – shared goals (high vs. low level) and mutual respect (high vs. low level) – on the communication quality between the Chief Audit Executive (CAE) and the Chief Executive Officer (CEO), and on the overall effectiveness of the IAF. Our results support our predictions that (i) the CAE/CEO communication quality is positively correlated with the IAF effectiveness, and that (ii) mutual respect and shared goals improve both communication quality and IAF effectiveness. We discuss the implications of our findings for the internal audit profession and research on IAF effectiveness.
ANALYSTS’ CHOICE OF PEER COMPANIES
HOPE, OLE-KRISTIAN
DE FRANCO, GUS; LAROCQUE, STEPHANNIE
Category: FA = Financial Analysis
This is the first large-scale study to examine the peer companies used by sell-side equity analysts in their research reports. Using a unique hand-collected data set, we investigate the manner in which analysts choose peer companies as well as the relation between peer valuation and peer choice by analysts. We first show that analysts are more likely to choose peer firms that are similar in size, leverage, asset turnover, industry classification, and trading volume, to the firm they are recommending. However, controlling for those firm characteristics, we find that analysts on average select peer companies with high valuations, consistent with analysts choosing peers strategically. We further find that this effect varies systematically with analysts’ reputation, analysts’ incentives, and expected firm growth. We also find partial support for the idea that the selection of peers with high valuations helps explain the widely documented optimistic bias in stock recommendations.
TOWARDS REFLECTIVE ACCOUNTING BEYOND SOCIAL AND INSTITUTIONAL CUL-DE-SACS: DOING ANALYTICS ON FOUCAULT’S OWN LINES
HOSKIN, KEITH
Category: GV = Accounting and Governance
In the lecture series Security, Territory, Population (Foucault, 2009), Foucault twice refers to analyzing the state as a way of doing things (and a way of thinking (2009: 109; 358, mistranslated in the second instance). He also cautions (2009: 114-7) against beginning analysis at the social or institutional levels of analysis, starting instead from the bottom level of the thinking, acting (and strategising) human, who is not always the subject but also the /individual/somatic singularity/body-psyche (e.g. Foucault, 2006: 56). This paper considers how this may be done on Foucault’s own lines, while also taking seriously how far he is concerned with the costs of thinking and acting ‘within the true’, in modes of veridiction, in a form of what Nealon (2008: 17ff) recognizes is a distinctive ‘economic’ analysis, which is ultimately accounting-grounded, whether focussed on the economic, political or personal levels of ‘cost’. Starting from the bottom-up, the paper seeks to understand how far Foucault is firstly articulating an insistent interplay between accounting, management and the constitution of the modern self as object and subject, and how this then works at institutional and social levels. Of importance here is Foucault’s tracing (2009: 3-6) of how forms of cost-benefit analysis became essential for the successful shaping of the action and thinking of that significant new object of government, the ‘population’.
IS THE LEVEL OF AN INDIVIDUAL AUDIT PARTNER SPECIALISATION IMPORTANT IN ISSUING A GOING-CONCERN OPINION?
HOSSAIN, SAROWAR
Category: AU = Auditing
We investigate the associations between an individual audit partner’s industry and city-levels expertise and audit quality. Audit quality is measured by the propensity of auditors to issue going-concern opinions for financially distressed companies, first-time going-concern opinions, and going-concern opinions. We provide evidence of significant and positive associations between an individual audit partner’s city-level expertise and the propensity of auditors to issue going-concern opinions for financially distressed companies, first-time going-concern opinions, and going-concern opinions. Those associations are not significant at audit partner’s industry level expertise. We find consistent and similar association for city-level expertise of audit partner of non-Big 4 audit firms, but the associations are not significant for either industry or city-levels expertise of partner of Big 4 audit firms. The findings provide evidence that (i) an individual audit partner expertise at city-level is more important than industry level of expertise in improving audit quality, and (ii) city-level expertise is also more important to the partner of non-Big4 audit firms than Big4 audit firms. The results are robust in various sensitivity analyses.
CAN DIRECTOR EQUITY COMPENSATION IMPAIR CEO PAY QUALITY?
HSU, AUDREY WEN-HSIN
LIAO, CHIH-HSIEN
Category: GV = Accounting and Governance
Our study examines whether director equity-based compensation affects the pay-performance sensitivity of CEO compensation and the adoption of clawback provisions. Our results show that directors receiving a higher portion of option-based compensation reduce the sensitivity of CEO pay to operating performance, and are less likely to adopt clawback provisions. Options exacerbate directors’ opportunistic incentives to design a compensation policy in favor of the CEO. We also find that this opportunistic problem can be mitigated when a larger proportion of options is long-term based. The results suggest that long-term options reduce directors’ focus on their own benefits and improve the effectiveness of CEO compensation.
AUDIT COMMITTEE, NON-AUDIT SERVICES AND AUDITOR REPORTING DECISION PRIOR TO FAILURE
HSU, HWA-HSIEN
HASLAM, JIM; WU, YU-HSUAN
Category: GV = Accounting and Governance
This study investigates the associations between audit committee independence, non-audit services fees, and the likelihood of auditor going-concern reporting decision among a sample of UK failed firms. Specifically, we examine whether the threat posed by auditor-provided non-audit services to auditor reporting quality is moderated by the level of independence of the audit committee. We find that failed firms with higher audit committee independence are more likely to receive auditor going-concern modifications prior to failure. Additionally, there is a negative association between non-audit services fees and the likelihood of receiving auditor going-concern modifications. The evidence further suggests that the unfavorable link between the provision of non-audit services and audit reporting quality is mitigated by a highly independent audit committee. Overall, the findings provide support for corporate governance regulators’ concerns about the monitoring benefits of audit committee independence on auditor reporting quality.
PRODUCT MARKET POWER AND ANALYST FORECASTING ACTIVITY: INTERNATIONAL EVIDENCE
HU, BINGBING
HAW, IN-MU; LEE, JAY
Category: FA = Financial Analysis
This study investigates how a firm’s product market power affects the extent of analyst following and analyst forecast properties. Using a broad sample of firms from 38 countries over the period of 1990 to 2008, we find that firms with strong product market power are associated with greater analyst following, higher forecast accuracy and lower forecast dispersion, after controlling for the conventional determinants of analyst forecasting activity. Moreover, the impact of product market power on analyst following and forecast properties is more pronounced in countries with less effective competition laws or higher entry costs. These findings suggest that product market power represents a prominent factor that affects analysts’ expectation formation, and that country-level institutions promoting competition constrain the impact of product market power on analyst information production.
CORPORATE GOVERNANCE AND INCOME SMOOTHING UNDER DIFFERENT OWNERSHIP STRUCTURE
HUANG, LI-JIN
HE, JIA-YU; LIN, YING-FEN
Category: GV = Accounting and Governance
Studies pointed out that managers prefer to engage in income smoothing, in order to achieve the purpose of company or individual. This paper would like to know whether Companies listed on the Taiwan Stock Exchange are the existence of income smoothing. Furthermore, Taiwan listed companies are mostly family firms. Further, this paper examines the effect of corporate governance on income smoothing between the family firm and the non-family firm. This study gathered 3,265 observations by sampling data of companies listed on the Taiwan Stock Exchange from 2005 to 2009.The empirical results show that there are widespread phenomenon of income smoothing in Taiwan. Moreover, this study divided into two groups, the family firm and the non-family firm, and empirical results find that: (1) in the family firm, income smoothing is positively associated with the pledge ratio of directors and supervisors and the percentage of holdings by passive institutional investors, but is negatively associated with the board size; (2) in the non-family firm, holdings percentage by directors and managers are positively related to income smoothing.
INTERNAL CONTROL OVER FINANCIAL REPORTING AND THE VALUE OF CORPORATE LIQUIDITY
HUANG, PINGHSUN
GUO, JUN ; MA, TONGSHU; ZHANG, YAN
Category: FA = Financial Analysis
We examine the trade-off between the precautionary benefits of liquidity management and its agency costs by exploring whether cash valuation is contingent upon the Sarbanes-Oxley (SOX) 404 disclosure of internal control weaknesses in financial reporting. We find that the value spread for firms with weak controls vs. strong controls is about $0.25 for a dollar of cash. Our inference is not driven by account-level weaknesses but by more severe, company-level weaknesses. Furthermore, cash valuation significantly decreases with the remediation of previously reported weaknesses. Collectively, the agency costs from financial flexibility appear to be more than offset by its precautionary benefits.
THE SPILLOVER EFFECT OF CHINESE REVERSE MERGER FRAUDS: CHINESE OR REVERSE MERGER?
HUANG, RONG
DARROUGH, MASAKO; ZHAO, SHA
Category: FR = Financial Reporting
This paper examines the spillover effect of the news about fraud allegedly committed by Chinese reverse mergers (CRMs). In a reverse merger, a private, operating company becomes public when it is acquired by a public shell company. A large number of Chinese companies became public in the last 10 years through reverse mergers with U.S. shell companies rather than through the traditional initial public offering. A number of these companies, however, have been found to be involved with fraudulent activities or reporting. Once the regulators and the public became alarmed by the frequency of fraud revelations, the stock prices of not only the offending companies but also those of other companies were hammered. Those that were affected more negatively are other CRMs and U.S.-listed Chinese IPOs. The negative spillover effect differs across non-fraudulent CRMs according to operation locations and auditor characteristics. Since reverse mergers involving non-Chinese (U.S. and other foreign) private companies appear to have escaped the wrath of investors, the stock market reaction to fraud news appears to be China bashing rather than reverse merger bashing.
OUTSIDER BOARD TENURE AND FIRM PERFORMANCE
HUANG, STERLING
Category: GV = Accounting and Governance
In this paper I study the link between outsider board tenure and firm performance. Outsider board tenure matters as it reflects the underlying trade-off between knowledge and independence over time, even when there is no change in board composition. I find that outsider board tenure, measured as the average tenure of all outside board members, exhibits an inverted U-shaped relationship with firm value and various corporate policies. Empirically, the highest firm value is observed at a board tenure of nine years. To address endogeneity issues, I use a sample of sudden deaths of outside directors and find that sudden deaths that move board tenure away from (toward) nine years are associated with a negative (positive) announcement return. The results are consistent with the interpretation that for an additional year of tenure, learning effects prevail for ‘younger’ boards, while entrenchment costs dominate for ‘older’ boards.
ANALYST FORECASTS, ERRORS-IN-EXPECTATIONS, AND THE VALUE PREMIUM
HUANG, YUAN
ZHANG, CHU
Category: FA = Financial Analysis
Investors' extrapolative errors-in-expectations about future corporate earnings have been hypothesized in the literature as an explanation for the value premium. The extant literature uses analysts' earnings forecasts as a proxy for investors' expectations and has found certain evidence consistent with the hypothesis. In this paper, we examine analysts' long-term earnings growth forecasts, compare them with the earnings growth predicted by an empirical model, and use the difference between the analyst forecast and the model forecast as a measure of the errors-in-expectations. We find evidence that analysts extrapolate in their earnings forecasts, but we find that the errors-in-expectations are not the cause of the value premium because the errors-in-expectations measure we construct does not have strong predictive power for future returns and does not subsume the market-to-book ratio in generating the value premium.
METAMORPHOSES OF VALUATION PRACTICES IN AN EPHEMERAL MEGA-PROJECT ORGANIZATION: THE CASE OF THE EUROPEAN CAPITAL OF CULTURE "RUHR.2010"
HUBER, CHRISTIAN
CREPAZ, LUKAS; JUNNE, BARBARA; SCHEYTT, TOBIAS
Category: PS = Public Sector Accounting
This paper discusses valuation as organizational practice. We focus on the case of a professional, complex, hybrid and fast developing organization that had, however, a short operational life of just five years: the RUHR.2010 GmbH. This organization was the host for the European Capital of Culture Campaign that took place in the German Ruhr Area in 2010 and hence institutionally bound to diverse orders of value: that can be called cultural, artistic, aesthetic, technical, political, and economic. Empirical research on the decision processes within the organization reveals that the management often chose a pragmatic, or nondogmatic, ways of re-valuing issues on those different orders of value in order to keep ‘balance’ between the manifold interests that numerous actors within and around the organization showed in the organization’s work and the overall campaign. We interpret these results against two contending strands of valuation research: Wendy Espeland and colleagues’ (Espeland & Stevens, 1998; Espeland & Sauder, 2007; Sauder & Espeland, 2009) work on the tendency of modern organizations towards commensuration of multiple orders of value, and David Stark’s (2009) work on the heterogeneity of multiple co-existing evaluative principles. We conclude that neither of these theories can fully grasp our empirical results. Rather, we argue that an approach combining elements of both theories is suitable for understanding empirical valuation processes as those we observed.
THE EFFECT OF CORPORATE GOVERNANCE, AUDITOR CHOICE AND GLOBAL ACTIVITIES ON EU COMPANY VOLUNTARY DISCLOSURES OF ESTIMATES AND JUDGMENTS
HUGHES, SUSAN
HODGDON, CHRISTOPHER; HUGHES, SUSAN
Category: FR = Financial Reporting
Following the 2005 EU adoption of IFRS, several descriptive studies noted that some companies omitted a separate disclosure of key judgments and estimation uncertainty within the notes to the financial statements, and that other companies limited their disclosure to uninformative boilerplate narrative. Although IAS 1 requires the disclosure of key judgments and estimates, it does not require a separate disclosure; such disclosure is voluntary. Using a sample of 151 companies from 25 countries and 35 industries, we determine if the choice of specific Big-4 audit firm and the independent variables included in the international financial reporting literature associated with voluntary disclosure are related to the decision to provide a separate disclosure of judgments and estimates and the format and content of the separate disclosures. We find that certain of the independent variables are significant in the decision to make a separate disclosure, the format of the separate disclosure, and the length and content of the separate disclosure. These findings add to the literature by identifying the factors that influence voluntary disclosure within the notes to the financial statements and illustrate there is a connection between the choice of a specific Big-4 audit firm and the extent of voluntary disclosure within that section of the financial statements.
AUDIT AND EARNINGS MANAGEMENT IN SPANISH SMES
HUGUET, DAVID
GANDÍA, JUAN L.
Category: AU = Auditing
The paper examines the relationship between auditing and earnings management in the framework of SMEs, an issue that has not been tackled by previous literature because it has focused on the effect of auditor quality in settings where audits are mandatory. Using a sample of Spanish SMEs, which is composed of audited and non-audited companies, we find evidence that audits, regardless of they are mandatory or voluntary, constraint the level of earnings management. However, we find that companies that are audited by a Big 4 auditor do not have lower discretionary accruals, thus Big 4 auditors are not more restrictive than the rest of auditors in a setting with low litigation risk. We have also examined the impact of the accounting reform of 2008 on earnings management and results obtained are mixed, so we cannot state that earnings quality in SMEs has improved by the accounting reform.
MOTIVATION AND FINANCIAL REWARDS IN PUBLIC ADMINISTRATION – WHY THE BOSS MATTERS
HUMMEL, KATRIN
RÖTZEL, PETER
Category: PS = Public Sector Accounting
This paper responds to recent calls for research on the integration of the manager into a framework of public work motivation (e.g., Terry, 1995; Van Wart, 2003). For a sample of 364 public-sector employees, results from covariance structure modeling show a positive and significant effect of boss satisfaction on satisfaction with financial rewards, job satisfaction and work motivation. Our results indicate a strong impact of boss satisfaction on public work motivation via satisfaction with financial rewards which might explain contrary results of previous studies. In a second analysis we include job and boss characteristics into our model thereby providing new insights into the direct and indirect impact of these characteristics on public work motivation. In particular, we show that boss characteristics such as ‘participation of employees’ and ‘commitment’ have a positive impact on satisfaction with financial rewards which in turn affects public work motivation. Our results are valuable for researchers and practicing managers alike as they do not only close a gap in public-service motivation research but also emphasize the importance of certain boss characteristics for the effects of financial rewards on public work motivation.
STATUS AND DISCRETIONARY BONUS PAYMENTS: EVIDENCE FROM A CHINESE HOSPITAL
HUNG, CHUNG-YU
ABERNETHY, MARGARET A. ; VAN LENT, LAURENCE
Category: MA = Management Accounting
We examine how the status of department heads affects the degree of discretion they exert in allocating bonuses to themselves and to their subordinates. We argue that status disciplines the way department heads exercise discretion in bonus decisions. We expect high-status heads will exert less discretion in bonus decisions than low-status heads. We consider two (related) decisions: (1) the slice of the bonus pool department heads keep themselves and (2) the degree to which department heads differentiate the bonuses they allocate to their subordinates. Using a proprietary dataset from a Chinese hospital, we find evidence consistent with this expectation. We also find that the department’s future performance is negatively associated with the discretionary bonus that department heads keeps themselves, but positively associated with the differentiation between subordinates’ discretionary bonuses.
EARNINGS MANAGEMENT AND CONSERVATISM UNDER CHINA SPECIAL TREATMENTS POLICY
HUNG, YUSHUN
LIEN, CHIEN-I
Category: FR = Financial Reporting
This paper examines the timing of accrual / real earnings management and motivation under China’s special treatments policy for A-share listed firms with the first year of loss. Results show that loss-making companies engage in both upward and downward earnings management behavior in the previous year, depending on industry natures. When the first year of the loss could not be avoided, loss-making companies, for the first time through discretionary accruals and downward adjustments in earnings, can successfully turn around the next year. In addition, the study also found that the motivation is biased towards the big bath rather than towards conservatism.
IS CEO HUMAN CAPITAL RELATED TO FIRM PERFORMANCE?
HUTCHINSON, MARION
HUTCHINSON, MARION; RUSSELL, MARK
Category: GV = Accounting and Governance
The global economy experienced continuous growth from 2002 to 2007 until the U.S. subprime mortgage crisis caused instability in worldwide stock markets. Simultaneously, global CEO turnover continued to fall to 13.8 percent in 2007. In contrast, the CEO turnover rate in Australia increased to 18 percent in 2007. The decision to replace a firm’s CEO is not taken lightly as firms invest a large proportion of earnings in CEO human capital with the objective of generating future income and long term-sustainability. The purpose of this paper is to determine whether a change in a CEO is associated with the performance of the firm and if the association depends on the CEO’s human capital. The results of this study show that that CEOs’ with less valuable human capital are more likely to be replaced. We also find that a turnaround in firm performance following a change in CEO depends on the successor’s human capital and that the successor’s general human capital is economically more significant than their firm-specific human capital. Finally, this study demonstrates that it is the internal successor’s general human capital that is an important determinant of increasing performance.
PAY-PERFORMANCE ASSOCIATION OF CEO COMPENSATION FOR FIRMS USING FINANCIAL AND NON-FINANCIAL PERFORMANCE MEASURES
IBRAHIM, SALMA
CHO, MYOJUNG; IBRAHIM, SALMA
Category: GV = Accounting and Governance
The pay-performance relationship for top executives, specifically that of the chief executive officer (hereafter, CEO), has come under scrutiny in recent years, especially following the real estate meltdown and recession of 2007. Some argue that the CEO pay is too high and unrelated to performance. An aspect that has not been studied is the effect of using particular performance measures in the executive bonus contract on this relationship. In this paper, we examine the pay-performance sensitivity and elasticity of CEO bonus and total compensation when bonus contracts are based on financial and non-financial performance measures. In a sample of S&P500 firms over the period 1994-2009, we find limited evidence that the pay-performance relationship is stronger in firms that utilize non-financial performance measures. We also find some evidence that this relationship is stronger when non-financial measures are utilized over a longer period of time.
DETERMINANTS OF VOLUNTARY HUMAN CAPITAL REPORTING: AN EMPIRICAL ANALYSIS OF TWO EUROPEAN COUNTRIES
IENCIU, NICOLETA MARIA
BARBU, ELENA; MATIȘ, DUMITRU
Category: SE = Social and Environmental Accounting
The article aims to empirically identify factors that influence voluntary human capital reporting in two European countries. Using the content analysis method and the linear regression model, this study reviews the 2010 annual reports and other information sources for companies listed on the Euronext Paris and Bucharest Stock Exchanges. We propose a grid of human capital information formed by 15 items and construct an index of voluntary human capital disclosure to test associations between human capital disclosure and some firm-specific variables like: firm size, board structure, leverage, auditor type, profitability, industry, foreign activity, market status, etc. The study highlights the need for a unic framework in developing a human capital disclosure.
UNDERSTANDING FINANCIAL ANALYSTS' RECOMMENDATIONS DURING FINANCIAL CRISIS
IMAM, SHAHED
LEE TAN, KHENG
Category: FA = Financial Analysis
This study examines sell-side analysts’ use of information and the factors that drive their stock recommendations during recent financial crisis. Prior studies suggest that analysts use more non-accounting information to support stock recommendations but there is little academic research on analysts’ behaviour during difficult economic environment such as financial crisis. We conducted a comprehensive content analysis based on 90 equity reports for FTSE 100 firms from 2006 to 2010. We followed Breton and Taffler (2001) approach to understand what type of information drives analysts’ recommendations during three sub-period, i.e. pre-crisis (2006-2007), during crisis (2007-2009) and post-crisis (2009-2010). The findings show that non-accounting information is used prevalently by analysts across three sub-periods. However, during crisis period, analysts focus more on specific set of information such as cost control and strength of management but in non-crisis periods they focus more on information related to earnings and market outlook. Even though analysts' optimism is slightly affected by the challenging market environment, their recommendations are found to be generally optimistic across all three sub-periods and there is positive news bias in their reports. We conclude that although non-accounting information may have been used more frequently in analysts’ reports, it is accounting information which ultimately guides analysts' recommendations both in good and bad times.
ASSESSMENT OF FINANCIAL CRISIS SPARKED BY USE OF DERIVATIVES IN BRAZIL – THE CASE OF ARACRUZ AND SADIA
IMONIANA, JOSHUA ONOME
CAVALCANTI ALVES, RICARDO; PERERA, LUIZ CARLOS JACOB; REIS NETO, CARLOS
Category: FA = Financial Analysis
This study investigated speculation cost incurred by Aracruz and Sadia due to their high degree of leverage with derivative instruments with the aim of pinpointing the materiality of risk exposure. To assist in the aims of the study, we question: How did the financial costs arising from the speculation with derivatives affect the company’s value? The methodology adopted for the research was descriptive. Therefore, considering envisaged results and that as it seeks to dive into problem solving for the use of derivative instruments and knowledge building from occurred events, the studied process is considered functionalist. Based on results, the entities evidenced agency problems, with disproportionate investments in hedged transactions. Thus, faced with a sudden appreciation of the US dollar resulting from the exacerbation of the global financial crisis, the firms obtained heavy financial losses worth of R$ 4.7 billion for Aracruz and R$ 2.6 billion for Sadia. And against the Investment index of about 70% for the market Sadia and Aracruz witnessed 28% for the year ended 2008. Overall, as a result of the events, we conclude for the indiscriminate penalization of the shareholders, controllers or minority interests, and that the latter will always be the most adversely affected, as they can only hope that managers and controllers will abide by the tag-along principles in order to mitigate the large losses that struck the organizations.
BANKERS AND CONSERVATISM AROUND MANDATORY IFRS ADOPTION
IPINO, ELISABETTA
BONETTI, PIETRO; IPINO, ELISABETTA; PARBONETTI, ANTONIO
Category: GV = Accounting and Governance
In this paper we exploit the cross-sectional variation in bankers’ board representation to examine the heterogeneity in IFRS mandatory adoption consequences on conditional conservatism. In particular, following the new institutional accounting theory we analyze the interplay between country-level (legal enforcement, proactive review and the importance of the debt market) and firm-specific (non-affiliated banker) characteristics on the level of conservatism. We show that country-specific factors complement the presence of non-affiliated bankers and lead to an increase in accounting conservatism. Our evidence suggests that non-affiliated bankers and country-specific factors complement each other and jointly affect negatively the cost of debt. Finally, we consider firm-specific events that lead to an increase in the demand of conservatism. We show that when the demand for conservatism is heterogeneous and the bondholder-shareholder conflict is intense, only firms with non-affiliated bankers on boards show significantly higher level of conservatism.
DISCLOSURE OF ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) PERFORMANCE AND FIRM VALUE
ISACHENKOVA, NATALIA
Category: SE = Social and Environmental Accounting
Using newly available data from Bloomberg, on Environmental, Social and Governance (ESG) factors, the paper is aimed at investigating the impact of sustainability strategies on firm value for a panel of corporate enterprises in the United States and Europe during the period 2007-2010. Complementing financial statements, indicators of ESG performance are becoming an important type of information for investor valuation. As the financial turmoil of 2008 and recent environmental challenges caused by pollution have illustrated, management attention to ESG factors can have a substantial influence on survival and growth of commercial enterprises. An interesting issue in the ongoing debate is whether social responsibility is a superior corporate behaviour in terms of the financial consequences of adopted sustainability attitudes. In this paper, the specific concern of whether enhanced disclosure by corporate enterprises of ESG information adds shareholder value is addressed empirically through a panel analysis of the value of strategies of ESG information disclosure. The analysis employs a set of standard, externally fixed, metrics for ESG behaviour of firms, and both accounting-based and market-based measures of financial performance. Our results tentatively suggest that financial performance might be an increasing function of the amount of ESG disclosure.
THE ASSOCIATION BETWEEN CORPORATE GOVERNANCE, PRODUCT MARKET COMPETITION AND NON-GAAP ADJUSTMENTS
ISIDRO, HELENA
MARQUES, ANA
Category: GV = Accounting and Governance
We investigate how product market competition affects the association between corporate governance quality and managers’ non-GAAP adjustments. Managers often disclosure in earnings announcements press releases non-GAAP earnings measures which are calculated by making adjustments to reported (GAAP) earnings. The lack of strict regulation in Europe and the voluntary nature of non-GAAP reporting gives European managers considerable discretion to make adjustments that are potentially misleading about firm performance. For the largest European firms and for fiscal years 2003-2007, we find that both strong corporate governance controls and high competition, when considered separately, are associated with smaller manager adjustments and adjustments for recurring items. However, when the two factors are considered concurrently governance controls have little effect in reducing aggressive non-GAAP adjustments whilst high competition is still associated with less aggressive adjustments. These findings suggest that in environments where product market competition is high there is less need for strong internal governance mechanisms in order to curb aggressive non-GAAP reporting.
BENEFITS AND COSTS OF APPOINTING TWO AUDIT ENGAGEMENT PARTNERS
ITTONEN, KIM
TRONNES, PER CHRISTEN
Category: AU = Auditing
We investigate whether the practice of voluntarily appointing two audit engagement partners is associated with audit quality and audit fees relative to appointing one partner and in which ways. Using a sample of publicly-held Finnish and Swedish firms listed in the Nasdaq OMX Exchanges, we find evidence that joint engagement partners are associated with higher earnings quality, but also with higher audit fees. Moreover, we show that joint engagement partners being co-located in the same office further increases both earnings quality and audit fees. In general, our findings indicate that the ‘four eyes principle’, i.e. the appointment of two jointly responsible engagement partners, benefits users of financial statements, but increases audit fees as well. Given the renewed regulatory interest in the issue of audit quality and joint audits, our evidence should be of interest to policy makers.
INTERIM ACCOUNTING EARNINGS AND PRICE MOMENTUM
IZADI ZADEH DARJEZI, JAVAD
MCLEAY, STUART
Category: FR = Financial Reporting
Interim Accounting Earnings and Price Momentum Abstract We know that managers may use their discretion by structuring transactions that can alter financial reports in order to persuade stockholders in their interpretation of the underlying economic performance of the company. The study reported in this study examines such earnings discretion in the six monthly interim reports issued by listed firms in the UK, and investigates the relationship between estimates of earnings manipulation and the market pricing of the firm’s shares. This is tested by examining whether managers use their discretion to sustain earnings trends in the case of ‘winner’ firms, i.e. those that are in the upper range of prior returns, and likewise to keep a negative trend in ‘loser’ firms, those in the lower range of prior returns. Specifically, momentum portfolios are formed based on past six-month returns and tested for differences in future six-month earnings management, as measured by discretionary current accruals in six month interim reporting periods. The results suggest that discretionary current accruals are significantly associated with past returns for winner more than loser firms, and hence that past returns may contribute to the explanation of future earnings management, the behaviour being consistent with appearing either to persist as winners or to turn losers around.
UNDERSTANDING THE CHANGE IN CAPITAL ALLOCATION PRACTICES DRIVEN BY ERM IMPLEMENTATION
JABBOUR, MIRNA
ABDEL-KADER, MAGDY
Category: MA = Management Accounting
Enterprise risk management (ERM) has recently become a widespread practice in financial institutions, more specifically in insurance companies. The recent emerging literature advocates apparent link between ERM implementation and the change in risk management practices, in particular capital allocation practices. To the best of our knowledge, there is an absence of empirical academic research into understanding the link between ERM implementation and capital allocation processes and practices in insurance companies and its relative merits. It is also the case that there is limited academic research into the models and strategies of ERM within insurance companies. This paper presents field-based evidence based on interviews and documentary analysis from a large non-life insurance company. The case suggests that changes in capital allocation practices exist in response to having mature ERM in place. The analysis in this study is based on the use of different theoretical concepts such as path-dependent change processes in explaining the empirical evidence. It is also conducted at various levels including, action, routines, intra-institutionalization and extra-institutionalization. We found out that ERM is adopted in response to various internal organizational pressures related to achieving the company's objectives rather than to coercive pressures. Further, effective capital allocation requires the incorporation of ERM elements in the whole process of allocating capital, as well as new capital allocation routines and institutions are produced. Risk-based capital allocation method is revealed to be intra- and extra-institutionalized at the company level as a result of being considered as a superior method to allocate capital.
ENHANCING THE COLLABORATIVE TEAM SKILLS OF CULTURALLY DIVERSE ACCOUNTING STUDENTS USING E-LEARNING
JACKLING, BEVERLEY
NATOLI, RICCARDO; SCIULLI, NICK; SIDDIQUE, SALINA
Category: ED = Accounting Education
This paper investigates whether the use of an e-Learning tool (Blogs) enhanced collaborative group work processes such as interaction and involvement. Additionally, the paper examines whether the introduction of e-Learning as part of a group learning strategy is perceived more positively by collectivist cultural groups than individualistic cultural groups. Using a mixed method design the results indicate that students from collectivist environments consistently gained more from the use of the e-Learning tool than individualist cultural groups. As technology increasingly encompasses student learning, the results of this study demonstrate the need to have a greater degree of integration of e-learning tools such as blogs across the accounting curriculum. The study concludes by providing direction for educators in incorporating e-Learning activities such as adopting a more focused approach when developing group tasks among culturally diverse groups.
WHO PARTICIPATES IN TAX AVOIDANCE?
JACOB, MARTIN
ALSTADSÆTER, ANNETTE
Category: TX = Taxation
This paper analyzes the sources of heterogeneity in tax avoidance strategies across individuals. Three conditions are required for a taxpayer to participate in legal tax avoidance: incentive, access, and awareness. Using a rich Swedish administrative panel data set, we analyze participation in income shifting around the 2006 Swedish tax reform. Using a unique link between corporate and individual tax returns, we can identify income shifting with closely held corporations. Our results suggest that some of these firms are not used to generate additional income, but to facilitate income shifting across tax bases to reduce the overall tax burden. We find that both tax incentives and awareness of the tax incentives matter for the decision to access income-shifting opportunities. Our results show that factors explaining the participation in legal tax avoidance substantially differ from those of illegal tax evasion.
CORPORATE GOVERNANCE, INCENTIVES, AND TAX AVOIDANCE
JAGOLINZER, ALAN
ARMSTRONG, CHRISTOPHER; BLOUIN, JENNIFER; LARCKER, DAVE
Category: TX = Taxation
This paper examines the link between corporate governance, managers’ incentives, and tax avoidance. We take the perspective that tax avoidance is simply one of many investment projects faced by the firm and agency problems may cause the manager to over- or under-invest in tax avoidance relative to the desire of shareholders. Using quantile regression, we find that the impact of corporate governance on firms’ tax avoidance appears to be most pronounced in the upper and lower tails of the tax avoidance distribution, which is arguably the area of most interest to researchers and regulators. Specifically, we find that that more financially sophisticated and independent boards are positively associated with tax avoidance at the lower end of the tax avoidance distribution and are negatively associated with tax avoidance at the upper end of the tax avoidance distribution. This suggests that corporate governance is associated with the degree of tax avoidance by firms.
WHICH USE OF ACCOUNTING NUMBERS BY PEOPLE WITH NO ACCOUNTING KNOWLEDGE? THE CASE OF FRENCH PROFESSIONAL FOOTBALL
JANIN, FLORIANE
Category: FA = Financial Analysis
This paper explores how people with no accounting knowledge behave towards accounting numbers. I investigate how such people can use accounting numbers politically, to defend their own opinion and interests. In the context of a general dispute about the “best” business model for the future of French professional football, this paper examines the use of accounting numbers in debates between sports journalists, former players and coaches, and listeners on a popular football radio program in France. The paper shows how the staging of a particular feature of accounting can be used as “ammunition” for these various actors to promote a specific business model in these debates. When staged as a “good representation” of reality, accounting numbers appear to serve as ammunition to promote an “industrial” business model for French professional football clubs. On the contrary, when staged as a “simulacrum”, they instead appear to serve as ammunition to promote a “market-fame” business model. This paper contributes to the literature on accounting as simulacrum and “hyperreality”. Firstly, it offers a number of empirical elements suggesting the existence of an “accounting hyperreality” in the media. Secondly, it shows that this accounting hyperreality co-exists with an “accounting reality” that is just as strong. Thirdly, it contributes to the conflicting theories of Macintosh et al. (2000) and Graham (2008) on the behavior of the masses towards accounting information.
STUDENTS' READING COMPREHENSION OF THE IASB CONCEPTUAL FRAMEWORK
JANSE VAN RENSBURG, CECILE
COETZEE, STEPHEN; SCHMULIAN, ASTRID
Category: ED = Accounting Education
Students’ understanding of more principle-based IFRS is dependent on their comprehension of the IASB’s Conceptual Framework. Inability to comprehend the Conceptual Framework, as a result of frustration when reading this document, could jeopardise their financial reporting knowledge. The objective of this study was to test students’ reading comprehension of the Conceptual Framework using the Cloze procedure. Many students demonstrated a reading comprehension of the Conceptual Framework at the Independent or Instructional Level. Further analysis of the Cloze scores by the first language, language of instruction and the attendance, or not, of reading courses, revealed some differences in mean scores, although not statistically significant. This paper provides a foundation for the development of a holistic research agenda in the domain of reading comprehension of financial reporting standards. Further, this paper provides a structure for academics to determine their own unique cohort of students’ reading comprehension of the Conceptual Framework.
TO WORK OR TO SHIRK: HOW DO AUDITORS DEAL WITH TAX ENFORCEMENT?
JANSSEN, WIM
Category: AU = Auditing
I examine whether independent auditors respond to corporate tax enforcement. I argue that tax enforcement affects audit fees in two non-mutually exclusive ways. First, tax enforcement could decrease audit fees due to spillover effects from the tax inspector’s monitoring activities on audit risk (spillover effect mechanism). Second, tax enforcement could increase audit fees due to an increased probability that the tax inspector reports a managerial action that implies bad monitoring of the auditor (penalty risk mechanism). I use two new measures of corporate tax enforcement to explore which of these effects dominates. I find that audit fees are negatively associated with tax enforcement, which is consistent with the hypothesis that corporate tax enforcement generates spillover effects on audit risk.
EFFECTS & DETERMINANTS OF THE RECLASSIFICATION OPTION ACCORDING TO THE AMENDMENTS TO IAS 39 & IFRS 7 – A BANKING SECTOR ANALYSIS ON RECLASSIFICATION BEHAVIOUR
JAROLIM, NATASCHA
ÖPPINGER, CARINA
Category: FR = Financial Reporting
Fair value accounting is an essential feature of International Financial Reporting Standards. Even though this accounting method did not spark the financial crisis, it did enhance its impact. As a consequence of the financial crisis the IASB amended IAS 39 to override the fair value recognition. The amendments to IAS 39 & IFRS 7 permitted reclassifications of the categories Held for Trading and Available for Sale, some of which had explicitly been forbidden prior to the amendment. Critics argue that these modifications to IAS 39 made it possible to camouflage losses of hundreds of billions of euros. The main goal of this paper is to evaluate the amendment to IAS 39 & IFRS 7 by conducting a survey of the banking sector. Furthermore fair value accounting in general is critically discussed.
COLLECTIVE IDENTITY, INSTITUTIONAL LOGIC AND ENVIRONMENTAL ACCOUNTING CHANGE
JÄRVENPÄÄ, MARKO
LÄNSILUOTO, AAPO
Category: SE = Social and Environmental Accounting
In this qualitative case study we investigate how institutional logic reproduces existing collective identity by reshaping new performance measurement system to incorporate also environmental issues. New environmental measures were reshaped by aligning them with the existing and dominating collective identity in the case organization i.e. cost savings and profitability. Moreover, institutional logic forced to leave environmental measures as the non-strategic and non-bonus criteria measures. Study illustrates how institutional logic is an important mechanism, when existing collective identity is reproduced.
STRATEGISING MANAGEMENT ACCOUNTING: A CASE STUDY OF NEW PRODUCT DESIGN AND DEVELOPMENT WITHIN PREMIUM AUTO GROUP (PAG) COMPANY
JAZAYERI, MOSTAFA
BURNS, JOHN; JAZAYERI, MOSTAFA; NIXON, BILL
Category: MA = Management Accounting
In this paper, we outline a practice theory approach to study the relationship between management accounting, strategy, and target setting in the new product design and development (NPD&D) process. Building on [Schhatzki, (2002); Whittington, (2003, 2006); Ahrens and Chapman, (2007); Jorgense and Messner (2010)], we explore where and how is the work of strategizing and management accounting within NPD & D process actually done; who does this strategizing and management accounting work; what are the common tools and techniques of strategizing and management accounting; and how the products of strategizing and management accounting are communicated and coordinated (Whittington, 2003). We find that the role of management accounting in the communication is essential to the co-ordination of arrays of the activities of multi-disciplinary teams and an extended network of participants in the new product design and development (NPD&D) process. This case also reveals that management accounting, including, in particular, a Balanced Targets Book (BTB) for each project, has evolved with, and is embedded in the Company’s multi-disciplinary, team-based organizational structure. Its very comprehensive information system, the iterative top-down-bottom-up project management style and its culture. The complementary, reinforcing interaction among components and activities of this company’s NPD&D process demonstrates the importance of strategizing and integration among processes within the business model, phases within the NPD&D process, and stages within the phases and activities within the stages.
‘AND THE BAFTA GOES TO ...’: THE ASSURANCE ROLE OF THE AUDITOR IN THE FILM AWARDS INDUSTRY
JEACLE, INGRID
Category: AU = Auditing
The annual film awards ceremony of the British Academy of Film and Television Arts (BAFTA) is a glitz and glamorous affair watched by millions of television viewers. A BAFTA win can substantially boost the revenue generation of a film while ensuring career success for the staring actor. Overseeing these winning results on the night of the ceremony, literally backstage, sits the Official Scrutineer, a role occupied by the audit firm Deloitte. This moment represents the culmination of weeks of systems testing by Deloitte on BAFTA’s voting process. As such, the case of BAFTA provides an illustrative example of the increasing demand for discretionary assurance services from audit firms (Free, Salterio & Shearer, 2009), which in turn is reflective of Power’s (1997) ‘audit society’. It showcases the power of audit as a legitimating tool. The paper seeks to understand the role of the auditor as assurance provider by drawing upon Goffman’s (1959) dramaturgical framework. Viewing the auditor as ‘performer’ and a range of interested stakeholders (BAFTA voting members, sponsors, award winners and industry commentators) as the ‘audience’, this theoretical lens facilitates insights into the nature of assurance provision. Interview results indicate that Deloitte are highly effective in delivering a successful performance to their audience; they convey a very convincing impression of trust and assurance. The paper therefore suggests the importance of performance ritual in the auditor’s role as assurance provider. Additionally, it argues that such a performance may be particularly effective, in the eyes of the audience, when played by a well known audit firm.
GOVERNMENT INTERVENTION, AUDIT MARKET, AND AUDIT QUALITY
JEANJEAN, THOMAS
HUANG, ZHONGWEI ; JIANG, LIKE
Category: AU = Auditing
In this paper, we analyze the consequences of government intervention on the audit market and audit quality. Regulators have expressed concern over the dominance of Big 4 firms and its potential harmful effects on the quality of audited financial statements. These concerns generated various initiatives to assure audit quality ranging from mandatory audit rotation to more direct forms intervention from public authorities. For instance, the European Commission proposed to generalize joint audit before giving up this proposal. From 2010, the Chinese government decided to to limit the dominance of Big4 firms by fostering non-Big4 attractiveness. We exploit this setting as a natural experiment to explore the consequences of a state intervention on the audit market. We find that audit market structure is altered significantly after the intervention. We also document a significant increase of audit fee pressure exerted on Big4 by their clients after the intervention and correspondingly a significant drop in Big4 audit fee premium. Further analysis indicates that, while the overall audit quality increased after the intervention, the audit quality of Big4 auditors decreased. Taken together, our study suggests that favoring non-Big4 firms helps to reduce Big4 market dominance and that much of the cost is borne by Big4 firms. Our evidence is of particular interests to regulators, such as European Commission, who may consider similar interventions.
A RE-EXAMINATION OF THE INDUSTRY SPECIALIST AUDIT FEE PREMIUM
JENY-CAZAVAN, ANNE
AUDOUSSET-COULIER, SOPHIE; JIANG, LIKE
Category: AU = Auditing
This paper analyzes the effects of using various definitions and measures of auditor industry specialization in empirical audit research. Industry specialist (ISP) auditors are auditors who have developed a specific expertise in their industry and who are therefore able to provide higher quality audits. This industry expertise provides them with a superior reputation and allows them to obtain an industry specialist fee premium. On a sample of 29,726 US-listed firms over the 2000–2010 period, we computed and compared 35 ISP measures. We find that the use of different definitions of auditor industry specialization results in inconsistent classifications of audit firms as specialists (or not) in a given industry. We further demonstrate that this lack of consistency between ISP measures is significant and represents a serious measurement issue as it questions the validity of the ISP fee premium estimates. We find that the results regarding the significance, sign and magnitude of the fee premium paid to ISP auditors are strongly dependent on the choice of the ISP measure. Our analysis suggests that the measures of industry specialization employed in empirical research have a low degree of internal and external construct validity.
THE ASSOCIATION BETWEEN ACCRUALS QUALITY AND VOLUNTARY DISCLOSURE: EVIDENCE BASED ON REGULATION FAIR DISCLOSURE IN KOREA
JEONG, KWANG HWA
JEONG, SEOK WOO; OH, KWANG WUK
Category: FR = Financial Reporting
This study investigates how accruals quality relates to managers’ voluntary disclosure behavior under Regulation Fair Disclosure in Korea by using Francis, LaFond, Olsson, and Schipper’s (2005) model of measuring accruals quality. It finds that accruals quality is negatively associated with fair disclosure that involves qualitative information. This study also finds that the effects of this relationship are more pronounced for innate accruals quality than for discretionary accruals quality. The results of this study contribute to extant literature by offering expanded evidence regarding whether accruals quality affects managers’ disclosure behavior.
THE EFFECTS OF AUTONOMY, INTERNAL CONTROL, AND ACCOUNTABILITY ON OVERCONFIDENCE IN CAPITAL BUDGETING DECISIONS
JERMIAS, JOHNNY
HU KIN HOI, BILLY
Category: MA = Management Accounting
The purpose of this study is to investigate the effects of managers’ autonomy in choosing a capital budgeting project on their confidence in managing the project. Furthermore, this study examines the role of internal control and accountability in mitigating the impact of autonomy on managers’ willingness to abandon unprofitable capital budgeting projects. Building on the motivated reasoning theory, we hypothesize and find that managers who were given autonomy to choose their own projects are more confident that their project will be successful as compared to those who were imposed the projects by their superiors. This study also shows that internal control and accountability are effective mechanisms to reduce the influence of prior decision on managers’ unwillingness to abandon the unprofitable projects.
INTERNAL CORPORATE GOVERNANCE AND GREENHOUSE GAS DISCLOSURE QUALITY: A US-BASED EMPIRICAL ASSESSMENT
JEROME, TIPHAINE
Category: SE = Social and Environmental Accounting
This paper examines the association between internal corporate governance and greenhouse gas (GHG) disclosure quality through a moderated mediation setting. In a first step, I consider internal corporate governance and distinguish between general and environmental-specific mechanisms. I show how sound corporate governance mechanisms lead to the implementation of environmental-specific governance, proxied here by the presence of an environmental committee. In a second step, I document a positive impact of the latter on GHG disclosure quality. However, this effect is moderated and conditional on other corporate governance mechanisms. Together, the empirical results are consistent with the notion that effective internal corporate governance is associated with higher-quality GHG disclosure.
HOW DOES INVESTORS’ ATTENTION AFFECT THE INFORMATION CONTENT OF EARNINGS?
JIA, YUPING
DING, RONG
Category: FA = Financial Analysis
In this study we follow Da et al. (2011) to measure investors’ attention with Google search frequency on stock ticker and test the role of investors’ attention in facilitating the incorporation of earnings related information into stock return. Specifically, we investigate 1) how investors’ attention of a firm enables impounding earnings related information at firm and industry level into stock return and 2) how investors’ attention of a firm enables the incorporation of information related to different components of earnings (cash flow and accruals) into stock return. We find that investors’ attention facilitates the incorporation of earnings related information at firm level to a greater extent into stock return than that at industry level, and investors’ attention helps to impound information related to accruals and cash flow to different extent. Information related to cash flow is found to be incorporated into stock return to a greater extent, which suggests that the average investor has an advantage in understanding and utilizing information that is easy to process and thus requires less information processing capacity.
PROBABILITIES OF LOSS REVERSALS AND RETURNS IN THE UK
JIANG, WEI
SOARES, NUNO; STARK, ANDREW
Category: FA = Financial Analysis
In this study, we attempt a number of contributions. Our initial contribution is to develop a loss reversal model which can be applied in the UK. According to the test criteria we establish, our results suggest that the loss reversal model is successful. The second contribution is to examine whether loss reversal probabilities are fully reflected in market prices. We find that, after controlling for other firm characteristics that are known to be, or could be, associated with stock returns in the UK, a hedge portfolio that takes a long position in firms with a high estimated likelihood of loss reversal and a short position in firms with a low estimated likelihood of loss reversal makes an average return of over 20% before trading costs are taken into account. This suggests that the UK stock market does not fully reflect the information in our model concerning loss reversal probabilities. Nonetheless, as a consequence of various trading frictions, it is unlikely that investors can exploit any mispricing opportunity.
THE EFFECT OF AUDITORS’ JOB SATISFACTION ON THE INFLUENCE OF ETHICAL CONFLICT ON AUDITORS’ INVENTORY JUDGMENTS
JIDIN, RADZI
LUM, JI YAN; MONROE, GARY S.
Category: AU = Auditing
This study investigates the effects of job satisfaction and ethical conflict on auditors’ inventory valuation judgments. It is predicted that participants who are more satisfied with their jobs will sign-off on a more conservative inventory amount compared to participants who are less satisfied with their jobs. It is also hypothesised that in the presence of an ethical conflict in the form of a job offer from the audit client, participants will sign-off on a less conservative inventory amount. Subsequently, it is expected that participants who are more satisfied with their jobs will sign-off on a more conservative inventory amount in the presence of an ethical conflict relative to participants who are less satisfied with their jobs. Using a sample of 53 auditors, a complex inventory valuation task is used to test the proposed hypotheses in a 1 x 2 between-subjects design. Auditors’ job satisfaction is measured using the Minnesota Satisfaction Questionnaire designed by Weiss et al. (1967) and ethical conflict is manipulated at two levels (presence or absence of job offer from the audit client). Participants were required to sign-off on an inventory amount after reading the case materials. This study finds evidence that job satisfaction affects auditor participants’ inventory valuation judgments, particularly the intrinsic dimension of job satisfaction. Consistent with prior studies, this study also finds that ethical conflict in the form of a job offer from the audit client, affects auditor participants’ inventory judgments. It also demonstrates that only the intrinsic dimension of job satisfaction mitigates the effect of ethical conflict on auditors’ judgments.
ACCOUNTABILITY AS ETHNIC PRACTICE: EMICS AND ETICS REVISITED
JOANNIDES, VASSILI
HOQUE, ZAHIRUL; WICKRAMASINGHE, DANTURE
Category: MA = Management Accounting
This paper questions how ethnic day-to-day practices make sense of an existing accountability system and thereby seeks to contribute to the literature on accountability as day-to-day practice. This question is answered through a rich ethnography of a Salvation Army Zimbabwean congregation in the UK confronted with the operationalisation of their denomination’s policy.This case is studied through the applying of the etic/emic discussion as theoretical framework. Our analysis shows that the conceivers and guardians of an accountability system view it as it is thought and interiorised (emic), whilst those expected to practice it regard it as it appears and seems to be functioning (etic). Conversely, conceivers and guardians see practices as they appear (etic) and not as they are thought and interiorised (emic). Whence it seems that practices’ deviating from the prescriptions of an accountability system reveal an etic-emic misunderstanding on both sides. The emics-etics distinction is usually applied as methodology in accounting and organisation studies. In this paper etics and emics are not discussed from the mere researcher’s stance but from field that of actors with different cultural (anthropological and occupational) backgrounds and differentiated understanding of each other’s expectations and practices. This paper’s findings might be limited by the observing of one ethnic group’s emics only colliding with that of accountability conceivers.
FAMILY POWER AND FIRM PERFORMANCE: EVIDENCE FROM AN EMERGING ECONOMY
JOHL, SHIREENJIT
JACKLING, BEVERLEY
Category: GV = Accounting and Governance
The aim of this study is to examine the effects of family power on firm performance using a sample of top 500 companies in India over the period 2004/05-2009/10. Specifically we test two aspects of family power, namely family involvement in top management and family ownership control in relation to firm performance. We find that family power play an important role in firm performance. Specifically in terms of family top management our results show that family CEO is associated with detrimental firm performance. In addition, we find that family ownership and family involvement in top management in terms of proportion of family directors on the board and family directors relative to independent directors have a non-linear effect on firm performance. The association is in the cubic form which shows a pattern of “entrenchment-alignment-entrenchment” which is contrary to prior findings. Specifically our results show that at low levels of family power (via family involvement in top management and ownership) there is evidence of expropriation behaviour which is reflected in lower performance, whilst at moderate levels of family power, alignment of family interest with other shareholders takes place (convergence of interest), and finally at very high levels of family power entrenchment behaviour prevails in that family members exploit their control position at the expense of minority shareholders and thus having a negative effect on firm performance.
ENTERPRISE RISK MANAGEMENT AND ACCRUALS ESTIMATION ERROR
JOHNSTON, JOSEPH ATKINS
SOILEAU, JARED
Category: MA = Management Accounting
In this study, we examine whether having an Enterprise Risk Management (ERM) system reduces errors in estimating accruals. The concept behind ERM is to think about risks at the enterprise level and to consider how risks in one part of the company are related to risks in other parts of the company. We argue that, through this process, managers gain a better understanding of the firm and can estimate accruals with less error. Using a sample of 6,237 firm year observations over the period 2009-2011, we estimation accruals estimation error and the choice of an ERM program simultaneously using a full information maximum likelihood technique. Consistent with our hypothesis, we find that having an ERM program is negatively related to accruals estimation error. In additional tests, we find that having an ERM program is positively associated signed abnormal accruals, suggesting that our findings are not due to simply a reduction of earnings management. We conclude that having an ERM program reduces accruals estimation error because ERM improves managers’ understanding of the accounts of the firm. Our study is relevant to academics who investigate the determinants of poor accruals quality and to practitioners and managers who are considering implementing an enterprise risk management strategy.
THE EFFECTS OF HOME COUNTRY INSTITUTIONS AND THE SARBANES-OXLEY ACT ON UNDERPRICING OF FOREIGN IPOS IN THE US
JONA, JONATHAN
Category: GV = Accounting and Governance
Using a unique dataset, I investigate the effects of the home country institutions on underpricing of foreign IPOs in the US, and whether underpricing is significantly different post enactment of the Sarbanes-Oxley Act (SOX). Findings indicate differences in underpricing based on IPOs home country institutions. Additionally, I find no evidence that SOX has affected underpricing when home institutions are considered. In terms of accounting practices, I find that conservative reporting reduces underpricing levels. In addition, auditors’ prestige significantly reduces the underpricing following SOX. The findings shed light on the differences between cross-listed firms and suggest that while foreign IPOs may abandon their home capital markets by listing in the US, their cost of capital are nonetheless influenced by home country institutions. Collectively, these results contribute to the ongoing discussion regarding the effectiveness of SOX in reducing the cost of capital and the loss of competitiveness of US capital markets.
THE EFFECT OF THE FINANCIAL CRISES ON EUROPEAN BANKS NARRATIVE COMMUNICATION
JONALL, KRISTINA
JONES, MICHAEL JOHN ; RIMMEL, GUNNAR
Category: FR = Financial Reporting
Accounting narratives have become an increasingly important part of the financial information that companies provide as an integral part of corporate financial reports. Accounting narratives play a crucial role for management when communication finnacial performance. Accounting narratives are considered an important document for the investment decisions of both private and institutional investors. However, since accounting narratives are unaudited they may be influenced by corporate management and thus may be subject to impression management. This paper focuses on the chairman's narratives in European top banks before, during and after the first recent banking crisis. It discusses how banks' reporting strategies and narratives depend on underlying financial performance. The aim of this study is to examine how the financial crisis affects the accounting narratives and whether this differs between countries and over time. This study also investigates if the President's explanations of performance in the CEO letter are affected by the crisis by looking at textual characterisitcs about good and bad news in different ways. The results in this paper indicate that banks´ chairman's statements are subject to impression management techniques and contribute to an enhanced understanding of impression management in banks reporting context.
MEDIEVAL MODES OF ACCOUNTING, CONTROL AND ACCOUNTABILITY
JONES, MIKE
Category: FR = Financial Reporting
All societies need administrative mechanisms to guard against fraud, inefficiency and waste. This article draws on published sources to look at medieval modes of accounting, control and accountability. It uses an accountability framework. This article looks at eleven ways in which the Medieval world sought to ensure an efficient well-run administrative system. These are classified as ongoing controls (personal accountability, audit and assignment), controls over assets (inventory, sampling, livestock control and seals) and controls over due income and authorised expenditure (authorised and recorded transactions, internal check, personal supervision and normalised returns). This is the first systematic investigation of internal controls in the Middle Ages. Personal accountability was ensured by making officials directly responsible for the accounts they rendered. Audits were carried out both at the Royal Exchequer, on the manors and in other medieval institutions. The article suggests that most of these features are recognisable today and that the essence of internal control remains the same. However, in the Middle Ages there was a relatively greater use of person-to-person control such as personal accountability and personal supervision. In addition, normalised returns were used much more. These normalised returns are seen as precursors of standard costs. Together these mechanisms of controls represented a coherent set of control mechanisms.
THE INTERACTION BETWEEN COUNTRY-LEVEL AND FIRM-LEVEL CORPORATE GOVERNANCE
JÖNSSON, MICAEL
HOMAYOUN, SAEID; NILSSON, OLA; VON KOCH, CHRISTOPHER
Category: GV = Accounting and Governance
We analyse the relationship between country-level corporate governance and firm-level corporate governance. We use a newly developed investor protection index (SPI) to measure corporate governance on the country level and the Corporate Governance Quotient index to measure corporate governance on the firm level. Using these indices, we can analyse the interaction between both levels of corporate governance not only in a cross-sectional manner but also over the course of time. The SPI also allows us to decompose investor protections into shareholder protections against management and shareholder protections against blockholders. Thus, the SPI allows us to analyse the types of agency conflicts that are most prevalent in common-law countries (shareholder protections against management) and the agency conflicts that frequently arise in civil-law countries (shareholder protections against blockholders). First, we find that there is a positive relationship between the two examined levels of corporate governance. Second, an examination of the subcategories reveals that both of these subcategories are significantly related to firm-level corporate governance. Thus, the conclusion is that corporate governance on the country level and on the firm level are complements; increases in country-level corporate governance are accompanied by increases in firm-level corporate governance. This phenomenon persists in examinations of the different subcategories of investor protection.
DO PMS ENHANCE FIRM PERFORMANCE IN FAMILY FIRMS: A RESOURCE BASED VIEW
JORISSEN, ANN
LAVEREN, EDDY ; MANEEMAI, PARICHART ; VOORDEKKERS, WIM
Category: MA = Management Accounting
Through a resource-based view lens we analyze whether the use of nonfinancial performance indicators (NFI) is positively associated with the performance of family firms. So far contingency based studies on performance measurement systems (PMS) provided mixed evidence with regard to the association between the use of NFI and firm performance. A number of authors found a positive association between the use of NFI and firm performance (e.g. Hoque and James, 2000; Said et al., 2003; Smith and Wright, 2004; Grafton et al, 2010), whereas other authors did not find this positive association (e.g. Ittner et al., 2003; Perera et al., 1997). Most studies so far, analysed the relationship between NFI and firm performance without taking into account a firm’s capabilities and resources, which are related to a family’s influence on the firm, present in the firm. Since the results of these PMS studies are mixed, a number of authors have launched a plea to explore more in depth which control systems attributes (whereby PMS with NFI are a control system attribute) influence outcomes at organizational level (Chenhall, 2003; Bisbe and Otley, 2004; Hall, 2008; De Geuser et al., 2009). In response to this call, this study sets out to examine whether unique family resources and capabilities might make NFI less relevant in the context of a family firm to enhance firm performance. With this research focus, we also respond to the call for more research on accounting and accounting practices in family firms (Salvato and Moores, 2010; Gnan et al., 2011; Prencipe et al., 2011). Using the level of family involvement as a proxy for a family firm’s unique resources (being tacit knowledge and social capital), we examine whether the relationship between the use of NFI and firm performance is moderated by the level of family involvement in the firm. Using survey based data from Thai manufacturing firms, we find that internally oriented nonfinancial performance indicators ( internal business processes, innovation and organizational learning) are positively associated with firm performance in nonfamily firms as well as in all types of family firms. With regard to the more externally oriented customer performance indicators, the results provide evidence that in the context of 100% family owned firms with a family CEO, customer related performance indicators are not significantly associated with firm performance. This finding can be explained by the fact that a family’s tacit knowledge and social capital which governs the relationship between the family firm and its customers includes enough valuable information on this relationship, so that the additional value of the information embedded in the more formal customer-oriented performance indicators is less relevant in the context of fully family owned and family managed firms than in the context of a nonfamily firm or a family firm with less family involvement.
IT GOVERNANCE MATURITY, INDUSTRY IT STRATEGIC ROLE, AND IT GOVERNANCE TRANSPARENCY
JOSHI, ANANT
BOLLEN, LAURY; HASSINK, HAROLD ; JOSHI, ANANT
Category: IS = Accounting and Information Systems
The study provides evidence on the association between the IT governance maturity, the strategic role of IT in the industry, and IT governance disclosure of firms. Adding to current information systems literature, which shows that organizational performance is strongly influence by IT governance, we investigate the relation between the maturity of IT governance processes on the IT information disclosure environment of firms. We find that higher maturity of IT governance is positively associated with higher disclosure on IT governance in firms’ annual report. In addition, we find that the strategic role of IT at the industry level is directly associated with the level of information dissemination on IT governance topics. Consistent with our hypothesis, we also find that firms in industries where IT serves a transformative strategic role to fundamentally redefine business and industry processes, are inclined toward more IT governance related disclosure. Our study suggests that the maturity of IT governance not only improves the IT related information environment within the firm, but can be used to improve strategic non-financial disclosure practices to retain and enhance stakeholder confidence.
FISTICUFFS AND CHOCOLATE FOUNTAINS. A STUDY OF GENDER SEGREGATION IN INSOLVENCY PRACTICE
JOYCE, YVONNE
WALKER, STEPHEN
Category: GV = Accounting and Governance
Advances towards gender equality in professional recruitment may be offset by the emergence of differential statuses founded on gender within occupational groups. The study investigates gender segregation in the insolvency profession, as revealed through the lived experiences of female and male practitioners. Having established the gender composition of the focal profession it is suggested that the increasing recruitment of women has limited cognisance of the extent of male domination in the upper reaches of the occupational hierarchy. We contend that notions of gender essentialism persist in the allocation of work tasks, and that gendered microinequities and microaggressions remain in the performance of tasks. It is shown that the subfields of corporate and personal insolvency are strongly perceived as gendered male and female respectively, the latter being deemed the most appropriate arena for the application of feminine attributes and the management of work-life balance. The exclusion of women from male-dominated networks in insolvency has encouraged the formation of separate institutional arrangements for developing female networks and sociality. The study suggests the ongoing potency of gender in everyday professional life.
INVESTMENT RELEVANCE AROUND THE WORLD HOW DO DIFFERENCES IN EARNINGS ATTRIBUTES AFFECT CORPORATE INVESTMENT BEHAVIOR?
KAGAYA, TETSUYUKI
Category: FR = Financial Reporting
The objective of this study is to examine the changes in earnings attributes after convergence toward or endorsement of the IFRS between the late 1990s and 2000s and how the changes affect corporate investment behavior worldwide. I conduct three analyses. Firstly, I investigate the trends in accrual quality and earnings smoothness in the past 10 years. I find that accrual quality and earnings smoothness worldwide have decreased in the past 10 years, especially in Far East countries and Western Europe countries, and not in English-speaking countries. Secondly, I examine the investment relevance around the world. The results show that earnings smoothness plays important roles in the Far East countries, not English Speaking countries. Thirdly, I examine the relation between accounting standards and investment behavior. The results show that the adoption of the IFRS or the U.S. accounting standards discourages long-term capital investment, and earnings smoothnesis not necessarily significantly positive for firms that adopted the IFRSs or the U.S. accounting standards. Those results suggest that earnings smoothness contributes to the long-term investment in the Far East countries and Western Europe countries and the convergence toward or endorsement of the IFRSs in those countries makes negative effects to the corporate investment behavior.
EFFECTIVE CENTRAL CONTROL OVER TRANSFER PRICING NEGOTIATIONS
KAISER, DANIEL
Category: MA = Management Accounting
It is common wisdom that headquarters sets the ground rules for decentralized transfer price negotiations. However, the exertion of central control has not received much recognition in analytical studies. This study introduces a transfer pricing model, in which an upstream supplier negotiates bilaterally and sequentially with multiple internal buyers that convert the intermediate product into imperfect substitutes. It is shown that uncontrolled negotiations are generally ill-suited to tackle the underlying coordination problem and different control mechanisms are identified that may increase efficiency. In particular, I argue in favor of central sequencing of bilateral negotiations. Further, if downstream divisions' productivities are highly correlated or little volatile, headquarters may effectively use the outcome of initial negotiations to resume control and specify a quantity budget for other internal trade relationships. Else, if products are good substitutes, headquarters may arrange exclusive supply negotiations.
THE IMPACT OF NATIONAL CULTURE ON IMPAIRMENT TEST PRACTICES UNDER IFRS – EMPIRICAL EVIDENCE FROM FRANCE AND GERMANY
KAJUTER, PETER
HOSSFELD, CHRISTOPHER; VOETS, CHRISTINA
Category: FR = Financial Reporting
Prior research provides evidence for differences in the application of IFRS across countries. This study explains the observed differences by varying accounting judgements of individuals from different nations. Individual risk aversion and overconfidence are used as proxies for characteristics which influence accounting-related decision making. The study focuses on impairment decisions under IAS 36 and examines in how far parameter estimates for the value in use determination differ across countries due to different levels of risk aversion and overconfidence. Based on experimental data collected in France and Germany, the results show that French decision makers react more strongly to a triggering event because of their higher risk aversion and their lower overconfidence compared to their German counterparts. Moreover, we reveal that risk aversion mediates the direct effect of nationality on parameter estimates. Various implications of these findings for users of financial statements and stan-dard setters are discussed.
EARNINGS NEWS AND AGGREGATE STOCK RETURNS
KALAY, ALON
CHOI, JUNG HO; SADKA, GIL
Category: FA = Financial Analysis
In contrast to fi?rm-level relations, prior literature ?finds aggregate earnings changes and aggregate stock returns are negatively related. This paper constructs new measures of aggregate earnings news based on revisions in analyst forecasts. The fi?ndings suggest aggregate earnings news is positively related to contemporaneous stock returns. The results also show that aggregate stock returns are positively related to unexpected aggregate forecast errors, and negatively associated with expected aggregate earnings growth. Taken together, these findings suggest the negative relation between aggregate earnings changes and aggregate contemporaneous stock returns results from the expected component of aggregate earnings,rather than aggregate earnings surprises.
ACCOUNTING COMPARABILITY: TESTING THE PERFORMANCE OF THE DE FRANCO, KOTHARI AND VERDI (2011) MEASURE
KALOGIROU, FANI
KIOSSE, PARASKEVI-VICKY; POPE, PETER
Category: FA = Financial Analysis
In this paper we investigate the performance of the accounting comparability measure introduced in De Franco, Kothari and Verdi (2011). Using Monte Carlo simulations we show that the DKV measure’s performance, in identifying comparable accounting systems, significantly deteriorates when accounting incorporates information in returns with a lag, particularly so when firms differ in terms of their cost of capital. Moreover, we find that comparability varies across periods and firms even when accounting systems are identical across both dimensions. We suggest the inclusion of lag returns as explanatory variables in the original earnings-return relation which, despite not improving accounting comparability measurement per se, seems to considerably increase the ability of the measure to rank firms based on accounting comparability.
EARNINGS MANAGEMENT AFTER CEO DEATH
KALYTA, PAVLO
Category: GV = Accounting and Governance
The big bath hypothesis suggests that incoming CEOs manage earnings downward in the year of CEO change to shift the blame for poor results on previous management, set low performance benchmarks, and report improved performance in subsequent periods. However, previous research on income-decreasing earnings management after CEO change is inconclusive due to evidence of income-increasing earnings management before CEO change and subsequent accrual reversal. I construct two samples with no ex-ante expectations of accrual reversal to test the big bath hypothesis. Contrary to previous studies, I find no evidence of big bath accounting following normal CEO changes, in which the departing CEO stays on the board of directors or leaves the firm. However, I find strong evidence of income-decreasing earnings management following unexpected CEO deaths. The results confirm that the departing CEO acts as a control mechanism for the incoming CEO. The incoming CEO is constrained by the continuing involvement of the departing CEO in the firm’s affairs, by his/her personal relationship with the departing CEO, by relationships of the departing CEO with current directors and managers, or by potential legal and reputational costs of blaming previous management for poor results. In the case of CEO death, such constraints are minimized or nonexistent.
CONDITIONAL PERSISTENCE OF EARNINGS COMPONENTS AND ACCOUNTING ANOMALIES
KAMA, ITAY
AMIR, ELI
Category: FA = Financial Analysis
Investors’ failure to assign different persistence measures to earnings components is a common driver behind the accrual anomaly, the post-earnings-announcement drift, and the post-revenue-announcement drift. We propose that investors overemphasize a component's autocorrelation coefficient (labeled here "unconditional persistence"), rather than focus on the power of the component's persistence to explain the persistence of a variable higher in the hierarchy, (labeled here "conditional persistence"). This overemphasis, on the wrong measure of persistence, provides a unifying explanation for the three anomalies. We find that when the conditional persistence of operating profit margin (OPM) is low relative to its unconditional persistence, the post-earnings-announcement drift decreases substantially, while the post-revenue-announcement drift vanishes. This is because investors' under-reaction to earnings and sales is negligible when the persistence of OPM is more weakly associated with that of return on assets. Furthermore, the accrual anomaly largely disappears when the conditional persistence of accruals is high relative to its unconditional persistence. Investors' over-reaction to accruals is negligible when the persistence of accruals is more strongly related to the persistence of earnings. Our findings suggest that investors' misperception of conditional persistence, rather than their misperception of unconditional persistence, is the driver behind the anomalies studied.
IMPERIALISM AND GLOBAL CAPITALISM: IMPLICATIONS FOR SYRIAN WOMEN ACCOUNTANTS
KAMLA, RANIA
Category: SE = Social and Environmental Accounting
This paper seeks to contribute and enhance the current literature on gender, globalization, imperialism and accounting by bringing new insights into the experiences of women accountants in Syria: an Arab and predominantly Muslim country. By doing so, the paper hopes to contribute to broadening the understanding of women’s interrelationship with accounting beyond the Anglo-American context, which is currently dominating the research agenda on gender and accounting. Face-to-face interviews with 22 women accountants were carried out in Syria in 2008. The study revealed that in the context of globalization factors of class, alienation, tradition and economic difficulties are contributing to the subordinated role of women in society in general and in the accounting profession in particular. The implications of the professionalization in the accounting profession in Syria has resulted in socio-economic hierarchies and discriminatory practices where interviewees spoke of discrimination based on hierarchy, sex and on the knowledge held. The paper concludes that the accounting profession’s aspirations need to be challenged through critically evaluating and redefining work roles and values to ensure emancipation for women. Furthermore, the aspiration for Arab ‘renaissance’ can only be reached when obstacles preventing women from enjoying their human rights and contributing fully in society are eliminated.
CONFIGURATION OF CORPORATE RISK COMMUNICATION WITHIN A CORPORATE GOVERNANCE SYSTEM – INSIGHTS FROM A BEHAVIORAL RISK PERSPECTIVE
KAMP, TILL
EULERICH, MARC; THEIS, JOCHEN
Category: GV = Accounting and Governance
When corporate ownership and control are separated, information asymmetries arise between the uniformed principal (investor) and the informed agent (manager). Within this principal agent conflict, the communication of risks faced by the entity is crucial within a corporate governance context, as investor decisions concerning a company are driven by the evaluation of chances and especially of risks regarding the future prosperity of the company. Risks can thereby only be communicated reliably as part of corporate communication (i.e. without inducing unexpected behaviors), when the informational needs of the investors are understood. In order to derive insight about which variables are important in explaining how investors perceive risks disclosed by an entity, we develop a structural equation model in which we combine two theoretical approaches of human risk perception: the “decision theory view” and the “behavioral risk perspective”. For estimating the model, we make recourse to data derived from a survey that was conducted with 32 students who were asked to assess five risks which the fictitious “Alpha group” discloses in its management commentary. Our results suggest that both theoretical approaches are important in explaining investors´ risk perceptions. This finding calls into question that standard-setters predominantly adopt a decision theory view concerning risk reporting, and has further implications for the development of a company´s risk communication strategy.
HOW WELL DO ACCOUNTING-BASED RISK MEASURES PREDICT BANK FAILURE/TROUBLE? EVIDENCE FROM THE RECENT FINANCIAL CRISIS
KANAGARETNAM, KIRIDARAN
LIM, CHEE YEOW; LOBO, GERALD J
Category: FR = Financial Reporting
We examine the relation between accounting-based risk measures and bank failure/trouble using a sample of banks from 60 countries. Using three pre-financial-crisis-period, accounting-based, summary risk measures, we find a positive relation between these measures and bank failure/financial trouble during the financial crisis. We also study whether the ability of accounting-based risk measures to predict bank failure/financial trouble varies systematically with characteristics of the institutional environment. We find that stronger legal, extra-legal and political systems enhance the ability of accounting-based risk measures to predict bank failure/financial trouble. Overall, our study documents that accounting-based measures have not lost their relevance in predicting bank failure/financial trouble.
THE PRICING MODEL OF INITIAL PUBLIC OFFERINGS: A NEW APPROACH
KAO, HUI SUNG
KAO, HUI SUNG
Category: GV = Accounting and Governance
The offer price of the IPO firms is correlated to the growth power of firm and predictable in the future. The outside investor valuates the firm value of the IPO firms by many methods, including Price-Earnings method, Discounted Cash Flow method, Market value to Book value method and Net value method. These prior methods must determine and adjust by professional and then get the offer price. But their judgments maybe lead to error pricing. This study used data mining, Cubist regression tree model, to learning by data sets and building the fit pricing model by each industry. Further, consider financial situation, profit earning ability, growth power, ownership structure and other relevance variables of the IPO firms to build offer price valuation model by Cubist regression tree. The advantage of this method can find the relevance factor rules of IPO pricing. In the different threshold, Cubist regression tree constructs its pricing model by each industry. That can find the fit offer price of the IPO firms to reduce the variance of stock price and reach the strategy of the stable stock price in the IPO market. This paper also uses multiple regression model and stepwise regression analysis as the benchmark model of Cubist regression tree. Through calculate MAPE and R2 of empirical model to prove it is better than other valuation method. The result of this study could provide making reasonable IPO price and a decision reference of IPO for regulator, securities dealer and manager.
SLEEPING WITH THE ENEMY: SHOULD INVESTMENT BANKS BE ALLOWED TO ENGAGE IN PROP TRADING?
KARAMANOU, IRENE
CHARITOU, ANDREAS
Category: GV = Accounting and Governance
This paper investigates whether conflicts of interest exist between the research and proprietary trading departments of investment banks. Using a data set of 27,723 analyst stock recommendations over the period 1999–2007, we find that both in the period before and after the Global Research Analyst Settlement (GRAS), sanctioned banks trade ahead of both upgrades and downgrades. We also find that in the post-GRAS period, stock affiliation with the investment banking department deters such activity. We posit that this may be due to increased regulatory attention to conflicts of interest between the research and investment banking departments that eventually led to GRAS. In the post-GRAS period, investment banks also trade against their upgrades and downgrades, suggesting that trading incentives prompt analysts to bias their recommendations both optimistically and pessimistically. Additional analysis suggests that recommendations are not related to changes in the holdings of other investment banks, alleviating concerns that common information available to both the trading and research departments is what drives results. Finally, our evidence does not support a relation between the holdings of the asset management division and the subsequent recommendation, suggesting that own trading poses a stronger incentive for investment banks to succumb to conflicts of interest than does asset management. The evidence thus supports recent concerns of regulators regarding prop trading.
THE RHETORIC OF JUSTIFICATION: THE PROCESS OF CONSTRUCTING WHAT'S “JUST” IN ACCOUNTING STANDARD-SETTING
KARASIEWICZ BAUDOT, LISA
Category: FR = Financial Reporting
This paper focuses on political grammars used by standard-setters to persuade the public interest (and themselves) of the merits of their decisions. One way to study this is as a process of justification, in which standard-setters convince readers that their decisions are “just”. However, the imperative to justify implies a choice and, often, underlying choices lay competing systems of meaning. We analyze the standard-setters’ choice between two conventions for the measurement of revenue - fair value and original transaction price- as competing meaning systems. We use transcripts of standard-setting meetings to show how the boards justified their choice of the original transaction price convention which runs counter to measurement trends in standard-setting over the past decades. We show a process of legitimacy at play in which standard-setters address controversial standard-setting decisions through justifications to their public audience that engage with meaning systems. These justifications involve the construction of concepts which reinforce established meaning systems in a way that ensures the legitimacy of the standard-setters decisions and the perception of those decisions as “just”.
ARE FEMALE AUDITORS MORE LIKELY TO BE INDEPENDENT? EVIDENCE FROM MODIFIED AUDIT OPINIONS
KARJALAINEN, JUKKA
NISKANEN, JYRKI; NISKANEN, MERVI
Category: AU = Auditing
The purpose of this paper is to examine the effect of auditor gender on the probability of issuing a modified audit opinion (MAO). We examine the setting of private Finnish firms in which the expected costs of litigation and the loss of reputation of the auditor associated with independence impairment are relatively low and opportunistic auditor reporting is therefore likely to occur. Based on psychological evidence that women are more risk averse and behave more ethically than men, we predict that female auditors are more likely to issue an independent audit opinion compared to male auditors. Supporting this contention, we find that male auditors are less likely to issue MAOs than female auditors and specifically when economic incentives for independence impairment are strong.
INTEGRATING PERSONAL EXPERTISE: A HISTORY OF JAPANESE AUDIT FIRMS, 1965–2010
KARUBE, MASARU
FUKUKAWA, HIRONORI
Category: AU = Auditing
To examine empirically the knowledge integration process of professional expertise that individuals have in a professional firm, this paper examines the emergence and growth of four large audit firms (ShinNihon, Azusa, Tohmatsu, and ChuoAoyama) in Japan over a period from the mid-1960s to 2010. Known as the Big Four, these firms—the product of a series of mergers between more than 70 audit firms—handled the vast majority of audit services for listed companies during this period. After the dissolution of ChuoAoyama in 2006, the remaining three audit firms have dominated the market. A longitudinal case study documents how these professional service firms were successful in providing nationwide services through mergers with domestic competitors and the provision of global services in alliance with large international firms, even though they did not sufficiently realize the systematic attainment of individual expertise. The historical account of this process suggests that the two driving forces underpinning the merger growth of the Big Four were strategic intent in (1) systematizing individual expertise and (2) establishing nationwide and global service networks in response to the increase in size and growing diversity and complexity of their client base. Finally, this paper discusses the knowledge tension between localized individual expertise and organizational knowledge in a global context.
OWNERSHIP STRUCTURE, AUDIT FEES, AND ACCRUAL QUALITY IN JAPAN
KASAI, NAOKI
Category: AU = Auditing
This study provides empirical evidence of how the association between accounting accruals (measured by accrual quality) and abnormal audit fees is moderated by ownership structure. Previous research shows that auditor independence is eroded by auditor–client economic dependence. Most researchers have focused on U.S. firms in assessing the effects of audit committees or boards of directors on the association between auditor–client economic bonding and audit quality. However, alternative governance mechanisms to these organizations exist in Japan, and can provide a new perspective on this issue. A unique feature of Japanese company ownership structure is that there exist stable shareholdings, such as financial institution shareholdings and cross-shareholdings (corporate-shareholdings). This governance structure is different from those found not only in the U.S. but also in other countries that have seen previous research on this issue, such as Australia and the U.K. There is no research available focusing on how the relationship between accrual quality and abnormal audit fees is moderated by financial institution shareholdings in the Japanese market. Thus, this study uses the accrual-quality measure developed by Dechow and Dichev (2002) as a measure of audit quality to fill this gap. The results demonstrate that higher audit fees are likely to have compromised auditors’ independence and thereby led to lower audit quality. On the contrary, financial institution shareholdings are
THE ROLE OF ACCOUNTING IN REFRAMING HEALTH CARE ORGANIZATIONS – TWO CASE STUDIES OF PATIENT AND PROCESS ORIENTATION
KASTBERG, GUSTAF
SIVERBO, SVEN
Category: PS = Public Sector Accounting
During the last decade, attempts to patient and process orient health care organizations have become more common. Based on Callon´s theorizing on framing and overflowing, we argue that these attempts are expressions of reframing. We argue that earlier research has failed to show how attempts to reframe (manage overflows) are affected by accounting and how various actors’ interests and professional values and identities affect what is perceived as an overflow and what is not. Therefore, the aim of this paper is to show how accounting affects and is affected by an attempt to reframe HCOs. Two longitudinal case studies are presented. We conclude that in both cases actors regarded accounting as useful tools and a lot of effort was put into the development of two-dimensional visualizations of the processes. However, we also conclude that the two-dimensionalization through accounting in our two cases did not lead to a general support for the patient and process orientation. In both cases the attempts to reframe caused discussion within the hospitals about prioritizations. In these discussions, the alliance of enrolled actors and accounting information did not give stronger arguments than other actors’ judgments about medical priorities. In fact, over time in the City Hospital case, accounting weakened rather than strengthened the network of actors that propagated for patient and process orientation.
HOW THE ABC SYSTEM FUNCTIONS AT ITO-YOKADO
KATAOKA, HIROTO
Category: MA = Management Accounting
This paper analyzes the case of the ABC system at Ito-Yokado Co., Ltd. (IY). The management system at IY is highly interesting in terms of consistency with management philosophy and organizational context, as seen in Japanese excellent companies. While the adoption rate of ABC in practice is not necessarily very high, IY is one of only a few examples of companies applying the ABC, and analyzing ABC at IY seems to derive important implication from the method of operation of its product costing system. Therefore, first of all, this paper shall examine the way of the causal relationship in product costing. To do so, it is important to discuss the structure in product costing model based on the analytical approach. And then, based on the case study research approach, this paper would like to present the way how the market/customer information is permeated into the organization inside by ABC, and the way how ABC affects the decision-making of organizational members. As a result, this paper was able to make clear the essential significance of the product costing system at IY, a Japanese excellent company, and the implications that can be derived from the method of using it, based on an intensive case study. The ABC system, set cost objects (SBUs) directly connected to customer needs, is functioning properly at IY because its management philosophies have permeated thoroughly through all management systems and among all employees, down to a detailed level.
THE EFFECT OF MANDATORY AUDIT FIRM ROTATION AND CLIENT REJECTION ON AUDITOR INDEPENDENCE: AN EXPERIMENTAL INVESTIGATION
KATO, TATSUHIKO
Category: AU = Auditing
The aim of our paper is to examine the effect of mandatory audit firm rotation and client rejection on auditor independence. An experimental investigation is conducted. Our research suggests that adopting a mandatory rotation requirement should enhance the investigative independence of auditors. It also demonstrates that client rejection should indeed occur, when managers are investment-averse and auditors are frequently facing with a legal penalty. Even in such a condition auditors don’t make an effort frequently enough in order to improve the probability of discovering the real quality of management. Our concern is that audit firms who cannot reject an offer and cannot but accept any client are running the risk of impairing their independence. In other words, medium and small audit firms with less market power may compromise their independence not to lose their clients. Fortunately, we obtain negative results about this issue.
THE CHANGING RELEVANCE OF ACCOUNTING NUMBERS TO DEBT HOLDERS OVER TIME
KATZ, SHARON
GIVOLY, DAN ; HAYN, CARLA
Category: FR = Financial Reporting
We examine the change over time in the information content of accounting numbers from the perspective of bond holders and the causes for that change. Using proprietary longitudinal data, we find that, in contrast to the stagnant information content of accounting numbers to equity holders, that content to bond holders has been steadily rising over time. The increase is attributable to economic factors such as an increase in risk and in the frequency of unfavorable news to which the valuation of debt is more sensitive than that of equity, as well as to the increase in conservatism over the last four decades. The findings contribute to the scant literature on the use of financial information by bond holders and the extent to which financial reporting meets their unique information needs. Given debt holders are an important constituent of financial statements, the findings have implications for accounting standard setting.
THE EFFECT OF ESTIMATION RISK ON AUDIT REPORTING
KAUSAR, ASAD
LENNOX, CLIVE
Category: AU = Auditing
Whether a company will file for bankruptcy in the future is uncertain. A point estimate of bankruptcy risk can be estimated using a statistical model but this poses estimation risk because the model’s true parameters are unknown. The purpose of this paper is to show that this estimation risk affects auditors’ going-concern reporting decisions. We find that auditors are more likely to issue going concern opinions when the point estimates of bankruptcy risk have larger standard errors. Moreover, auditors put less weight on the point estimates of bankruptcy risk when the standard errors surrounding the point estimates are larger. We demonstrate that estimation risk has a first-order impact on auditors’ decisions to issue going concern opinions.
RELIABILITY OF FAIR VALUE MEASUREMENTS IN JAPAN
KAWASHIMA, KENJI
Category: FR = Financial Reporting
This study investigates whether reliability of asset revaluations differ across types of fair value measurements which means who measures fair values and how fair values are measured. The land revaluation in Japan provides a unique research opportunity to test the reliability of fair value estimates. In evaluating reliability, I carried out an analysis of the management choice of measurement type and the gain on sale of lands (GSL) after the revaluations. The results of my tests indicate that, on average, the financial characteristics at the time of fair value measurement influence the management choice of measurement type. Empirical results revealed that firms choosing the licensed real estate appraiser (LREA) were more likely to have a large amount of land, high debt-equity ratio, and high foreign ownership holdings. In the analysis of the GSL after the revaluation, firms that recorded GSL were more likely to have chosen the LREA. This means that the LREA had a tendency to measure fair value more conservatively than the non-licensed appraiser who referred to the public price index. The evidence reveals that reliability of fair value measurements depends on the business environment and measurement methods.
WHY DO COUNTRIES ADOPT INTERNATIONAL FINANCIAL REPORTING STANDARDS FOR SMALL AND MEDIUM-SIZED ENTITIES (IFRS FOR SMES)? − EARLY EMPIRICAL EVIDENCE
KAYA, DEVRIMI
KOCH, MAXIMILIAN
Category: FR = Financial Reporting
International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs) have recently been adopted in a considerable number of countries. Despite the economic importance of non-publicly accountable entities, little is known what factors influence countries’ decisions to adopt IFRS for SMEs. While prior literature on the determinants of adoption of full IFRS at country and firm level has focused on the benefits, we argue that countries’ decision to adopt IFRS for SMEs is mainly determined by transitional costs. We hypothesize that countries are more likely to adopt IFRS for SMEs if countries’ transitional costs are relatively low. A large sample of 139 countries supports this hypothesis. Our findings are robust to alternative explanations regarding other possible determinants that were suggested by related literature. The results contribute to the understanding of the economic role of accounting standards in settings for non-publicly accountable entities. Our analysis should be of interest to regulators, standard setters, national authorities, and companies in the current debate on the harmonization of accounting standards for non-publicly accountable entities.
PROCESSES OF EVALUATING THE EFFECTIVENESS OF PUBLIC COMPANIES’ INTERNAL CONTROLS OVER FINANCIAL REPORTING: AN INTERVIEW-BASED STUDY
KELLY, KHIM
BÉDARD, JEAN ; KOCHETOVA-KOZLOSKI, NATALIA
Category: GV = Accounting and Governance
This paper investigates the processes underlying the evaluation of the effectiveness of companies’ internal controls over financial reporting (ICFR); the interactive roles played by senior management, audit committees, ICFR consultants, and external auditors; and the factors companies consider when they evaluate the severity of control deficiencies. We conduct our investigation through 25 individual interviews with 12 Canadian corporations listed on the Toronto stock exchange. Our analyses indicate that the prior experience with Sarbanes Oxley implementation and the personal attitudes of senior management and audit committees are the key drivers of the rigor and structure in the ICFR evaluation process. We also find that the most important factor that companies use to assess the severity of control deficiencies is the materiality of misstatements or potential misstatements arising from those control deficiencies. The classification of a control deficiency as a material weakness is straightforward when a material misstatement has been detected. When no material misstatements have been detected, greater professional judgment is required to identify key controls as well as assess the effectiveness of those key controls, the size of potential misstatements given control deficiencies, and the adequacy of compensating and mitigating controls.
A STAKEHOLDER ANALYSIS OF DIVERSITY OF EMPLOYEE RELATED DISCLOSURES IN ANNUAL REPORTS
KENT, PAMELA
WINDSOR, CAROLYN ; ZUNKER, TAMARA
Category: SE = Social and Environmental Accounting
ABSTRACT The purpose of this study is to examine the diversity of voluntary employee related disclosures in annual company reports by applying Ullmann’s three dimensions of stakeholder theory. The first dimension of stakeholder power is measured by employee share ownership, employee concentration and share ownership. It is found that disclosure diversity is associated with higher employee share ownership, employee concentration and shareholder dispersion. The second dimension of corporate strategic posture is measured by corporate governance best practices and content of corporate mission statements. Diversity of disclosure is associated with better formal corporate governance mechanisms and employee content in companies’ mission statements. The third dimension of economic performance is measured by profit per employee and Tobin’s Q and we find that disclosure is related to lower profit per employee and tobins Q. Disclosure diversity is also significantly associated with higher leverage, employee industry concentration and employee size.
PRIVATE INFORMATION, SUBJECTIVE VALUATION AND TARGET PRICE ACCURACY
KERL, ALEXANDER
BONINI, STEFANO
Category: FA = Financial Analysis
How do analysts set their forecasts? In this paper we analyze how sell-side analysts estimate target prices and show that analysts consistently apply subjective adjustments to baseline models. We argue that the amount of deviation from the basic valuation model serves as a proxy for the analysts’ (private) information or experience. For a panel of analyst reports, we show that target price forecasts that highly deviate from simple multiple-based pseudo-target prices are (ex-post) more accurate. Controlling for various stock and broker characteristics we also show that our results are not driven by the degree of sophistication of the valuation models. Surprisingly, market participants seem to be unaware of this ex-ante identifiable difference in accuracy as the short-run price reaction to the target prices issuance is uncorrelated with the degree of private information incorporated in the forecast. Consistently with our results on superior accuracy, we find evidence though for these forecasts to outperform in the long-run.
RESEARCHING THE LIVED EXPERIENCE OF CORPORATE GOVERNANCE
KHALIFA, RIHAB
AHRENS, THOMAS
Category: GV = Accounting and Governance
This literature review seeks to engage with the discussion of the limitations of studying corporate governance processes as a ‘black box’ by developing a theoretical framework for qualitative corporate governance research that can support the design of future hermeneutic research into corporate governance practices. The approach is to develop a qualitative research framework based on the methodological discussions in the business and sociology literatures, and compare it with existing alternative research frameworks in the corporate governance literature and three qualitative field studies in corporate governance. This paper identifies methodological gaps that have made it difficult for extant qualitative studies of corporate governance to capture the complexity of the practices they have studied. Through a close reading of alternative corporate governance research frameworks and qualitative studies this paper explains how future scholarly and practical corporate governance research can produce insights into the lived experience of corporate governance.
BOARD INDEPENDENCE, AUDIT QUALITY AND EARNINGS MANAGEMENT: EVIDENCE FROM EGYPT
KHALIL, MOHAMED
OZKAN, AYDIN
Category: GV = Accounting and Governance
This study, using a unique dataset for Egyptian firms, investigates the monitoring and disciplining roles of board independence, board size and audit quality in constraining earnings management. Our results cast doubt on the notion that smaller boards with higher ratio of non-executive members necessarily lead to lower earnings management. We find that the potential effects of board independence and board size on earnings management are conditional on the levels of ownership held by executive directors and large shareholders as well as the composition of audit committees. In addition, the results are consistent with the view that high quality auditors are effective in reducing earnings management.
CONSISTENT ESTIMATION OF EARNINGS PERSISTENCE
KHANSALAR, EHSAN
KASHEFI POUR, EILNAZ
Category: FA = Financial Analysis
Prior research by Sloan (1996) provides evidence that by using an equation-by-equation application of least squares, accruals are likely to have lower persistence than cash flows. We note that applied models in earnings persistence literature including the work of Sloan (1996) are all typically defined as single-equation least-square regression. Consistent with Christodoulou (2006), we construct a model that applies Seemingly Unrelated Regressions (SUR), using articulation of financial statements in constraining earnings, to compare earnings persistence of accrual components versus cash flow components, which is perceived to yield a consistent estimation of earnings persistence by way of a higher likelihood attached to our applied SUR model and greater precision attached to predictor variables (accruals and cash flow items). The results, which are robust across all industries, show that just two components of accruals – change in accounts receivables and depreciation – have less persistence than the cash flow components and that is not applicable to other components of accruals. This suggests that using SUR model there is no evidence of all accruals having less persistence on future earnings and proposes that the lower persistence of accruals versus cash flows may not be fully due to the notion of subjectivity of accruals mentioned in the work of Sloan (1996) but may rather be due to the specification of the model which is critical to the interpretation of the results.
DO BOARD AND AUDIT COMMITTEE CHARACTERISTICS AFFECT FIRM’S COST OF EQUITY CAPITAL?
KHEMAKHEM, HANEN
AHMED, NACIRI
Category: GV = Accounting and Governance
This paper examines the association between board and audit committee characteristics and cost of equity capital. Using a sample of TSX-S&P 300 firms, our analysis shows that overall audit committee characteristics are negatively associated to the cost of equity capital. The size of the audit committee and the non-duality of the Chairman of the board are, however, positively related to the cost of equity capital. The results also confirm that being listed on the American stock exchange is usually associated with changes in the overall board characteristics and also affects the relationship between non-duality of the Chairman of the board and cost of equity capital. However, being listed in the US capital market doesn’t change the relationship between audit committee features and the cost of equity capital and this can be explained by the fact that audit committee regulatory requirements are similar and mandatory in both Canadian and American capital markets.
THE IMPACT OF ELIMINATING THE FORM 20-F RECONCILIATION ON SHAREHOLDER WEALTH: EVIDENCE FROM THE U.S. CROSS-LISTED FIRMS
KHURANA, INDER
CHEN, LUCY
Category: FR = Financial Reporting
This paper examines the shareholder wealth effects in the U.S. and home markets to the announcement events relating to the U.S. Securities and Exchange Commission (SEC)’s rule to eliminate the Form 20-F reconciliation. We find stock prices of our treatment sample of U.S. cross-listed firms that prepare financial statements under International Financial Reporting Standards (IFRS) are positively affected by the examined events, but no such effects for the control sample. We also find the stock market impact of the SEC ruling for our treatment sample to be positively related to our proxy for cost savings and negatively related to the pre-adoption reconciliation magnitude from IFRS to U.S. GAAP. These results suggest that shareholders place some value on information in reconciliations, but the costs of preparing and auditing the reconciliations on average outweigh the concern for information loss. Moreover, we find that the information loss is more pronounced for firms from stronger enforcement countries and for firms that have used IFRS for a shorter period.
THE EFFECT OF STAKEHOLDER POWER AND SALIENCE ON NOT-FOR-PROFIT ACCOUNTABILITY
KILGORE, ALAN
CHEN, JINHUA; DYBALL, MARIA; KILGORE, ALAN
Category: FR = Financial Reporting
The purpose of this study is to examine the association between stakeholder power and salience and the mechanisms not-for-profit organizations use to account to stakeholders. Data from 621 Australian not-for-profit organizations were collected using a mail survey. The results reveal that not-for-profit management prioritized their upward accountability to funding agents, despite seeing clients as the most salient stakeholder. The results also indicate that while the use of the downward accountability mechanism of participation was related to client power, the use of upward accountability mechanisms of reports and disclosure statements, performance assessment and evaluation, and self-regulation was driven by funding agents’ salience. Implications are drawn with respect to not-for-profit managerial practices and regulatory reform.
SECURITIES UNDERWRITING AND DISCRETIONARY FINANCIAL REPORTING BEHAVIOR
KILIC, EMRE
FRANCIA, ARTHUR; KUIATE, CHRISTIAN; LOBO, GERALD
Category: FR = Financial Reporting
We investigate the discretionary financial reporting behavior of banks with Section 20 subsidiaries after the Federal Reserve removed the firewalls restricting information flows between the security subsidiary and the affiliated bank. The combination of lending and underwriting activities within one bank is a source of concern for depositors of the bank, investors in the underwritten securities, and regulators. We hypothesize that these banks will engage in more signaling through loan loss provisions to alleviate concerns about the quality of the issues they underwrite. We also hypothesize that these banks will engage in less income smoothing through loan loss provisions to alleviate concerns about the riskiness of the Section 20 activities compared to traditional banking. We find evidence consistent with these hypotheses. We also find that on a net basis, these changes in discretionary financial reporting reduce the reliability of loan loss provisions as a predictor of future loan defaults.
HOW IS AN AUDITOR INVOLVED WITH CORPORATE BUSINESS RISK DISCLOSURE?
KIM, HYONOK
FUKUKAWA, HIRONORI
Category: AU = Auditing
The purpose of this study is to empirically investigate the auditor’s involvement with business risk disclosure by management. More specifically, we examine whether the level of corporate business risk disclosure is influenced by whether its auditor is a Big 4 firm and, more importantly, by various attributes of engagement partners. Business risk disclosure that has been mandated since the fiscal year ending March 2004 is not a subject to auditing. However, auditors who concern their audit quality may have any influence on clients’ business risk disclosure practice. Through OLS regression, we find that companies whose financial statements are audited by a Big 4 audit firm disclose more business risk than companies whose financial statements are audited by a non-Big4 audit firm. We also find that the longer companies are audited by the same engagement partner, the less risk factors are disclosed. In addition, companies with an engagement partner who has more clients disclose more business risk. The results suggest that an auditor is associated with the company’s business risk disclosure.
DISCOUNT BASED VALUATION MODEL: CONTRAST BETWEEN THEORETICAL VALUE AND EMPIRICAL RESULTS
KIM, JA RYONG
REES, WILLIAM
Category: FA = Financial Analysis
One common belief in equity valuation is all valuation models measure the same intrinsic value. This paper explains why this is not the case theoretically, and addresses an unresolved question in Liu, Nissim and Thomas (2002): how simple earnings multiples outperform complex discount based valuation models (DBVM). Our theoretical reasoning suggests the DBVMs are designed to measure the intrinsic value of stock, while the multiples are to measure the current stock price. The paper extends the pricing error result and examines the performance of models when their estimates are compared to the intrinsic value directly. Three alternative measures of the intrinsic value are chosen: i) linear fitted value, ii) moving average of prices for the next five years, and iii) return generation ability. A surprising result is, contrary to the theory and our expectation that the DBVMs would outperform the multiples in intrinsic value measurement, the multiples still outperform the DBVMs in all three measures. We suspect this is because the DBVMs have lower correlation with price but higher dispersion of their estimates than the multiples’.
THE EFFECT OF GREEN CERTIFICATION COMPANIES ON THE IMPLIED COST OF EQUITY CAPITAL: EVIDENCE FROM KOREA
KIM, SOOKMIN
KIM, SEON MI; KIM, SOOK MIN; LEE, DONG HEUN; YOO, SEUNG WEON
Category: SE = Social and Environmental Accounting
Although the importance of green growth is globally emphasized, little is known about the relation between green growth and the perceptions of the market participants in accounting field. Prior literatures present the controversial arguments for environmental management and the corporate valuation or performance. Based on the demand of era and the opposite arguments, we examine the effect of green certification from Korean government on the implied cost of equity capital. Specifically, we analyze the relation between the Green Certification Companies (GCCs) and the implied cost of equity capital in year 2010. We find that across all three specifications of the dependent variables (GM, PEG and MPEG model), the GCCs are significantly positively associated with the implied cost of equity capital. The results are also consistent when we use the arithmetic mean of three implied cost of equity capital. These results imply that the investors demand higher ex-ante return for the GCCs than other firms. We infer that the prospect for GCCs still remain relatively higher information uncertain surrounding the green industry from the perspective of market participants. We expect that this study contribute to improve understanding of the impact of GCCs on profitability assessment and investment risk evaluation when a variety of policies associated with green growth are recently prepared by the Korean government and other countries.
EXECUTIVE BONUS TARGET RATCHETING: EVIDENCE FROM THE NEW EXECUTIVE COMPENSATION DISCLOSURE RULE
KIM, SUNYOUNG
Category: MA = Management Accounting
This paper investigates whether compensation committees revise executive bonus compensation targets based on past performance. Studies in this area have suffered from a lack of detailed information on executive compensation. Using mandatory disclosures of executive compensation information under the U.S. Securities and Exchange Commission’s (SEC’s) new disclosure rule, this paper provides the first large-sample evidence of bonus target ratcheting. There are four major findings: that executive bonus targets ratchet asymmetrically; that the degree of ratcheting asymmetry is positively related to a firm’s investment opportunities and the information asymmetry between its managers and compensation committee; that the asymmetric ratcheting practice results in more difficult next-year targets for managers who fail to meet their current-year targets; and that managers with good year-to-date performance report lower final-quarter performance compared with other managers, consistent with the well-known “ratchet effect.”
TECHNOLOGICAL EMPOWERMENT: CREATING LOCAL KNOWLEDGE WITH CALCULATING PRACTICE
KITADA, HIROTSUGU
KOKUBU, KATSUHIKO; TENNOJIYA, TATSUMASA
Category: MA = Management Accounting
The purpose of this study is to reassemble the process of knowledge construction in terms of measurements and calculations and to indicate the empowerment process enabled by the management mechanism that encompasses measurements and calculations. In order to analyze the case of Material Flow Cost Accounting (MFCA), we have employed the discussion on the relationship between inscription, knowledge and reference(Latour, 1999) and insight from accumulations of inscriptions (Latour, 1987). We analyzed implementation of MFCA in Japanese company by action research and participant observation. Our findings are mainly two points. First, this study shows that the technology of calculation enables the construction of localized practical knowledge by setting up objects of measurements and calculations dexterously. Rather than taking the dichotomous worldview of technological practice and social practice, we grasped the implementation of MFCA as a field of knowledge formation in the actor world created by measurement and calculation practices. Second, as a result, this study also shows that embedding calculating practices within management system programs can have an effect of empowerment. Local knowledge that was generated for each diverse context created power for autonomous actions, and at the same time, the aspect of uniformity of calculation inherent in the program acted for the control of the organization.
FINANCIAL ACCOUNTING AND REPORTING IN GERMANY: A CASE STUDY ON GERMAN ACCOUNTING TRADITION AND EXPERIENCES WITH THE IFRS ADOPTION
KLEIN, MALTE
FÜLBIER, ROLF UWE
Category: GV = Accounting and Governance
Financial accounting is rooted in national thoughts, traditions and institutional settings. As a consequence, accounting has developed heterogeneously over time and fulfilled contracting purposes in divergent national environments. Against this background, we argue that the ongoing process of accounting internationalization and imposed harmonization carries with it the danger of deforming country-specific balancing factors in the accounting systems, especially when the national environment for economic and contractual activities is not harmonized at all. In contrast to more evolutionary integration and adjustment processes of the past where spillover effects have always existed, the rapidity of the current process and coercive nature increases country-specific frictions. To support our argument and to substantiate the interplay of accounting as a contractual device and country-specific characteristics, we provide an in-depth case study of one country, Germany. We illustrate how the traditional German commercial law accounting system has evolved over time to meet specific contractual needs. We demonstrate how the current process of globalization and accounting internationalization has been attended by increasing frictions and challenges, especially on the contractual and regulatory level. We finally investigate the consequences on the German standard setting system, which also includes the changing role of German accounting research.
HOW TOP MANAGERS CONTROL THE ORGANIZATION - THE EFFECTS OF LEADERSHIP STYLES ON MANAGEMENT CONTROL SYSTEMS CHOICE AND ORGANIZATIONAL COMMITMENT
KLEINE, CHRISTIAN
WEIßENBERGER, BARBARA E.
Category: MA = Management Accounting
The notion of organizational commitment has been intensively discussed in many fields of contemporary management research. Current literature in the field of leadership suggests that leadership styles, such as initiating structure and consideration, are able to explain the level of organizational commitment. In a parallel vein, scholars in the field of management accounting and control argue that it is the various forms of formal and informal control systems that affect the level of commitment among the workforce. This study is aimed at closing the gap between both strands of literature and examines how leadership and management control systems interact in the process of creating organizational commitment. Building on structural equation modeling, the study extends the existing knowledge by analyzing the direct effects of leadership styles and management control systems on organizational commitment as well as testing whether the relation between leadership styles and commitment is mediated by the use of formal and informal management control elements. Based on a sample of 294 German firms, the results suggest that informal control elements, such as personnel and cultural controls, act as a hinge through which top management is able to positively affect the development of organizational commitment.
LINGUISTIC CHARACTERISTICS OF ANALYST REPORTS
KLIMCZAK, KAROL
DYNEL, MARTA; KLIMCZAK, KAROL
Category: FA = Financial Analysis
The literature on the linguistic characteristics of analyst reports and corporate disclosures shows that language used in narratives conveys information beyond that contained in quantitative financial information. Linguistic tone and certainty help predict future performance and affect stock market reactions to disclosures. This paper contributes an analysis of linguistic characteristics in a non-English language, Polish. The Polish language uses verb conjugation like German and French, so the results of the study offer insights into international differences in the linguistic characteristics of financial narratives. We follow the methodology of pragmatics and analyse the content of 73 analyst reports to determine what pragmatic strategies are employed by analysts in conveying their assessment of corporations. We find that analysts vary in the use of explicit as opposed to implicit evaluations, and in the use of hedging. Analysts use subjectivisation (e.g. “our assessment”), depersonalization and time deixis (specific assessments of past, present, future) to reduce their accountability for erroneous forecasts.
CORPORATE GOVERNANCE IN NOT-FOR-PROFITS: THE BOARD, THE CEO AND DIRECTORS’ LIABILITIES
KLOOT, LOUISE
OATES, GRAINNE
Category: PS = Public Sector Accounting
This paper examines the roles and relationships of directors and CEOs in not for profit (NFP) organisations. It considers these roles in the light of three recent school board problems, and a recent Australian court case which has highlighted board due diligence and directors’ skills, and increased directors’ duties and accountabilities, with the possibility of criminal liability for corporate failures. The research uses an interpretivist methodology interviewing directors of NFPs. The paper explores how directors and CEOs interact when directors attempt to acquire the information essential for their work. The recent court ruling highlighted that directors must be financially literate and must seek and understand information: they cannot rely on others to provide that information. The research finds that the experience, knowledge and expertise of directors and their willingness to challenge the CEO is crucial in determining the outcomes of NFPs. Inexperienced or inept CEOs can expose directors to significant risk if the directors do not take action to improve organisational outcomes. Directors need to be mindful of the onerous civil and criminal liability that follows appointment as a director, even when acting in good faith. This also applies to voluntary unpaid directors in large and small NFPs.
CORPORATE GOVERNANCE EFFECTIVENESS AND THE PRICING OF AUDIT SERVICES: A LONGITUDINAL STUDY OF THE UK LIFE INSURANCE INDUSTRY
KLUMPES, PAUL
ELEFTHERIOU, KONSTANTINOS; KOMAREV, ILIYA
Category: AU = Auditing
This paper identifies the interrelation between the price of audit and actuarial services within the distinctive corporate governance environment of insurance sector. To do so, we use a panel of UK life insurance companies over the period 1994-2009. Our empirical evidence indicate that the nature of the institutional adjustments (market-driven or regulation-driven) appears to determine the association between the demand of audit and actuarial services. More specifically, after regulatory interventions, the above services exhibit complementarities (knowledge spillover). In contrast, when the governance control stems from the market mechanism, audit and actuarial fees are substitutes (impairment of auditor independence). Finally, we find that the effective internal governance (board independence) and the ownership structure are valid causal factors of audit fees along the entire period under consideration.
MARKET REACTION TO GOODWILL IMPAIRMENTS
KNAUER, THORSTEN
WÖHRMANN, ARNT
Category: FR = Financial Reporting
This paper examines the information content of goodwill write-offs under International Accounting Standard (IAS) 36 (Impairment of Assets) and whether or not the informational value depends on the reliability of the news. Using a sample of 499 goodwill write-off announcements issued from 2005 to 2009, our results indicate that investors revise their expectations downward upon the write-off announcement. We provide evidence that the market reaction is associated with the level of legal protection, with greater absolute price reactions in common law countries where strong protection limits managers’ benefit from exerting their discretion opportunistically. We further report that market reaction is associated with managers explaining the write-off decision and that the market reaction depends on the verifiability of the explanations. In sum, our study suggests that the announcement of goodwill impairment losses reveals negative news to the market, but that the informational value depends on factors that constrain management discretion and enhance the reliability of the news.
DETERMINANTS OF LOBBYING TOWARDS THE IASB: PARTICIPATION, CONTENT AND SUCCESS
KNOSPE, OLIVER
DOBLER, MICHAEL
Category: FR = Financial Reporting
This paper provides evidence on key determinants of lobbying the International Accounting Standards Board (IASB) through comment letters. We adopt Sutton’s (1984) theoretical framework, focus on the project “Post-employment Benefits (including Pensions)” and conduct a content analysis of 377 comment letters submitted at various stages of the due process to analyse the participation, content and success of lobbying. Key results on the first two points support Sutton’s predictions on participating interest groups and on regulators and accountants using comment letters to foster their legitimacy. They are inconsistent with his predictions on the timing of lobbying and on the focus of lobbying of preparers and users with regards to content. Results of consistent sets of logit and linear regressions imply that lobbying success is positively related to information on preferences conveyed in comment letters. But they are indecisive on the effect of the intensity of comments. This seems consistent with Board members relying on summary feedback provided by the staff and could erode some constituents’ incentives to lobby through comment letters. Our findings have implications for the legitimacy and independence of the IASB and research on lobbying through comment letters.
TAX RATE DIFFERENCES, TAX STATUS AND THE CAPITAL STRUCTURE CHOICE OF DOMESTIC AND MULTINATIONAL CORPORATE GROUPS
KOCH, REINALD
Category: TX = Taxation
The present paper analyzes and compares the tax impact on the capital structure choice within domestic and multinational groups. To this end, a modified version of the analytical model proposed by Moen et al. (2011) is empirically tested for a large panel of EU corporations. In contrast to previous literature, dichotomous tax rates and simulated marginal tax rates are employed, which account for the company’s tax status. Empirical results suggest that using these measures of the tax burden improves the predictive power of the regression model and avoids a bias in the estimated tax rate elasticities. Furthermore, regression results suggest that domestic and multinational groups respond in a similar manner to intra-group differences in the tax burden.
STRATEGIC PERFORMANCE INFORMATION AND CANADIAN BOARD INVOLVEMENT IN STRATEGY RELATED ISSUES: A FIELD STUDY
KOCHETOVA-KOZLOSKI, NATALIA
ATKINSON, ANTHONY ; WEBB, ALAN
Category: GV = Accounting and Governance
This study contributes to the growing body of research examining the governance processes undertaken by Boards of public companies. Specifically, we investigate the Board’s role in developing, executing and monitoring strategy and the nature and extent of strategic performance information provided to Boards. We also examine directors’ perceptions of indicators of effective Board involvement in strategy-related issues. Despite calls for greater Board involvement in strategy, few studies have examined this issue in a Canadian setting. To address this gap in the literature, we conducted 18 field interviews with directors (n = 14) of Canadian public companies and other governance experts (e.g., former directors, consultants). Our findings indicate Boards are commonly involved in monitoring strategy but there is more variation regarding the extent to which they also play an advisory role in developing and executing strategy. We also find that while Boards typically receive key performance indicators (financial and non-financial) there is limited provision of more strategy-based performance information such as balanced scorecards. Finally, our interviewees indicated that indicators of effective Board involvement in strategy should focus on process measures (e.g., nature and extent of strategy discussions) rather than objective outcomes such as financial performance. Our descriptive, field-based evidence provides a better understanding of Canadian Board involvement in strategy-related issues and suggests important areas for future empirical research.
DOES COMPREHENSIVE INCOME INFLUENCE DIVIDENDS?
KOCHIYAMA, TAKUMA
ITOU, KUNIO
Category: FR = Financial Reporting
We examine whether comprehensive income and other comprehensive income influence dividends of Japanese companies. Whilst comprehensive income is considered as a new “bottom line” of companies’ income statements, the impact on dividends has not been examined empirically. Linter (1956) and subsequent prior studies predict that only earnings which are more persistent and less volatile are related to dividends. Contrary to this prediction, our findings suggest that both comprehensive income and other comprehensive income have positive coefficients with dividend changes. From additional regression analyses, we further find that negative other comprehensive income more likely leads to lower dividends. We propose several explanations on our findings.
A SEGMENT-BASED ANALYSIS OF FIRMS’ DECISION TO MANAGE EARNINGS TO INFLUENCE EXISTING AND POTENTIAL COMPETITION
KOENIGSGRUBER, ROLAND
PEROTTI, PIETRO ; SCHINNERL, OLIVER; WINDISCH, DAVID
Category: FR = Financial Reporting
Recent research on the effects of product market competition on earnings management has found conflicting evidence. We contribute to this literature by disentangling the effects of existing competition and the threat of market entry by a potential competitor. Since product market competition as well as efforts to influence it are more likely to play out at the segment level than at the corporate level, we use segment data both for our competition measures as well as for our earnings management metric. We find that both existing and potential competition are negatively associated with absolute discretionary unallocated costs - our segment-level measure earnings management. On the other hand, absolute discretionary accruals are significantly negatively associated with potential competition but not with existing competition.
FINANCIAL ANALYST STOCK RECOMMENDATIONS AND CORPORATE DISCLOSURES: COMPLEMENTS OR SUBSTITUTES?
KOPITA, ANASTASIA
CHARITOU, ANDREAS; KARAMANOU, IRENE
Category: FR = Financial Reporting
This paper investigates whether the mandatory IFRS adoption has significantly affected the informativeness of analysts’ recommendations revisions. Using a dataset of 9054 analysts’ stock revisions over the period 2003 – 2007, we document a significant increase in the informativeness of both stock upgrades and downgrades. In line with related research, we also document that this increase is more pronounced for firms in strong enforcement environments. We do not find similar changes in the market reaction for a control sample of firms that had voluntarily adopted IFRS before the 2005 mandated switch. This alleviates concerns that our results are affected by other concurrent capital market or other macroeconomic events. Overall, our evidence suggests that analysts’ role is mostly related to that of information intermediary rather than information provider and highlight the complementarity rather than the substitution effect between stock recommendations and firm provided disclosures.
BUY ON BAD NEWS, SELL ON GOOD NEWS: HOW INSIDER TRADING ANALYSIS CAN BENEFIT FROM TEXTUAL ANALYSIS OF CORPORATE DISCLOSURES
KORCZAK, ADRIANA
HAGENAU, MICHAEL; KORCZAK, ADRIANA; NEUMANN, DIRK
Category: FR = Financial Reporting
We demonstrate how insider trading analysis may benefit from textual analysis. We analyze reported insider trading behavior and explain the association between corporate as well as 3rd-party news announcements on directors’ dealings activity. Previous approaches are extended by adding the sentiment of news to the research setting. We find strong evidence that insiders follow the stock market adage “Buy on bad news, sell on good news”: They tend to buy (sell) securities in those years where their respective companies issue negative (positive) news. Likewise, insiders tend to buy (sell) stocks in years when 3rd-party news coverage is pessimistic (optimistic). The impact of corporate news on insider trading is higher than for 3rd-party news, as corporate news are subject to direct influence by the insiders. We also find that insiders buy when next year’s news improves compared to the current year. Looking more concretely into the language, we also demonstrate that insiders buy when expressing insecurity and uncertainty. Overall, the findings reveal additional insights for insider trading analysis and demonstrate how finance may benefit from textual analysis.
DOES FINANCIAL STATEMENT AUDIT REDUCE THE COST OF DEBT FOR PRIVATE FIRMS?
KOREN, JERNEJ
KOSI, URŠKA; VALENTINČIČ, ALJOŠA
Category: FA = Financial Analysis
This study examines the effect of audit on small private firms’ cost of debt. We use a sample of 1,922 small private firms operating in the period 2006-2010 with optional financial statement audit. High-quality data allows us to construct a more precise interest rate measure than existing studies. Contrary to several existing studies we find a robust central result that voluntary audit increases rather than decreases the cost of debt financing. Only if the voluntary audit is performed by a Big4 auditor the cost of debt decreases. The origin of debt financing, term structure of loans and firm financial complexity also systematically affect the cost of debt. The results are not sensitive to the estimation method and (sub-) sample selection. Additional analyses show that mandatory audits of private firms do not affect the cost of debt financing. Our results also indicate that results are sensitive to cost of debt definition and this might have affected the results reported in the existing literature.
COMMUNICATION APPREHENSION OF ACCOUNTING STUDENTS: A CROSS-CULTURAL STUDY
KOTZE, LIZETTE
COETZEE, STEPHEN; SCHMULIAN, ASTRID
Category: ED = Accounting Education
Communication apprehension has been found to negatively affect communication skills. These skills are important skills to enable the professional accountant to function in the modern economy. In order to successfully address any communication apprehension experienced by accounting students it is necessary to understand factors which may influence this apprehension. The influence of culture on communication apprehension has, as yet, not been addressed by the literature. By using a multivariate regression analysis this study aims to address the lacuna in the existing literature through considering factors influencing the communication apprehension of accounting students in multicultural and multilingual classrooms. The influence of tuition language on communication apprehension is also investigated. The results of this study show that South African students have lower levels of communication apprehension than students surveyed in earlier international studies. Cultural differences in communication apprehension for accounting students were identified. Furthermore, a home language that differed from English as tuition language led to lower levels of communication apprehension, while a tuition language that was not English was linked to increased levels of communication apprehension.
THE INFLUENCE OF MARKET MAKING ON ANALYST FORECAST QUALITY
KREIS, YVONNE
Category: FA = Financial Analysis
We analyze the influence of market making on analyst forecast quality in the German market and test whether financial analysts employed by market makers significantly differ in their earnings forecast quality for affiliated stocks. There are two hypotheses: On the one hand, affiliated analysts might make use of the detailed information and better access to company management from the market maker affiliation and on average provide more accurate forecasts. On the other hand, financial analysts might be inclined to support market making activities and stock price liquidity by issuing more optimistic earnings forecasts. For earnings forecasts of German companies in 2004 - 2006, we find strong evidence for the later.
DO FIRMS MANAGE TAX POSITIONS TOWARD DESIRED LEVELS?
KUBATA, ADRIAN
WATRIN, CHRISTOPH
Category: FR = Financial Reporting
We investigate whether firms have desired tax position targets, i.e. desired levels of ‘cash income taxes paid’ and ‘total income tax expense’, and if they do, whether they manage their actual tax positions toward these targets and how quickly they approach to them. We apply our model to a sample of U.S. firms for the period 1988-2009. We find that firms have desired targets of tax positions and that they manage both the amounts of ‘cash income taxes paid’ and ‘total income tax expense’ toward these targets. We also find a wide heterogeneity in adjustment speeds toward the desired targets. The typical firm needs, on average, 6.4 years to fully accomplish the management of actual income taxes paid values toward its desired values and 5.8 years to fully accomplish the management of actual total income tax expense values towards its desired values.
CEO DUALITY, TMT COMPOSITION & MANAGEMENT CONTROL IN LOW-RISK AND HIGH-RISK TAKING FIRMS
KUERSCHNER, SANDRO
Category: MA = Management Accounting
Research on the impact of the top management team (TMT) on management control systems is scarce. Upper-echelons theory and attention-based theory promise to facilitate theory building in this stream of research. This study aims to shed some light on the relationship between the TMT composition and the configuration of the management control system. The power-structures-biasing impact of CEO duality is also considered in this study. Survey data from 97 companies is used together with publicly available data to empirically answer the question whether CEO duality and TMT composition do affect the setup of the management control systems or not. Results show that dual CEOs use their power to limit the rational approach to forecasting and budgeting, but on the other hand facilitate an efficiency orientation of management control. This efficiency orientation is also supported by certain TMT compositions, however, these TMT compositions also positively influence the rational approach to forecasting and budgeting. Nearly all found relationships are moderated by the risk-taking orientation of firms. Therefore, it is recommended to always include risk-taking as moderating variable.
MANAGING RELATIONS THROUGH A BALANCED USE OF MANAGEMENT CONTROL SYSTEM: A FIELD STUDY
KULLMAN, CHRISTER
KULLMAN, CHRISTER
Category: MA = Management Accounting
The purpose of this paper is to explore how management control systems (MCSs) are used in the relationship between the firm, its accountant and auditor in a small and medium-sized entity setting (SMEs). By integrating theories of service relations into Simons’ (1995) Levers of Control model, this study aims to clarify the forms and degree of value is added in the interactive relation. The research is based on evidence from four in-depth longitudinal case studies with entrepreneurs, accountancy office staff and auditors and from various sources such as interviews, observations and archival materials. The study shows that small enterprises use financial reports and various financial measurements as control instruments and have implemented their management control as a strategy instrument in the decision-making process. It also indicates that entrepreneurs need counselling within the fields of administration and business operations, in particular regarding accountancy and finance, and that they participate in the counselling process themselves to some extent. By analysing and combining diagnostic and interactive control factors in the relational model, a perspective of how the counselling relation works was created. The analysis of the success factors supported the proposal that the relation with the accountancy firm and/or the auditors serves as a supplementary resource. The result may have both practical and theoretical implications.
OMITTED VARIABLES AND TESTS OF DIVIDEND DISPLACEMENT
KUNGWAL, THANAMAS
DEDMAN, ASSOC. PROF. ELISABETH; STARK, PROF. ANDREW
Category: FA = Financial Analysis
Theory suggests that, under certain assumptions, corporate distributions should reduce market value on a one-to-one basis. This result is sometimes known as dividend displacement. Nonetheless, dividend displacement tends to be rejected by empirical tests for dividends in the UK. We study a conjecture in the literature that the omission of lagged accounting variables in accounting-based market value models is the cause of the rejection of dividend displacement for regular dividends. Our results suggest that when various controls for omitted variables in models used in prior literature are employed, it is in only one case that the results of prior studies are overturned. This is the case when lagged market value is added into the estimated equation. Nevertheless, we argue that including lagged market value as an independent variable in the estimated equation cannot control for the omission of lagged accounting variables, or other omitted variables, without producing additional model mis-specification problems. As a consequence, we conclude that the results in previous literature are robust to the inclusion of lagged accounting variables, and the evidence against these results when lagged market value is included in the model is unreliable.
INTERNET FINANCIAL REPORTING (IFR) IN EUROPE - A COMPREHENSIVE COMPARISON OF MAJOR STOCK-LISTED COMPANIES
KUNZ, CHRISTIAN
Category: FR = Financial Reporting
Investor Relations (IR) today owns a high priority in the public relations of stock listed companies. From the set of possible instrument (e.g. Conference Calls, Investor Meetings) the IR-specific parts of the company website haven’t been analyzed in full extend. The purpose of this paper therefor is to close a gap in research concerning the website based Investor Relations. Since some studies already provided the instrument of an IR-website quality score this paper will further develop and enhance a comprehensive multi-criteria and two-tiered scores which bases on carefully hand collected data of websites from 168 European companies, dating from April/May 2012. It covers the CAC40, DAX30, FTSE MIB, IBEX35, STOXX Nordic, and a market capitalization based selection of the 30 biggest companies from the FTSE100. As the statistical analysis reveals there are several factors which relate to the web site quality. Besides quite common factors (e.g. market capitalization and return on total assets) some unique evidence could be found: The Secrecy of the auditing culture, analyst following, US-Cross-Listing and the percentage of different Free-Float share classes relate to the overall web site quality-score and/or its underlying sub-scores. While some findings represent confirmation of prior studies, some new aspects result from this paper.
INFORMATION EQUIVOCALITY, TRUSTWORTHINESS OF INFORMATION SOURCE AND ESCALATION OF COMMITMENT
KUNZ, JENNIFER
Category: MA = Management Accounting
Decision makers’ escalation of commitment to a failing course of action is an important example of the failure of management control systems. Following the literature on decision dilemmas, the paper investigates on an experimental basis the influence of information content and source equivocality on escalation. The results of the study indicate that information provided by a trustworthy source rather leads to the termination of a project whose costs are getting much higher than expected than information from a less trustworthy one, indicating that trustworthiness of information sources reduces escalation of commitment. In contrast, the equivocality of information did not exhibit any main effect. Yet, unexpectedly a gender specific effect could be observed.
A SPECIFIC ACCOUNTING APPROACH FOR PUBLIC UNIVERSITIES
KÜPPER, HANS-ULRICH
Category: PS = Public Sector Accounting
As a basic instrument of an effective management, many universities in Germany and other countries therefore introduce commercial accrual accounting. In this paper I analyze, whether its components suit the special conditions of public state universities. Based on an analysis of the reports of two famous universities we argue, that it is necessary to change traditional accounting in important aspects and elements. Cash flow statement should keep high relevance, and a balance sheet seems to be informative. As the success goals of this type of universities are non-profit oriented, their financial accounting should be completed by a change in value, instead of an income statement; output measures and performance indicators should substitute revenues as the counterpart of costs. Furthermore, long-term decisions are crucial within universities. Therefore, investment accounting is very important for them. But it has to be modified by investment and knowledge balances of their intellectual capital. In order to introduce and to use such a special university accounting it is shown, how the concept of a balanced scorecard can be transferred to public universities, and how the components of accounting can be integrated in it.
FINANCIAL CRISIS AND LEGITIMACY OF GLOBAL ACCOUNTING STANDARDS
KUSANO, MASAKI
SANADA, MASATSUGU
Category: FR = Financial Reporting
The purpose of this study is to examine and clarify a mechanism of global accounting standard-setting and accounting regulation exposed by politicization of accounting from the perspective of the legitimacy of global accounting standards. Especially, we investigate the legitimation crises of global accounting standards and their restoration process focusing on the IASB’s response to the financial crisis. With using an analytical framework of ‘decoupling, compromises, and systematic dominance’ (Tamm Hallström, 2004), we find that the IASB tried to maintain the mechanisms of the endorsement from the EU, in other words, the legitimacy element of ‘taking advantage of the power of other organizations’ with decoupling the legitimacy element of ‘theoretical consistency’ and ‘justification through due process’ in order to avoid a further ‘curve-out’. In order to reconcile the concerns from the United States and the outside of Europe about the IASB’s decision to bypass its usual due process, the IASB tried to maintain and restore its legitimacy by establishing the monitoring board, with compromising two elements of ‘justification through organizational structure’ and ‘superior organizations’ delegation and/or acceptance of standard-setting activity.’ We also find that the IASB always had made it a priority to the element of ‘justification through organizational structure’ based on the needs of the EU as the biggest customer.
THE SYNTHETIC BALANCE OF FRANCESCO DATINI COMPANY IN AVIGNON (1411) AS THE IMPORTANT STAGE OF DEVELOPMENT IN BALANCE THEORY
KUTER, MIKHAIL
ALENIKOV, DMITIY; GURSKAYA, MARINA
Category: ED = Accounting Education
For the first time in Russia, a detailed study of the first surviving a synthetic balance and analytical calculations, based on which it is built.
OPERATING PERFORMANCE CONSEQUENCES OF DIFFERENT TYPES OF MERGERS AND ACQUISITIONS
KUVANDIKOV, AZIMJON
FADZLY, MOHAMED
Category: GV = Accounting and Governance
Prior empirical investigations on the performance consequences of mergers and acquisitions have generally produced mixed findings. We address this by splitting our sample of 235 UK-based mergers according to the type of deals, namely, related/unrelated and hostile/friendly acquisitions. We analyse post-takeover performance changes using the change model and the intercept model, focusing on industry and matched-firm adjusted Return on Assets (ROA), Return on Sales (ROS), and Sales on Total Asset (SOA). Our results indicate that M&A in general leads to negative changes in acquirers’ ROA and SOA. Acquirer’s ROS, however, improves as mainly the result of substantial decline in sales volume – relative to the pre-merger combined sales of target and acquiring firms. We also find that transaction type affects the nature and the extent of operating performance change. In particular, related acquisitions are followed by improved ROA and ROS, whereas unrelated acquisitions tend to result in reduced ROA. As sales reduction is observed in both deal types, such finding signifies a greater extent of efficiency enhancement from related acquisitions than is achievable via unrelated transactions. Similarly, we find evidence of improved profitability following hostile takeovers despite deteriorating sales, which suggests asset efficiency improvement effect of such deals. Friendly acquisitions, on the other hand, are likely to be succeeded by SOA deterioration.
DETERMINANTS OF CORPORATE CASH HOLDINGS: EVIDENCE FROM THE EMERGING MARKET OF TURKEY
KUZEY, CEMIL
UYAR, ALI
Category: FA = Financial Analysis
This study analyzes the factors that might explain the level of corporate cash holdings in a broad sample of Turkish listed non-financial firms over the 1997-2011 period. The empirical results reveal that, on average, Turkish firms hold 8.9% of total assets as cash and cash equivalents. There is a steady increasing trend in cash level across years. Both system and difference GMM regression results are consistent; almost the same variables are significant with the same direction. The findings indicate that previous year cash holding is significant and positive at current year cash level, suggesting that firms have a target cash level. Furthermore, the results revealed that cash flow has positive and significant impact on cash level. However, the amount of capital expenditures, liquid assets used as cash substitute, the degree of tangibility of assets, financial debt ratio, firm size, leverage, and volatility have negative and significant impact on cash level. Most of these explanatory variables were in line with theoretical background and also with previous studies as well.
THE IMPORTANCE OF THE INTERNAL INFORMATION ENVIRONMENT FOR TAX AVOIDANCE
LABRO, EVA
GALLEMORE, JOHN
Category: TX = Taxation
We show that firms’ ability to avoid taxes is greatly affected by the quality of the firm’s internal information environment, with effective tax rates (ETRs) substantially lower for high internal information quality firms. Furthermore, we show that firms that experience an internal information quality improvement (reduction) are reducing (increasing) their ETRs. Cross-sectionally, the effect of internal information quality on tax avoidance is strongest for firms in which information is likely to play a more important role. First, firms with high coordination needs because of their dispersed geographical or business industry presence benefit more from the reduced information asymmetry and improved information coordination between their various business units, allowing for more effective tax planning. Second, firms that are operating in a more uncertain environment are able to offset some of the negative effect of uncertainty on their ETRs through the quality of their internal information system. Because lower ETRs are obtained through better internal information quality, they do not come at the cost of increased risk in the tax positions taken: unrecognized tax benefits and ETR volatility are lower in high quality information environments.
PERFORMANCE MANAGEMENT SYSTEMS IN HOSPITALS — EMPIRICAL EVIDENCE ON THEIR DESIGN AND USAGE IN THE LIGHT OF REGULATORY INFLUENCES
LACHMANN, MAIK
TRAPP, ROUVEN; WENGER, FELIX
Category: MA = Management Accounting
Our study analyzes the design and usage of performance management systems (PMS) in the context of a changing regulatory environment using the example of the German hospital setting. Based on a case study of three hospitals, we investigate the regulatory environment's effect on the strategic priorities of these organizations and the implementation of these priorities through PMS. Our study suggests that the regulatory environment impinges upon key success factors that are, however, only partially reflected in the PMS applied. Although a plethora of performance measures is implemented, these measures are used only partially for the performance evaluation of clinicians. We employ stewardship theory to explain the inconsistencies in the PMS applied.
MULTIPLE DECOUPLING IN THE ADOPTION OF ACCOUNTING TOOLS
LAGUECIR, AZIZA
KERN, ANJA; LECA, BERNARD
Category: MA = Management Accounting
In this paper, we explore the different forms of decoupling taking place in organisational departments as an accounting tool is adopted at the departmental level. Through an in depth case study, this paper contributes to research on decoupling in several ways. First, by focusing at the departmental level, this research complements existing studies on decoupling which assumed that organisational response to decoupling would be uniform, and reveals that when responding to policy adoption, different departments will decide to comply or decouple depending on their specific agendas. Second, it contributes to research on means-ends decoupling as recently developed by Bromley and Powell (2012). While Bromley and Powell suggest that means-ends decoupling is an unintentional outcome of the complexity of the environment and the potentially opaque relationship between means and ends, the present research shows that means-ends decoupling can also be intentional as actors engage in such decoupling to pursue their own agendas. Third, this research identifies a new form of decoupling - between decision and policy – not identified by previous studies, opening new directions for research into the relationship between the adoption of accounting tools and the potential impact on decisions based supposedly on those tools. Finally, the research points to the importance when investigating decoupling of considering the political dimensions of the relationships between the actors.
THE ARITHMETIC BROWNIAN MOTION IN CORPORATE VALUATION
LAHMANN, ALEXANDER
Category: FA = Financial Analysis
In this paper we expand the Discounted Cash Flow (DCF) framework for the valuation of an unlevered firm when the free cash flows are modeled by an arithmetic Brownian motion (ABM). We approximate the ABM by a binomial lattice in order to keep the typical time discrete framework of the DCF methodology. In contrast to the typical multiplicative process assumption for modeling earnings figures and free cash flows the ABM implied additive process admits for possible negative free cash flow values and grows by an absolute amount rather than a growth rate. But this process assumption has important implications on firm valuation. After the binomial lattice approximation we derive valuation formulas based upon an additive process assumption, touch the topic of the determination of CAPM consistent cost of capital and show a possible equivalence between the multiplicative and additive process assumption. We finish our analysis by calculating some numerical examples.
ASSOCIATION BETWEEN OPPORTUNISTIC MANAGEMENT EARNINGS FORECASTS AND AUDIT FEES
LAI, KAREN
GUL, FERDINAND; JAGGI, BIKKI; RADHAKRISHNAN, SURESH
Category: AU = Auditing
In this paper, we hypothesize that firms issuing management earnings forecasts (MEF), especially opportunistic MEF (OPP MEF), are associated with higher audit risk and hence with higher audit fees compared to the firms which do not issue MEFs or issue informative MEF. We use the methodology developed by Li et al. (2012) to classify MEFs into three types, i.e. cost of capital (COC), opportunistic (OPP) and disclose or abstain (DOA) MEFs. Our results confirm audit fees are significantly higher for firms issuing MEF compared to the firms which do not issue MEF, and that the significantly positive association between audit fees and MEF is especially higher for OPP MEF compared to other types of MEFs. Additionally, our results show that CEO’s long horizon moderates the positive association between audit fees and OPP MEF, and conversely CEOs’ short horizon strengthens positive association.
CONSTRUCTING FINANCIAL ENVIRONMENTAL INFORMATION: A CASE STUDY OF A NORDIC ENERGY COMPANY
LAINE, MATIAS
HYVÖNEN, TIMO; JÄRVINEN, JANNE; KANTOLA, HANNELE
Category: SE = Social and Environmental Accounting
Corporations regularly disclose figures of environmental expenditures and investments in the various reports they publish. The role of such information however remains unclear (Bebbington et al., 2012) and the purpose of disclosing these figures can thus be questioned. We provide insights on this topic with a qualitative case study focusing on a Nordic energy company. Our dataset includes semi-structured interviews with 26 individuals from all organizational levels, supplemented by a longitudinal set of corporate annual reports and media data. The case study setting allows us to look at the role of financial environmental information in the organization’s decision-making processes, including both the construction and (non-)use of this data. Further, we discuss how individuals on different positions and organizational levels conceptualize the role, nature and significance of these figures. Our interpretation draws on the concept of loose coupling (Orton & Weick, 1990), which helps to provide explanations for why gaps between actions and measures emerge and persist within organizations. In terms of findings, we argue that the disclosed financial environmental information was only loosely coupled with various dimensions, including the organization’s actual activities, its environmental impacts and organizational decision-making. Furthermore, our findings contrast many prior studies, in which financial environmental information has been considered to have a high value.
ECONOMIC BONDING, AUDITOR SAFEGUARD AND AUDIT QUALITY: A CONTINGENCY APPROACH
LAITINEN, ERKKI K.
LAITINEN, TEIJA
Category: AU = Auditing
In this paper we examine whether the economic bond between an individual engagement partner and client threatens auditor independence and thus audit quality. Furthermore, we investigate if auditor’s high income level acts as a safeguard against this economic bond. Using a sample of a peer reviewed individual audit engagement of 119 auditors we examined whether auditors are likely to bargain quality for clients that have a high economic rank in their client portfolio. Furthermore, using taxable earned and unearned income information of auditors we investigate if high income level of an auditor diminishes the risk of financial self-interest threat. Our results provide evidence that client’s economic rank affects auditor’s independence. Our results also suggest that this financial self-interest threat can be safeguarded by auditor’s high income level diluting the economic bond with the client.
EXPLORING THE RISK TOLERANCE IN THE GOLD INDUSTRY: AN EMPIRICAL STUDY
LAJILI, KAOUTHAR
BEN AMOR, SARAH
Category: FA = Financial Analysis
The purpose of this paper is to develop a corporate risk tolerance level based on annual reports’ risk and risk management disclosures and using the Canadian gold mining industry as an example. A content analysis approach is followed to hand-collect and analyze corporate risk disclosures including risk sources, exposure, and risk management strategies reported by Canadian listed gold mining firms between 2006 and 2008. Risk information coding and scoring techniques are then used to assign risk tolerance levels to each sample company. The analyses indicate that Canadian gold companies have moderate levels of risk tolerance and about a third of them (including some industry leaders) could be classified as risk neutral. The approach and findings are potentially useful to various firm stakeholders including shareholders, potential outside investors and employees among others. The approach could be used to check whether outside investors (or stakeholders in general), corporate management, and boards are in alignment with respect to the risk acceptance/tolerance levels as well as risk management strategies adopted. This would further reduce the agency costs between management and outside investors. The proposed risk tolerance measure with possible further refinements could be used as an additional relative performance metric by potential investors and analysts in building their investment portfolios in the future.
MEETING OR BEATING FORECASTS AND UNCERTAIN EARNINGS BONUSES
LANG, KONRAD
Category: FR = Financial Reporting
It is a widespread notion that managers’ strong incentives not to disappoint the market are pivotal for why a vast majority of firms meet or beat the analyst consensus forecast. However, “it is not clear why analysts do not unravel the effects of these incentives” (Ramnath et al. 2008, p. 62), i.e., why the majority of firms still meet or beat expectations (MBE). This model studies the interaction between a manager exercising reporting discretion and financial analysts forecasting the firm’s earnings. It examines the forces that drive predominant MBE by explicitly considering both MBE incentives and an additional, though, uncertain earnings bonus. Combining the evidence of high earnings bonuses and the absence of complete pre-forecast information about these bonuses provides a possible theoretical explanation for MBE predominance. The analysis yields that, surprisingly, unexpected excess bonuses, rather than MBE incentives, cause predominant MBE. In addition, the probability of disappointing the market increases in the incentives not to disappoint the market. The model predicts that firms in industries with little compensation disclosure and high excess bonuses are more likely to achieve MBE.
VOLUNTARY DISCLOSURES AHEAD OF IPOS
LANGBERG, NISAN
KUMAR, PRAVEEN; SIVARAMAKRISHNAN, SHIVA
Category: FA = Financial Analysis
We examine voluntary disclosure by firms ahead of an initial public offering (IPO) that seek to raise funds for a real capital investment. Market participants in the IPO face two sources of adverse selection: from informed issuers that wish to sell over-valued equity and from informed investors that selectively participate in undervalued IPOs. By disclosing information to markets ahead of the IPO the owner of the firm can mitigate information asymmetry and reduce under-pricing of the IPO. When the fraction of informed investors is low, firms going public disclose less information, there is underpricing, and the volume of firms going public is high. On the contrary, when the fraction of informed investors is sufficiently high, there is excessive disclosure of information by firms, less underpricing but also under-investment as the average failing IPO has a positive NPV project. The average quality of IPO firms is, however, higher in the low-volume equilibrium outcome. Due to the strategic disclosure of information, we find that more disclosure reduces underpricing but that the average level of underpricing is nonmonotonic in the fraction of informed investors.
CASH FLOW ACCOUNTING AND THE COST OF DEBT ‎
LARI DASHTBAYAZ, MAHMOUD
MCLEAY, STUART; VADIEI NOWGHABI, MOHAMMAD HOSSEIN
Category: FR = Financial Reporting
The aim of this study is to examine why firms may manipulate not just their earnings but also ‎their cash flows, and to investigate the effects of this behaviour on the cost of debt. The ‎study highlights the discretion afforded in IFRS and US GAAP with regard to the reporting ‎of operating cash flow. Using samples of firms in the UK and the USA, the results show that, ‎for the ten years to 2010, the cost of debt has a significantly positive association with the ‎managed (abnormal) component of operating cash flow. The market is more likely to ‎incorporate abnormal operating cash flow information into pricing when firms are ‎experiencing financial problems, especially when such companies are faced with low cash ‎flows. ‎ Key words: Cost of debt, Cash flow manipulation, Abnormal operating cash flow, GAAP ‎discretion
THE FAIR VALUE OF EXECUTIVE COMPENSATION: THE CASE OF REDEEMABLE EQUITY WARRANTS
LARMANDE, FRANCOIS
BELZE, LOÏC; SCHNEIDER, LORENZ
Category: FA = Financial Analysis
Accounting standards, IFRS2 and SFAF123R, recommend to use formal valuation models to measure the fair value of share based payments. This paper analyses the possible manipulation of these valuation models. A two-fold issue is addressed: first, the discretionary choice of the volatility input which has revealed mixed results in the earlier literature; second, the manipulation of the valuation model itself. As data on stock options are often scarce in Europe, we review the fair value measurement of redeemable warrants, a special case of listed employee stock options used in France. As public securities, a detailed disclosure of their fair value measurement is required by the market regulation which reveals an average 40% discount on a standard model valuation. We provide an in-depth analysis of this discount that is often justified by the existence of transaction costs. When factored in, these costs actually reveal a range of possible prices and accounting standards have never addressed this issue. The latter assume that a model properly calibrated would give only one price. However, when considering the range of possible prices in the case of redeemable warrants, the lower bound is systematically used. By contrast, we argue that no discount is justified for the measurement of a liability like share based payment: only a premium should be considered. Then, when analyzing the choice of the volatility input in the model, we show that discretion is at work to systematically lower the warrant value again. After reviewing other measurement issues, we show that these executive warrants are underpriced by an up to 66% discount. Our findings shed light on the necessary improvement of the process for fair valuing share-based payment instruments leading to a better specification of ex ante admissible valuation techniques and a better ex post control of their implementation.
SUSTAINABILITY REPORTS AS BOUNDARY OBJECTS IN AN ORGANIZATIONAL SETTING
LARRINAGA, CARLOS
BEBBINGTON, JAN; FERNÁNDEZ-CHULIÁN, MANUEL
Category: SE = Social and Environmental Accounting
This paper reports a research engagement that investigates sustainability reporting as an activity that intends to construct a narrative of the organization to provide members of the organization a reality they can live with. Instead of studying the clean, final, sustainability report, this investigation focuses on the back stage of sustainability reporting in one Spanish savings bank, where the researchers engaged for more than three years. The paper explains sustainability reports as boundary objects, that occupy the space between loosely coupled parts of the organization and whose interpretive flexibility allow the unproblematic cooperation of actors with different interpretations of the organization. Different translations of discourses and actions ensure that the sustainability report be so ductile and ill-defined so as to limit the need of change. By editing the sustainability report any narrative that is not consistent with the approved CSR standards and categories is ignored and marginalized. Those translations and editions explain why sustainability reporting is not inscribing a more socially responsible behaviour of the case organization.
THE INFLUENCE OF CULTURE AND LEGAL ORIGIN IN COUNTRY PARTICIPATION THROUGH COMMENT LETTER WRITING TO THE IASB
LARSON, ROBERT K.
MYRING, MARK
Category: FR = Financial Reporting
Many key supporters of the International Accounting Standards Board (IASB) desire diverse geographical participation in the determination of International Financial Reporting Standards (IFRS). Widespread constituent participation in the IASB’s due process is seen as increasing the legitimacy of both the IASB and IFRS. Prior research finds that while almost one hundred countries participate in the IASB’s standard-setting due process, just seven countries provide a majority of the comment letter responses. Possible reasons for this situation have not been fully investigated. Culture provides explanations for a number of phenomena in accounting. This study examines whether a country’s culture influences its participation in the due process of the IASB through comment letter writing. The study uses a multi-issue/multi-period approach and utilizing data from The Globe Study to measure culture. The results suggest that some cultural and legal origin differences do affect the number of writers or responses from a country. This may reflect a difference by countries in their preferred modes of participation in the development of IFRS. This has implications regarding the best due process for the IASB if greater participation by more countries is to be achieved.
TAX-INDUCED CONSERVATISM – EVIDENCE FROM THE GERMAN CORPORATE TAX REFORM 2008
LASCHEWSKI, CHRISTIAN
HOHLER, KATRIN
Category: FR = Financial Reporting
In this paper, we contribute indirectly to the current debate ensuing around whether prudence and or conservatism are desirable accounting qualities and examine taxation as a determinant of conditional conservatism. In line with recent studies (Lara et al., 2009; Karjalainen, 2011) and in contrast to prior studies (Qiang, 2007; Kim and Jung, 2007), we find that taxation induces conditional conservatism in German firms. Using the unique setting of the German corporate tax reform in 2008, we exploit a natural setting where taxation creates different incentives for small and large firms reporting in the same GAAP. Our results confirm that conditional conservatism decreases with lower tax costs. Therefore, our results are not only addressing the debate around accounting conservatism, but can also be insightful for the “race to the bottom” trend seen in corporate taxation.
INSTITUTIONAL LOGICS AND THE HISTORICAL CONTINGENCY OF PUBLIC SECTOR ACCOUNTING CHANGE: THE FINNISH UNIVERSITY SECTOR IN YEARS 1980-2010
LATVANEN, JAANA
PELLINEN, JUKKA
Category: PS = Public Sector Accounting
From the beginning of 2010 universities in Finland have been either independent corporations under public law or foundations under the Foundations Act. The long journey from the state agency position to an independent entity and a change of ideology began 1983, when a working group set by Ministry of Education and Culture (MEC) published its preliminary report of plans of a new legislation concerning the development of higher education in Finland. We found altogether 24 reports of MEC and 21 of Ministry of Finance (MF) dealing with management by results (MBR) and its ramifications in universities in Finland between years 1980 and 2010. Both ministries have had a very important role in the developing of MBR of universities in Finland. While MEC has concentrated on developing models to evaluate university performance, cost accounting, funding formula and the issues dealing the independency and autonomy of universities, MF has had a significant role in decentralization of power, clearing the role of ministries in MBR, and financial management of public sector organizations. Reports indicate the strong position MF has taken in developing normative theory of public sector accounting. Our study seeks institutional explanations to the adoption of performance measurement practices in university sector in Finland by studying the reports of both ministries in years 1980-2010. The relationship of ministries with university sector and changes in it is important in trying to better understand the mechanisms behind this development. The present situation of accounting and financial management of universities as a result of past development is a combination of activities of MF, MEC and universities.
AUDITORS’ EARLY COMPETENCE DEVELOPMENT: A FINNISH STUDY FROM THE KNOWLEDGE STRUCTURE PERSPECTIVE
LAU, YENG WAI
FREDRIKSSON , ANTTI
Category: AU = Auditing
How auditors’ knowledge is structured determines auditors’ competence in exercising judgment. Experts’ knowledge is of a deep structure where the fundamental principles applicable across situational contexts can be readily retrieved from memory and applied. Having to elicit and assess knowledge structure is challenging resulting in mixed findings on the dimensions used in structuring audit experts’ knowledge. Using a problem solving task and a cue sorting task to elicit and assess knowledge structure on an individual basis, this study explores how Finnish auditors’ knowledge is structured at the beginning of their career. Unlike the US accounting curriculum and GAAP, the Finnish accounting curriculum and legislation are acclaimed to be rooted in deep meaning. Results of this study suggest that these novice auditors’ knowledge is more of a deep structure. Such findings run counter to the conventional understanding that novices’ knowledge is more of a surface structure, which does little to enable novices to perform with competence. This study proceeds to demonstrate how these auditors perform the problem solving task with competence and the circumstances that help as well as hinder their competence development.
HOW MUCH IS TOO MUCH? FUND GOVERNANCE AND PERFORMANCE IN RESPONSIBLE INVESTMENT
LAUREL, DANIELA
ENGUERRAN, PETIT
Category: GV = Accounting and Governance
This paper investigates the plausibility of sustainability integration in the financial sector by investigating the materiality of sustainability governance in the context of Responsible Investments (RI). We find that sustainability disclosure is value enhancing only when it does not jeopardize the competitive positioning of the fund. Further, we find that sustainability activism is negatively related to performance without it having any effect on fund attractiveness. We find moderate support that having an in-house sustainability research team is positively related to performance as well as strong evidence that this increases the attractiveness (money flow) of the fund. Finally, we find that while having a high level of governance is negatively related to performance, it increases fund attractiveness. Overall, we contribute to a discussion which extends the literature on governance to include non-financial (sustainability-related) issues. We show in a first attempt that governance practices related to sustainability issues – often overlooked in the literatures – are value-relevant and should be considered as part of the overall governance strategy of a fund, illustrating how financial archetypes increasingly assimilate sustainability issues.
SEC DIVISION OF CORPORATION FINANCE MONITORING AND CEO POWER
LAWRENCE, JANICE
CHEN, XIAOYAN ; GAO, LEI; SMITH, DAVID
Category: AU = Auditing
SEC Division of Corporation Finance Monitoring and CEO Power Abstract Section 408 requires the Securities and Exchange Commission (SEC) to review filings of all SEC registrants every three years.Our study investigates this SEC monitoring role. Our study differs from past SEC research by focusing on the SEC Division of Corporation Finance (DCF), rather than the Division of Enforcement, and specifically on DCF’s “review and comment” monitoring role. We rely on past theoretical research in management, finance and accounting that provides us with arguments suggesting the DCF may target companies with strong CEOs and weak monitoring. Our findings cast light on the power struggle between the board and CEO by suggesting that the CEO’s influence over the board may adversely affect board oversight. This may be associated with the DCF’s taking a more active monitoring role by selecting these companies for more intensive review. Second, our results indicate that the DCF-prompted restatements lead the companies to re-evaluate their governance oversight parameters.
SEGMENT INFORMATION: WHAT DO EUROPEAN SMALL AND MID-CAPS DISCLOSE?
LE MANH, ANNE
ALEXANDER, DAVID; DELVAILLE, PASCALE; DEMERENS, FRÉDÉRIC ; PARÉ, JEAN-LOUIS
Category: FR = Financial Reporting
The adoption of the IFRS 8 accounting standard symbolises the IASB's dual commitment: an effort toward convergence and harmonisation with the American standard, but also an effort to optimise the standardisation process through an unprecedented study: a post-implementation review. Many studies have laid the groundwork for an implementation review of the standard, mostly focusing on large firms. However, intermediate-size companies – which are much more numerous – are also faced with the application of IFRS standards. In this context, our study aims to analyse the implementation of IFRS 8 by a sample of intermediate-size European listed companies. Our research questions mainly focus on issues of compliance with the standard and the comparability of segment information reported by intermediate-size European companies. Our findings reveal a lower level of compliance than that observed in previous studies on samples of multinationals. The intermediate-size European companies in our sample use fewer segments and provide less information per segment, without however neglecting voluntary disclosures. Some significant differences emerge between companies depending on their country of domicile and their economic sector.
CUSTOMER VALUE DISCLOSURE AND ANALYST FORECASTS: THE INFLUENCE OF ENVIRONMENTAL DYNAMISM
LEDOUX, MARIE-JOSEE
CORMIER, DENIS; HOULE, SYLVAIN
Category: FA = Financial Analysis
In this paper, we study the economic benefits of a pro-active disclosure strategy in a dynamic environment. More specifically, we explore the relationships between customer value disclosure, analyst following, and earnings forecasts, taking into account environmental dynamism as captured by R&D intensity, sales variability and competition. Results show that customer value disclosure is positively associated with analyst following and consensus in analyst earning forecasts. Results also show that environmental dynamism enhances the association between customer value disclosure and analyst following as weel as consensus among analysts. Those results suggest that customer metrics attract analysts and improve their ability to forecast earnings. They also suggest such disclosure to be especially relevant for forecasting earnings of firms involved in dynamic environments.
PRODUCT MARKET COMPETITION AND THE ROLE OF FINANCIAL REPORTING QUALITY IN MANAGERS' HIRING DECISIONS
LEE, BRYAN BYUNG-HEE
JUNG, BOOCHUN; YOON, SUNGWOOK; YUEN, DESMOND
Category: FR = Financial Reporting
This paper examines the interacting relation between product market competition and financial reporting quality in terms of improving efficiency in firms’ hiring practices. Prior literature in economics and finance show that product market competition acts as a monitoring mechanism to reduce agency problems. On the other hand, the accounting literature document a similar monitoring role of financial reporting quality. We find that better quality financial reporting leads to more efficient hiring decisions by managers in less competitive industries, suggesting a substituting relation between the quality of financial reporting and product market competition. We further find evidence that the substituting relation between financial reporting quality and product market competition exists in reducing both over-investment in labor (over-hiring and under-firing) and under-investment in labor (under-hiring and over-firing).
HOW CEOS AFFECT FINANCIAL TRANSPARENCY IN AN EMERGING MARKET?
LEE, EILEEN CHIA-LING
HUNG, CHIAN-FEI ; PAN, CHIEN-MIN KEVIN
Category: MA = Management Accounting
Financial transparency is an important measure in improving corporate governance. Since the passage of the Sarbanes–Oxley Act, corporate CEO has faced increasing demands for higher quality financial reporting from both the regulators and the market. This paper examines whether corporate top managers’ demographic characteristics and economic incentives (tenure, MBA degree, gender, and family CEO) have association with firms’ financial transparency. We find that top managers with long tenure and female CEO are more likely to reduce firms’ financial transparency. We also find that CEOs holding a MBA degree are more likely to promote firms’ financial transparency.
DETERMINANTS OF THE CAPITAL MARKET RESPONSE TO THE REGULATION OF COMMUNICATION WITH AUDIT COMMITTEE CONCERNING INDEPENDENCE: A CASE OF ISB NO. 1
LEE, ERIC
NAIKER, VIC ; NAVISSI, FARSHID
Category: AU = Auditing
The purpose of this paper is twofold. First, it tests the effect of news announcements related to ISB No. 1 on equity value in order to empirically examine the objective of this standard, namely whether discussions on audit independence between audit committees and auditors enhance audit independence and consequently increase shareholder wealth. Next, a cross-sectional analysis is conducted to examine whether the variation in stock price reaction depends on the risk characteristics of firms (proxied by the lagged implied cost of equity). The empirical evidence shows that investors reacted positively to two of the three ISB No. 1-related news announcements. The results also show that firms with higher lagged implied costs of equity experienced higher cumulative abnormal returns around the passage of the standard. Collectively, these results show that investors value the communication of audit committee with auditors concerning the auditor independence.
AUDIT COMMITTEE EFFECTIVENESS IN A MANDATORY DISCLOSURE ENVIRONMENT
LEE, JENNY (JUNG-WHA)
CHAPPLE, ELLIE (LARELLE); JUBB, CHRISTINE; LEE, JENNY (JUNG-WHA)
Category: AU = Auditing
This study examines audit committee effectiveness in its association with regulatory compliance in a highly sanctioned environment. It uses the Australian continuous disclosure regime to investigate whether audit committee effectiveness is associated with a higher frequency of disclosures, thereby enhancing the efficiency of the capital market and creating more informed individual investors. The findings show that, as hypothesised, audit committee effectiveness measured as an index composed of sub-components involving audit committee size, meeting frequency, independence, member financial literacy and membership of other audit committees, is positively associated with disclosure frequency. Further tests show that it is the financial literacy sub component which is most implicated in this relationship. Company size, years of listing, the proportion of inventories and receivables to total assets, whether or not the company has been involved in a takeover offer or bid or in changes to its number of shares are significant control variables.
MEASURING REPORTING CONSERVATISM USING THE DICHEV-TANG (2008) MODEL
LEE, JIMMY
Category: FR = Financial Reporting
This paper provides a critical evaluation of an alternative measure of reporting conservatism introduced by Dichev and Tang (2008). Although there is substantial interest in research on accounting conservatism, there is no consensus among researchers on the most appropriate measure of conservatism in empirical studies. Dichev and Tang (2008) introduce a new measure of conservatism, which they believe to be a “natural and practical measure of conservatism (p. 1441).” However, the econometric properties of this measure have not been fully evaluated, and previous studies have not provided evidence of this measure’s construct validity. Based on a parsimonious model of conservatism, I find that the Dichev and Tang (2008) measure is increasing in the conservatism parameter. However, although this measure produces well-specified test statistics that generate Type 1 errors according to researchers’ specifications, it generates tests of low power that lead to relatively high Type 2 errors. Next, I use actual data to provide evidence consistent with the construct validity of this measure. Finally, I suggest an alternative measure by using the reverse regression specification of the Dichev and Tang (2008) model. Results from simulations suggest that this alternative measure is feasible and is slightly superior to the Dichev and Tang (2008) measure in terms of test power.
DO MANAGERS WITHHOLD GOOD NEWS FROM LABOR UNIONS?
LEE, WOO-JONG
CHUNG, RICHARD; LEE, BRYAN BYUNG-HEE; LEE, WOO-JONG; SOHN, BYUNGCHERL CHARLIE
Category: GV = Accounting and Governance
With scarce empirical support, prior literature argues that managers tend to withhold good news and promote bad news to preserve their bargaining power against labor unions. This paper provides evidence on this rarely supported argument. Using comprehensive firm-level data in Korea where labor unions have a long tradition of making credible threats, we find that overall disclosure frequency is negatively related to labor union strength, and that this relation is more pronounced in firms with good news. We also find that firms with strong labor unions withhold good news during the labor negotiation period and release it in an abrupt fashion afterwards and this pattern is more prominent than that of the firms with weak or no unions, implying that managers time news disclosure considering bargaining schedules to achieve better outcomes in labor negotiations. These results are robust to a battery of sensitivity tests.
THE ROLE OF CORPORATE GOVERNANCE IN SHAPING EARNINGS MANAGEMENT PRIOR TO ACQUISITIONS
LEHMANN, NICO
Category: GV = Accounting and Governance
This paper investigates the role of corporate governance in shaping accrual-based earnings management prior to acquisitions. Using stock swap transactions with public acquirers originating from the UK between the years 1998 and 2011, I investigate (1) whether stock swap acquirers manage earnings via discretionary accruals prior to the announcement of the deal, and (2) whether corporate governance affects earnings management in this specific period. In line with prior literature, my results show significantly positive discretionary accruals in the period leading up to the stock swap announcement and thus indicate the presence of accrual-based earnings management. However, and contrary to common claims that good corporate governance constrains accrual-based earnings management (‘safeguarding role’ of governance), my results show that acquirers with strong corporate governance engage more aggressively in income-increasing accruals manipulation than those with weak governance in the period prior to the stock swap transaction. These findings are consistent with the ‘value enhancement’ role of corporate governance, and are robust to different discretionary accrual models, to differences in the firm’s growth structure, to M&A control variables, and to potential sample selection problems.
DETERMINANTS OF FINANCIAL STATEMENT PRESENTATION OF COST ITEMS: AN ANALYSIS USING COST OF GOODS SOLD, AND SELLING, GENERAL AND ADMINISTRATIVE COSTS
LEPPIK, LIIVAR
Category: FR = Financial Reporting
This paper investigates the relationship between the financial statement presentation of main operating expenses, firm current performance and other relevant factors by examining public UK companies, which have the option to not report the Cost of Goods Sold and Selling, General and Administrative costs within separate line items on the income statement of annual accounts. We find that: (1) annual reports of the companies with higher (lower) profit margins tend to have the main operating expenses recognized on the income statements (disclosed only in the notes). We interpret it as a proof of managers’ strategic-opportunistic presentation and reporting decisions. Moreover, we also find that income statement recognition of main operating expense is more likely among firms: (2) reporting a loss, (3) applying IFRS accounting standards (4) that are younger (5) are quoted on US stock market; and (6) in healthcare, medical equipment, and drugs industries. This is consistent with the findings of disclosure literature of managers’ being more transparent in their reporting choices in response to investor demand for information.
MARKET ORIENTATION, BROAD SCOPE MAS INFORMATION AND PERFORMANCE: AN EMPIRICAL INVESTIGATION
LESTARI, UTAMI
MIA, LOKMAN; WINATA, LANITA
Category: MA = Management Accounting
Purpose – This study examines the mediating role of broad scope management accounting system (MAS) information and customer performance on the relationships between responsive market orientation (RMO), proactive market orientation (PMO) and financial performance. Design/methodology/Approach – The participants were 127 general managers who fully completed the questionnaire mailed to them. The data were analysed using partial least squares structural equation modelling (PLS-SEM) to test the hypotheses. Findings – The results show that broad scope MAS information (hereafter, the MAS information) plays a mediating role in the relationship between responsive market orientation (RMO) and customer performance. The findings also show that customer performance mediates the relationships between financial performance and (i) RMO, (ii) PMO and (iii) the MAS information. Originality/value – This study contributes towards a better understanding of the role of the MAS information in the relationship between organisational performance and the types of market orientations. Keywords - Market orientation, broad scope MAS information, customer performance, financial performance Paper type - Research paper
DARK TRADING UNDER BLUE SKIES: REGULATORY REGIMES IN THE OTC MARKETS
LEUZ, CHRISTIAN
BRUEGGEMANN, ULF; KAUL, ADITYA; LEUZ, CHRISTIAN ; WERNER, INGRID
Category: FA = Financial Analysis
In this paper, we analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. Many of the issuers provide hardly any information to investors and are often viewed as “dark” firms. As little is known about this market, we first characterize firms by venue and then provide evidence on survival, success, frequency of venue changes, and trading activity. We analyze how market liquidity, price efficiency and crash risk relate to OTC venues and regulatory regimes, including Federal Securities and State Blue Sky Laws. We show that OTC firms that are subject to stricter regulatory regimes have higher market liquidity and price efficiency, and lower crash risk. Investors appear to recognize the information and regulatory environment when determining which OTC stocks to trade. We also analyze OTC market features that are potential substitutes for SEC registration, such as publication in a securities manual or state merit reviews, and provide evidence on their capital-market effects. This evidence is relevant in light of the JOBS Act and the relaxation of registration requirements.
CORPORATE SOCIAL RESPONSIBILITY REPORTING IN CONTROVERSIAL BUSINESS SECTORS: A STRUGGLE FOR LEGITIMACY
LEVENTIS, STERGIOS
DEDOULIS, EMMANOUIL ; GROUGIOU, VASSILIKI
Category: SE = Social and Environmental Accounting
A branch of the corporate social responsibility (CSR) literature has illuminated managers’ tendency to engage in and disclose CSR practices in order to secure the support of various stakeholders and attract the interest of groups of investors who value corporate commitment to broader social norms highly. Little is known, however, about relevant management practices in the case of controversial business sectors, such as alcohol, firearms, gambling, military, nuclear power and tobacco, which have attracted considerable criticisms about their operations. Against this background, we aim to further current understandings of management practices by shedding light upon managers’ initiatives to initiate CSR reports in the particular case of controversial industries. Thus, we employ a sample of 109 listed U.S. companies belonging to controversial sectors for a seven-year period (2003-2009) and we control with another 109 set of similar sized and non-controversial industry sample for the same period. Our findings suggest that controversial firms are more prone to issue standalone CSR reports compared to their matched sample. We suggest that operating within adverse contexts due to the nature and effects of their activities, managers in controversial firms develop various strategies, inter alia standalone CSR reports, to neutralize the perceived negativity of their operations and, thereby, confer legitimacy upon their practices.
ASYMMETRIC DECREASE IN LIQUIDITY BEFORE ANNOUNCEMENTS, AND THE EARNINGS ANNOUNCEMENT PREMIUM
LEVI, SHAI
ZHANG, XIAO-JUN
Category: FA = Financial Analysis
Trading volume is known to decrease before earnings announcements, as investors are reluctant to trade when information asymmetry is high and liquidity is low. Using data on buy and sell orders of institutional investors, we however find that investors are more reluctant to buy stocks than to sell them before announcement. This asymmetric decrease in liquidity is found also for data on the trades carried by all investors. Specifically, we classify the trades on TAQ data as buyer or seller initiated, and find that when more trades are seller initiated in the days before announcements, announcement returns are positive. According to inventory microstructure models, these findings suggest that liquidity traders are net sellers before announcements. Market makers provide liquidity by buying at a discount relative to future prices, and liquidity sellers accept this price concession in order to get immediacy before announcements. The subsequent positive announcement returns, suggested by inventory models, compensate market makers for the risk of holding the stocks, or inventory, over the announcement date. Prior literature documents average positive earnings announcement returns, or premium, and links it to information or idiosyncratic risk. Our evidence suggests that one group of undiversified inventors in particular, the market makers, bear this risk and impose this premium.
FROM CASH ACCOUNTING TO ACCRUAL BASED IPSAS IN A NON-PROFIT ORGANIZATION – PERCEIVED BENEFITS AND CHALLENGES
LI, JING
SAMAROO, LAJPATROY
Category: PS = Public Sector Accounting
Public sector organizational and managerial reforms of the past two decades quickly caught the attention of non-profit organizations (NPOs) and intergovernmental organizations (IGOs). It is generally considered that accounting reform in the public sector by moving from cash to accrual accounting is the key to the success of all other reforms. While the literature is rife with the experiences of the public sector, very little has been documented on those of the NPOs. Using a questionnaire survey, this paper examines the benefits and challenges of implementing IPSAS in a world leading NPO (a charitable organization) perceived by professionals involved in the implementation process and others within the organization whose work is significantly affected by the process. The findings are generally consistent with those found for the public sector organization that the adoption of accrual based IPSAS is generally perceived to have its benefits of improving transparency and enhancing accountability. An interesting view that was brought out is the benefits to the employees through the adoption given that IPSAS is now extensively used in the public sector. Challenges are also identified such as time and resources required to ensure a smooth and successful transition. Staff training is one of the most often mentioned in the comments and the suggestion is to have more hands on training and training for local and regional offices.
EARNINGS SMOOTHING AND FUTURE CASH FLOW VOLATILITY
LI, LAURA
CHENG, MEI
Category: FR = Financial Reporting
While prior literature focuses on the informativeness of accrual level on future cash flow level (“first moment” accrual usefulness), we investigate the “second moment” usefulness of accruals: the informativeness of earnings smoothing through accruals on future cash flow volatility. We find strong evidence that on average higher current earnings smoothing is associated with lower future cash flow volatility. We also find that this signaling ability of smoothing is higher when firms operate in a more certain environment, are not under financial distress or have more external monitoring. We also model and test the relation between the second and the first moment accrual usefulness. Supporting our theoretical predictions, we find that when cash flows are more persistent, accruals’ second moment usefulness is more positively correlated with accruals’ first moment usefulness.
THE SUBTLE POWER OF WORD CHOICE IN THE QUARTERLY EARNINGS PRESS RELEASE BY FRENCH LISTED COMPANIES
LI, LI
Category: FR = Financial Reporting
This paper examines the narrative form of the quarterly earnings press release by French listed companies. We focus on the linguistic style in this financial publication, especially the degree of optimism. We start by analyzing whether the tone of an earnings press release can be an indicator of the firm’s future performance. We then study the reaction of French capital markets to the tone of the press release. The empirical results show a positive relationship between the tone and future performance. We also observe that cumulative abnormal returns are positively related to the degree of optimism. These findings thus suggest that the degree of optimism may be an indicator of future performance. Furthermore, French capital markets react positively to the degree of optimism, even after firm size and the variation in sales are controlled for. Last, investors are more sensitive to the pessimistic degree than the optimistic degree in a financial announcement.
INFORMATION FLOWS, TAX AVOIDANCE POLICY AND FIRM-LEVEL INSTITUTIONAL VARIATION: INTERNATIONAL EVIDENCE
LI, TIEMEI (SARAH)
KIM, JEONG-BON
Category: FR = Financial Reporting
Using a large sample of Type I offshore firms, i.e., firms registered in 14 jurisdictions or countries identified as offshore financial centers (OFCs), and firms with no offshore operations from 19 countries and jurisdictions that are not OFCs, we investigate the extent to which firm-specific information is capitalized into stock prices measured by stock price synchronicity. We also examine whether synchronicity is higher for Type II offshore firms, i.e., U.S. and U.K. companies that set up affiliates in an OFC or OFCs, compared with U.S. and U.K. firms with no OFC affiliates. We find that synchronicity is higher for both Type I and Type II offshore firms than for their respective benchmark firms with no offshore operations. The above results hold even when the extent of a firm’s offshore operations is proxied by the extent of tax avoidance or by the offshore characteristics of an OFC where offshore operations take place.
THE INCREMENTAL VALUE RELEVANCE OF US BANKS’ STATEMENTS OF CASH FLOWS
LI, WEIJIA
GAO, ZHAN; O'HANLON, JOHN
Category: FR = Financial Reporting
Despite the long-standing disagreement between accounting standard-setters and banks regarding the usefulness of banks’ statements of cash flows (SCFs), little prior research on this matter exits. This paper empirically investigates the usefulness of banks’ SCFs by examining the incremental value relevance of information in banks’ SCFs beyond information in other financial statements. In a sample of US banks, we examine the association between market value of equity (returns) and the three SCF categories under the standard classification. we find limited evidence that banks’ SCF categories are incrementally value relevant in the presence of book value of equity and net income, which is in contrast to nonfinancial firms’ SCFs. Using individual SCF items in lieu of SCF categories does not improve their value relevance. Overall, the results are in line with banks’ claim that information in banks’ SCFs is of limited use.
DOES MANDATORY IFRS ADOPTION FACILITATE FINANCIAL MARKET INTEGRATION
LI, YAN
DHALIWAL, DAN; HE, WEN; LI, YAN; PEREIRA, RAYNOLDE
Category: FR = Financial Reporting
Do accounting standards impact financial market integration? This question is important because financial market integration is posited to entail improved risk sharing and stock price efficiency. Prior research contends accounting quality can hamper financial market integration. A resulting implication is that accounting standards will have a bearing on financial market integration since it significantly impacts accounting quality. We evaluate this contention by focusing on the mandatory adoption of International Financial Reporting Standards (IFRS). We find IFRS adoption positively impacts financial market integration. This finding is robust across multiple measures of financial market integration. We further find these results to be pronounced in countries where there is significant distance in quality between IFRS and domestic accounting standards. We also find the impact of IFRS to be pronounced in countries with stringent legal enforcement in place. Overall, our study provides initial evidence on the role of accounting standards on financial market integration.
HEDGE FUND INTERVENTION AND ACCOUNTING CONSERVATISM
LI, YINGHUA
CHENG, C.S. AGNES; HUANG, HENRY
Category: FR = Financial Reporting
Recent evidence shows that hedge fund intervention has elicited many positive corporate changes and is becoming an important vehicle of informed shareholder monitoring. It is also shown that effective monitoring is positively associated with accounting conservatism. Building upon these two streams of literature, we predict an increase in accounting conservatism after hedge fund intervention. Using a large sample of hedge fund interventions, we find that target firms have significantly increased accounting conservatism compared with their control firms identified through the propensity score matching method. Furthermore, we find that in those activist events where hedge fund activists have greater monitoring power (as measured by higher fund ownership levels, longer holding periods, and the use of hostile tactics), target firms experience greater increases in conservatism. Finally, we show that post-intervention CFO turnovers and improvements in audit committee independence are accompanied by more pronounced increases in accounting conservatism. Our study adds important new evidence on the effectiveness of shareholder monitoring on accounting conservatism.
CORPORATE ENVIRONMENTAL RISK EXPOSURE AND ANALYST BEHAVIOUR
LI, YUE
DE FRANCO , GUS ; ZHOU, YIBIN
Category: SE = Social and Environmental Accounting
This study examines financial analysts’ use of non-financial, non-corporate disclosure of environmental performance information to assess firms’ future earnings and financial prospects. Specifically, we examine whether analysts use the Toxics Release Inventory (TRI) data released annually by the U.S. Environmental Protection Agency (EPA) to assess firms’ environmental risk exposure. We hypothesize that corporate environmental risk exposure as proxied by the TRI data represents an important source of uncertainty underlying firms’ future operations and analysts impound corporate environmental risk exposure into their stock recommendations and earnings forecasts. Using a large sample of U.S. public companies from 1997 to 2009, we find that firms’ environmental risk exposure is associated with lower accuracy and higher dispersion in analyst earnings forecasts. We also find that analysts are more likely to revise their stock recommendation and earnings forecasts of a firm downward if the firm experiences an increase in their environmental risk exposures, and vice versa. As expected, our findings are more prominent for firms operating in high-polluting sectors. Overall, the findings are consistent with analysts using non-financial, non-corporate disclosure of environmental performance information to assess corporate environmental risk exposure and shed light on the mechanism through which corporate environmental risks are impounded into the stock prices.
THE IMPACT OF MANDATORY IFRS ADOPTION IN THE UK AND GERMANY ON ACCRUALS QUALITY: IS CORPORATE GOVERNANCE A MATTER?
LIANG, JIAN
SHAN, GEORGE
Category: GV = Accounting and Governance
This study explores the impact of International Financial Reporting Standards (IFRS) mandatory adoption on earnings quality in the United Kingdom and Germany from 2001 to 2009. Other than accounting standards, reporting incentive is also recognised as a determinant in financial reporting. However, despite of being recognised at both national level and market level, preparer incentive at firm level as suggested by the agency theory has not been explored yet. This study strategically operationalizes preparer incentives using a self-constructed corporate governance variable. The results suggest that, if considered standards alone, IFRS has improved earnings quality in the post-adoption period. When taking into consideration of both standards and incentives, less earnings management incentives as signalled by good corporate governance can help improve earnings quality but only in shareholder-oriented countries. Overall, the results show that in shareholder-oriented countries, high quality standard and efficient governance mechanisms operate as complements whereas in stakeholder-oriented countries they function as substitutes. This study further substantiates the debate on standards versus incentives in determining the quality of financial reporting. The role of incentives in financial reporting ultimately reflects the information demands from a country’s institutional settings as suggested in Ball et al. (2003).
THE IMPACT OF FIRM-SUPPLIED VERSUS USER-SUPPLIED FAIR VALUES ON ANALYST OUTPUTS
LIANG, LIHONG
RIEDL, EDWARD
Category: FR = Financial Reporting
This paper examines how the source of fair value estimates affects user valuation outputs. Following accounting-based valuation theory, we examine two analyst forecast outputs: a balance sheet construct (net asset value, or NAV, which requires fair values of assets as a primary input) and an income statement construct (earnings-per-share, or EPS). Our sample includes publicly-traded UK and US real estate firms, for which real estate is the primary operating asset. The UK captures firm-supplied fair values, with firms reporting property fair values as mandated under both UK and international reporting standards. In contrast, the US captures user-supplied fair values, with firms reporting properties at depreciated historical cost as mandated under US standards, and also not voluntarily disclosing property fair values. We predict and find that relative to US firms, analysts of UK firms have more accurate and less dispersed NAV forecasts, consistent with firm-supplied fair values revealing private information that is incorporated into users’ valuation estimates in a balance sheet construct. However, we further find that analysts of US firms have more accurate EPS forecasts, consistent with historical cost reporting models leading to either more predictable earnings streams and/or greater analyst effort on income statement constructs.
THE EFFECT OF BUSINESS STRATEGY AND LIFE CYCLE ON MYOPIC R&D INVESTMENT
LIAO, CHIH-HSIEN
CHIA, YI-PONG
Category: MA = Management Accounting
This study examines whether a firm’s business strategy and life cycle stage will affect its earning management through R&D reduction. Using a sample of public companies in Taiwan during years 1996-2010, we find that firms adopting the prospector strategy are more likely to cut R&D investment. This myopic behavior is primarily present in firms with poor corporate governance. We also find that prospectors that are in the growth stage of the life cycle are less likely to reduce R&D. The results suggest that a firm’s strategy and life cycle serve as some mechanisms that potentially influence R&D myopia in different ways.
THE RELATIVE AND INCREMENTAL VALUE RELEVANCE OF FAIR VALUE AND HISTORICAL COST MEASUREMENTS UNDER IFRS: EVIDENCE FROM EUROPEAN FINANCIAL INSTITUTIONS
LIAO, LIN
KANG, HELEN; MORRIS, RICHARD; TANG, QINGLIANG
Category: FR = Financial Reporting
This paper investigates the relative and incremental value relevance of financial assets and liabilities measured at fair value and historical cost using a set of sample financial institutions from 25 European countries over the period 2006-2010. Relative value relevance means that one measure alone provides greater information content than another measure. On the other hand, incremental value relevance means that one measure provides information incremental to that provided by another measure. Our results show that, overall, fair value measurements are not relatively more value relevant than historical cost measurements or vice versa. However, by splitting the full sample into two periods, the financial crisis period and the non-financial crisis period, we find that, in the financial crisis period, financial assets and liabilities measured at fair value are relatively more value relevant than those measured at historical cost. On the other hand, both fair value and historical cost measures are found to be incrementally informative in both the financial crisis and non-financial crisis periods.
DOES CORPORATE TAX AGGRESSIVENESS REDUCE EARNINGS INFORMATIVENESS?
LIETZ, GERRIT
KUBATA, ADRIAN; WATRIN, CHRISTOPH
Category: FR = Financial Reporting
We investigate a previously overlooked type of non-tax cost associated with tax aggressiveness: the potential loss of earnings informativeness. Up-front benefits realized by corporate tax planning include positive effects on after-tax cash flows and an increase in firm value. However, we argue that the complexity of aggressive tax structures impairs earnings informativeness, possibly causing an undesired negative effect on equity valuation. To the extent that managers do not communicate their complex actions to shareholders, we expect a decrease in the ability of earnings to provide decision useful information. We conduct firm-level tests on a large U.S. sample over the period 1999 to 2009. First, we find evidence that tax aggressiveness is negatively associated with earnings informativeness as measured by the Earnings Response Coefficient (ERC). Second, we show that the overall timeliness of market’s reaction to mispriced securities remains rather stable across different levels of tax aggressiveness. Our interpretation of this result is that the market relies on other information sources to price a firm when earnings informativeness is impaired by tax aggressiveness. In a third step, we contribute methodologically, as we repeat our main analysis applying a novel dynamic model that leads to less biased ERC coefficients.
DOES XBRL ADOPTION CONSTRAIN MANAGERIAL OPPORTUNISM IN FINANCIAL REPORTING? EVIDENCE FROM MANDATED U.S. FILERS
LIM, JEE-HAE
KIM, JEONG-BON; KIM, JOUNG
Category: FR = Financial Reporting
In this study, we examine whether XBRL disclosure (i.e., interactive data submissions) reduces the magnitude of accounting accruals for firms during SEC mandated years. Using mandated XBRL filers, we first compare the magnitude of discretionary accruals in the XBRL-adoption quarters with that in the non-XBRL-adoption quarters. This comparison shows that the magnitude of discretionary accruals decreases significantly from the pre-XBRL-adoption period to the post-XBRL-adoption adoption period. This finding is in line with the view that the XBRL adoption constrains managerial opportunism in financial reporting in general and opportunistic accrual management in particular. Our analyses further reveal that the use of standardized official XBRL elements significantly reduces levels of discretionary accruals in the post-adoption period, while the use of customized extension elements does not. This result is consistent with the view that, compared with the use of customized XBRL extensions, the use of official elements discourages opportunistic accruals management more effectively by improving transparency and comparability in financial reporting.
SELF-REGULATED LEARNING IN ACCOUNTING: DIAGNOSIS, DIMENSIONS AND EXPLANATIONS.
LIMA FILHO, RAIMUNDO NONATO
AUGUSTO SAMPAIO FRANCO DE LIMA, GERLANDO; LEAL BRUNI, ADRIANO
Category: ED = Accounting Education
This research analyzes self-regulated learning in Accounting students in two governmental universities, presenting diagnosis, dimensions and possible explanations, contextualized from the gender, age and stage in the course. The objectives of this paper include to: (a) identify the self-regulated learning strategies used by Accounting students in two governmental universities, (b) determine the dimensions associated with those strategies, and (c) analyze how these strategies could be explained on the basis of gender, age or stage (semester) of the students in the course. A sample consisting of 249 individuals revealed that gender and age are factors that influence the degree of self-regulation of a student. Women and younger students tend to have higher levels of self-regulated learning, however, in the stage analysis, the results did not show normal distribution, thus demonstrating the impossibility of realizing the increase or decrease of the degree of self-regulated learning among respondents. These results contribute to the practice of teaching accounting, as older students and those with a male gender should receive more special attention in relation to their development of self-regulated, independent and proactive learning.
ACCOUNTING-BASED VALUATION OF EMPLOYEE STOCK OPTIONS: VESTING CLAUSES, EMPLOYEE TERMINATION, EARLY EXERCISE, AND DEFAULT RISKS
LIN, I-CHENG
CHIU, YUN-CHU; LIN, I-CHENG; WU, MING-CHENG
Category: FR = Financial Reporting
Based on the International Financial Reporting Standard 2 (IFRS 2) and the revised Financial Accounting Standard 123 (FAS 123R), the new accounting regulation mandates companies to recognize the relevant compensation costs as an expense item and leave companies the only choice of adopting the fair value method. The objective of this paper is to construct a more general employee stock options pricing model that captures several characteristics of ESOs in reality and provides estimations for evaluating ESOs fair values. The pricing model takes into account the vesting period, the employee termination, the early exercise, and the possibility of being default of the company. The result of this study provides a more accurate pricing model than before and establishes the more estimations of the pricing model by completing an empirical analysis.
FIRM PERFORMANCE, FIRM CHARACTERISTICS, AND EXECUTIVE COMPENSATION IN BANKING INDUSTRY
LIN, YINGFEN
HUANG, LI JIN; LIAO, YUAN PING
Category: MA = Management Accounting
This study investigates the impact of relative performance, institutional investors, and operational stability on executive compensation of listed banking companies in Taiwan. The results show that relative performance has a positive effect on executive compensation. The higher the level of ownership government and financial institutions have, the more effective they will be in monitoring executives, and minimizing additional costs shareholders have to shoulder for compensation packages for managers. Higher Bank of International Settlement ratios and coverage ratios for the allowance for uncollectible accounts pertain to better stability, denoting appropriate managerial decisions made by executives and result in higher executive compensation. Keywords: executive compensation, relative performance, institutional investors, industrial characteristics, banking industry
DIRECT AND INDIRECT EFFECTS OF OPEN BOOK ACCOUNTING IN A SUPPLIER NETWORK: A CASE FROM THE RETAIL SECTOR
LIND, JOHNNY
ALENIUS, ERIK; STRÖMSTEN, TORKEL
Category: MA = Management Accounting
The purpose of this paper is to extend our knowledge about the use of open book accounting (OBA) in industrial networks. From the case study we can observe that the use of OBA had effects in how activities were linked, affecting efficiency; how resources were combined affecting innovation and how actors related to each other, affecting the focal firm’s strategic position in the network due the use of OBA. These direct and indirect effects could be identified on the network level, the relationship level as well as on the individual firm level. These findings stress the important acknowledgement of interdependency and resource heterogeneity and the impact accounting information has as a device to change how activities are linked and resources combined, and how value is created in industrial networks. From an IMP perspective, this study illustrates the importance of acknowledging the role that accounting and control play in embedded industrial relationships. We build our argument on an in-depth single and embedded case study of procurement by a large food retailer. The data has mainly been collected through interviews, but this has been complemented by observations. Further, Access to the company’s internal documents, such as explicit open book calculations, has increased our understanding of the role accounting plays in inter-organizational relationships.
HAS EAST MET WEST? THE EFFECT OF LAWS ON ACCOUNTING QUALITY IN THE EUROPEAN UNION
LINDAHL, FREDERICK
LINDAHL, FREDERICK; SCHADÉWITZ, HANNU
Category: FR = Financial Reporting
The EU continues to converge: increasing use of the euro, harmonization of laws, increasing mobility of labor and expanding coordination of monetary and fiscal policy. One important mechanism to form a more solid union has been the adoption of IFRS. A single set of high quality accounting standards is intended to produce accounting reports of high quality. While this is the aim, it is by no means certain that this will be the result. If firms do not follow the standards, and if auditors do not enforce strict compliance, then the goal will not be met. The first objective of this paper is to evaluate the uniformity of compliance with IFRS among EU countries. The paper also investigates the causes for less-than-complete compliance. One factor that is often discussed is the legal system. This study investigates the effect of the law on financial reporting. It uses the “natural experiment” of the EU, where ten countries share a past tradition of socialist law, and the other fifteen Continental European countries share a tradition of Roman law. We find that the forces of convergence within the EU have not brought the legal quality in the eastern countries up to the level of the western neighbors. We hypothesize that the weaker legal force in the east is associated with poorer accounting quality. An effect, though not strong, is detectable in two tests of accounting quality. The lower cost of capital that results from good reporting may curb earnings management.
RISK MANAGEMENT IN THE CITY OF LONDON: THE LIVED EXPERIENCE OF THE MIDDLE RANKING EMPLOYEE
LINSLEY, PHILIP
MCMURRAY, ROBERT
Category: GV = Accounting and Governance
Drawing on interviews with analysts, reporting officers and contractors working in ‘risk management’ for some of the UK’s biggest investment banks, we consider what it means to live through, and even warn of, impending crises, just to be ignored or silenced by those with greater authority. Not as salacious as the Fred Goodwin story, nor as tragic as the loss of home experienced by the sub-prime mortgagee; the lived experience of the middle ranking banking employee is nonetheless linked to these. We are concerned with the mundane and predictably uncontrolled life of your average [corporate banking] employee (Gabriel, 1999). We refer to those working behind the scenes in areas such as risk management, compliance and audit. What can their experiences tell us of the crisis? Did they neither know nor sense that something was amiss? Where, in short, were the voices of the middle ranking banking employee? In pursuing answers to these questions we see how deficiencies in corporate procedures, information and thinking can be identified and then silenced, and how the diverse and fragment cohort of people who would be labelled as your ‘average worker’ (Thomas & Listead, 2002) come to see such trends as an inevitability.
FLEXIBILITY IN CASH FLOW REPORTING CLASSIFICATION CHOICES UNDER IFRS
LINTHICUM, CHERYL
GORDON, ELIZABETH; HENRY, ELAINE; JORGENSEN, BJORN
Category: FR = Financial Reporting
Relative to U.S. GAAP, IFRS allows more flexibility in classifying certain items within the statement of cash flows. Where U.S. GAAP requires firms to classify interest paid, interest received, and dividends received as operating cash flows (OCF), IFRS allows firms to report these within OCF or classify them as investing or financing. Studying IFRS-reporting firms in 13 European countries, we document firms’ cash-flow classification choices vary, with about 77%, 54%, and 49% of our sample classifying interest paid, interest received, and dividends received, respectively, in OCF. Reported OCF tends to be higher under IFRS than it would be under U.S. GAAP classification. We find the main determinants of OCF-enhancing classification choices are capital market incentives and other firm characteristics, including greater likelihood of financial distress, greater probability of default, and accessing equity markets more frequently. We also find the cross-listed firms in our sample do not necessarily make choices consistent with U.S. GAAP.
DETERMINANTS AND PERFORMANCE EFFECTS OF SOCIAL PERFORMANCE MEASUREMENT SYSTEMS
LISI, IRENE ELEONORA
Category: SE = Social and Environmental Accounting
This study explores the performance measurement systems adopted by companies to internally manage their social responsibility activities, a theme which is becoming an unavoidable thematic for companies given ever escalating public scrutiny and pressures. In particular, the study investigates the determinants and performance effects of such systems. A theoretical model is proposed to explain how three fundamental drivers of corporate social strategies - i.e. expected competitive advantage, stakeholders’ concern and top management social commitment - influence the use of social performance measures for internal decision-making and control, and how such use impacts companies’ social and economic performance. The model is tested using data collected from a survey of 76 managers. Results demonstrate that, consistently with the study’s hypotheses, expected competitive advantage and top management social commitment are influential motivations behind the integration of social concerns within companies’ decision-making and control processes. Contrary to what expected, instead, stakeholders’ concern is not significantly associated with the extent to which social performance measures are used for decision-making and control. Use of social performance measures, in turn, is found to be positively associated with social performance and, through this, with economic performance.
CORPORATE TAX COMPLIANCE: THE ROLE OF INTERNAL AND EXTERNAL PREPARERS
LISOWSKY, PETRO
KLASSEN, KENNETH; LISOWSKY, PETRO; MESCALL, DEVAN
Category: TX = Taxation
Using confidential data from the U.S. Internal Revenue Service on who signs the corporate tax return, we investigate whether tax preparer type—internal tax department, external auditor, or external non-auditor—is related to a firm’s tax aggressiveness. In doing so, we also evaluate the usefulness of publicly disclosed tax fees to infer these parties. We find that internally prepared tax returns claim more aggressive tax positions than externally prepared returns, and that external non-auditor-prepared tax returns claim more aggressive positions than returns prepared by the company’s auditors. We also show that publicly disclosed tax fees paid to a company’s auditor do not provide information sufficient to replicate this result; applying conventions in tax fee research to infer if the auditor also prepares the tax return, we estimate total error rates that exceed 60 percent. Our findings are important given the paucity of archival research on tax preparers due to a lack of available data, preparers’ importance to tax-related decisions in an uncertain corporate environment, and the tax and financial reporting consequences of auditor-provided tax services.
ECONOMIC CONSEQUENCES OF IMPLEMENTING AND COMMUNICATING VALUE BASED MANAGEMENT SYSTEMS: EVIDENCE FROM GERMANY
LIST, THOMAS
SCHULTZE, WOLFGANG
Category: MA = Management Accounting
This paper studies the economic consequences of implementing and communicating Value Based Management (VBM) Systems on information asymmetries, cost of capital and stock returns. We use the firms’ reporting on internal control systems as the source of information for market participants. We study the extent and quality to which firms provide voluntary disclosures about their internal processes for value creation (Value Based Reporting, VBR) and its relationship to VBM. Our results suggest that VBM and VBR work as complements. The implementation of VBM and a greater extent of VBR are both significantly related to lower information asymmetries, lower cost of equity capital and higher stock market returns. The interaction of VBM and VBR is related to higher reductions in information asymmetries and cost of capital as well as higher market returns.
INCENTIVE EFFECTS OF PERFORMANCE-VESTED RESTRICTED SHARE COMPENSATION AND RPE-RELATED TARGET FEATURES
LIU, LISA SHIFEI
KOH, WEI-CHERN
Category: GV = Accounting and Governance
This study examines the effect of the type of equity compensation plans and the various RPE-related target features on incentive alignment, measured by pay-for-performance sensitivity. While the active institutional investors have been recommending restricted stock over stock options, there remains little empirical evidence of the usefulness of one over the other. In line with the institutional investors’ recommendation, we find that the use of restricted stock increases pay-for-performance sensitivity more than if stock options are used. With respect to relative performance evaluation, little has been done to examine how various RPE-related target features affect incentive effect of restricted stock. We find that when a higher percentage is set to vest at the minimum hurdle rate, the pay-for-performance sensitivity is reduced, suggesting that setting a higher percentage at the minimum hurdle rate reduces incentive alignment. However, we do not find that choice of a market index peer versus self-selected peers nor the choice of a single target versus multiple targets has any statistical significance on incentive effects.
INVESTMENT PYRAMID LAYERS AND INVESTMENT EFFICIENCY
LIU, SOPHIA H.T.
HSU, WEN-HSIN; HUANG, SU-JUNG
Category: FR = Financial Reporting
This study investigates how investment layers relate to firm-level capital investment efficiency. We first argue that investment layers will reduce investment efficiency because the complex process of transferring information from the lowest-tier firms to the parent company on the apex of investment structure can increase information asymmetry between the firm and outsiders. Besides, as controlling shareholders usually expropriate resources through the pyramid investment structure, we argue that the agency problems between controlling shareholders and outside capital providers can increase as the number of layers increases. Using the negative sensitivity of investment to cash flow as a proxy for investment efficiency, we find that the number of investment layers in firms’ investment structure is negatively related to investment efficiency.
RECLASSIFYING CORE EXPENSES AS SPECIAL ITEMS: COST OF GOODS SOLD OR SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES?
LIU, XIAOTAO
FAN, YUN
Category: FR = Financial Reporting
We develop expectation models for cost of goods sold (COGS) and selling, general, and administrative expense (SGA) to investigate how opportunity factors affect COGS and SGA reclassification as income-decreasing special items. These expectation models enable us to explore managers’ portfolio approach of managing earnings by reclassifying core expenses and cutting real expenditures. We find that manufacturing (non-manufacturing) firms and firms with more material COGS (SGA) are more likely to reclassify COGS (SGA) as income-decreasing special items. Our results also suggest that firms with greater capital intensity shift more COGS, but not SGA, to special items, while those firms with greater intangible assets reclassify both COGS and SGA more. Furthermore, we demonstrate that firms use expense reclassification and real activities manipulation (RAM) jointly to meet or beat earnings benchmarks. In the supplemental analyses, we explore specific types of special items and find that restructuring costs, asset write-downs, loss on asset sale, and impairment of goodwill and other intangibles have been used as vehicles to camouflage the reclassified COGS and SGA. Overall, this study contributes to the earnings management literature by identifying conditions under which COGS and SGA are individually or jointly reclassified as special items and by documenting managers’ portfolio approach for managing core expenses.
RELIABILITY OF DISCLOSED INTERNAL CONTROL WEAKNESS AND CHANGES IN DISCLOSURE REGULATION
LIU, YANJU
Category: FR = Financial Reporting
This paper investigates whether changes in internal control weakness (ICW) disclosure regulation affect the reliability of a firm’s disclosed ICW in a unique Canadian setting. In Canada, public firms have been required to provide internal control weakness disclosures since 2006. However, the credibility enhancement mechanisms (i.e., the implementation of effectiveness evaluation and CEO/CFO certification) were not adopted until 2008. Taking advantage of such an evolutionary process of regulations and inferring the reliability of the disclosed ICW from the magnitude of the negative association between disclosed ICW and investment efficiency, I first document that in the pre-adoption period, the association between Canadian firms’ disclosed ICW and their investment efficiency is insignificant; however, in the post-adoption period, the disclosed ICW negatively affects firms’ investment efficiency. This finding suggests that the credibility enhancement mechanisms improve the reliability of disclosed ICW in Canada. In addition, using the U.S. sample as a benchmark, I find that in the post-adoption period, the association is weaker between Canadian firms’ disclosed ICW and their investment efficiency, which is consistent with my prediction that the external audit requirement increases the reliability of the disclosed ICW. Overall, the study implies that changes in disclosure regulation lead to efficient resource allocation by improving the reliability of the information disclosed.
EARNINGS QUALITY IN FOREIGN IPOS IN THE U.S.: THE ROLE OF HOME COUNTRY INSTITUTIONS
LIVNE, GILAD
FILATOTCHEV, IGOR ; JONA, JONATHAN
Category: FR = Financial Reporting
Using a unique dataset we compare measures of earnings management in foreign IPOs listed in the U.S. to U.S. domestic IPOs. Foreign IPOs are characterized by higher level of earnings management (more extreme reporting or earnings inflation) than U.S. IPOs. Earnings management by IPOs from countries with weaker legal institutions is either the same or lower than earnings management of IPOs from countries with strong institutions. Additional findings include evidence that a litigation threat constraints earnings management more in IPOs from countries with strong legal institutions. We also document a constraining effect of the Sarbanes-Oxley Act on earnings management of IPOs from countries with weak institutions. We contrast these findings with prior research on cross-listed firms and argue that although foreign IPOs may abandon their home capital markets by listing in the U.S., their reporting characteristics are nonetheless influenced by home country institutions.
TAX COMPLIANCE AND GENERAL EDUCATION
LO, AGNES W.Y.
WONG, RAYMOND
Category: ED = Accounting Education
This study examines whether and how tax compliance is improved via different forms of tax education. To explore this, we conduct a survey related to tax compliance among 205 undergraduate and postgraduate students taking either a general tax course or a technical tax course. The findings suggest that different types of tax education have respective impacts on tax compliance. Specifically, we find that sales tax compliance was significantly improved if the undergraduate students had been exposed to a general tax education, and income and sales tax compliance were significantly improved if the postgraduate students had taken a technical tax course. These results suggest that a move toward general education at the undergraduate level may increase the extent to which students comply with tax laws. Technical tax education for postgraduate students may also be an effective means for improving tax compliance.
INFORMATION QUALITY AND CAPITAL STRUCTURE
LOBO, GERALD
LIM, CHEE YEOW
Category: GV = Accounting and Governance
Although prior research documents that information quality is related to capital structure in the US market, little is known about how differences in the institutional environment influence this relation. Using data from 38 countries over the period 1996 to 2009, we examine whether the relation between information quality and financial leverage, our measure of capital structure, holds outside the US, and whether that relation varies systematically with the strength of institutions across countries. We find that firms with greater information quality in the current period are less leveraged in the subsequent period. In addition, we find that the relation between information quality and financial leverage is more pronounced when the strength of investor protection is weaker, when the size of the private lending market is smaller, and when country-level bankruptcy resolution costs are higher.
INVESTOR DECISION MAKING: DIGITAL REPORTING AND THE CONDITIONS FOR IMPROVED TRANSPARENCY
LOCKE, JOANNE
LOWE, ALAN; LYMER, ANDREW
Category: IS = Accounting and Information Systems
This paper reports the results of an experimental study of retail investors’ use of XBRL tagged (interactive) data. It extends the work of Hodge et al (2004) and Arnold et al (2012) by incorporating more of the functionality interactive data is expected to provide for users, including automated calculation of ratios, linking between footnotes and financials, and access to the references in the tags. Our study indicates that in a setting in which information disclosed in the footnotes was important for evaluating an investment decision, interactive data did not improve the participants’ ability to locate and incorporate that information into their decision. They perceived the interactive data as accurate and easy to use even though the ratios were not adjusted for key information on asset values contained in the (narrative) footnotes. The findings indicate that careful consideration should be given to how links between the face financials and narrative disclosures are automated using digital tagging to highlight their significance to retail investors.
REGULATION OF FINANCIAL ANALYSTS IN THE EU - AN EMPIRICAL EVALUATION OF THE IMPACTS OF RECENT REGULATORY MEASURES -
LOEW, PHILIPP
Category: FA = Financial Analysis
This paper investigates whether recent EU-regulatory measures successfully miti-gated the adverse effects of conflicts of interest in financial analysts’ investment research. For a sample of firms listed in 28 states within the European Economic Area we investigate the impact of two recent EU-directives, the MAD (Market Abuse Directive, introduced in 2003) and the MiFID (Markets in Financial Instruments Directive, introduced in 2004). Using regression analysis, we find mixed results. We cannot find a direct impact of the directives in the expected direction. However, a high prior level of regulation and high sanction severity seem to have an influence on the forecast bias of analysts’ earnings forecasts. Our results are important as they shed light on the potential benefits of the mentioned EU-directives and should be of interest to researches, investors and regulators.
THE USE OF COMPUTER SIMULATIONS IN MANAGEMENT ACCOUNTING CLASSES: AN EXPERIMENT IN TEACHING THE BALANCE SCORECARD
LOPES, ANA ISABEL
CAPELO, CARLOS; MATA, ANA
Category: ED = Accounting Education
Kaplan and Norton introduced the Balanced Scorecard (BSC) which is based on a systems perspective of the business strategy and performance measurement. Many organizations around the world are using the BSC to define, implement and manage strategy. Nevertheless there exist studies that identify problems and limitations associated with the implementation and use of the BSC. Those studies show in general terms that managers do not understand the BSC as the measures and perspectives in use are fairly independent, and do not always mirror the recommended cause-and-effect logic included in the systems perspective of the BSC approach. This article addresses the effectiveness of teaching the Balanced Scorecard by means of business simulation. An experiment that uses a business simulator is performed for testing a set of hypotheses about the influence of simulation on the students’ understanding of the BSC. The simulation experience was specifically designed to promote understanding of the BSC concepts. Student feedback and assessment showed that the simulation significantly enhanced the understanding of the BSC concepts related to the strategic management and double-loop learning processes and the systems perspective.
EVALUATION AND RE-DESIGN OF PUBLIC EDUCATION NETWORKS: A CENTRALIZED ANALYSIS
LÓPEZ TORRES, LAURA
PRIOR JIMENEZ, DIEGO
Category: PS = Public Sector Accounting
The vast number of studies on school efficiency confirms that it is a topic of interest for researchers. While existing literature has focused on determining the features of educational centers and environmental factors that influence students’ results, this study aimed to assess and re-design a sample of schools in the public education network in Catalonia (north-eastern Spain) based on post-New Public Management, through the use of non-parametric frontier techniques. The results indicate that the network could be improved to redistribute the budget devoted to the education optimally. The study also provides useful information for accountability and decision making regarding the implementation of improvement programs in public schools.
TAX CONSULTANTS’ INCENTIVES – A GAME THEORETICAL EXPLANATION FOR THE BEHAVIOR OF TAX CONSULTANTS, TAXPAYERS AND THE FISCAL AUTHORITY
LORENZ, JOHANNES
GROTTKE, MARKUS
Category: TX = Taxation
We propose a game theoretical investigation of the interaction of the incentives of tax consultants, tax payers and the fiscal authority. Three different settings are considered. In the basic model we analyse which Nash Equilibria are obtained considering costs and benefits of consulting accurate, costs and benefits of auditing the tax return on behalf of the fiscal authority and costs and benefits of checking the tax result on behalf of the taxpayer. In the second setting we extend the first setting with an opportunity for taxpayers to influence tax consultants towards tax evasion and for fine sharing. In the third setting we enlarge the first and the second setting with the opportunity for tax consultants to insure themselves against losses incurred by inaccurate consulting services. We obtain that the incentives cause a complicated and context dependent interaction between the actions of the three parties.
THE USE OF FINANCIAL INCENTIVES IN SMES
LOURENÇO, SOFIA
Category: MA = Management Accounting
Despite the importance of SMEs in the economy, both in terms of employment and value created, management accounting research in SMEs has been sparse (Mitchell and Reid 2000). Other authors have studied the adoption of MCS and the use of HR practices in early stage/startup companies (Davila and Foster 2007), but no evidence has been collected on the use of financial incentives on managers’ compensation schemes. Hence, I contribute to the literature by characterizing the use of financial incentives, defined as a percentage of the total compensation, and the use of performance metrics used on those financial incentives. Using data from 1,438 questionnaires answered by CEOs and CFOs of SMEs in a European country, I find evidence that firms that adopt financial incentives are younger; have better performance; are more often funded by venture capital and use more management control systems. When I restrict my sample to companies that use financial incentives, I find that individual performance is associated with the percentage of incentives in total pay. Surprisingly, I also find that family own companies use incentives to a greater extent. My data shows that the majority of the respondents have an incentive scheme that includes an evaluation by their supervisors. I also find that the measures more widely used in the incentive scheme are Sales and Net Income, and the least used are EVA and ROE. Finally, I find nonfinancial measures to be used as complements to financial measures.
THEORIZING PRIVATE EQUITY PRACTICES: A SOCIAL SITE ANALYSIS
LOWE, ALAN
NAMA, YESH
Category: MA = Management Accounting
This paper contributes to the recent ‘practice turn’ in management accounting literature in two ways: (1) by experimenting with the application of Schatzki’s site ontology, and (2) by theorizing private equity practices and investigating the extent to which accounting is implicated in them. We discuss the value chain of the private equity industry and also identify and describe aspects of the role of accounting in different parts of the value chain. We theorize the practices using Schatzki’s site ontology and raise two queries over Schatzki’s practice organization framework. Key words: Practice theory, Site ontology, Private equity, Accounting
EMPLOYEE CO-DETERMINATION OF GERMAN PRIVATE COMPANIES: SMOOTH EARNINGS AS A JOB PROTECTION INSTRUMENT?
LOY, THOMAS
Category: GV = Accounting and Governance
This study investigates the association of employee participation on supervisory boards with firms' earnings patterns. Attributable to legal requirements, employees obtain up to half the seats on the supervisory boards of German firms. Supervisory boards control management and thus financial reporting. The results of this paper contribute to literature for several reasons. Employees seemingly view smooth company income as a job protection device. Co-determined supervisory boards exhibit a significantly positive association with income smoothing. This association is increased with higher degrees of co-determination.
INFORMATION LEAKAGE AND WEALTH TRANSFER IN A CONNECTED WORLD
LU, HAI
HUANG, WENLI; LU, HAI; WANG, XIAOLU
Category: GV = Accounting and Governance
We examine whether information leakage occurs and persists between institutional investors and firms. We document that institutions trade ahead of other investors before the public revelation of option backdating and gain significantly. Based on these trades, we develop a proxy for the likelihood of information leakage for each institution-firm pair and examine institutional trades on connected firms outside the backdating setting. We find that institutions trade more actively on connected firms, gain from their trades prior to earnings announcements of connected firms, and consistently perform better on connected firms. Our results are consistent with information leakage resulting in wealth transfer.
COST STICKINESS IN AUSTRALIA
LU, MEITING
BUGEJA, MARTIN; SHAN, YAOWEN
Category: FA = Financial Analysis
This study presents empirical evidence on cost stickiness using a large sample of Australian listed firms during 1990-2010. We find cost behaviour in Australian firms is sticky on average. Costs increase by 0.885% with a 1% increase in sales revenues, but decrease by only 0.797% for a 1% decrease in sales. The degree of cost stickiness has demonstrated a “U” shape over the period, and has increased after the adoption of IFRS. Sticky cost behaviour however is not evidence in the resources, construction and retail industries. We document evidence consistent with the argument of adjustment costs of employed resources, managerial incentives and agency costs. The degree of cost stickiness in Australia increases with a firm’s asset and employee intensity, and when managers face strong incentives to avoid losses or earnings decreases, but is less pronounced when revenues decline in the preceding period and in firms with strong governance mechanisms. Finally, we find that sticky cost behaviour provides useful and incremental information for predicting future accounting earnings. Given the significant costs incurred in Australia ($609 billion in 2010), our results provide important implications for managers making decisions on cost control and external stakeholders understanding firm performance.
DETERMINANTS OF CUSTOMER ACCOUNTING
LUEG, RAINER
ILIEVA, DIMA
Category: MA = Management Accounting
Customer profitability analysis (CPA) has received increasing attention due to the evolving customercentric approach to strategy formulation and the need to manage investments in customers. However, research on the context surrounding its implementation is scarce and does not explain the varying sophistication of CPA in practice. Responding to the call of Holm, Kumar and Rohde (2011), this paper adopts a contingency perspective and investigates how contextual factors determine CPA sophistication. Following an abductive approach, we conduct a case study in six units of a listed, European manufacturing company. Our findings reveal that extensive implementations of CPA are not generally recommendable. We identify the contextual conditions that warrant high (or low) CPA-sophistication, specifically customer characteristics (large size, high customer-to-customer interaction, and high customer service complexity), external orientation of the business model, high centralization of authority, and the cost structure (high relative customer-specific overhead costs, and high controllability of these costs). Moreover, our study provides valuable insights how customer-related factors overpower other factors if conflicts arise among them. We documents that executives are aware of some ‘mismatches’ to the textbook-prescriptions of contingency theory. Nevertheless, they accept these insular deviations in favor of an overall, economically efficient balance between CPA and its context.
THE SHAREHOLDERS AGREEMENTS: TYPOLOGIES, DIFFUSION AND INFLUENCE ON CORPORATE GOVERNANCE OF ITALIAN LISTED COMPANIES
LUGLI, ENNIO
LUGLI, ENNIO; MARCHINI, PIER LUIGI
Category: GV = Accounting and Governance
The shareholders agreement is an agreement drawn up by the shareholders when the company is founded, or after its foundation, to rule one or more aspects of the relationships held by the shareholders. The shareholders agreement phenomenon is particularly important and relevant in the Italian context. In Italy Legislator allows the shareholders agreements, while in business economic theory there are different and more critical considerations about those aspects. Starting from such considerations, it may be considered that the shareholders agreements could be interpreted as elements in evident antithesis with a governance able to even manages the minority interests and the interests of potential investors. The paper wants to answer the questions here below summarized: 1. Do some enterprise characteristics exist that makes more probable that a company adopt a shareholder agreement respects to another one? 2. Which characteristics does corporate governance system assume in the enterprises that have shareholders agreements? In which way could corporate governance be influenced by the presence or the absence of the shareholders agreements? The empirical analysis is developed on the all Italian listed companies at the date of 30, April 2010, at Milan Stock Exchange (MSE). The framework is developed finding correlation among the data collected from all the available documents on the website of the companies, Consob and MSE regarding ownership, equity and board of directors.
RISK SHIFTING IN PENSION ASSET ALLOCATIONS
LUI, DAPHNE
GUAN, YANLING
Category: FR = Financial Reporting
We provide empirical evidence of risk-shifting behavior in the investment of defined benefit (DB) plan assets. The creation of the Pension Benefit Guaranty Corporation (PBGC) that acts as the trustee of a DB plan in the event of a distress termination represents an insurance scheme where the sponsor holds a put option of its pension liability. The existence of such a put option incentivizes financially distressed sponsors with severely underfunded DB plans to engage in risky asset allocation strategies that shift pension underfunding risk to PBGC. We find evidence consistent with this view. Our results suggest that a risk-adjusted insurance program is necessary for PBGC to mitigate cross-subsidization between low-risk and high-risk sponsors.
REPORTING FREQUENCY AND SUBSTITUTABLE TASKS
LUKAS, CHRISTIAN
Category: MA = Management Accounting
The optimal reporting frequency is an important issue in accounting. In many production settings, substitution effects across periods occur. This paper shows that the optimal reporting frequency depends on the strength of the substitution effect and on the information content of performance signals. For a subset of parameter combinations - the low-chance scenario - infrequent reporting is always efficient; for other parameter combinations - the high-chance scenario - infrequent reporting is efficient as long as fi…rst-period signals show high informativeness (and substitution effects are strong). Limited commitment by the principal does not influence results.
THE IMPACT OF NATIONAL CULTURE ON VOLUNTARY CARBON DISCLOSURE: EVIDENCE FROM CARBON DISCLOSURE PROJECT (CDP) 2011
LUO, LE
TANG, QINGLIANG
Category: SE = Social and Environmental Accounting
The paper investigates the impact of the national culture on firms’ voluntary carbon disclosure choice. Voluntary carbon disclosure is measured in terms of the Carbon Disclosure Project (CDP) response status, namely, whether the company voluntarily participated in the CDP and disclosed relevant carbon information publicly through answering the questionnaire. The scores for national culture values are from Hofstede et al.(2010). Based on 3317 companies from 45 countries in 2011, the results indicate that firms from larger power distance and masculinity countries are associated with higher propensity to disclose carbon information. And individualistic managers or managers with higher uncertainty avoidance tendency and long-term orientation are more likely to voluntarily communicate with their carbon performance or other carbon related information with outsides. Moreover, the impact of national culture on voluntary carbon disclosure varies with the level of the economic development, the nature of legal system and the presence of a national operating Emission Trading Scheme (ETS).
CONTRADICTORY DISCOURSES AND THE IDENTITY WORK OF MOTHER MANAGERS IN THE FRENCH ACCOUNTING PROFESSION
LUPU, IOANA
Category: MA = Management Accounting
Drawing from contemporary theories on identity, this paper explores the construction of female manager professional identity and its interaction with motherhood in the context of public accounting in France. It shows that in constructing their identities, female accounting professionals in leading positions dwell on socially defined roles and organizationally available discourses that are in contradiction with each other. It also highlights the strategies used by mother- accountants to reconcile contradictory identities and to construct themselves as both good mothers and good professionals.
CAN AUDITORS MITIGATE INFORMATION ASYMMETRY IN M&AS?
LUYPAERT, MATHIEU
VAN CANEGHEM, TOM
Category: AU = Auditing
This paper empirically studies the relationship between an external financial statement audit and the method of payment in a sample of Belgian M&As between listed as well as private firms during 1997-2009. We investigate whether a high-quality financial statement audit reduces the need for contingent payments resulting from information asymmetry about the target’s value. In addition, we analyse whether BigN audits limit incentives for bidders to exploit private information on their own value. Using multivariate ordered probit and binary regression models, our results show a lower necessity for contingent payments in M&As where the target is audited by a BigN audit firm, after controlling for several other deal and firm characteristics. Furthermore, we find that the incentive for acquirers to use stock payments in periods of stock market overvaluation is mitigated by a BigN external audit. Finally, target shareholders are more likely to accept contingent offers if the acquirer’s financial statements are certified by a BigN auditor.
FIRM-SPECIFIC IMPLIED COST OF CAPITAL ESTIMATES AND THEIR EVALUATION
MA, XIN
WANG, PENGGUO
Category: FA = Financial Analysis
In this paper, we first present a simple variation of the approach developed by Ashton and Wang (2012) to estimate firm-specific implied cost of capital. Within a framework developed in Lee, et al. (2011), we then evaluate various existing different estimates of implied cost of capital in terms of closely tracking true expected returns. We find that our estimate is superior to other existing alternatives. Our findings are robust to both analysts’ forecasts of earnings and mechanical model based forecasts of earnings. In addition, we find that only our estimate can generate significant risk adjusted hedge return.
COMPLIANCE CHECKLISTS AND BIAS IN AUDIT JUDGMENTS
MAAS, VICTOR
STOLKER, DAVID; VAN RINSUM, MARCEL
Category: AU = Auditing
We investigate whether using a compliance checklist affects auditors’ judgments of the acceptability of aggressive reporting methods. The use of decision aids such as checklists in audit settings is increasing and existing research generally suggests that checklist use can improve decision-making quality. We argue that the use of a compliance checklist can also have detrimental effects as it increases auditors’ acceptance of aggressive reporting methods by inducing cognitive biases. Our data, collected using an experiment with experienced auditors of a Big Four company as participants, supports this prediction. Specifically, in line with theory that checklist use can induce automation bias, we find that auditors using a compliance checklist are more lenient in their evaluation of aggressive reporting. Furthermore, we find that this effect is stronger for auditors who have been hired by a company’s management board than for auditors who have been hired by an independent audit committee, which is consistent with theory that checklist use can also induce pro-client acceptability bias. We discuss the implications of these findings for research and practice.
EARLY MODERN ACCOUNTING AND THE EMERGENCE OF THE ADMINISTRATIVE STATE
MACIAS, MARTA
LARRINAGA, CARLOS
Category: GV = Accounting and Governance
This paper charts early modern accounting in Castile from a governmentality analytical perspective. Guided by the importance attached to the process of gradual governmentalization in the work of Michel Foucault, it extends governmentality histories of accounting to the relatively unexplored early modern period. Castile provides a privileged context for the governmentality approach, because this kingdom laid the foundations for a great administrative state in the early modern period, when it faced the intellectual and political challenges of responding to unprecedented problems of authority and understanding as its empire grew. Hence, accounting was embedded in the assemblage of legal, professional, institutional and communicative technologies of government that made the centralization and internal organization programmes of government practicable in 16th century Castile. By making economic circulation, taxes, bullion and the contribution of all individuals to the strength of the state thinkable and amenable to intervention, accounting technologies contributed to the transformation of the domain to which government was applied. If historians concur that an assemblage of technologies of government -particularly, the bureaucratic system and a professional corps of competent letrados- made the Spanish empire possible, then accounting made the centralization and internal administration programmes practicable, by illuminating the elements that constituted its strength.
DEFAULT PREDICTION AROUND THE WORLD: INTERNATIONAL EVIDENCE ON THE ROLE OF CORPORATE TRANSPARENCY AND MARKET FRICTIONS
MAFFETT, MARK
OWENS, EDWARD; SRINIVASAN, ANAND
Category: FR = Financial Reporting
We document significant heterogeneity across countries in the ability to assess a firm’s likelihood of default using market- and accounting-based sources of default risk information. Surprisingly, for some countries, we find that a default prediction model based solely on public financial reporting information outperforms a model based solely on market variables. Our evidence suggests that variation in the predictive ability of market-based variables across countries is primarily attributable to the existence of capital market frictions, such as short sale constraints, which prevent the incorporation of information into prices, rather than the availability of information. Finally, we document that direct incorporation of accounting information into the default prediction model largely offsets the loss in overall predictive accuracy created by market frictions, especially in countries with high corporate transparency.
THE UN-SOLVED DILEMMA OF TAX AVOIDANCE IN FAMILY FIRMS
MAFROLLA, ELISABETTA
D'AMICO, EUGENIO
Category: TX = Taxation
Tax aggressiveness is predominantly investigated by accounting scholars in US, and is in a great fashion in the last few years. Relations between tax aggressive behaviors and governance patterns of the firm have recently been variously analyzed, and still wide areas of investigation are unexplored. This paper tests whether family firms are more tax aggressive than non-family firms in the special environment of Italian enterprises, where the overwhelming majority of firms has a family group as an ultimate owner. To the best of our knowledge, no prior research analyzes this topic in EU, and the only existing paper is settled in US. We partially confirm findings of the prior literature. If the firm has a concentrate ownership structure and the top managerial positions are held by members of controlling family group, the firms is less tax aggressive. In fact, family owners prefer to suffer greater tax pressure and avoid non-tax costs due to minority shareholders’ concerns about the eventuality of family tax aggressive activity. Nevertheless, where the ownership structure is lead by a single individual (i.e. the shares are not controlled by a company or organization), a tax aggressive behavior prevails.
CSR DISCLOSURE, GOVERNANCE AND FINANCIAL ANALYSTS
MAGNAN, MICHEL
CORMIER, DENIS
Category: GV = Accounting and Governance
In this study, we explore the relationships between social and environmental disclosures, corporate governance, and analyst forecast precision. Results are the following. First, findings show that both CSR disclosures and corporate governance increase consensus among analysts and reduce forecast dispersion. Second, results suggest that there is a substitution effect between environmental and social disclosures in their relation with analyst forecast precision. Third, corporate governance substitutes to environmental and social disclosures in improving analyst forecast precision. Finally, results also suggest a mediating effect of governance and analyst following in the relation between environmental and social disclosures and analyst forecast precision. It appears that both CSR disclosures and good corporate governance attract analysts and improve their ability to forecast earnings.
THE ROLE OF CORPORATE GOVERNANCE ON FINANCIAL STATEMENT FRAUDS
MAGNANELLI, BARBARA SVEVA
Category: GV = Accounting and Governance
The paper focuses on the role of the corporate governance as a system on the fraud occurrence and magnitude. The relation is analysed within the agency theory theoretical framework. The study examines the impact of the quality of the corporate governance of the firms, for which a fraud was detected, on the fraud occurrence and magnitude. We posit that fraudulent behaviours, by those who can take advantage of information asymmetry and gain personal benefits from them, can occur when strong agency problems emerge and a week governance exists. Thus, the financial statement fraud can be seen as the result of high agency problems and high conflicts of interests not solved by the company. Starting from a sample of 107 listed companies, in which a fraud was detected, we develop a governance index that measures the quality of the governance system of the firms to test the hypothesis. Empirical evidence seems to confirm the existence of a negative relationship between the quality of the corporate governance system of a firm and both the financial statement fraud occurrence and magnitude. Our study adds to the governance literature by focusing on the corporate governance quality and its impact on financial statement frauds. Moreover, our analysis suggests that a good level of governance can help companies to mitigate the agency problems and to detect fraudulent behaviours, thus our empirical evidence can guide regulators in developing regulations to avoid the fraud occurrence.
UNRAVELING THE ERP AND MANAGEMENT CONTROL PARADOX: THE COMPLEMENTARITY BETWEEN BUSINESS INTELLIGENCE AND ERP
MAHAMA, HABIB
ARNOLD, VICKY; G. SUTTON, STEVE; MAHAMA, HABIB; Z. ELBASHIR, MOHAMED
Category: MA = Management Accounting
For over a decade managerial accounting research has unsuccessfully sought evidence of the transformational effect of ERP systems implementation on managerial control (MC). More recently, research has viewed business intelligence (BI) as the potential catalyst to effecting this transformational change. In this pursuit, researchers have established the importance of organisational culture and cultural controls to the assimilation of BI-enabled MC, but evidence of actual impacts on organisational performance remain elusive. This study endeavours to reveal the relationship between the deployment of BI-enabled MC and organisational performance through an exploration of the intermediary effects of the complementarity between ERP and BI on MC assimilation. The results confirm the hypothesized influence of this complementarity on assimilation of BI-enabled MC at the business process level, the positive effect of business process level assimilation on business processes performance, and finally the positive relationship between business processes improvement and overall organisational performance improvements. The results also show that the complementarity has significant indirect effects on business process improvement and organisational performance.
MICRO GAMES OF POWER IN AUDITING: GETTING COMFORTABLE WITH THE AUDITEE
MALSCH, BERTRAND
GUÉNIN-PARACINI, HENRI; TREMBLAY, MARIE-SOLEIL
Category: AU = Auditing
Based on the works of Crozier and Friedberg (1980), this paper examines the micro-strategies used by auditors and auditees to exert power over each other in the field. To conduct the study, seven audit teams of a Big Four firm were observed during several months. This produced the following findings. (1) By controlling the space, the time and the working atmosphere in which an audit is performed, members of audited organizations are able to interfere with the audit process and can therefore exact a price for their support to audit teams. (2) In response, public accountants resort to a number of interpersonal tactics to secure their possibilities for action, including not disturbing their “clients”, developing good relationships with them, and offering value-added services. (3) Ultimately, an audit is shown to be a complex balancing act, in the course of which auditors strive to appeal to auditees to get comfortable with them, while taking care not to lose their independence along the way. To conclude, significant implications for research, regulation and audit methodology are discussed.
MOTIVATIONS FOR ISSUING STANDALONE CSR REPORTS: A SURVEY OF CANADIAN FIRMS
MANETTI, GIACOMO
MAHONEY, LOIS S. ; THORNE, LINDA
Category: SE = Social and Environmental Accounting
There is a debate in the literature regarding the underlying motivations for companies who voluntarily issuing standalone CSR reports (Clarkson et al., 2011). To gain insight into this debate we report the results of a survey which asks 221 Canadian firms their motivations, their costs and whether they follow independent GRI guidelines in choosing to issue (or not issue) their CSR report. Of the 57 companies that responded to our survey, 32 issued standalone reports and 25 choose not to. The most frequently cited reason for issuing standalone CSR reports was to signal their interest in social responsibility to stakeholders followed closely by CEO/Board commitment to CSR. Other frequent responses were that companies wished to communicate to stakeholders a policy of corporate transparency and to put all CSR information in one place. Approximately 71% of companies that issue CSR reports follow GRI reporting guidelines and 25.8% of these CSR Reports are independently verified. Over 50% of companies reported that it costs over $75,000 to produce the standalone CSR report, takes over four months to prepare on average, and requires five or more people to produce it. The primary reason that companies chose not to issue CSR reports was lack of stakeholder pressure and regulatory requirement to do so. Our research provides support for the need for multiple perspectives to provide insight into standalone CSR reporting.
THE REAL EFFECTS OF DISCLOSURE TONE: EVIDENCE FROM RESTATEMENTS
MANGEN, CLAUDINE
DURNEV, ART
Category: FA = Financial Analysis
This study analyzes whether the tone of financial disclosures affects corporate investments, using texts released by firms that publicly announce restatements of their financial reports. We argue that the tone of restatement texts provides news about restating firms' private information regarding unknown future investment payoffs. We find that restatement tone carries news, because it affects restating firms' and their competitors' abnormal returns at restatement announcements, and changes their information asymmetry. Moreover, we document that news in the restatement tone matters for corporate investments, since it is related to subsequent changes in restating firms' and their competitors' investments.
FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES: SOME DETERMINANTS OF ACCOUNTING POLICY PREFERENCES BY ZIMBABWEAN CORPORATES
MANGENA, MUSA
CHAMISA, EDDIE
Category: FR = Financial Reporting
In November 1999, the regulatory bodies in Zimbabwe (namely, the Zimbabwe Stock Exchange and the Institute of Chartered Accountants in Zimbabwe) determined that Zimbabwe was a hyperinflationary economy and required all listed companies, financial institutions and other large enterprises to publish financial statements that were adjusted for inflation in terms of the International Accounting Standard (IAS) 29 (Financial reporting in hyperinflationary economies). This study examines the decisions of Zimbabwe listed companies to comply or not comply with IAS 29 in 2001 and 2002 using a costly contracting framework. The logistic regression results indicate that compliance with IAS 29 by listed Zimbabwe companies was negatively related to the two measures of capital intensity (non-current assets to total assets and inventory to total assets), but was positively related to taxation and gearing. Overall, the preparation costs appear to have been the major factor in the decision by companies not to comply with IAS 29.
HOW DOES THE MARKET READ INFORMATION CONVEYED BY ACCRUALS?
MAO, QINGHAO
WEI, K. C. JOHN
Category: FA = Financial Analysis
We use return decomposition to differentiate the earnings fixation explanation from the growth explanations for the accrual anomaly. We show that the underperformance of high-accrual stocks mainly comes from the underperformance in the cash flow news component of returns with the effect being stronger when information uncertainty is high. In addition, stocks with high discretionary accruals experience lower total returns and lower cash flow news returns both before and after portfolio formation. Such a pattern is not observed for stock portfolios sorted by nondiscretionary accruals. A comparison between accruals and other growth proxies suggest that the former has much stronger predictive power for subsequent total returns and cash flow news returns. Overall, the results favor the earnings fixation explanation more than the rational or behavioral growth explanation. The evidence is also consistent with the agency theory of earnings management.
CONTROL SYSTEMS IN THE BANKING SECTOR. TOWARDS AN INTEGRATED APPROACH?
MARCHINI, PIER LUIGI
Category: GV = Accounting and Governance
Nowadays the economic and normative scenery in which companies operate is liable of sudden changes that make a priority of a cultural change in the approach to the control systems. Control activities should not anymore be meant as simple activities of a posteriori controls usually in a repressive vision, but rather as essential tools of prevention of economic and reputational losses that could be fatal for the business development. Today, such aspects are even more critical and remarkable if observed with reference to banking activities. In the Italian bank sector specific control functions that involve internal tasks, other functions and institutes external to the enterprise are placing next to the typical control activities of listed enterprises. The aim of the work is to verify the configuration of the control systems in the firms as applied in the present economic and legal framework. I will develop this holistic approach to the control system with particular reference to the firms operating in the bank sector, where internal and external pushes to the change in the approach to the control systems are increasing more and more. In view of the considerations above, it is of extreme interest an empirical analysis developed through semi-structured questionnaire and interviews in an Italian Bank (Cariparma Credit Agricole).
SOCIAL NETWORKS, AUDITOR INDEPENDENCE AND EARNINGS QUALITY
MARMOUSEZ, SOPHIE
JEANJEAN, THOMAS; SIROIS, LOUIS-PHILIPPE
Category: AU = Auditing
We analyze the existence and the consequences of social ties (networks) between auditors and auditees on earnings quality. In France, Grandes Ecoles alumni constitute strong business networks. We argue that audit partners, directors and officers who graduated from the same Grande Ecole share common social and educational backgrounds, tastes and activities. These similarities are likely to develop into strong social ties between audit partners and an auditee’s directors and/or officers. It is unclear whether or not these networks will affect earnings quality. On the one hand, the implied social ties may impair auditor independence; on the other hand, stronger ties may facilitate information sharing or create a “social control” among network participants. Using a sample of French listed firms over 5 years, we document that a significant portion of audit partners, directors and officers graduated from the same Grande Ecole consistent with the importance of such networks in France. Our findings indicate that the existence of social ties between auditors and auditees is associated with an increase in earnings quality, consistent with greater information sharing and “social control”.
POWER AND VOLUNTARY DISCLOSURE IN SEQUENTIAL SUPPLY-CHAIN BARGAINING: SOME EXPERIMENTAL EVIDENCE WITH ACCOUNTING INFORMATION
MARQUEZ ILLESCAS, GILBERTO
GAGO RODRÍGUEZ, SUSANA ; NÚÑEZ NIKEL, MANUEL
Category: MA = Management Accounting
In this paper we conducted an experiment with 336 volunteers. Our aim was to test the effect of power asymmetries on the voluntary disclosure within the supply chain. Specifically, we challenged the common notion that more powerful partners tend to share less information since they prefer to use other mechanisms in order to improve the outcomes of their negotiations. We used an economical approach to show that economic incentives in the way of delay costs may generate an effect in the opposite direction. The results of our experiment, also confirm that voluntary disclosure of accounting information acts as an enhancer of the efficiency of negotiations.
HARMONIZING PLURALITY: A CASE STUDY OF AN INTER-ORGANIZATIONAL RELATIONSHIP
MÅRTENSSON, MARIA
HOLMGREN CAICEDO, MIKAEL; MÅRTENSSON, MARIA
Category: MA = Management Accounting
There is a growing interest for collaborations between organizations in general and more specifically between academia and other organizations. The purpose of this paper is to contribute to the field of management control (MC) of inter-organizational relationships (IORs). This is done by presenting results from a longitudinal study of how an IOR is managed and accounted for. The empirical case is a Swedish robotics initiative whose aim is to develop new projects and products by working in close cooperation with innovators, researchers and different organizations. We hope to contribute to the literature on MC of IORs by studying “the actual structuring, management and control” in and of IORs, which so far has been paid “less attention” (Dekker 2004:28). Using a longitudinal approach we respond to a call for more research by Caglio and Ditillio (2008:895), who argue that “more studies … on [IORs] processes and dynamics are needed” because “relationships … change throughout their life cycle”. We also hope to contribute by widening the definition to include both activities within the organization and between organizations as well as formal and informal/non-formalized aspects of MC practices. This has been done using Dekkers (2004) classification of control mechanisms. In accordance with prior research (Thomasson 2009) the study identifies ambiguities and difficulties within IORs. However, by virtue of being longitudinal, the study also shows how ambiguities have been overcome.
ANALYZING THE INSTRUCTOR EFFECT ON STUDENTS’ ACADEMIC PERFORMANCE IN FINANCIAL ACCOUNTING
MARTÍ-BALLESTER, CARMEN-PILAR
Category: ED = Accounting Education
The main objective of this paper is to analyze how the characteristics of professors affect students’ academic performance in financial accounting. To do so, it employs a sample composed of information relating to 3,219 students and twelve professors from the Universitat Autònoma de Barcelona. A linear regression model, adopting the censored least absolute deviations model, is applied to these data. The results obtained indicate that the quality of teaching and the publication of a greater number of articles in journals indexed in the ISI Web of Science and Econlit databases have a positive and significant influence on academic productivity. On the contrary, dedicating more lecture time to the subject of Financial Accounting in comparison with the total amount of lecture time, working as an adjunct professor and teaching experience negatively influence students’ academic performance.
THE DETERMINANTS OF SYNERGY DISCLOSURE BY FRENCH TARGET COMPANIES IN TAKEOVER BIDS
MARTINEZ, ISABELLE
NÈGRE, EMMANUELLE
Category: FR = Financial Reporting
We examine the determinants of voluntary synergy disclosure by target companies during takeover bids. The sample contains 124 French takeover bids between 1999 and 2011. The variables assumed to influence the targets’ synergy disclosure are the characteristics of the bid and the characteristics of both the target and the bidding companies. Disclosure is significantly more likely in the case of equity payment. Moreover, there is some evidence that i) CEO non-duality and the size of the target company; ii) the nationality of the bidder influence disclosure. Finally, the European Directive on Takeovers encourages targets to disclose synergy forecasts.
REGULATION, SUPERVISION AND ACCOUNTING CONSERVATISM IN BANKS
MARTINEZ CONESA, ISABEL
DÍAZ-SÁNCHEZ, INMACULADA; ILLUECA-MUÑOZ, MANUEL
Category: FR = Financial Reporting
Of key importance in the management of banks is the role of accounting conservatism. The main purpose of this article is to analyze how different forms of bank regulation and supervision, as well as market discipline (measured by market concentration, listing status and corporate governance) affect incentives to practice conservatism or, in other words, the timeliness with which banks recognize losses. The direct and indirect impact of regulation and supervision on accounting quality is examined. Major empirical findings are that, first, greater bank regulation and supervision regimes are positively associated to conservatism; second, unlisted banks and commercial banks are more conservative than listed entities and savings banks, respectively; and third, we find that the more concentrated the market is, the less conservative banks are. Further analysis suggests that regulation and supervision smooth the negative effect that market discipline may have on conservatism, which constitutes one of the major contributions of this paper.
EARNINGS MANAGEMENT AND CORPORATE SOCIAL RESPONSIBILITY: INTERNATIONAL ANALYSIS USING SIMULTANEOUS EQUATIONS
MARTÍNEZ FERRERO, JENNIFER
GALLEGO-ÁLVAREZ, ISABEL; GARCÍA-SÁNCHEZ, ISABEL MARÍA
Category: SE = Social and Environmental Accounting
In view of numerous reports of accounting fraud, together with the current economic and financial situation and declining investor confidence, the aim of this paper is to analyse the connection and possible bidirectional relationship between Corporate Social Responsibility (CSR) and Earnings Management (EM), and also to identify the factors moderating this relationship. The hypotheses proposed are tested for an unbalanced sample of 1960 international non-financial listed companies from 26 countries for the period 2002-2010. The use of simultaneous equations for panel data, via the GMM estimator proposed by Arellano and Bond (1991), highlights the existence of a bidirectional inverse relationship between the two variables. This relationship is especially important in Anglo-Saxon, Germanic and Asian systems, and also in countries where there is significant institutional pressure regarding sustainability. The results obtained are robust for different measures of CSR and EM.
LOWER PRICE LIMITS FOR FLAT-FEE SERVICE CONTRACTS UNDER RISK
MARTINI, JAN THOMAS
JAHNKE, HERMANN
Category: MA = Management Accounting
Capital equipment requires various services at the different stages of its useful life, e.g. maintenance, monitoring and repair. This paper addresses the determination of lower price limits for profitable flat-fee contracts from the perspective of a provider of such services. Management accounting traditionally focuses on costs as a major factor for lower price limits and neglects uncertainty. But under a flat-fee contract the service provider assumes part of the customer’s risk. Our research analyses the impact of the contract’s inherent risk on the service provider’s lower price limit. The analysis is mainly based on the concept of almost stochastic dominance which makes it possible to consider decision making under both risk and restricted information on the decision maker's risk preferences. We extend the concept to model multi-person decision contexts such as the delegation of preparatory work, the delegation of pricing decisions and several decision makers. Besides opening a route to the calculation of price limits based on the risk assessments of the relevant decision makers, we discuss implementation issues concerning the assessment of preferences and a variable number of contracts. Our approach is not restricted to service contracts, but can be applied to a wide range of flat-fee contracts.
THE AUDIT REPORT: INSIGHTS INTO AUDIT REPORT DEVELOPMENT WITHIN NATURAL RESOURCE MANAGEMENT ASSURANCE
MARTINOV-BENNIE, NONNA
HECIMOVIC, ANGELA
Category: AU = Auditing
This exploratory research, using a single longitudinal case study method, investigates an organisation’s experience of assuring a complex non-financial subject matter and its determination of the key aspects of the audit report. The data analysed was collected from several sources with unrestricted access to internal and external documents, including audit work papers in addition to semi-structured interviews, informal discussions and observations of meetings. The data was analysed by drawing on Power’s theoretical perspectives of the audit reporting processes. The challenges of determining the appropriate stakeholder audience, objective, content, format and level of assurance inform the current debate on audit reporting reforms and assurance of integrated reporting.
PRINCIPLES-BASED MANDATORY DISCLOSURES
MARTON, JAN
RUNESSON, EMMELI
Category: FR = Financial Reporting
In recent years the amount and format of mandated disclosures have been discussed. For example, in a draft discussion paper, EFRAG suggests that disclosures should be more principles-based. In this study, we empirically test disclosures that are currently principles-based, being disclosures on judgment and uncertainties in the preparation of financial statements, in accordance with IAS 1 Presentation of financial statements. We use a sample of over 2,300 annual reports from listed firms in the EU. Testing was done of the extent to which disclosure are driven by incentives, enforcement setting, management ability, or whether they provide information on the underlying economics of the firm. Results show that incentives are important, but that enforcement setting and management ability are even stronger explanatory factors for disclosure. Controlling for such factors, the disclosures do also provide information on underlying economics. This suggests caution should be used in applying principles-based disclosure standards. Further, we show that disclosures do provide some information on the accruals quality, related to the transition to IFRS. There are indications that the increase in accruals quality following the IFRS introduction, is driven by firms subject to a low level of judgment, and that there is no or weak improvement for rms with a high level of judgment.
SAY ON PAY AND THE SHAREHOLDER SPRING
MASON, STEPHANI
MASON, STEPHANI; PALMON, DAN; SUDIT, FRED
Category: GV = Accounting and Governance
“Say on Pay has become a lightning rod for shareholder protest. …much work remains to be done before the protests achieve their intended goal.” (Paul Hodgson, Senior Research Associate, Executive and Director Compensation, The Corporate Library; Author of Perspectives: Building Value Through Executive Compensation). There is a global movement to give shareholders a greater role in the corporate process. Say on Pay, which gives shareholders the right to vote on executive compensation is one of the tools of increased corporate democracy. This first study chronicles the history of Say on Pay in a cross-country context within various groups: legislated vs. shareholder-initiated votes or binding vs. non-binding legislation.
UNDERSTANDING THE DEVELOPMENT OF AN ENABLING PMS: A KNOWLEDGE-BASED PERSPECTIVE
MASQUEFA, BERTRAND
Category: MA = Management Accounting
This paper aims at studying the development of a performance-measurement systems by financial controllers as an enabling device to improve their work. The paper builds on ideas of knowledge search and transfer [e.g. Hansen, M. T. (1999) The search-transfer problem: The role of weak ties in sharing knowledge across organization subunits. Administrative Science Quarterly, 44, 82–111] on rules of interactions within triadic arrangements [Heider, F. (1958) The Psychology of Interpersonal Relation. John Wiley & Sons] on conflict escalation within formal organizations [Smith, K. K. (1989) The movement of conflict in organizations: The joint dynamics of splitting and triangulation. Administrative Science Quarterly 34, l-20] and on uncertainty-reduction mechanisms [Berger, C. R., Calabrese, R. J. (1975) Some explorations in initial interaction and beyond: Toward a developmental theory of interpersonal communication. Human Communication Research 1, 99–112]. The empirical context entails an action research conducted at the research and development site of a multinational company. The author finds that knowledge is central to the development of an enabling PMS. The study points out that knowledge-related behaviors and attitude were embedded in interpersonal relationships. Adoption of an enabling PMS at the macro-organizational-level can be understood as emerging from interactions at the micro level. Consistent interpersonal patterns across nine Development divisions support this claim.
THE DOUBLE AUDIT MODEL AND EARNINGS MANAGEMENT: A PORTUGUESE SINGULARITY
MATEUS, CLÁUDIO
MATOS, PEDRO VERGA; SAMAGAIO, ANTÓNIO CARLOS DE OLIVEIRA
Category: GV = Accounting and Governance
After the financial scandals that occurred in the beginning of the 21st century in the U.S. and in Europe, it was necessary to find solutions to restore the confidence in the work of the auditors and in the financial report. One of these solutions could be the adoption of alternative Governance models. In Portugal, some public companies adopted a Governance model unique in the world, which we designated in this paper as the “Double Audit Model”. This model differs from the others because it uses two different audit firms, to issue each, an opinion about the same financial statements. Thus, the purpose of this study is to analyze if the Governance model used by some Portuguese public companies, which we called the “Double Audit Model” leads to a better financial report. To study this question, we use a multivariate model with discretionary accruals as dependent variable, calculated through DeAngelo Model (1986). Our findings, based on a sample of public companies that trade in Euronext Lisbon, for the period between 2005-2010, show us that the Double Audit Model doesn´t improve the financial report quality when putted against the traditional one auditor model. However, we concluded that the companies that adopted this model are in average big companies, have high return on assets, high levels of operational cash-flows and report few losses.
FIRM CREDIT RATING STATUS AND THEIR IMPLICATIONS FOR THE ESTIMATED EFFECTS OF AUDITOR SIZE ON BANK LOAN PRICING
MATHIEU, ROBERT
CHU, LING; ZHANG, PING
Category: AU = Auditing
This study estimates the relationship between auditor size and audit quality using the cost of bank loans as the audit quality proxy. To the extent that banks perceive Big 4 auditors as of higher audit quality then, they will incur lower cost of capital. We initially document findings consistent with the literature. That is, when using the complete sample, the results indicate that firms audited by non-Big 4 pays a higher interest rate on their new loans. This result is robust to the use of the Heckman’s two-stage model. Then, we provide evidence that firms’ characteristics between rated and unrated firms are drastically different. Specifically, all variables used in the regression analyses are statistically different between rated and unrated firms. This raises the concern that firms’ characteristics may be driven the initial result. In other words, the significance of audit quality may in fact reflect differences in clients’ characteristics across clients of Big 4 and non-Big 4 auditors. Once we regress separately rated and unrated firms, the results indicate that banks do not perceive Big 4 auditors as having a higher audit quality than non-Big 4 auditors. After comparing the coefficients of the variables in the regression model from the respective rated and unrated samples, we conclude that the two samples fit distinctive regression regimes and hence, using the pooled sample can bias the estimation.
DISSEMINATION AND INSTITUTIONALIZATION OF PUBLIC SECTOR ACCOUNTING REFORMS IN LESS DEVELOPED COUNTRIES: A COMPARATIVE STUDY OF THE NEPALESE AND SRI LANKAN CENTRAL GOVERNMENTS
MATILAL, SUMOHON
KURUPPU, CHAMARA; PAWAN, ADHIKARI
Category: PS = Public Sector Accounting
One of the major issues in the developing world today is the alleviation of poverty and it is acknowledged that public sector accounting has a key role to play in this through the effective allocation of resources. Implementing public sector accounting changes in developing nations has been a key agenda of international organizations since the 1980s. This study, drawing on the ideas of neo-institutionalism, strives to explore the implementation of public sector accounting reforms in two less developed countries (LDCs), namely Nepal and Sri Lanka. The empirical findings of the study demonstrate that, while internationally propagated public sector accounting reform ideas have not gone beyond the trial/proposal stage in Nepal, colonialism has bequeathed on Sri Lanka the promotion of accounting education and training, enabling the country to implement some of these reform ideas. However, increasing resistance to accounting changes at the lower administrative level, witnessed in both countries, indicates a need to understand the contexts of LDCs and to fulfil basic preconditions prior to disseminating/embarking on reforms there. Key words: Institutional theory; international organizations; less developed countries; public sector accounting.
THE FINGERPRINTS’ THEORY: A TOOL TO MEASURE HARMONIZATION AND CONVERGENCE IN REGULATION ENDEAVORS
MATIS, DUMITRU
BAKER, C. RICHARD; BONACI, CARMEN GIORGIANA; MUSTATA, RAZVAN V.
Category: GV = Accounting and Governance
There is increasing evidence of harmonization and convergence among national accounting standards and international financial reporting standards. The process of convergence is both formal and actual. We review several approaches to the measurement of the formal degree of accounting harmonization and convergence. We also introduce a new measurement approach – the Fingerprints’ Theory - to explore the degree of formal harmonization. We focus on the concepts of Euclidian Distance, Jaccard’s Coefficients, the Tanimoto Coefficient and the Tversky Coefficient. The results indicate an increasing level of harmonization and convergence between Romanian Accounting Standards and the international ones over the last twelve years. We provide empirical support for the Fingerprints’ Theory as a reliable technique for measuring harmonization and convergence. The proposed theory offers insights for the regulatory process especially in cases aiming to bring national regulation closer to international/regional standards, which is quite common under the globalization process.
SOME EVIDENCE ON MANAGEMENT CONTROL SYSTEM CHOICES BASED ON A TRANSACTION COST THEORY APPROACH
MATOLCSY, ZOLTAN
GIACOBBE, FRANCESCO; WAKEFIELD, JAMES
Category: MA = Management Accounting
This paper provides evidence on Speklé’s (2001, 2003) transaction cost economics based approach to management control system choices. We have chosen the setting of head office control of wholly owned foreign subsidiaries. The two testable implications which we provide evidence on are (1) that there are a number of distinct management control systems (archetypes) and (2) the choice of management control system is driven by the activity traits of a firm. Our case study based on five firms and our survey evidence based on 167 firms, confirms the existence of different management control system archetypes, but we only find limited support for the association between management control system choices and activity traits as predicted by transaction cost economics. Our results are robust based on further testing conducted.
COST MANAGEMENT IN THE PUBLIC SECTOR: LEGITIMATION BEHAVIOR AND RELEVANT DECISION MAKING
MÄTTÖ, TONI
SIPPOLA, KARI
Category: MA = Management Accounting
Discussion on the state of public sector management accounting research has been lively in recent years. Several authors have expressed concern that present research in management accounting (MA) has had only limited practical relevance in the public sector. There are also notions that public sector organizations are only using different MA techniques for legitimation purposes. Thus, the information provided by MA techniques is not used for actual decision making. We propose that these elements could be tied together; technique lacking relevance for the practitioner may lead to organizational lack of decision making and thus it appears as if the sole purpose of implementation may have been legitimation seeking. Using action research methodology, quality cost management project is implemented at the case organization. In the case organization, problem data, improvement initiatives, as well as cost information are constructed. The relationship between relevance and decision making is highlighted through this case, also showing practically relevant cost management in a public sector organization. Further, we argue that in some instances where public sector organization has been deemed to seek only legitimacy, a real reason behind this behavior may be the lack of relevance for the practitioner.
WHERE IS THE ACCOUNTING? THE ROLE OF INTERNAL ACCOUNTING AND EXTERNAL REPORTING IN AN EMERGING SUSTAINABILITY PROCESS.
MAUGHAN, REBECCA
MAUGHAN, REBECCA; O'DWYER, BRENDAN
Category: SE = Social and Environmental Accounting
This paper considers the development and legitimation of internal and external accounting and reporting practices as part of a corporate sustainability process. The paper stems from a longitudinal case study of the introduction of sustainability practices and reporting at Musgrave Group (Musgrave), a large Irish family owned company. Musgrave has been engaged in a sustainability process (encompassing both sustainability practices and accounting), since the late 1990s and publishes independently verified GRI compliant sustainability reports. A system of sustainability related internal accounting and reporting has also evolved over this time. The study of the company has been ongoing since 2007 and has resulted in a considerable body of data from interviews and documentary analysis. The paper provides insight into the role of the internal accounting and information systems as a source of pragmatic legitimacy for the emerging sustainability process and the perceived failure of the external reporting process to consolidate and maintain its initial legitimacy.
AN INVESTIGATION INTO THE DETERMINANTS OF AUDITOR SWITCHES BY UK FIRMS IN A LARGE PANEL SETTING
MAY, AMY
CLACHER, IAIN ; WILSON, NICHOLAS
Category: AU = Auditing
This study investigates the determinants of auditor switching in a large UK panel setting. Our aim is to provide additional insights based on a different regulatory regime to the majority of extant auditor switching literature. Using a panel dataset of 17,972 private and public UK firms we analyse whether determinants of switching in US-based extant literature are generalizable a UK context. The determinants of a switch are classified along two dimensions of client risk: ‘audit risk’ and ‘financial risk.’ Firms undergoing a switch are found to have increased levels of both audit risk and financial risk in comparison to non-switching firms. In addition, firms switching downward to a non-Big N auditor are shown to possess increased levels of both audit and financial risk in comparison to firms switching upward; however, financial risk appears to be more influential with regards to the direction of a switch. Findings also support the proposition that the determinants of auditor switching differ for private and public firms. We conclude that the main findings from US-based auditor switching literature can be generalised to a UK context.
UNDERSTANDING WHY FIRMS HOLD SO MUCH CASH: A TAX RISK EXPLANATION
MAYDEW, EDWARD
HANLON, MICHELLE; SAAVEDRA, DANIEL
Category: TX = Taxation
A recent puzzle in the corporate finance literature is the observation that both multinational and domestic U.S. corporations hold large amounts of cash on their balance sheets. We test whether tax risk is a determinant of cash holdings. Because tax authorities can challenge and disallow tax positions, demanding cash tax payments in the future, firms may hold cash in order to satisfy these potential future demands. We find that both domestic and multinational firms that bear tax risk hold significantly larger cash balances than firms that do not. The data suggest that there is a tax-based precautionary motive to hold cash. This particular type of precautionary motive has not been examined before and adds to both our knowledge of why firms hold so much cash and to our knowledge about the real effects of tax avoidance.
GOODWILL RELATED MANDATORY DISCLOSURE AND THE COST OF EQUITY CAPITAL
MAZZI, FRANCESCO
ANDRÉ, PAUL; DIONYSIOU, DIONYSIA; TSALAVOUTAS, IOANNIS
Category: FA = Financial Analysis
The present study examines whether enhanced mandatory disclosure reduces implied cost of equity capital. Prior cross-sectional studies focusing exclusively on voluntary disclosure have produced mixed results. This is why it has been suggested to go beyond voluntary information in analysing the relationship between disclosure and cost of capital. Considering evidence suggesting that companies do not fully comply with disclosure requirements, even if they are supposed to, this paper deals with mandatory disclosure. More specifically we examine the relationship between goodwill related mandatory disclosure and the implied cost of capital for a sample of 225 European firms for the period from 2008 to 2011. The findings suggest that enhanced mandatory disclosure is correlated with the cost of capital, but that this correlation depends on the materiality of the information, measured as the percentage of goodwill to total assets.
DOES DISCLOSURE LEVEL THE PLAYING FIELD?
MAZZOLA, PIETRO
GABBIONETA, CLAUDIA ; GASSEN, JOACHIM
Category: FA = Financial Analysis
This paper investigates whether disclosure reduces the information asymmetry between heterogeneously informed investors. We use a unique sample of Italian market microstructure data that allows us to assess the trading sizes of completed transactions separately for the buy and sell side. Thus, our data allows us to use buy and sell trade sizes as a high-quality proxy for the wealth and sophistication level of investors. We use conference calls and strategic plan presentations of Italian firms as our disclosure events. Strategic plan presentations are used to provide complex forward-looking information to investors. We find that strategic plan presentations cause significantly more short-window abnormal turnover than earnings conference calls. In addition, we find that this abnormal turnover is caused by a disproportional share of large trades. Also, abnormal net buying activity caused by large (small) trades is consistently linked to positive (negative) returns. Finally, large trade induced net buying behavior is related to a short-window post information-announcement drift. Our findings are consistent with strategic plan presentations in Italy causing divergence in beliefs, increasing information asymmetry, thereby unleveling the playing field and resulting in a wealth distribution effect from unsophisticated to sophisticated investors.
PREPARE OR GO: AN ANALYSIS OF ENFORCING TUTORIAL PREPARATION REQUIREMENTS IN AN ACCOUNTING COURSE
MCGOWAN, SUE
Category: ED = Accounting Education
The tutorial is often seen as the primarily vehicle that provides students with the opportunity to actively engage with the subject materials, their teacher and their peers. Although preparation for class is an expectation, students’ lack of preparation for tutorial work is widespread. This results in a reality where not only the unprepared student’s engagement is problematic but the experiences of their peers and the ability of teaching academics to facilitate learning is also compromised. Within an action research approach, this paper discusses the rationale, implementation and results of requiring students to provide evidence of adequate class preparation in order to attend tutorials for a financial accounting course. This requirement transformed the nature of tutorials although it had no impact on student evaluations or results.
EXAMINING THE IMPLEMENTATION, EVOLUTION AND DECLINE OF ECONOMIC VALUE ADDED IN THREE NEW ZEALAND COMPANIES: A DYNAMIC CONTINGENCY PERSPECTIVE
MCLAREN, JOSIE
APPLEYARD, ANTHONY ; MITCHELL, FALCONER
Category: MA = Management Accounting
When Economic Value Added (EVA™) was first promoted by Stern Stewart and Company, it was hailed as an innovation in management accounting. The suggestion was that this measure could be used as the basis for the management control system within the firm, covering planning, control, investment decision making and remuneration determination. This study adopts a longitudinal perspective to examine the experience of three large New Zealand companies, in which EVA was implemented in the 1990s and used as the management control system for 10-15 years. Evidence is gathered from a questionnaire conducted in 1999, interviews conducted in 2001 and 2011and supporting documentary evidence. It covers the entire ‘life cycle’ of EVA, from initial implementation, through evolution to the eventual decline. Contingency theory is extended to a longitudinal perspective to analyse the variables that were important at each stage of the life cycle. The study provides four main contributions to the literature on contingency theory. First, the longer-term perspective is itself a contribution. The extension to a longer-term focus facilitated the second contribution, the identification of the relevant variables that were influential at each stage of the life cycle. A third contribution is the proposed new contingency variable, termed learning and adapting. For the companies, learning and adapting led to evolution in the system. Finally, the model of technique decline is itself a contribution.
THE DOUBLE ENTRY CONSTRAINT, STRUCTURAL MODELING AND ECONOMETRIC ESTIMATION
MCLEAY, STUART J.
CHRISTODOULOU, DEMETRIS
Category: FA = Financial Analysis
The key proposition of the paper lies in the treatment of financial statements as a matrix of endogenous information codetermined by double entry. To account for the highly structured information set in econometric estimation, we develop a generalised structural system for use with accounting variables, within which the deterministic relationships governing financial statement articulation are clearly defined. The framework is used to formulate fully identified models that are consistent with the underlying duality that characterises the generating process of accounting data. To demonstrate the efficacy of the approach, we consider the model of equity pricing in Penman and Yehuda (2009), and the model of investment sensitivity to operating cash flow in Fazzari, Hubbart and Petersen (1988) and Kaplan and Zingales (1997). By comparison with the more traditional estimation methods, the structural system is shown to yield estimates with increased precision that adhere to double entry rules.
FIRM RESPONSES TO CLIMATE CHANGE: THE CARBON DISCLOSURE PROJECT
MCNICHOLAS, PATTY
BIRT, JACQUELINE; ZHANG, SHAN
Category: SE = Social and Environmental Accounting
Climate change issues have increasingly attracted government, business and professional attention in recent years. More specifically, there is mounting evidence that indicates that human induced carbon emissions are a major cause of climate change. The objective of the Carbon Disclosure Project (CDP) is to ensure that investors are better informed about the risks and opportunities facing the largest quoted companies worldwide due to climate change (CDP 2007). This paper investigates the factors that influence a firm’s decision to participate in and disclose corporate carbon emissions information via the Carbon Disclosure Project (CDP). The relationship between the level of carbon or “solicited” disclosure, corporate governance, and total carbon emissions is also examined. The degree of “solicited” disclosure is furthered examined as an additional analysis of the study. We find that firm size, subsequent equity offerings and regulation regime are significant determinants of corporate response to the CDP. However, a firm’s decision to reply to the CDP questionnaire is found to not be influenced by leverage. Companies representing the Utilities, and Industrials sectors are more likely to respond to the ‘solicited’ CDP information request compared to other sectors. Managerial ownership and total carbon emissions are found to be negatively related to the level of carbon disclosure, while the association between proportion of non-executive directors and disclosure is significantly positive. The results are consistent with the prediction of agency theory. Size, Equity Offerings, Utilities Sector, and last year’s CDP response are found to be the significant variables in explaining the variability of the degree of “solicited” disclosure.
MANDATORY RECOGNITION OF EXTERNALITIES, PRICE ELASTICITY OF DEMAND AND THE MARKET VALUE OF FIRMS
MEAD, JOHN
Category: SE = Social and Environmental Accounting
The scene for environmental performance and disclosures is changing rapidly from that of a voluntary state to one where both are being mandated. One such regulatory initiative is that of the European Union Emissions Trading Scheme (EU ETS), under which all firms within certain industries have to comply with similar environmental performance and disclosure requirements. The imposition of such requirements can have both adverse and beneficial effects on firm value. The purpose of this study is to examine how EU ETS membership affects the market value of European firms. Using a sample of 1,985 firm-year observations from Great Britain, France, Germany, Spain and Italy, we find that joining the EU ETS has a positive impact on firm value, and this impact is larger for firms with high price elasticity of demand (PED). These findings suggest that a regulated environmental performance and environmental disclosure setting is likely to reduce uncertainties pertaining to externalities, in particular, for firms which are unable to shift their externality costs to their consumers.
RESPONSIBLE BEHAVIOR DURING A SITUATION OF DECLINE: U.S. EVIDENCE
MECAJ, ARJOLA
GONZÁLEZ-BRAVO, MARÍA ISABEL; MARTÍN-JIMÉNEZ, DOROTEO
Category: SE = Social and Environmental Accounting
The purpose of this paper is to analyze to what extent companies facing financial distress situations incorporate investment in responsible behaviors among their strategies as a mechanism to create favorable expectations that mitigate the weakened image given by certain financial indicators. The analysis of similarities and differences in the CSR behavior is performed using a dataset of 392 companies classified, based on their financial structure, in healthy firms and distressed firms. CSR performance is assessed using the rating reached by the firms in the KLD database, accounting for the concerns and strengths obtained in the seven KLD dimensions. For this analysis, we chose to use Multidimensional Scaling (MDS), which provides a visual representation of the pattern of proximities (similarities) among a set of observations. This study does not start off a direct link between company crisis and certain CSR strategies. The MDS methodology allows us to analyze the profiles of firms in a specific financial distress situation without any a priori assumptions on causal relations that could be used as predictors of CSR performance. The results show that there are no significant differences between healthy firms and distressed firms considering the strength items of the KLD database. However, the severity degree of the firms in a distress situation, as well as its origin (i.e. operational or financial) does influence the behavior of the firms on the responsible actions.
YOU REMIND ME OF SOMEONE: WHY THE DOMINANT PERSONALITY TYPE PERSISTS IN ACCOUNTING FIRMS
MEDLIN, JOHN
Category: ED = Accounting Education
This study explores the reasons for the persistence of the dominant personality types in accounting firms despite claims the professional skills required by the profession have evolved over the past three decades. Since the 1980s, there have been persistent calls in Europe, Australia and the United States of America (US) to change accounting education to develop graduates’ professional skills in response to globalisation and information technology becoming ubiquitous in the business environment. Using Holland’s Theory (1997), this study explores whether accounting firms attempt to employ graduates with an emphasis on professional skills and to what extent they succeed. Consistent with Holland’s Theory (1997), this study found that although there was some attempt to change the personality type employed to favour the professional skills promoted in the literature, initial success is followed by graduates with more social skills leaving when fully qualified.
SME EARNINGS AND FUTURE ECONOMIC PERFORMANCE
MEERSSCHAERT, STEFAAN
VAN CAUWENBERGE, PHILIPPE; VANDER BAUWHEDE, HEIDI
Category: FA = Financial Analysis
This paper tests whether earnings mandatorily reported by privately held SMEs in a high book-tax conformity setting convey more information about those companies’ future economic performance than the information inherent in current period operating cash flows. Moreover, to investigate whether this information value of earnings is associated with the need for information asymmetry reduction, it also examines the impact of external credit market dependence on the informativeness of earnings. Using financial statements of a large panel of privately held Belgian SMEs over the 2001-2010 period, we find that current period earnings numbers are more informative about future economic performance than current period operating cash flows. Consistent with economic theory, the analyses further indicate that external credit market dependence has a positive impact on the information value of earnings numbers, thereby suggesting that earnings informativeness is also an information asymmetry reduction mechanism for privately held SMEs.
INDEPENDENT NON-EXECUTIVE DIRECTORS’ REMUNERATION: A COMPARISON OF THE UK AND ITALY
MELIS, ANDREA
GAIA, SILVIA; MALLIN, CHRIS
Category: GV = Accounting and Governance
This paper investigates the roles that equity and human capital theories, and the managerial power view play in explaining the pay of independent directors. Using a sample of 1733 independent non-executive directors’ year observations in Italian and UK non-financial firms listed in the period 2007-2009, we find that independent directors’ remuneration in Italy is mainly based on the effort independent directors' exert, whilst in the UK it is based on their responsibilities. Neither Italian nor UK companies adopted performance-based remuneration for their independent directors. The managerial power view seems to help to explain independent directors’ remuneration, as those independent directors who do not fulfil formal independence criteria stated by the national Corporate Governance Codes seem to be paid more, after controlling for effort, responsibilities, human capital and firm characteristics, than those who do fulfil such criteria. Our results provide empirical support for equity theory, and the managerial power view, in explaining independent non-executive directors’ remuneration as well as for the institutional perspective. Moreover, the paper contributes to the debate on the choice of either a statutory regime or a flexible system in regulating the independent director dimensions of corporate governance. It offers insights to policy-makers by questioning the effectiveness of adopting non-binding criteria when assessing non-executive directors’ independence.
GOVERNANCE AND PHILANTHROPIC STRATEGY: THE CASE OF FOUNDATION OF BANKING ORIGINS
MENINI, ANDREA
BOESSO, GIACOMO; CERBIONI, FABRIZIO; PARBONETTI, ANTONIO
Category: GV = Accounting and Governance
This paper investigates the relationships between the choice of philanthropic strategy (expressive, receptive, proactive and collaborative) and board capital (competences and networks), board processes (planning, control, evaluation, etc.), and the CEO power (entrenchment and tenure). Using a sample of fifty-one Italian foundations of banking origins, this paper shows that high levels of board capital, the CEO’s long tenure, and sound governance processes are positively associated with the proactive and collaborative philanthropy models. Results provide clear guideline to researchers and practitioners for a better understanding of strategic philanthropy’s drivers.
INTEGRATION OF THE ACCOUNTING SYSTEMS IN THE MERGERS - ACQUISITIONS: AN APPROACH TYPOLOGICAL ACCULTURATIVE
MEREAUX, JEAN-PAUL
Category: IS = Accounting and Information Systems
This paper on the management of the accounting systems in the mergers-acquisitions rests on the survey of twenty-two operations of mergers-acquisitions achieved between 1992 and 2007 by four groups, quoted or no, operating in different sectors (distribution, wines and spirits, champagne, steel industry). The analysis of the data is done while using the cognitive mapping for the interviews and the chronological matrix for the other introverted data (direct observation, survey of documents on site and external). The results show the differentiated approaches and non linear according to the groups purchasers. While being inspired by the acculturation models, we propose a typology of the accounting systems integration in the mergers-acquisitions.
BOARD OF DIRECTORS’ CHARACTERISTICS. THEIR INFLUENCE ON COMPENSATION STRUCTURE OF DIRECTORS
MERINO MADRID, ELENA
BANEGAS, REGINO; MANZANEQUE, MONTSERRAT
Category: GV = Accounting and Governance
Some corporate scandals have put into question the level of remuneration received by members of the board of directors, accentuating the lack of investor and institutions confidence on them, as control mechanisms to protect the shareholders interest. To curb the excesses compensation and so the shareholders regain the confidence in the management of the board, the literature propose to increase the degree of independence of the Board of Directors. In this context we analyze the relationship between the independence board and the level and structure of directors´ compensation in Spain to determine whether this “independent” exert a moderating effect on the remuneration. The results reveals that the effect of board characteristics on directors´ compensation depend on the type of remuneration.
UNTANGLING THE ANTECEDENTS OF CODE OF ETHICS QUALITY: DOES CORPORATE GOVERNANCE MATTER?
MERLOTTI, EMILIA
GAREGNANI, GIOVANNI MARIA ; RUSSO, ANGELOANTONIO
Category: GV = Accounting and Governance
In recent years, codes of ethics are becoming one of the most relevant examples of managerial tools firms are investing in to improve the transparency and effectiveness of their relationships with their stakeholders in response to the repeated corporate scandals and the deep economic crisis occurred. This study investigates the antecedents of code of ethics quality with specific regard to the peculiarities of corporate governance. Relying on a sample of 248 Italian public companies, five corporate governance characteristics were considered: the role of primary shareholders within the firm, the role and influence of independent directors within the board, the effect of board size on the strategic decision-making process, the influence of Chief Executive Officer (CEO) age and board diversity. The results suggest that investing in high-quality codes of ethics can influence the agency problem evident between ownership and control.
ACCOUNTING NUMBERS AND THE MANAGEMENT OF UNCERTAINTY: A MICRO-LEVEL STUDY OF A FORECASTING PROCESS
MESSNER, MARTIN
GORETZKI, LUKAS; JORDAN, SILVIA
Category: MA = Management Accounting
The paper examines the relationship between accounting information and the management of uncertainty. While existing literature has mainly drawn upon contingency theory to examine the use and usefulness of accounting systems under conditions of uncertainty, we look at how such conditions of uncertainty are actually recognised by managers and how managers use accounting information to make sense of and deal with such uncertainty. Drawing upon interactional data from forecasting meetings in one manufacturing firm, we suggest that accounting information is relevant both for recognising uncertainty and for managing it, although the former role appears to dominate the latter one. We furthermore find that managers shift between accounting information and operational knowledge when making sense of uncertainty. In our analysis, we distinguish between the uncertainty inherent in numbers, on the one hand, and the uncertainty of the operational business, on the other hand. We show how discussions tend to move from a concern with the numbers to a concern with operations. Importantly, it is not only when accounting numbers are perceived as uncertain that managers start discussing operational uncertainty; such discussions are also triggered when accounting numbers are established as reliable, but when these numbers raise questions about the feasibility to match demand and supply.
ANALYSIS OF MANIPULATION IN CORPORATE PREDICTION MARKETS APPLIED TO FORECASTING: A MULTI-AGENT SIMULATION MODEL
MEYER, MATTHIAS
KLINGERT, FRANK
Category: FR = Financial Reporting
Prediction markets are a promising instrument for drawing on the “wisdom of the crowds”. For example, in a corporate context they have been used successfully to forecast sales or project risks by tapping into the heterogeneous information of decentralized actors in- and outside of companies. Manipulation constitutes an important aspect of prediction markets as it can negatively affect prediction market accuracy. Current research on manipulation in prediction markets is inconclusive. On the one hand empirical research is regularly not able to identify a significant effect on prediction market accuracy. On the other hand, exceptions are reported in small size prediction markets about sport events as well as large scale prediction markets about elections. We contribute to this discussion by introducing an agent-based simulation model derived from laboratory experiments of Hanson et al. (2006). While this experiment is not able to find successful manipulation, the simulation model shows that increasing the manipulation strength of manipulators leads to an increase of the accuracy error. Furthermore, an increased amount of traders does not generally lead to lower manipulation. However, the manipulation influence decreases, when manipulation is considered as a public good game. Finally, the logarithmic market scoring rule is shown to be more more robust against manipulation than the continuous double auction.
CONTROLLERSHIP IN TURBULENT AND DISTANT SEAS: HOW ENVIRONMENTAL UNCERTAINTY AND ORGANIZATIONAL DISTANCE DEMAND FOR STRONG LOCAL CONTROLLERS
MEYER, TIMO
SCHÄFFER, UTZ
Category: MA = Management Accounting
Uncertainty and distance are two fundamental challenges for controllership in decentralized firms. We use a combination of survey and archival data to examine how both contingency factors expand the roles of decentralized (or local) controllers. In addition to direct effects on their decision support and corporate control role, we find that both contingency factors affect and interact with individual antecedents of their roles. We largely find empirical support for the relevance of three such individual antecedents: high quality exchange relationships with operating managers, social effectiveness in dealing with conflict and ambiguity and local discretion to adapt to business unit specific needs. Our results suggest that these aspects function as personal resources and job resources to fulfil a strong dual role in uncertain and distant environments. However, the analysis of interaction effects reveals that personal resources and job resources differ in their capability to cope with distance and uncertainty. Taken together, the empirical results largely support a theoretical perspective on controller roles which interprets role involvement as a joint consequence of organizational-level demands and individual-level resources.
DISCLOSURE OF CASH FLOW INFORMATION IN EARNINGS ANNOUNCEMENTS
MIAO, BIN
ZHU, ZINAN
Category: FR = Financial Reporting
This paper examines the capital market consequences of voluntary disclosures of statement of cash flow (SCF) information in quarterly earnings announcements. We find strong evidence that SCF disclosure enables the market to more efficiently price reported earnings. More importantly, we find this effect is only present for firms widely held by individual investors and institutions holding small stakes. Further investigation of the intraday trading activities surrounding earnings announcements suggests only small traders respond to disclosure of SCF information. The results are robust to standard procedures for correcting self-selection bias. These findings are consistent with the notion that voluntary disclosure of statement cash flow information at earnings announcements benefits retail investors more than sophisticated institutions, and have direct implications for the existing disclosure rules, which do not mandate disclosure of detailed financial statements at earnings announcements.
IMPRESSION MANAGEMENT AND ORGANIZATIONAL AUDIENCES: THE FIAT GROUP CASE
MICHELON, GIOVANNA
BOZZOLAN, SAVERIO; CHO, CHARLES
Category: SE = Social and Environmental Accounting
The aim of this paper is to study how management strategically uses disclosure to manage the beliefs of different audiences. In particular, we study the interaction process of the FIAT Group with three organizational audiences (the local and international press and the financial analysts) who represent three key audiences characterized by different levels of salience for the company (Mitchell et al. 1997). We focus on both how the management reacts to the existing optimism of each audience and how the disclosure tone adopted by Fiat influences the ex-post optimism in the local and international press or in the financial analyst community. We investigate the disclosure of Fiat Group over a period of six years (2004 - 2009) during which 72 price sensitive press releases were published. On the basis of 2,013 (272) news published in Italian (international) newspapers and 377 analyst reports, we find evidence of different patterns in the interaction process between FIAT and its audiences. Our result also shows some differences in the way in which Fiat is affected by and affects the sentiment of each audience, thus highlighting that the salience of the audience is an important driver of the adoption of impression management techniques in the ordinary accountability process.
THE DETERMINANTS OF AND TOOLS FOR ACCOUNTING STUDENTS’ LEARNING IN THE BACHELOR THESIS SEMINAR COURSE
MIIHKINEN, ANTTI
VIRTANEN, TUIJA
Category: ED = Accounting Education
Assessment of university students’ learning is challenging. Earlier studies state that student’s approach to studying is often based on assessment methods (e.g. Scouller, 1998; Thomas & Bain, 1984). A final exam as an assessment method easily leads students to a surface approach to learning while different kinds of activating in-class and home exercises during the course encourage a deep approach to learning. The basic idea of Assurance of Learning (AOL) standards is that learning objectives and assessment methods lead students to deep approach to learning. The objective of this paper is to describe the results of a project that was focused on developing the learning objectives and assessment criteria for the bachelor thesis seminar course in order to assure the quality of students’ learning. The development project was carried out at the Aalto University School of Business in the department of accounting. Our aim was to develop assessment rubrics that teachers and students can use as an assessment tool in the bachelor thesis seminar courses. The rubric we have developed takes into account the main criteria in the assessment of the bachelor thesis and studying process in an easily understandable form. Finally, we consider how our findings on the assessment of students’ learning could be applied more broadly to assure learning at the Bachelor’s degree level.
THE APPEAL OF THE APPROPRIATE: ACCOUNTING, RISK MANAGEMENT, AND THE COMPETITION FOR THE SUPPLY OF CONTROL SYSTEMS
MIKES, ANETTE
MIKES, ANETTE
Category: MA = Management Accounting
How do certain risk measurements in organizations come to be seen as more reliable and acceptable than others? Taking a multiple-control perspective, I investigate the aftermath of a control debacle at a financial services company (MultiBank), focusing on its insurance division (EurInsurance), which suffered large losses in the European insurance crisis of 2002-2003. At MultiBank, the insurance crisis opened up a field of contestability in which new control agents got the opportunity to become implicated in divisional control. The struggle for custody over divisional control was a micropolitical process of interprofessional competition, played out between accountants and risk controllers who promoted conflicting measures of the key strategic uncertainty, EurInsurance’s capital adequacy. The control agents engaged in credentializing strategies (Power, 1992); they mobilized and drew on different cultural resources to construct the reliability of their techniques and to discredit and “minoritize” the others’. This credibility contest was won by the accountants who (unlike their opponents) were able to demonstrate the “institutional appropriateness” of their controls. Importantly, the fate of the competing control systems was contingent, not on how well their technologies addressed the problem of EurInsurance’s capital adequacy, but rather on the controllers’ capacity to generate top managerial acceptance and a widespread consensus among both internal and external stakeholders. The outcome of this type of professional competition is not determined by claims about representing the underlying economic reality, but by claims about representing those who care about it most. While competing controller groups have been observed to appeal to top management’s logic of functionalism, this paper argues that, in certain circumstances, controller groups may successfully draw on the logic of appropriateness as they supply new control systems.
EFFICIENCY ANALYSIS AND BENCHMARKING: A QUANTITATIVE APPROACH TO COMPARE THE PERFORMANCE OF VOLUNTARY ORGANIZATIONS
MILANI FILHO, MARCO ANTONIO F
Category: PS = Public Sector Accounting
Voluntary organizations face the challenge of fundraising and fulfilling their organizational missions in an efficient way. In this article, I compare the production efficiency of 42 voluntary organizations that provide specialized housing for elderly people in Sao Paulo, Brazil. I also test whether the dependence level of these organizations on public resources is significantly related with their efficiency level calculated using the Data Envelopment Analysis. Capital and labor were used as input data, while operational performance indicators were used as output data. The results pointed out benchmarks for inefficient entities and indicated that no significant relation exists between dependence level on public resources and production efficiency level.
CONTRACTS AND CONTROL STRUCTURES AS VEHICLES IN THE DEVELOPMENT OF AN INTERFIRM RELATIONSHIP
MINNAAR, REINALD
HASSAN, KALEEM; VAN VEEN-DIRKS, PAULA; VOSSELMAN, ED
Category: MA = Management Accounting
This paper contributes to the debate on the governance of interfirm relationships by addressing the interactive relationship between control and trust building, focusing on the dynamics between control and trust. The study examines the role that contracting (resulting in formal control structures) and control practices can play in both safeguarding and trust building. Through an in-depth case study into a dyadic relationship between the facilities management department of a multinational company and an outside contractor it is demonstrated how the governance of this relationship develops. It illustrates how negotiating the contract provides an important source for relational signalling. Control practices not only incentivize and/or constrain behaviour, but also build trust through which the interfirm relationship can further develop. It is concluded that contracting, control practices and trust building are strongly intermingled. Both contracting and control practices are vital in the process of signalling commitment to the relationship and, thus, for the development of the relationship. Our study offers a refinement and an extension of the ostensive perspective on the interaction between control and trust taken by Vosselman and Van der Meer-Kooistra (2009). Control may be used in an instrumental way, but it is the interaction between control and trust that act as a duality and shape the development of the relationship.
EMPIRICAL EVIDENCE ON THE VALUE RELEVANCE OF BROKERS' INCOME ACTUAL NUMBERS AND GAAP EARNINGS TO THE INTERNATIONAL EQUITY MARKETS
MISSONIER-PIERA, FRANCK
AUBERT, FRANÇOIS
Category: FA = Financial Analysis
This paper aims at investigating the relative information content of the broker’s earnings actual. The empirical analysis provides, for the first time at the international level, evidence that broker’s earnings actuals are more value relevant and useful in equity valuation than GAAP earnings. However, our results indicate that, consistent with prior literature, non-GAAP earnings metrics are more informative and useful for assessing securities. Following Baik et al. (2008) and Albring et al. (2010), our paper contributes to enhancing the body of literature on value relevance of earnings literature, as it shows that reducing managerial discretion on earning numbers has a positive impact on the relevance of earnings performance to security markets in increasing transparency and investors’ confidence in accounting data.
FIRMS’ STRATEGIC MANAGEMENT DISCLOSURE POLICY BEFORE DEBT OFFERINGS
MO, KYOUNGWON
JUNG, KOOYUL; KIM, BOYOUNG
Category: FR = Financial Reporting
This study examines firms’ strategic management disclosure policy before debt offerings. We extend prior studies by performing multiple regression analyses for both the level of and the change in management disclosure prior to debt offerings using a much more comprehensive set of sample firms. We find that debt issuing firms issue more management disclosures or increase them prior to debt offerings than do non-debt issuing firms, and that these management disclosures tend to be conservative rather than optimistic. We also provide some evidence that public debt issuing firms use more management disclosures than private debt issuers. Additional tests using alternative measures of management forecasts and methodologies similar to prior studies confirm our results. These results add convincing evidence to the literature in this area, where there is a lack of strong evidence.
THE RETURN ON INVESTMENTS IN TAX PLANNING FOR EMPLOYEES: EVIDENCE FROM GERMANY
MOEHLMANN, AXEL
BLAUFUS, KAY; HECHTNER, FRANK
Category: TX = Taxation
Tax preparation firms advertise their services as a way to save taxes. Along this line, we use a large cross-sectional sample of German income tax accounting data, consisting of employees and other taxpayers with non-business income, to explore the relationship between expenses for tax preparation and tax liabilities. We find a negative link with expenses exceeding estimated tax savings. Specifically, one additional Euro yields estimated tax savings of only 75 Cents which implies that individual tax planning is no profitable investment from a tax saving perspective. In consideration of time savings, tax planning is worthwhile only for high income groups. This result suggests for most taxpayers an overinvestment. Potential explanations include an overvaluation of time and tax savings or a benefit of tax planning beyond these savings.
PURPOSEFUL DECISION MAKING OR LEGITIMISATION: AN EMPIRICAL ANALYSIS OF DIFFERENT TYPES OF INNOVATION METRIC USE
MOELLER, KLAUS
JANSSEN, SEBASTIAN H.; KRUSE, NINA
Category: MA = Management Accounting
In recent years a significant body of literature on performance measurement of new product development (NPD) has emerged, emphasising the increased need of efficiency and effectiveness in NPD processes. However, most of the literature focuses on design and implementation issues of performance measurement systems, but disregarding the managers’ role in respect of a purposeful use of innovation metrics and the resulting consequences for the NPD success. To contribute to this field of research, this study focuses on different types of using innovation metrics in the NPD context. Based on existing literature we differentiate between instrumental, conceptual, and symbolic types of using innovation metrics. We use structural equation modelling to evaluate the data of 133 engineering companies. Our findings show that using metrics conceptually, i.e. to stimulate organizational learning, has a positive and significant effect on the financial success of NPD. In contrast, both, the instrumental and the symbolic use of innovation metrics have only a minor relevance according to our results. However, the inclusion of the quality of decision making and project selection as well as efficiency in our research model, gives further insights regarding the high importance of a strong innovation management.
THE EFFECT OF INSTITUTIONS AND POLITICS ON CORPORATE OWNERSHIP AND BOARD REPRESENTATION
MOHAMAD YUSOF, NOR ZALINA
WICKRAMASINGHE, DANTURE; ZAMAN, MAHBUB
Category: GV = Accounting and Governance
This paper reflects on the historical, political and economic factors which have led to the state’s credible commitment towards a particular ethnic in Malaysia and the effect of this on the country’s corporate governance reforms especially board representation and corporate ownership. Historical institutionalism as advanced by political scientists is used as an approach to show the emergence of Bumiputera institution and how it impacted on corporate governance. Bumiputera phases are identified based on critical events, which mirrors the periodization analysis as commonly employed in comparative historical analysis. Data are mainly from secondary sources. The study shows that corporate governance apparatuses in emerging economies such as Malaysia are a constitutive of multiple programmes of economic and political reforms. The analysis shows how Bumiputera institution established a power base in the country’s corporate governance mechanisms through substantive representation by the Malays to affect ownership and board representation. This paper marks an alternative way of looking at corporate governance issues by focusing on the relevance of historical and political context of institutions, vis-à-vis an emerging economy. We show that corporate governance is a social process - it cannot be isolated from social and other non-economic conditions and factors such as power, legislation, social relationships and institution contexts.
ARE EXTENSIVE AUDITS "GOOD NEWS"? - MARKET PERCEPTIONS OF ABNORMAL AUDIT FEES AND FAIR VALUE DISCLOSURES
MOHRMANN, ULF
RIEPE, JAN; STEFANI, ULRIKE
Category: AU = Auditing
Although the auditor’s role is to increase the reliability of financial statements, surprisingly little is known about the market participants’ perceptions of the auditor-client relationship, even in situations in which management has substantial discretion about the valuation of a large proportion of assets. Using a sample of more than 1,000 U.S. bank-years from 2008 to 2011, we analyze the economic consequences of the joint announcement of audit fees and the level breakdown of fair value assets. We confirm prior findings that audit fees are higher in case of high proportions of Level 3 fair values. Moreover, we find that the market perception of fair value assets depends on the extent of managerial discretion in the process of estimating fair values. Most importantly, addressees interpret abnormal audit fees as an indication of additional risk. Thus, a higher amount of unexpected audit fees is not seen as a signal for a more reliable audit but further increases the market discount on Level 3 fair values. Bank managers have to consider these negative consequences in their reporting strategy.
INTERNATIONAL EDUCATION STANDARDS: TOWARDS A TRANSFORMATIVE EDUCATIONAL PARADIGM
MONK, ELIZABETH
CHRISTINE, HELLIAR; CRAWFORD, LOUISE; MONICA, VENEZIANI
Category: ED = Accounting Education
This paper presents a six country study of university professional accounting education. The paper is set within the framework of a transformative, or participative, approach to facilitating student learning rather than the more traditional transmissive, or passive, paradigm. To examine this framework, the paper considers the topics listed in International Education Standards (IES) 2, 3 and 4, which cover competencies and capabilities of: professional knowledge; professional skills; and professional values, ethics and attitudes. This paper investigates the level of coverage of each of the listed IES topics and the methods used for teaching these topics in undergraduate university education. Further, it analyses academic perceptions of the balance of developing these competencies and capabilities across universities, professional firms, training providers and professional bodies. The results indicate that countries focus on IES topics to different extents, but that the teaching methods used for knowledge, skills and values, ethics and attitudes are similar and reflect a formal, managerial and transmissive perspective of teaching where the teacher imparts knowledge in a classroom fashion. In a fast changing global business environment this transmissive paradigm will not meet the requirements of employers of these putative accountants and thus we call for universities to address the need for a more transformative approach to undergraduate accounting education.
THE NORMALIZATION OF ORGANIZATIONAL DEVIANCE AND THE CONCEPTUALIZATION OF THE “DANGEROUS” INDIVIDUAL: A GENEALOGY OF THE FRAUD TRIANGLE
MORALES, JEREMY
GENDRON, YVES; GUÉNIN-PARACINI, HENRI
Category: AU = Auditing
This article examines how a discourse of organizational fraud has been constructed around a particular technology: the fraud triangle. We examine the genealogy of the fraud triangle and follow various chains of translations underlying its construction. One of our main arguments is that the translational trajectories surrounding the triangle sustain a climate of generalized surveillance and suspicion that promotes a field of practical intervention (on individual deviance and morality), as legitimized through the production of hybrid knowledge on the overlap between fraud, control and individual ethics. Conceptualizations of organizational deviance, as epitomized in the fraud triangle, relate to a normalizing discourse targeting individual personality. As such, this discourse redefines social, political and economic relations around mechanisms of surveillance and risk assessment predicated on a view of the subject constituted as a potentially dangerous individual.
DO ANNUAL REPORTS COVER PROPERLY MAIN STAKEHOLDERS?
MORENO, ALONSO
CAMARA, MACARIO
Category: FR = Financial Reporting
Most of the accounting research drawing on stakeholder theory have focused on CSR. In contrast, they have not focused on studying if annual reports reflect reliably the main events of a company on specific issues or stakeholders. With the aim to fill this gap, this paper analyses the extent to which the annual report serves to communicative the most important events of a company with three critical stakeholders. To address this issue, we use internal information of the government bodies of a Spanish medium-sized brewery company (192893), supplemented through interviews maintained with a representative of each stakeholder. The context of the focal firm, i.e. the sector and the country, suffered from significant economic, social and political changes during the observation period. Our findings show that the annual report covers most of key events for the shareholders, only a small part of the events for the workers and many events for the customers. The results confirm that the annual report has been a document traditionally focused on shareholders. In the case of the workers, we can distinguish two different periods related to disclosure. However, social activities devoted to workers were constant in the company. Consequently and conversely to some authors, strategy and disclosure have been quite independent at least until the 1960s. Regarding the customers, a more random pattern is found, although the bad news is not reflected outward.
EXPLAINING EFFICIENCY IN THE PROVISION OF PUBLIC CULTURAL FACILITIES
MORENO ENGUIX, MARIA DEL ROCIO
BENITO LÓPEZ, BERNARDINO; MORENO ENGUIX, MARIA DEL ROCIO; SOLANA IBAÑEZ, JOSÉ
Category: PS = Public Sector Accounting
Recent years have seen a wealth of studies on Cultural Economics, in line with the importance of the economic performance of the public sector. In this context, the two-stage double bootstrap procedure of Simar and Wilson (2007) has been used to estimate the efficiency determinants of Spanish local entities in the management of culture oriented public infrastructures, given the limited financial resources available to these entities. The final sample comprises 1,159 municipalities. In the first stage, technical efficiency is estimated by Data Envelopment Analysis (DEA) and, based on a truncated-regression, the resulting efficiency estimates are regressed on a group of 10 selected environmental variables in a second stage. We have also considered the influence of a dummy categorical variable –the political sign of the governing party– on the efficient provision of the facilities under study. The results show the existence of a significant relation between efficiency and all the variables except two: unemployment rate and political strength. Our results also show that municipalities governed by conservatives parties are more efficient.
VENTURING TO CARE: NEW METRICS FOR SOCIAL IMPACT
MORLEY, JULIA
Category: SE = Social and Environmental Accounting
Social impact metrics are increasingly gaining the status of best practice in UK third sector organisations. Most practitioners explain this development in terms of the functional benefits it confers. However, from a political economy or genealogical perspective, such norms might be described as the result of an interplay between different interest groups (Cooper and Sherer, 1984; Perry and N ̈olke, 2006) or as reflective of some underlying “institutional logic” (Young, 1994) or “calculative idealism” (Power, 2010). Moreover, viewed as a tool for programmatic change’, such performance measures reflect the influence on practice of a neoliberal programme (Miller and O’Leary, 1987; Rose and Miller, 1992). Based on evidence from third sector practitioner publications and interviews with key practitioners involved with social impact measurement, I suggest that these new measures can be explained, in part, by contextual and institutional factors. These include a political shift in the UK towards a neoliberal ideology, the increasing influence of a close-knit network of investment experts and the consequences of the financial crisis.
TARGET COSTING AS A MANAGEMENT CONTROL SYSTEMS FOR PRODUCT INNOVATION: A CASE OF TOYOTA.
MOROFUJI, YUMI
Category: MA = Management Accounting
In the current economic climate, product innovation is important for organizations as they adapt to uncertain environments. In this paper, we explore how the design and use of management control systems to facilitate product innovation. We focus on target costing systems as management control systems for product innovation. Based on a review of the literature, we conclude that target costing systems should fulfill the requirements of diagnostic control systems stimulating creativity for intended strategy, interactive control systems and interactive networks with shared responsibility. Therefore, based on a case study of Toyota, we demonstrate how target costing systems fulfill those requirements. Toyota made substantial alterations to its target costing systems in 1998. We clarify that Toyota had mechanisms for lateral interaction and shared responsibility since before 1998, and add the mechanisms for intrinsic motivation by these changes in 1998. We also describe the trigger and details of these changes and discuss the problems arising from these changes.
THE APPROPRIATENESS OF ANGLO-AMERICAN CORPORATE GOVERNANCE IN EGYPT: STAKEHOLDERS’ VIEWS
MOUSSA, TANTAWY
LIEW, PIK
Category: GV = Accounting and Governance
Drawing upon the stakeholder theory, this study aims to develop an understanding of the appropriateness of CG reforms in Egypt, primarily through focusing on the existing CG practices in Egyptian listed companies. It also aims to elicit the issues/barriers that might impact the development and implementation of good CG that promotes accountability and social responsibility from the Egyptian perspective, specifically soliciting the views of various stakeholders. We employ an interview methodology to incorporate the perceptions of wider stakeholder groups (directors, external auditors, internal auditors, academics and regulators) who were involved in corporate governance. The study results indicate that even though some initiatives have been taken in recent years to improve corporate governance and transparency, actual corporate governance practices in Egypt did not function effectively and are far behind the standards in the USA, the UK and other western countries. Our findings also reveal that corporate governance in Egypt is still in the early stages of development and the corporate infrastructure of Egypt is dysfunctional in most aspects. The opaque regulatory system, unique business culture, intervention of controlling shareholders and some other socio-economic factors are working as major challenges for development of the corporate governance in Egypt. The study aims to fill gaps in the literature and contribute to it by assessing the perceptions of different stakeholders in Egypt in an institutional environment significantly different from that of the USA, the UK and other western economies.
DO MANAGERS DISCLOSE MORE INFORMATION ABOUT TAX LOSS CARRYFORWARD WHEN FUTURE PROFITS ARE UNCERTAIN?
MUELLER, JENS
FLAGMEIER, VANESSA
Category: FR = Financial Reporting
The value of tax loss carryforwards is difficult to assess for an investor since it strongly depends on if and when they can be offset against taxable income. We examine whether companies voluntarily disclose additional information about tax loss carryforwards when their recoverability is more uncertain. To investigate whether companies consider such uncertainty in their disclosure policy, we employ a pooled cross-section regression analysis, controlling for other factors that might influence disclosure. We develop a disclosure index and distinguish between mandatory disclosure under IAS 12 and voluntary disclosure. Our empirical analysis is based on a sample of German hand collected data from notes of IFRS financial statements. We find that companies that are exhibited to greater ex ante uncertainty voluntarily disclose more and more useful information regarding the future usability of tax loss carryforwards. These findings are robust for several indicators representing information and income uncertainty. Our findings suggest that managers anticipate the investors’ need for more private information and thus disclose them voluntarily to send a signal of credibility to the market participants. It can be assumed that disclosing this information is less costly than facing potential risk premiums demanded by investors leading to higher cost of capital.
COST PRESSURE, RATIONALIZATION, SPECIALIZATION AND THE QUALITY OF HEALTH CARE – EVIDENCE FROM A GERMAN HOSPITAL
MUELLER, SABINE
SZCZESNY, ANDREA
Category: MA = Management Accounting
Health care systems all over the world are subject to regulatory reforms with the objective to get under control the steady increasing costs. Cost containment instruments like capped hospital budgets or prospective payment may induce hospitals to cut costs at any price. But at the same time concerns over decreasing quality of patients` outcome arise. This paper uses empirical estimation techniques to investigate whether a small German hospital records impairments of quality measured as probability of complications after a surgical intervention at the recovery room. During the sample period 1994-2002 cost pressure has increased remarkably as a reaction of changes in reimbursement. Like many other hospitals specialization, selection and rationalization strategies were chosen to react on the cost pressure. Our analysis tries to shed light on the association between learning effects, economies of scale, efficiency and patient outcomes. Our findings reveal that the hospital was able to increase short term quality by an increase of the degree of specialization. Thereby the probability to underlie a complication decreases for specialized surgeries as well as for all other surgeries. Hence our results indicate a form of organizational learning in addition to individual learning concerning specialized surgeries.
DO LOSSES PRECIPITATE IMPROVEMENTS IN CORPORATE GOVERNANCE?
MULCAHY, MARK
DONNELLY, RAY; MULCAHY, MARK
Category: GV = Accounting and Governance
This paper studies the relationship between loss events and corporate governance in the UK. We examine whether firms that report a loss improve their corporate governance and also examine the timing of any changes in governance. The study uses four years of governance information spanning the report of an initial loss for companies listed on the UK stock exchange. An industry and size matched control sample is used in a difference-in-difference methodology to isolate the impact of the loss from underlying changes in governance during the period. The findings in this study indicate that for loss firms the loss precipitates an improvement in the standard of corporate governance and that this improvement is by and large confined to companies which displayed evidence of weak or extreme governance before the loss. There is also evidence this improvement begins before the loss is actually reported.
CHALLENGING THE EFFECTIVENESS OF GOVERNMENT GRANTS IN SUPPORTING THE BUSINESS SECTOR: SOME EVIDENCE FROM ITALIAN SMES
MURA, ALESSANDRO
MULAS, LAURA; SERRA, MILENA
Category: FA = Financial Analysis
This paper aims at demonstrating that government grants related to assets do not increase the financial performance of established recipient firms as these subsidies are unable to trigger investment projects that are more efficient than those financed via either equity or debt. Using a sample of small and medium-sized Italian manufacturing enterprises for the years 2002 until 2009, we analyse the differences in the creation of value added (VA) between a group of recipient firms and a matched group of non-recipient firms. The results of a set of univariate and multivariate tests reinforce each other in showing that VA is significantly negatively related to the size of government grants. These findings present severe policy implications and question the overall effectiveness of government grants in supporting firms.
VOLUNTARY DISCLOSURE AND VALUE RELEVANCE OF SEGMENT INFORMATION
MURAKAMI, YUTARO
SHIIBA, ATSUSHI
Category: FR = Financial Reporting
This paper considers how firms determine the disclosure of segment information in capital market setting. The analysis is based on a two-period model in which manager has private information and decides how to allocate her effort between two businesses in the first period by considering the stock price which is formed by public information. Each segment profit is determined by manager's effort level as well as manager's ability, the market size and uncertainty of each segment. The second-period earnings are determined by the persistence of core earnings in the first period. In this setting, we provide the conditions that manager does not voluntarily disclose segment earnings. In particular, we find that the manager chooses not to disclose segment earnings if both market sizes are almost the same and if the uncertainties of segment earnings are small and almost the same. Note that we do not consider the proprietary cost of segment disclosure such as the competitive effect on the rival firms. Moreover, we also examine the factors that affect value relevance of aggregate earnings and segment earnings, which provide the empirical hypotheses. For example, we show that value relevance of one segment earnings is greater than that of the other segment earnings when the uncertainty of earnings per market size in one market is smaller than that in the other market.
ACCOUNTING NUMBERS AND ROMA SLAVES IN THE 19TH CENTURY
MUSTATA, RAZVAN V.
ALEXANDER, DAVID; BONACI, CARMEN GIORGIANA
Category: SE = Social and Environmental Accounting
This paper explores the phenomenon of gypsy (= Roma) enslavement in Romanian Principalities for many centuries, and then their emancipation in the middle of the 19th century. We provide a strong historical/sociological backcloth. We then, using the IASB conceptual framework as our starting point, consider the accounting implications of their status, and their valuation for trading in the market and for emancipation, the latter involving in many cases 'payments' to former slave-owners by the state, usually by the issue of governmental 'financial instruments' in the jargon of today. We find overwhelming evidence of an active market with apparently sophisticated pricing structures, and argue that the IASB definition of asset, and the requirements for a level 1 fair value derivation, are frequently met. We describe and analyse already discovered contemporary and later documents, descriptions and evidence, and note that more research, especially relating to primary accounting records, remains to be undertaken.
THE MONITORING EFFECTIVENESS OF CO-OPTED AUDIT COMMITTEES
MYERS, LINDA
CASSELL , CORY; MYERS, LINDA; SCHMARDEBECK, ROY; ZHOU, JIAN
Category: AU = Auditing
We investigate the impact of audit committee co-option on financial reporting quality. We adapt the Coles et al. (2010) measure of board co-option and calculate audit committee co-option as the proportion of audit committee members appointed to the board after the current Chief Executive Officer (CEO) took office. Because CEOs are often actively involved in the director nomination and selection process, we expect that higher levels of audit committee co-option will be associated with less effective monitoring, as evidenced by more financial statement misstatements and greater absolute discretionary accruals. Consistent with our expectations, we find a positive relation between audit committee co-option and misstatements as well as between audit committee co-option and absolute discretionary accruals. Our findings should be of interest to regulators, investors, and other stakeholders because we provide new evidence about how potential CEO influence on director nominations and audit committee appointments impacts the effectiveness of monitoring.
ARE CREDIT RATING AGENCIES, “THERMOMETERS THAT CREATE CLIMATE”?
NACIRI, AHMED
Category: FA = Financial Analysis
Credit Rating Agencies were openly and strongly decried for their lack of governance rules and their sins were suddenly unraveled: Lack of appropriate regulation, lack of sufficient competition, conflicts of interest, excessive remuneration, etc., they seem to emerge unscathed. Agencies seem, however, to be here to stay and the question is not as much how to get rid of their oligopoly but rather how to create the appropriate environment for their good governance, although the path of redemption appears to be full of pitfalls. This paper has several objectives: First, it shows how three rating agencies (Big3) had spun their web of control over 90% of the world rating market; Second, it explains why coexisting with the Big3 oligopoly would seem inevitable, at least in the short run; Third, it explains why, in the long run and for the sake of better governance, the market dependence to the Big3 must be reduced. Finally, it explores ways that could be followed to improve Big3 governance and warns for the pitfalls to be expected. It concludes that only when rating agencies are obliged to operate in a market where nobody is forced to use their services, the problem will be solved.
OWNERSHIP STRUCTURE AND THE ATTITUDE TOWARDS MANAGEMENT FORECASTS DISCLOSURE
NAGATA, KYOKO
TOKORO, SEIYA
Category: GV = Accounting and Governance
The availability of management forecasts for most publicly traded companies in Japan enables us to investigate the association between ownership characteristics and properties of management forecasts issued not only when managers have incentives but also when there are disincentives to disclose private information. Especially, we focus on the impact of ownership structure on the frequency and the timeliness of information provided by managers. The results show that firms subjected to less external discipline or firms without incentives to enhance public disclosure are less active in updating information, whereas firms with large foreign institutional ownership are more likely to disclose updated forecasts frequently and in a timely manner. Overall, we provide evidence that ownership characteristics have a strong influence on managements’ attitudes towards in disclosing forecasts.
AUDITORS’ JUDGMENT AND DECISION MAKING ON ACCOUNTING ESTIMATES: THE EFFECTS OF ESTIMATION UNCERTAINTY, FRAUD RISK, EXPERIENCE, AND SKEPTICISM
NAKAMURA, HIDETOSHI
FUKUKAWA, HIRONORI
Category: AU = Auditing
The purpose of this study is to examine the effects of estimation uncertainty, fraud risk, auditors’ experience, and auditors’ professional skepticism on auditors’ judgments and decisions in the context of the audit of an impairment of a fixed asset. These factors are identified as variables that are important especially in the audit of accounting estimates in auditing standards and literature. Based on an experiment in which practicing auditors from one of large audit firms in Japan participated, we find that when estimation uncertainty is recognized as high, the risk of material misstatement regarding an impairment loss is assessed higher. Other factors do not affect the risk assessments. Among these factors, auditors’ experience of the audit of asset impairment has a positive impact on auditors’ decisions (i.e., additional audit procedures and audit hours necessary to complete the audit). These results imply that audit guidelines are necessary for inexperienced auditors in the audit of accounting estimates.
BOARD VINTAGE AND RISK-TAKING: AN EMPIRICAL ANALYSIS BASED ON JAPANESE FIRMS
NAKANO, MAKOTO
NGUYEN, PASCAL
Category: GV = Accounting and Governance
We analyze the role of board age on firm performance using a large sample of Japanese firms. The results reveal the existence of a significant negative relationship. After controlling for endogeneity using firm size as instrument, the effect of board age is found to be more significant, consistent with the notion that older directors are more likely to retain (relinquish) their positions in strongly (poorly) performing firms. In addition, we show that the performance of younger and high-growth firms is more sensitive to board age, which points to a risk-based explanation. Indeed, it appears that older boards are more reluctant to take risks and particularly to undertake acquisitions. Overall, the results underline the disadvantage of (re)appointing older managers since the latter tend to be more conservative, perhaps because of their shorter decision horizons or greater vested interests.
AN EXPERIMENTAL STUDY OF EFFECTS OF ACCOUNTING CHOICES AND THE AUDITOR’S REPORT ON USERS’ JUDGMENTS AND DECISIONS
NAKANO, MASAFUMI
Category: AU = Auditing
This study investigates users’ responses to a firm’s discretionary accounting choices and the auditor’s report when these choices match users' expectations or not. Clor-Proell (2009) examines how judgments and decisions of financial statement users are affected by the extent to which a firm’s actual accounting choices match users’ expectations. Although this study examines users’ judgment and decisions from the aspect of financial statements, it does not consider the role of the auditor’s report. Nonprofessional users may use information from the auditor’s report in addition to the financial statements. I have tested the hypotheses of prior studies in the Japanese experimental settings, but did not get similar results; hence, I have conducted this experiment to test new hypotheses. The results indicate that the actual accounting choice, the auditor’s report, and the extent to which it matches expectations affects assessments of credibility of financial statements, managers, and future profitability. Further, users’ assessment of the credibility of financial statements is lower when there is a mismatch with the qualified opinion between actual and expected accounting choice than when there is a mismatch with the emphasis of matter paragraph between actual and expected accounting choice. This study provides evidence to researchers, academics, regulators, standards-setters, and managers.
TRUST, EXTERNAL CAPITAL AND ACCOUNTING TRANSPARENCY
NANDA, DHANANJAY
WYSOCKI, PETER
Category: FR = Financial Reporting
We examine the relation between societal trust and firms’ accounting transparency, and how firms’ external capital demand affects this relation. Trust and transparency are predicted to have a positive association if corporate disclosures are viewed as more credible in high trust environments thereby increasing stakeholders’ demand for information. While competing theories predict a negative relation between trust and transparency, we document a robust positive empirical association between trust and accounting transparency measures across countries. We further find that firms’ demand for external capital amplifies the positive association, suggesting that trust is an important factor affecting the relation between accounting transparency and external financing.
CULTURE AND TYPES OF EARNINGS MANAGEMENT: A CROSS COUNTRY STUDY
NANDY, MONOMITA
CHEN, JEAN; LODH, SUMAN
Category: GV = Accounting and Governance
Earnings management is an important indicator of bundle of weak corporate governance. In this study, we consider the importance of ‘open system’ approach in corporate governance and examine the impact of national culture on the management’s choice of earnings management. We use cross-country data to investigate the impact of Hofstede’s cultural dimensions on managers’ preference for accrual and real earnings management. We find that in a country with high degree of individualism, managers do more accrual than real earnings management. In addition, the expensive but less detectable real earnings management is preferred in a country where uncertainty avoidance, power distance and masculinity are quite high. Motivated by the ‘prospect theory’, we extend the arguments in the prior literature by showing that the national culture not only determines the earnings management behavior of the managers but also influences the choice of types of earnings management. It contributes to the discussion related to ‘under contextualization’ of agency theory. The findings of our paper indicate that national culture should be considered in determining the bundle of corporate governance norms to mitigate the earnings management. The practitioner and the policy makers should carefully weights the two types of earnings management measures and consider national culture to develop an improved corporate governance practice throughout the world.
INFORMATION ASYMMETRY AND FINANCING DECISIONS AROUND THE WORLD
NARANJO, PATRICIA
SAAVEDRA, DANIEL ; VERDI, RODRIGO
Category: FR = Financial Reporting
We study changes in financing decisions around changes in information asymmetry. Our hypotheses come from a key assumption of the pecking order theory ─ that information asymmetry affects a firm’s financing choices. Using IFRS as a setting with exogenous variation in information asymmetry, we hypothesize that post-IFRS firms: (i) will be more likely to seek external (as opposed to internal) financing and (ii) conditional on raising external capital, will be relatively more likely to issue equity than debt. Further, we also study predictions of the modified pecking order theory by studying changes in financing choices conditional on financial distress. Overall, our findings suggest that information asymmetry plays an important role in explaining financing policies around the world.
ACCOUNTING EDUCATION AND THE ACCOUNTING PROFESSION IN JORDAN: THE CURRENT STATUS AND THE PROCESSES OF IMPROVEMENT
NASSAR, MAHMOUD
AL-KHADASH, HUSAM ALDEEN; MAH’D, OSAMA; RAMADAN, ABDULHADI
Category: ED = Accounting Education
The main aims in the current research paper are to identify the problems that are obstructing the development of accounting education and the accounting profession in Jordan and to identify strategies and techniques that can be effective in improving accounting education and the accounting profession in Jordan. Specifically, the current paper aim is to seek the views of accounting educators in Jordan on three issues. A questionnaire had been designed and distributed to (73) accounting instructors in Jordan. The population of this study consists of all accounting instructors employed in the both public and private Universities in Jordan. 73 questionnaires were distributed and 56 were returned giving a rate of response of 77%. The results of this study has revealed that; the important factors for the improvement of accounting education and the accounting profession in Jordan include Inadequate use of computers in accounting teaching , Inadequate salaries of accounting instructors., Poor university infrastructure resulting in the creation of ineffective class groups. Similarly, this research tested a list of strategies and techniques that have been recommended for the improvement of accounting education and the accounting profession in developing countries. The research discovered that many of the strategies could be effective in improving accounting education and the accounting profession in Jordan. However, there are other strategies that would not be effective. Some of these include the development of accounting textbooks in domestic languages, setting local auditing and accounting standards and, localising professional accounting examinations. In this research paper, attempted were made to identify problems that are hindering the enhancement of accounting education and the accounting profession in Jordan. An analysis of strategies that can be employed to improve accounting education and the accounting profession in Jordan was also carried out, with a view to determine those strategies that can be effective given Jordanian environment and needs.
PREDICTING BUSINESS STUDENT CHARACTERISTICS THAT INFLUENCE UNDERGRADUATE ATTRITION RATES THROUGHOUT A DEGREE
NATOLI, RICCARDO
JACKLING, BEVERLEY; ZUHAIR, SEGU
Category: ED = Accounting Education
This study develops a predictive model to investigate key student characteristics associated with the attrition of undergraduate business students across all years of a degree program. In this way the study adds to the small body of research that addresses attrition across an entire undergraduate program. Using logistic regression techniques, the results - that span over three years - demonstrate that the characteristics of business students that influence attrition can be differentiated by year of study. The findings reveal a need for university business faculties to consider the adoption of a range of initiatives focusing on ways to enhance the time commitment and academic confidence of students as a means to address the differences in the characteristics of business students who depart beyond first year.
FAIR VALUE EFFECTS ON THE INFORMATION CONTENT OF ACCOUNTING DATA
NEGAKIS, CHRISTOS
KOUSENIDIS, DIMITRIOS; LADAS, ANESTIS
Category: FA = Financial Analysis
We investigate the effects of the IFRS implementation on the value relevance of the book values of equity and earnings and particularly whether any of these effects can be attributed to the use of fair value accounting. The use of valuation models that control for various methodological issues, i.e., scale effects, outliers and heteroscedasticity reveals a decrease in the combined value relevance of the book values of equity and earnings in the post-IFRS period. However, under an incremental information content framework, we show that only the book values of equity have lost some of their information content as a consequence of the introduction of the IFRS. Further research indicates that the observed reduction in the value relevance of the book values of equity is partially attributed to the application of fair value accounting. However, we report that in the post-IFRS period the use of fair value has led to an increase in the information content of earnings. These results do not conform with the concept of fair value accounting, which focuses on book values being closer to market values. Therefore, our results suggest that the practical implementation of fair value accounting in Greece has led to the weakening of its conceptual merits.
MEASURING AND MANAGING THE PERFORMANCE OF THE INTELLECTUAL CAPITAL BASED BUSINESS MODEL THROUGH CAUSAL MAPS
NIELSEN, CHRISTIAN
LUND, MORTEN; MONTEMARI, MARCO
Category: MA = Management Accounting
This paper investigates the measurement and the management of the dynamic aspects of intellectual capital through the use of the causal mapping tool. The study details the methods utilized in a single in-depth case study of a network of companies involved in the development of a location data project and the associated management of intangible resources. In conducting its observations, the paper shows that the causal mapping tool can be used to understand how intellectual capital really works in the specific business context in which it is deployed. Moreover, exploiting the causal map as a platform for detracting a set of indicators can provide information on the length of the lag and the persistence of the effects of managerial actions. The paper highlights the need to build causal maps to enhance the measurement and management of intellectual capital dynamism. As a consequence, this tool can be useful for companies to monitor their intangibles and to better understand the contribution of their intellectual capital to the value creation process. The paper openly questions the measurement of the fluid and dynamic aspects of intellectual capital. It proposes a tool in order to govern these aspects and it suggests that also the existing intellectual capital measurement systems can improve their usefulness by including these dimensions. So a shift in intellectual capital measurement is prescribed.
MANAGERIAL INCENTIVES FOR TAX PLANNING IN A MULTI-TASK PRINCIPAL-AGENT MODEL
NIEMANN, RAINER
EWERT, RALF
Category: TX = Taxation
We extend prevailing principal-agent-models by integrating both corporate and individual income taxation as well as by including tax planning efforts in the agent’s action portfolio. In our multi-task LEN-model, the agent is remunerated on the basis of total after-tax cash-flows and decides about her operational and tax planning efforts. We demonstrate novel and apparently paradoxical results regarding the impact of increased tax rates on efforts, risks, incentive schemes and utilities. First, the principal’s after-tax profit can increase with a higher corporate tax rate. Second, tax planning effort can decrease in the corporate tax rate. Third, operational effort can increase with increasing corporate taxes. Similar paradoxical tax effects are derived for an extension with two separate bonus coefficients for operating cash flow and tax planning success, respectively. The model provides a basis for assessing the impact of tax rates on economic activities that are subject to agency relationships.
SHOULD COMPANIES DISCLOSE FINANCIAL INFORMATION TO EMPLOYEES? A CASE STUDY OF THREE WORKS COUNCILS IN THE FRENCH STEEL INDUSTRY FROM 1945 TO 1982
NIKITIN, MARC
FLOQUET, MATHIEU
Category: SE = Social and Environmental Accounting
The consensus in HRM and industrial relations is that making information available to employees is good practice and contributes to the involvement of personnel. Yet analysis of three major French steel companies between 1945 and 1982 would appear to suggest otherwise. The senior management in these companies regularly had to draw the line between a total absence of information and too much information, although there is no evidence of a shift towards greater divulgence, contrary to what a reading of the literature would suggest. It would appear first of all that the decision to provide information is opportunistic rather than the result of a systematic policy, and secondly that it is only linked to the short-term gain which management hope to achieve. In most cases, management see disclosure as a means of exerting pressure and increasing their negotiating power in discussions with employees or public authorities.
CONSERVATISM UNDER BOOK-TAX CONFORMITY
NISHITANI, JUMPEI
Category: FR = Financial Reporting
This paper analyzes the relationship between conservatism and taxation with a moral hazard model, presenting an accounting information system that enables the analysis of conservatism and informativeness separately. It also shows that unconditional conservatism can be brought about under taxation with the book-tax conformity rule, although unconditional conservatism will not be adopted in a plausible situation. The adoption of a conservative accounting information system as an optimal solution by the owner depends on the magnitude of relationships among relevant economic factors. These findings should be able to provide hypotheses for further empirical studies. Moreover, this paper implies that conservative accounting policies are likely to be chosen in cases of high informativeness of accounting information under the book-tax conformity rule, and that there could be a conflict of interest between an anti-conservatism tax authority and an accounting standards-setting body making efforts toward informativeness.
AUDIT QUALITY: THE ROLE OF BOARD STRUCTURE IN PRIVATE FIRMS
NISKANEN, MERVI
KARJALAINEN, JUKKA; STEIJVERS, TENSIE
Category: AU = Auditing
This study investigates the role that board structure has on the demand for audit quality in a sample of private firms. We also shed light on whether ownership structure and board structure are substitute mechanisms in resolving agency costs in private firms. Our main results show that the presence of outsiders on the board increases the demand for audit quality in the overall sample. Our results also confirm previous results and the likelihood of engaging a Big 4 auditor decreases with an increase in CEO ownership even when we control for board structure. When we investigate the interaction between CEO ownership and outside boards, we find that role of outside boards is weaker when CEO ownership increases.
THE EFFECTS OF STAKEHOLDERS ON CSR DISCLOSURE: EVIDENCE FROM JAPAN
NODA, AKIHIRO
SAKA, CHIKA
Category: SE = Social and Environmental Accounting
This paper examined the effects of stakeholders on firms’ CSR information disclosures. In Japan, many firms voluntarily disclose CSR information, with disclosure practices varying across firms. This paper quantified the CSR information released by 236 Japanese listed firms and examined the relationship between CSR information disclosures and the information needs of firm stakeholders. The results revealed that (1) the information needs of external stakeholders, including governments, creditors, consumers and local residents induced firms to disclose CSR information, (2) internal stakeholders have no effects on CSR information disclosure, and (3) CSR advocacy groups as intermediary stakeholders exerted a positive effect on CSR disclosure. The results suggest different relationship between CSR information disclosures and stakeholders’ information needs by CSR categories. These findings also reinforce the suggestion that the different stakeholder types (internal, external, and intermediary) have dissimilar CSR information needs. This research would contribute to our understanding of the effect of stakeholders on firms’ CSR information disclosure more inclusively.
A NEW WAY OF BEING A CONTROLLER – FROM BELLBOY TO ACTOR
NORREKLIT, HANNE
KAARBØE, KATARINA
Category: GV = Accounting and Governance
Repeatedly, it has been stated that the changing business environment challenges the traditional role of the management accountant. The purpose of this paper is to uncover a new way of being a controller in a contemporary business context. For our analysis, we have chosen the book Implementing Beyond Budgeting: Unlocking the Performance Potential by the controller Bjarte Bogsnes (2009), who in self-narrative form describes how he changed his approach to management accounting. Using a discourse analysis of the book, we dissect this change over time, uncovering a movement from mechanical language games embedded in the traditional management control method to interactive-reflective language games embedded in the beyond budgeting (BB) method. As a consequence, the way of being a controller has changed from bellboy going up and down between board and department in the process of producing a ‘true’ budget to reflective actor interlacing opposite views and thoughts of managers and employees. Our analysis shows that escaping the mechanical way of being a controller requires not only a change in management control procedure but also a change in the character of the controller. In our view, Bjarte Bogsnes has realized a change in the paradigm of management control.
IS INSIDER TRADING INFORMATIVE ABOUT CHANGES IN ACCOUNTING PERFORMANCE?
NOVAK, JIRI
FIDRMUC, JANA
Category: FA = Financial Analysis
This paper shows that corporate insiders optimally time their trades around breaks in firm profitability trend. Consistent with prior research documenting that insiders tend to sell (buy) after periods of positive (negative) stock returns, we show that they sell (buy) after positive (negative) quarterly earnings-per-share (EPS) surprises. On average, the EPS growth (decline) starts to slow down in the quarter immediately following an insider sale (purchase). Financial analysts interpret fairly precisely the future earnings implications of insider sales, but they overestimate the speed of recovery following insider purchases. The market seems to process the information in insider trading more efficiently leading to small negative (no) stock price reaction on earnings announcements in the four quarters following insider purchases (sales). These results are consistent with insiders trading on contrarian views about the degree of persistence of accounting performance imputed in current prices. Our data cover around 300,000 insider trading days in the post-SOX period over 2003-2009 with prompter reporting of insider transactions.
IFRS ADOPTION, REPORTING INCENTIVES, AND EARNINGS QUALITY IN PRIVATE FIRMS
NOVOTNY-FARKAS, ZOLTAN
BASSEMIR, MORITZ
Category: FR = Financial Reporting
This paper examines earnings quality effects of voluntary IFRS adoptions by German privately held firms. We find that IFRS adopting firms exhibit, on average, higher earnings quality than firms reporting under German GAAP, as measured by several empirical metrics for earnings management and timely loss recognition. We further argue that the net benefits of reporting transparency vary across different types of firms which should be reflected in heterogeneous earnings quality effects. Using a comprehensive set of firm characteristics, we identify four types of adopting firms that proxy for underlying motivations for the accounting switch. Results indicate that earnings quality effects are primarily driven by one type of firms, which are young, fast growing and seeking access to public equity markets. In contrast, large, mature firms with public debt financing and a propensity to go public do not evidence higher earnings quality improvements than benchmark firms. Overall, results are consistent with varying net benefits of reporting transparency across types of firms. However, some of our findings suggest that accounting standards (IFRS) also contribute to higher earnings quality.
DO CEOS AND DIRECTORS GET ‘SICK’ OF ATTENDING MEETINGS?
NOWLAND, JOHN
GRAY, STEPHEN; NOWLAND, JOHN
Category: GV = Accounting and Governance
This study examines whether more frequent board and committee meetings are associated with lower director attendance rates than expected based on random absences (e.g. due to sickness). We overcome the bias inherent in U.S. data by utilizing a hand-collected Australian dataset that provides the number of board and committee meetings held and attended by each director. We find that attendance rates for both outside and inside directors decrease (i.e. non-random absences increase) as the total number of meetings they are required to attend increases. In particular, we find that attendance rates decrease for both outside and inside directors that are required to attend more board meetings. In addition, attendance rates for inside directors (particularly CEOs) decrease when they are required to attend more monitoring committee meetings but attendance rates for outside directors do not. Further investigation also shows that female director attendance (both outside and inside directors) is less sensitive to the frequency of board meetings than male director attendance. For practitioners, our results indicate that companies can reduce non-random director absences by holding fewer board meetings each year. For committee meetings, attendance behavior differs by the type of director and the type of committee. For academics, our results indicate that while average attendance is useful, what is most important is the marginal effect of additional meetings on director attendance.
CORPORATE GOVERNANCE AND RISK REPORTING IN SOUTH AFRICA: A STUDY OF CORPORATE RISK DISCLOSURES IN THE PRE- AND POST-2007/2008 GLOBAL FINANCIAL CRISIS PERIOD
NTIM, COLLINS GYAKARI
LINDOP, SARAH; NTIM, COLLINS ; THOMAS, DENNIS
Category: GV = Accounting and Governance
The 2007/2008 global financial crisis has reignited the debate regarding the need for effective corporate governance (CG) through sound risk management and reporting practices. This paper, therefore, examines the crucial question of whether the quality of firm-level CG has any effect on the quality and extent of corporate risk disclosures (CRD) in South Africa (SA) with particular focus on the pre- and post-2007/2008 global financial crisis period. Using one of the largest datasets to-date on CG and CRD, from 2002 to 2011, and distinctively drawing on a multiple theoretical perspective, we find that CRD are largely ‘non-financial’, ‘historical’, ‘good news’ and ‘qualitative’ in nature over the ten-year period investigated. We also find that block ownership and institutional ownership are negatively associated with the extent of CRD, whilst board diversity, board size and independent non-executive directors are positively related to the extent of CRD. By contrast, dual board leadership structure has no significant connection with the extent of CRD. Our results are robust across a raft of econometric models that adequately address different types of endogeneity problems, as well as alternative CG and CRD proxies. Our findings are largely consistent with the predictions from agency, legitimacy, institutional, resource-dependence and stakeholder theories.
EXPERTS OR RIVALS: MIMICRY AND VOLUNTARY DISCLOSURE
NUNEZ-NICKEL, MANUEL
CANO-RODRÍGUEZ, MANUEL; MARQUEZ-ILLESCAS, GILBERTO; NÚÑEZ-NICKEL, MANUEL
Category: FR = Financial Reporting
We explore how the decision of revealing information of a particular firm maybe influenced by the previous disclosure behavior of other organization in the same industry. Specifically, we verify the existence of this pattern and explore two possible factors motivating it: uncertainty and competition. These two factors simultaneously determine if the organizations imitate expert players or rivals. We empirically disentangled these two effects, identifying their relative influence on the disclosing behavior of firms in the newspaper industry in Spain during the period 1966.1993. To pursue this task, we used a multi-failure Cox's model. Our results show that imitation exists in this setting, and firm's disclosure is driven by the disclosing behavior of expert firms and not by the actions of competitors. We conclude that the imitation of disclosure practives is seen by firms as a mechanism to deal with uncertainty instead of as tool to face competition in the market.
ASSESSMENT MATTERS: DEVELOPING COLLABORATIVE PEER ASSESSMENT OF ACCOUNTING LEARNING STANDARDS
O'CONNELL, BRENDAN
ABRAHAM, ANNE ; DE LANGE , PAUL; FREEMAN, MARK ; HANCOCK, PHIL ; HOWIESON, BRYAN
Category: ED = Accounting Education
This paper reports results from a workshop designed to develop shared understanding of national threshold learning standards (TLS) within Australia by a cohort of external reviewers. The process involves consensus moderation of students’ work within the accounting discipline from ten Australian universities. Supported by significant funding provided by a range of external stakeholders this project seeks to develop a sustainable model for assuring achievement of accounting TLS using external peer reviewers. To be effective such a model relies on the calibration of assessment standards across reviewers. Based on this project aim, this study sought to answer two key research questions. First, does participation in the workshops lead to reduced disparity in the assessment of learning outcomes relating to written communication skills of students? Second, does participation in the workshops lead to greater confidence by reviewers in their ability to assess written communication skills of students? Findings to date provided positive support for both research questions.
THE CCCTB OPTION - AN EXPERIMENTAL STUDY
OESTREICHER, ANDREAS
KESER, CLAUDIA; KIMPEL, GERRIT
Category: TX = Taxation
The objective of this paper is to assess the probability of corporate groups opting for taxation on a consolidated basis. Consolidation would offer the potential advantage of being able to offset losses cross-border. At the same time, however, the consolidation of entities would deny them the opportunity to exploit international tax rate differentials between these enti-ties via transfer pricing. The questions we are addressing here are, first and foremost, to what extent corporations would be inclined to take up a consolidation option under various condi-tions. If so, the question arises whether this impacts the corporations’ location of investment and their transfer pricing activities involving countries outside the consolidated group. In order for us to analyse the possible conditions such as the riskiness of investment (probability of a loss) and tax-rate differentials that factor into the choice of taxation on a consolidated basis (rather than separate accounting), we turn to the method of laboratory experiments. In our experiments we use a 2 by 2-treatment design, with two probability levels of making a loss and two levels of tax-rate differential between two investment options. With a higher probability of a loss, we observe (1) a higher tendency to use consolidated taxa-tion and (2) lower profit shifts. With a higher tax-rate differential we observe (1) a higher tendency to use consolidated taxation and (2) higher profit shifts.
ORGANIZATIONAL STRUCTURES AND DIVERGENT SETTING-STANDARDS IN THE GLOBAL CONVERGENCE ERA
OGATA, KENSUKE
Category: GV = Accounting and Governance
Although having jointly developed significant accounting standards, FASB and IASB took divergent activities of setting standards both quantitatively and qualitatively in the late 2000s. This research aims to clarify the reason for the divergent activities of the Boards. In this research, it is assumed that the setters produce their strategies suitable for the environment they confront, construct any organizational structures to carry out the strategies, and take actions. Based on this assumption, four types of behavioral patterns of the setters are presented as an analysis model. In this model, the most significant factor is the network structure of the setters. To identify the structure, social network analysis is used. According to the results of analysis based on the careers of Board members and additional determination of the environment each Board faced, it became evident as follows. FASB issued many user-friendly, innovative standards to strengthen the alliance with such actors in a situation in which the Board faced pressures to respond to the domestic accounting scandals and the setting-standard competition with IASB. In contrast, IASB issued compromised standards to satisfy two different needs: the innovative need from international organizations and the status quo need from European actors which are the main customers of IAS/IFRSs. This indicates that true global convergence is far from being realized.
BEATING THE BASE-RATE FALLACY: AN EXPERIMENTAL APPROACH
OHLERT, CHRISTINE REBECCA
WEIßENBERGER, BARBARA E.
Category: MA = Management Accounting
The existence of cognitive biases such as the base-rate fallacy is already well known in theory, but until recently there exists only limited research how to cope with those biases in managerial decision-making. Hence, the aim of our study is to examine how management accountants should prepare information to reduce the phenomenon of base-rate neglect in probability judgment to guide rational managerial decision-making. To address this research question, we use an experimental design. Empirical evidence suggests that a visual-based information format, especially in comparison to a tabular presentation of information, significantly reduces the fallacy of neglecting base-rates in decision-making. In addition, we integrate user’s cognitive style and other per-sonal characteristics as possible factors influencing the base-rate fallacy. The results indicate that the base-rate fallacy is significantly reduced when people tend towards an analytical cognitive style.
DOES EXECUTIVE COMPENSATION REFLECT THE EQUITY RISK INCENTIVE AND CORPORATE TAX AVOIDANCE?EVIDENCE IN JAPAN
OHNUMA, HIROSHI
Category: TX = Taxation
This study examines corporate tax avoidance as one determinant of executive compensation, based on equity risk incentives. Prior research provides evidence that equity risk incentives motivate managers to make more risky – but positive net present value – investing and financing decisions. In this research, it is demonstrated in correlation analyses that my measures of tax risk are negatively associated with both the adoption of stock option and tax aggressive measures. In multivariate analyses, executive compensations are significantly associated with our measures of tax risk positions despite the inclusion of numerous control variables. I also find consistent evidence that executive equity risk incentives are significantly associated with aggressive tax positions, regardless of estimation method and the strength of the corporate governance function, and across several measures of tax risk.
ACCOUNTING CONSERVATISM AND FIRM CHARACTERISTICS
OHTA, YASUHIRO
Category: FR = Financial Reporting
Accounting conservatism is a long-lasting principle in accounting practices although its rationale has been frequently questioned. Recent analytical studies revealed that accounting conservatism could emerge in plausible settings. This paper examines how accounting conservatism relates to firm characteristics in a binary moral hazard setting with limited liability and a compensation cap. The degree of accounting conservatism increases with the firm’s profitability, size and compensation variability.
DOES CAPITAL STRUCTURE DOMINATE THE DEMAND FOR VOLUNTARY AUDIT IN MICRO-COMPANIES?
OJALA, HANNU
COLLIS, JILL; KINNUNEN, JUHA; NIEMI, LASSE; TROBERG, PONTUS
Category: AU = Auditing
We investigate capital structure as a determinant of voluntary audit in a large sample of micro-companies in Finland. Building on agency theory, we hypothesise and find that the likelihood of voluntary audit is higher in micro-companies funded by trade credit or bank finance than in those funded solely by owners’ equity. Surprisingly, we find that many micro companies that have no external debt funding, (i.e. those funded solely by owners’ equity), also opt for voluntary audit. Interviews with owner-managers of micro-companies, bank managers and the tax authorities not only validate our statistical results, but also provide rich insights that help explain this unexpected demand. These include factors such as the need for advice and internal control, as well as the owner-manager’s need to focus on the core business rather than financial systems and records. Our results should be of interest to auditing professionals and regulators in EU Member States in the context of the new accounting Directive (2012/6/EU) relating to micro-entities, where there is little empirical evidence to guide policy-makers.
DISTRIBUTED ACCOUNTING VALUATION: CONSIDERING FAIR VALUE ACCOUNTING FROM A DISTRIBUTED COGNITION PERSPECTIVE
OKAMOTO, NORIAKI
Category: FR = Financial Reporting
This study offers a new interdisciplinary perspective on fair value accounting. Valuation plays a crucial role in modern financial reporting. Given the growing influence of esoteric financial instruments whose valuation is becoming increasingly complex and controversial, it is necessary to turn our attention to actual valuation practices and consider their characteristics. This paper then introduces the framework of distributed cognition and applies it to some actual valuation practices. It suggests that the processes of valuation of complex financial instruments are distributed among individuals who are located inside and/or outside of reporting entities. This point is aptly explained from the viewpoint of distributed cognition, which leads to focus on reporting companies’ external and internal resources for fair value accounting. It thus facilitates a theoretical understanding of increasingly specialized, complicated, and professionalized accounting valuation. Furthermore, the results of some experimental cognitive studies imply that interactions of distributed knowledge among professional people may contribute to more reliable accounting numbers.
CONFLICTING RESPONSES OF CORPORATE GOVERNANCE GROUPS TO LEGISLATIVE CHANGE.
O'LEARY, CONOR
BOOLAKY, PRAN; COPP, RICHARD; DELANEY, DEBBIE
Category: GV = Accounting and Governance
Three critical components of the corporate governance framework are executive directors, audit committee members and external auditors. Changes to corporate legislation, especially in relation to annual reporting, impact these three groups. Post GFC many countries have considered amending their annual financial reporting requirements. This study examines the attitudes of the above three groups to nine such proposals and finds little consensus between them. Executive directors and audit committee members appear opposed to additional legislation which would increase the responsibilities of preparers and reviewers. However auditors appear in favour of proposals which increase the responsibilities of preparers but appear opposed to additional responsibilities for reviewers. Similarly, executive directors and audit committee members indicated they would be less comfortable in their current roles should any such proposals be adopted. Auditors considered they would be more comfortable. The three groups achieved consensus only in their opposition to any amendments to audit appointment provisions. This has audit independence implications. The significance of the study is that legislators should consider carefully the impact of proposed accounting regulations on all parties as their views may differ.
CORPORATE TRANSPARENCY, SUSTAINABLE TAX STRATEGIES, AND UNCERTAIN TAX ACTIVITIES
OMER, THOMAS
NEUMAN, STEVANIE; SHELLEY, MARJORIE
Category: TX = Taxation
We investigate whether the sustainability of firms’ tax strategies is associated with corporate transparency. We expect and find that firms with sustainable tax strategies are associated with more transparent information environments. Prior research shows that transparency is associated with better governance; we expect better governed firms to engage in more sustainable tax strategies and we find that firms with more sustainable tax strategies exhibit significantly higher return on assets, free cash flows and cash flows from operations, and higher Altman’s Z-Scores. We also find that the likelihood of engaging in uncertain tax activities is negatively related to both transparency and tax strategy sustainability. Finally, we find that firms with lower transparency record higher unrecognized tax benefits. These relationships are important because a firm’s degree of transparency significantly affects capital costs and value, and relying on the assumption that tax planning investments lead to more obscure information environments can be costly.
A THEORETICAL FRAMEWORK FOR CORPORATE DELISTINGS: GOVERNANCE CHANGES AND VALUE DYNAMICS
ONESTI, TIZIANO
FAVINO, CHRISTIAN; PIERI, VALERIO; ROMANO, MAURO
Category: GV = Accounting and Governance
Corporate delistings can be related to a wide variety of circumstances and operations (going private transactions, going dark strategies, mergers, buy-outs, involuntary delistings, etc.), representing a very complex and highly differentiated phenomenon, whose relevance has recently increased as one of the many effects of the ongoing global financial crisis. In this paper, on the basis of a systematic review of the existing international literature, we give reasons for the need of a wider and deeper theoretical framework for corporate delistings as a fundamental premise for the conduction of further studies on corporate governance changes and on the dynamics of corporate value (income and financial performance, firm value, etc.). We then put forward a possible classification of corporate delistings. Our proposal deepens the fundamental distinction between voluntary and involuntary delistings, with a particular focus on voluntary delistings, that we analyse in the light of three main characterising aspects: the subjects who pursue delisting, the strategic context and the operating conditions of the delisted company. We define eight uniform areas of observation, which may represent a useful framework for future deeper studies concerning governance and value dynamics issues. Finally, we apply our framework to the corporate delistings happened in recent years in the Italian market, in order to give further insights about the validity and the limits of our proposal.
MANDATORY IFRS ADOPTION AND THE COST OF EQUITY CAPITAL. EVIDENCE FROM SPANISH FIRMS
ORGAZ-GUERRERO, NEUS
CASTILLO-MERINO, DAVID; MENÉNDEZ-PLANS, CARLOTA; ORGAZ-GUERRERO, NEUS
Category: FR = Financial Reporting
This paper analyses the effects of mandatory International Financial Reporting Standards (IFRS) adoption by Spanish firms in 2005 on the cost of equity capital. Using a sample of listed Spanish companies during the 1999 to 2011 period and a country-level focused analysis, we find evidence that, unlike previous studies’ results, Spanish listed companies show a significant reduction in their cost of equity capital after the mandatory adoption of IFRS in 2005, after controlling by a set of firm-risk and market variables. Increased financial disclosure and enhanced information comparability, along with changes in legal and institutional enforcement, seem to have a joint effect on the cost of capital, leading to a large decrease in expected equity returns.
PROFIT SHIFTING CHANNELS OF MULTINATIONAL FIRMS - A META STUDY
OVERESCH, MICHAEL
HECKEMEYER, JOST H.
Category: TX = Taxation
This paper provides a quantitative review of the empirical literature on profit shifting behavior of multinational firms. We synthesize the evidence from 23 studies and find a substantial response of profit measures to international tax rate differentials. A first interesting result of the meta-regression analysis is a significantly higher tax semi-elasticity of subsidiary profit as compared to EBIT. Moreover, neglecting the worldwide tax incentives of the multinational firm leads to a significant downward bias in estimated tax effects on subsidiary profit while omitting the additional real investment effects of international tax rate differentials is associated with overstated tax effects. The tax response is even smaller if the home country is the US. Moreover, we disentangle the tax response by means of financial planning from the transfer pricing and licensing channel. Interestingly, our results suggest that transfer pricing and licensing is the dominant profit shifting channel.
AN EXAMINATION OF THE STATISTICAL SIGNIFICANCE AND ECONOMIC IMPLICATIONS OF
OW YONG, KEVIN
EVANS, MARK; NJOROGE, KENNETH; OW YONG, KEVIN
Category: FA = Financial Analysis
We address the demand for model-based earnings forecasts by proposing a cross-sectional model which incorporates three salient ideas. First, firm performance converges to expected levels over time; second, amounts from current financial statements are robust predictors of future performance; and third, ordinary least squares (OLS) estimation is unreliable in samples including extreme values. Accordingly, we estimate a cross-sectional earnings forecasting model based on least absolute deviations analysis (LAD), and include profitability drivers derived from financial statements as predictors. In terms of statistical significance, we find that these forecasts are more accurate than forecasts from three extant prediction models and consensus analysts’ forecasts. In terms of economic implications, we find that forecasts from our model have greater predictive ability for future abnormal returns than consensus analysts’ forecasts. Overall, our results are important because they document the usefulness of a crosssectional earnings forecasting model for a broad range of diverse firms, including those with little or no analyst coverage.
THE COST OF DEBT IMPLICATIONS OF FINANCIAL REPORTING QUALITY AMONG PRIVATELY OWNED SWEDISH SMES
PAANANEN, MARI
BLOMKVIST, MARITA ; PAANANEN, MARI
Category: FR = Financial Reporting
Using a unique database and manually collected data we analyse and document accounting choices made by Swedish SMEs between 2005 and 2008. We find that given an option to report under Swedish GAAP or a translation of IFRS (SFASC/IFRS), only 5 firms out of 1,500 opted to do so. Further analysis of choices of picking individual standards of SFASC/IFRS shows no significant difference across Gazelles and Non-Gazelles. Among firms that select individual SFASC/IFRS standards most opt to use the percentage-of-completion method for long-term contracts. We also investigate differences in quality of financial reporting across Gazelles and Non-Gazelles and find that the financial reporting quality is consistently higher among Gazelles compared to Non-Gazelles. Test of cost of debt implications show that creditors find Gazelles’ financial reporting more useful to assess the credit risk resulting in lower cost of debt for this group of firms. Thus, SMEs seem to have little incentive to switch to SFASC/IFRS, which may be an indication of their attitude to future adoption of IFRS for SMEs as well. Furthermore, the results suggest that SMEs with an incentive to produce high quality financial reporting to raise capital, Gazelles, are able to do so using Swedish GAAP. These findings raise the question whether the IFRS for SMEs project is worthwhile.
VOLATILITY, PERSISTENCE, AND PREDICTABILITY OF TIME-SPECIFIC VS. NON-TIME-SPECIFIC ACCRUALS
PAEK, WONSUN
Category: FA = Financial Analysis
This study examines statistical properties of Francis and Smith’s (2005) time-specific and non-time-specific accruals. Francis and Smith (2005) show the statistically indistinguishable persistence between cash flows and accruals when they remove from conventional accruals non-time-specific accrual components that do not affect current-period earnings. Although their result provides important implication for the literature in earnings persistence and accrual anomaly, their result is based on various simplifying assumptions. In this study, I evaluate empirically their assumptions and expectations based on those assumptions with respect to such properties as volatility, persistence, and predictability. Francis and Smith’s (2005) assumption and expectation on time-specific earnings components are empirically supported only for the persistence, not for the volatility and predictability. The volatility and predictability of time-specific earnings components are differential among them and compared to non-time-specific earnings components.
EARNINGS MANAGEMENT IN FAMILY FIRMS
PAIVA, INNA
LOURENÇO, ISABEL
Category: FR = Financial Reporting
Our study investigates the earnings management in publicly listed family firms. We also examine whether the incentives of earnings management are likely to be different in large family firms, small family firms, highlighting the differences from nonfamily firms. This study relies on United Kingdom firms on the London Stock Exchange and on their level of discretional accruals. Our findings demonstrate that large family firms have lower earnings management, whereas small family firms have higher earnings management as both compared to nonfamily firms. They confirm broad findings from US literature which indicate that large family firms face less severe type II agency problems than nonfamily firms, as well as findings in European literature which suggest that small family firms face more severe type II agency problems than nonfamily firms. This study fills a gap in the literature, suggesting that not only the level of family ownership, but also the family firm size should be considered when addressing the incentives for earnings management.
ANALYSTS’ PERCEPTIONS OF GOODWILL ACCOUNTING UNDER IFRS
PAJUNEN, KATI
SAASTAMOINEN, JANI
Category: FA = Financial Analysis
Research literature suggests that the goodwill accounting rules of IFRS and US GAAP can be used to earnings management. This study explores financial analysts’ perceptions about goodwill accounting based on IFRS. The data is a survey to Finnish financial analysts. Both quantitative and qualitative data was collected, and we adopt the mixed-method approach in the analysis. We find that there are two lines of thought concerning goodwill accounting under IFRS among financial analysts. The first line of thought approves the new valuation rules and does not perceive problems in managerial discretion. The second line exhibits a more critical stance seeing earnings management and opportunistic behavior stemming from goodwill impairment loss decisions. We find also that criticizing goodwill accounting is the general discourse among financial analysts.
IMPACT OF THE FINANCIAL CRISIS IN INCOME SMOOTHING THROUGH LOAN LOSS PROVISIONS. EXPLORATORY FACTORS AFTER THE REVISION OF STANDARDS CBE 4/2004
PALACIOS MANZANO, MERCEDES
DIAZ-SANCHEZ, INMACULADA; MARTINEZ-CONESA, ISABEL; SOTO ACOSTA, PEDRO
Category: FR = Financial Reporting
It is argued that the system of provisions designed by the Bank of Spain (CBE 4/2004) has given the Spanish banks a cushion preventing one's counter-cyclical financial regulation emphasizes the cycle and allowing them to be in a stronger position to face the crisis. That is why we analyze the factors explaining the income smoothing and regulatory capital management practices through loan loss provisions (LLP) in the Spanish banking industry during the period 2005-2009. The results evidence the hypothesis that the LLP carries a countercyclical role by offering a different pattern in the period of expansion and recession in Spanish banking industry. The relevance of the subject is clear as the crisis has called into question the system of recognition of the loss of credit for bad debt under IFRS, resulting in the revision of the IFRS 39 to introduce systems based on expected losses.
CAPITAL MARKET EFFECTS OF THE IFRS ADOPTION FOR SEPARATE FINANCIAL STATEMENTS: EVIDENCE FROM THE ITALIAN STOCK MARKET
PALEA, VERA
Category: FR = Financial Reporting
Using a sample of Italian firms, I investigate whether separate financial statements are useful to capital market investors and IFRS are more value-relevant than domestic GAAP. I find significant differences in value-relevance between Italian GAAP and IFRS, with IFRS being more informative than Italian GAAP. However, while results are robust for book value, they provide mixed evidence on net income. I also investigate the value-relevance of separate financial statements under IFRS relative to consolidate financial statements and I find that the former are more value-relevant than the latter. Overall, this study provides evidence supporting the choice of adopting IFRS for separate financial statements.
THE INTERDEPENDENCIES BETWEEN MANAGEMENT CONTROL AND EXTERNAL ACCOUNTABILITY - A CASE STUDY
PALERMO, TOMMASO
Category: MA = Management Accounting
This paper examines how Enterprise Risk Management (ERM) can function in a large public sector organisation both as an external accountability tool and an internal management tool. The paper explores the external and internal conditions around the emergence of ERM, and how these conditions are recognised and shaped by internal and external actors. The paper develops two strands of results. First, the case study shows how, in the context of extensive use of ERM as an external accountability tool, internal uses are mediated by the prior experience and organisational background of local actors. Second, the study suggests that the interdependencies between the external and the internal uses of a management control instrument can be better understood looking at the inter-organisational relationships that the tool generates, rather than focusing narrowly on its technical features.
HOW JAPANESE FIRMS RESPOND TO MARK-TO-MARKET ACCOUNTING? AN EARNINGS MANAGEMENT PERSPECTIVE
PAN, CHIEN-MIN KEVIN
Category: FA = Financial Analysis
This paper investigates how firms respond to mark-to-market accounting from an earnings management perspective. I hypothesize and find evidences showing that Japanese firms offset expenses occurring from income-decreasing extraordinary items through both accruals management and real earnings management. This paper also presents evidence that the firms have growth options tend to engage in real earnings management. In the same time, the evidences also indicate that non-manufacturing firms tend to manage earnings upward using over-production, but not firms in manufacturing industry. The implication drawn from the evidences presented in this paper suggests that Japanese firms consider the anticipated external shock as a risk to avoid rather than an opportunity to disgorge hidden unrealized losses.
CEO HEDGING OPPORTUNITIES AND THE WEIGHTING OF PERFORMANCE MEASURES IN COMPENSATION
PAN, HUNGHUA
HUNG, SHENGMIN; WANG, TAYCHANG
Category: GV = Accounting and Governance
Ideally, managerial ownership and short-sale constraints make managers bear firm-specific risk, leading them to prioritize shareholder interests. However, corporate managers can easily hedge their ownership positions, thereby avoiding firm-specific risk. In the context of managerial hedging, we examine whether corporate boards take advantage of accounting-based performance measures, which can be observed ex post, to develop efficient incentive schemes ex ante that will induce managers to take desired actions. We first investigate the effect of CEO hedging opportunities or hedging cost and performance measures on compensation, considering the relative weighting of accounting- and stock-based performance measures. We find that when managerial hedging cost is low, compensation is more sensitive to accounting-based than stock-based performance measures. Additionally, the effect of the interaction between managerial hedging opportunities and accounting-based performance measures on compensation increases with managerial hedging needs (represented by managerial ownership and firm-specific risk). Overall, our study relies on the contract theory to provide evidence that given managerial hedging, accounting information plays an important role in compensation design.
AN EMPIRICAL INVESTIGATION OF THE INFLUENCE OF TRANSLATION AND CONTEXT ON ACCOUNTING JUDGMENTS: EVIDENCE FROM CHINA
PAN, PEIPEI
PATEL, CHRIS
Category: FR = Financial Reporting
International convergence of accounting standards has resulted in researchers’ greater interests in international accounting research, which often involves the translation from one language into other languages. A number of studies have been conducted to examine the cross-cultural and cross-national similarities and differences in accountants’ judgments on ‘uncertainty expressions’. National culture has been a dominant variable in explaining differences in accountants’ judgments in a significant number of cross-cultural and cross-national studies published in leading journals, such as Accounting, Organizations and Society (AOS). However, it has been argued that the employment of the culture concept has been an excuse for intellectual laziness (Patel, 2004). The differences in subjects’ judgments may not be fully attributable to differences in national culture. One of the possible reasons for cross-cultural and cross-national differences in judgments may attribute to language and translation. To address this gap in literature, a within-subject experiment was conducted among final year undergraduate accounting students from three Chinese universities. The objectives of this study are to examine the influence of translation and economic context, namely financial performance of corporations, on subjects’ judgments on the concept of control, which is the essential criterion in preparing consolidated financial reports.
THE ROLES OF ACCOUNTING IN THE EUROPEAN MENTALITY OF GOVERNMENT
PANOZZO, FABRIZIO
Category: PS = Public Sector Accounting
This paper looks at the European mentality of government from an accounting angle. It explores the roles of one particular calculative practice (“Public Internal Financial Control” - PIFC) in shaping the process of accession of candidate countries to the European Union. It tries to fill a research gap by connecting the political programmes of creating and reinforcing European institutions to their technical dimension. The distinction between programmes and technologies suggested by Rose and Miller (1992) and picked up by Power (1997) is the framework used. In this vein, the mentality of the PIFC model is inscribed within an encompassing narrative, a narrative of self-improvement via purposeful self-control and conscious self-management. The predominant logic rising from processes of regulation at national and transnational level seems to be the construction of subjects as responsible, rational and self-controlling entities, responsible also in the sense of having responsibility for their own destinies and being both able and obliged to turn themselves into ‘successful’ achievement. This mentality of government depends on the constitutions of individuals, professionals, organisations, agencies and indeed central government bureaucracies as sites for the exercise of ‘responsible autonomy’ that can be indirectly regulated through new kinds of accounting standards.
THE ACCRUAL ANOMALY: INSIGHTS FROM EUROPEAN EQUITY MARKETS
PAPANASTASOPOULOS, GEORGIOS
Category: FA = Financial Analysis
In this paper, I show a generalization of the negative relation of traditional accruals and percent accruals with future returns in eleven of sixteen European countries. Positive abnormal returns from hedge portfolios on both accrual measures summarize the economic significance of this generalization, while the magnitude of returns is higher for traditional accruals (in contrary with existing evidence from the U.S. capital market). The magnitude of the accrual effect on stock returns based on both accrual measures is stronger in countries with higher individualism, higher equity-market development and lower concentration ownership. Equity-market liquidity has a positive impact only on the accrual effect based on traditional accruals, while shareholder protection and permission to use accrual accounting have a positive impact only on the accrual effect based on percent accruals. Legal origin and earnings opacity appear to not exhibit a significant influence. Overall, the paper suggests inability to adjust for potential managerial empire building tendencies and/or overconfidence & self attribution bias about a firm’s investment opportunities, as underlying driving forces of the accrual anomaly.
PRIVATIZED RETURNS AND SOCIALIZED RISKS: CEO INCENTIVES, SECURITIZATION ACCOUNTING AND THE FINANCIAL CRISIS
PARBONETTI, ANTONIO
FABRIZI, MICHELE
Category: FR = Financial Reporting
Using a sample of US financial institutions over the period 2003-2009 we document that CEOs with high equity incentives have systematically engaged in securitization transactions to a larger extent than CEOs with low incentives. We also show that CEOs with high equity and risk-related incentives have engaged in the securitization of risky loans and have used securitization for transferring risks to outside investors. Finally we show that highly incentivized executives have provided outside investors with low quality disclosure about losses recorded on securitized loans thus contributing to increase the opacity of securitization transactions undertaken. Overall we interpret these results as evidence that CEOs have foreseen in securitizations under US GAAP an opportunity to bypass regulatory requirements, hiding risks while bearing them and generating profits and cash flows because of the risks. In additional analyses we document that before the collapse of the subprime mortgage market in 2007, financial institutions involved in the securitization of subprime loans have largely over performed other banks. On the contrary, starting from 2007 subprime securitizers have recorded worse market performances than other financial institutions that were not involved in subprime securitization. This indicates that by securitizing risky loans CEOs have been successful in boosting stock price but the risks undertaken have turned out to be extremely costly.
GOODWILL IMPAIRMENT IN THE AFTERMATH OF THE CRISIS: DO MANAGERS BEHAVE DIFFERENTLY FROM THE PREVIOUS YEARS?
PARDO, FRANCISCA
GINER INCHAUSTI, BEGOÑA
Category: FR = Financial Reporting
This paper analyses managerial discretion in goodwill impairment decisions following the adoption of IFRS 3. The replacement of the systematic amortization of goodwill for the impairment-only approach has been very controversial. Although IFRS 3 was issued to provide users with more value-relevant information regarding the underlying economics of the business, it has been criticized on the grounds of the managerial discretion inherent in impairment testing. The study is based on a sample of Spanish listed companies along the period 2005-2011 that embraces the economic crisis, and we consider its impact on managers´ behaviour. The results are consistent with the IASB's proposals to the extent that the impairment partially captures the underlying economic attributes of the firms, although size is also highly significant, which suggest the complexity and cost of the impairment estimation process influence the decisions. Moreover firms´ attitudes vary with the macroeconomic conditions suggesting that along the crisis opportunistic behaviours are driving the impairment decisions.
SOCIALLY RESPONSIBLE INVESTING: A CRITICAL APPRAISAL OF THE SCANDINAVIAN MUTUAL FUND MARKET
PARISI, CRISTIANA
STANG, ANDREAS
Category: SE = Social and Environmental Accounting
This paper analyzes the Scandinavian market for Socially Responsible Investing (SRI) mutual funds in order to determine the returns from discriminatory investment decision compared to the return from conventional portfolios. The analysis is conducted on 642 Scandinavian equity mutual funds. The methodology adopts the Sharpe ratio to establish the risk return relationship. Moreover, the Capital Asset Pricing Model (CAPM) and the Fama and French Three Factor model are used to test the hypotheses. The results indicate the underperformance of Swedish and Danish SRI funds relative to their conventional counterparts. In the case of Norway no statistical difference in return is found when conducting the three factor regression. The Scandinavian market is considered particularly relevant for the interest of the investors in SRI mutual funds. However, to the authors’ knowledge, this is the first study to present a systematic analysis of its performance.
SUBJECTIVITY IN FAIR VALUE ESTIMATES, AUDIT QUALITY AND INFORMATIVENESS OF OTHER COMPREHENSIVE INCOME
PARK, MYUNG
LEE, CHEOL
Category: AU = Auditing
This study empirically examines whether other comprehensive income (OCI) measures of Big 4 clients are more value-relevant than those of non-Big 4 clients. The current financial reporting environment raises concerns about the fair value measures, creating additional challenges for auditors. OCI is mainly derived from fair value application, which often involves subjective judgment by management. Unlike prior studies, we carve out different angle through which subjective fair value estimates of OCI should be of particular concern and scrutinized closely by auditors. Some OCI components may contain more subjective estimates than marketable securities adjustments (e.g., Dhaliwal et al. 1999), thereby requiring increased scrutiny by auditors. Therefore, we explore whether the differential valuation effect of OCI between Big 4 and non-Big 4 clients is more pronounced for more subjective OCI components compared to a less subjective component. We find that the aggregate OCI of clients audited by a Big 4 auditor has incremental information content in explaining stock returns, relative to OCI of clients audited by a non-Big 4 auditor. More interestingly, our results show that the differential valuation effect between Big 4 and non-Big 4 clients is stronger for more subjective OCI components than for less subjective marketable securities adjustments.
THE ROLE OF DIALOGUE BETWEEN SENIOR AND GROUND MANAGERS MEDIATED BY MACS
PÄRL, ÜLLE
Category: MA = Management Accounting
Contemporary IT systems allow everyone to work together in a company to achieve its business strategy (Baldvinsdottir et al., 2009). The aim of this paper is to broaden our understanding of the cooperation between the senior level and ground level in the organisation by using management accounting and control systems (MACS). Habermas (1981) argues in favour of the need for ‘ideal speech situations’ in fostering both understanding and a humane collective life. Based on ‘ideal speech situation’ (Habermas, 1981) or dialogical communication (Buber, 1958; Botan, 1997; Johannesen, 1971, 1996; Lotman, 2005), we argue that to compete successfully in a rapidly changing environment, both senior managers and ground-level employees need to have a better understanding of processes and thoughts originating at opposite ends of the organisational hierarchy. The main contribution of this research is to observe senior and ground-level managers together to analyse and understand their interaction in the dialogue mediated by MACS. This study provides an example of how dialogues by MACS work (or do not work) in one organisation, and based on the research, it stresses some topics connected with the role of dialogue.
CONTROLLING THE UNMANAGEABLE? MANAGEMENT CONTROL IN A KNOWLEDGE-INTENSIVE ORGANISATION
PARMENT, ANDERS
GULLBERG, CECILIA
Category: MA = Management Accounting
The purpose of the paper is to explore and conceptualise the management of professional workforce in knowledge-intensive organisations by focusing on the interplay between classical top-down (cybernetic) management control forces, and the (bottom-up) control created by codes of conduct that guide professionals in carrying out knowledge work. The emerging Management Control as a Package framework, which focuses on the interplay between several horizontal and vertical management control dimensions, is applied to a case study of a Swedish government agency where interviews with professionals in various organisational positions have been conducted. The findings indicate that, contrary to a wide-spread assumption of professionals being difficult to manage, various aspects of control may intermix in a manner that makes a certain degree of top-down control feasible. The idea of management control as a package articulates opportunities to create a mutual reinforcement between top-down imposed cybernetic controls and bottom-up cultural controls where the professionals are allowed to act in accordance with their personal interests while still conforming to the overriding goals of the organisation. Our paper illustrates the hitherto relatively unexplored concept of management control as a package empirically. Few explicit attempts to normative control can be seen. The results underline the role of clans and organisation structure in sustaining certain values in the organisation.
A FUZZY SYNERGETIC APPROACH FOR IDENTIFYING POTENTIALLY DEFAULTING FIRMS FROM THE CORPORATE GOVERNANCE PERSPECTIV
PARNG, YUH-JIUAN
Category: GV = Accounting and Governance
Since the attack of 2008 global financial tsunami, identifying potentially defaulting firms becomes an urgent challenge for most financial investors and professionals. Other than financial reports, the evaluation of corporate governance mechanism constitutes an alternative strategy for signaling out the firms. It is crucial to understand the relative ranking of seriousness for the potential defaulting firms. However; two of the most popular methods: logistic regression and classification decision tree method can neither reflect the relative overall seriousness among defaulting firms nor incorporate qualitative weightings among decision factors. This paper develops a fuzzy synergetic approach (FSA) which can not only successfully resolve the aforementioned demerits but also preserve the statistical soundness and decision maker’s flexibility. FSA is capable of exploring the impact attributes of CG, constructing the rule set for signals of impending defaults, and generating rankings of the risky firms based on the fuzzy potential defaulting scores. The data of the sample firms are extracted during 2000~2009 in Taiwan. The results successfully demonstrate the “possibility/seriousness” of the potential defaulting firms and explore that the CPA changes prior to default year plays an influential role in the matter. The contributions are of the most referential value for decision makers in auditing evaluation and financial risk judgment.
DETERMINANTS OF THE ADOPTION OF SUSTAINABILITY ACCOUNTING: RESULTS FROM A PARTIAL LEAST SQUARE APPROACH
PASSETTI, EMILIO
CINQUINI, LINO; TENUCCI, ANDREA
Category: SE = Social and Environmental Accounting
Sustainability accounting is a complex and ambiguous form of accounting, which has been subject to many challenges and discussions over the time. In its development, sustainability accounting has been popularized in techniques and literature have examined several and different aspects of the link between accounting and sustainability. However, despite the large amount of literature, there is still limited empirical research that examines the influence of contextual factors on the adoption of sustainability accounting. Relying on this premise, the objective of this research is to explores the influence of a set of contextual factors on the adoption of sustainability accounting. The research is based on a survey questionnaire in sample of Italian manufacturing firms and use partial least squares structural equation to test hypotheses development. The findings confirm five of the eight hypothesis developed. In particular, sustainability accounting is influenced by sustainability strategy and operational practices but not by environmental and social management systems.
THE EFFECTS OF BUDGETARY CONSTRAINTS ON THE PRESCRIBING PRACTICES OF HOSPITAL PROFESSIONALS
PATERSON, AUDREY
JACKSON, WILLIAM; PONG, CHRISTOPHER; SCARPARO, SIMONA
Category: PS = Public Sector Accounting
In recent years substantial research effort has been applied to the study of the introduction of accounting logics into medical practice, but little of that effort has been applied to the area of the prescribing of medicines, especially in the hospital setting. This paper uses the sociology of the professions as a lens to analyse how policy and managerial initiatives promoting cost and budgetary concerns have affected medical jurisdiction and prescribing practice within the setting of Scottish acute hospitals. Findings suggest that the introduction of accounting logic is shrinking medical jurisdiction and stratifying the profession within the hospital setting.
DOES TODAY’S CSR DISCLOSURE DIFFER FROM THAT OF THE 1970S? AN EMPIRICAL ANALYSIS
PATTEN, DENNIS
CHO, CHARLES; MICHELON, GIOVANNA; ROBERTS, ROBIN
Category: SE = Social and Environmental Accounting
In this paper, we respond to the call for further research on whether the accountability disclosure of today differs from the social disclosure of the 1970s. We do this by examining for differences in corporate social responsibility (CSR) disclosure in the late 1970s (using data from Ernst & Ernst, 1978) relative to disclosure from 2010 corporate reports. More specifically, we show (1) the breadth of CSR disclosure (using two different measures of disclosure extensiveness) has grown dramatically, (2) that there is no significant change in the relation between legitimacy variables and differences in CSR disclosure, and (3) that differences in CSR disclosure (using either of the breadth measures) were not significant in explaining differences in the market value of firms in the late 1970s and continue to be insignificant today. In general, our results suggest that CSR disclosure, while more extensive today than it had been three decades ago, fails to provide information that is relevant for assessing firm value.
EFFECT OF JOINT AUDITOR PAIR ON CONSERVATISM: EVIDENCE FROM IMPAIRMENT TESTS
PAUGAM, LUC
CASTA, JEAN-FRANÇOIS; LOBO, GERALD; ZHANG , DANA
Category: AU = Auditing
Using a sample of firms from France, where the law requires use of two auditors, we examine the effect of auditor pair composition on overall measures of unconditional and conditional conservatism, as well as on a specific measure of conditional conservatism, i.e., impairment loss. We use game theory to demonstrate that pairs of Big 4 auditors facing similar incentives are likely to have lower auditor independence, leading to lower conservatism. Conversely, pairs of a Big 4 and a Small auditor increase Big 4 auditors’ incentives to be conservative. We document that Big 4–Small auditor pairs are more unconditionally and conditionally conservative using market-to-book ratio and Basu’s (1997) measure of conservatism, are more likely to book impairments when operating performance is low, and make more transparent impairment-related disclosures. Our results inform regulators who are considering requiring joint audit to improve audit quality.
CREDITABLE BEHAVIOUR? THE INTRA-FIRM MANAGEMENT OF TRADE CREDIT
PAUL, SALIMA
BODEN, REBECCA
Category: MA = Management Accounting
This paper explores the reasons for the apparent failure of many UK firms to achieve the competitive advantages indicated in largely positivist literature through the management of their trade credit positions. It utilises data from a set of semi-structured interviews with trade credit managers in firms and is the first substantial qualitative study of the intra-firm aspects of trade credit management in the UK. Through this approach, we explore the reasons why the theoretical promise of trade credit may or may not be realised. The principal findings relate to the importance of three organisational attributes (skills/awareness, communication and structural position of the activity in the firm). That is, trade credit management should be regarded as a relational activity and not merely a narrow technical function. The paper finds that there is no generic formulation of these attributes that can deliver on the promise of trade credit identified in the extant literature. Rather, individual firms must adapt themselves to suit their circumstances.
STRATEGIC MANAGEMENT ACCOUNTING, CONTINGENT FACTORS AND PERFORMANCE IN HOTELS
PAVLATOS, ODYSSEAS
Category: MA = Management Accounting
The purpose of this paper is to investigate the relationship between contextual factors identified from contingency-based research, the extent of the use of strategic management accounting techniques and business performance in a service context. An empirical survey was conducted on a sample of 106 leading hotels in Greece. The analysis of the survey data indicates that the use of strategic management accounting techniques in hotels can be considered quite satisfactory. By drawing on the grounds of contingency theory, six factors were identified as potentially exhibiting an emergent relationship with strategic management accounting techniques. The six factors are; (1) Perceived environmental uncertainty, (2) Structure, (3) Quality of IS information, (4) Organizational life cycle stage, (5) Strategy and (6) Size. The survey revealed that SMA usage is positively affected by these six contingent factors, while SMA usage, in turn, positively affects performance. A significant mediating effect of SMA usage on performance is evident.
EARNINGS MANAGEMENT: DO FIRMS PLAY “FOLLOW THE LEADER”?
PAYNE, JEFF
BRATTEN, BRIAN; THOMAS, WAYNE
Category: FR = Financial Reporting
We examine whether managers respond to industry leaders’ earnings announcements by strategically managing their reported earnings. We find that after leader’s bad news announcements (i.e., missed analysts forecasts) subsequent reporting firms report reduced levels of discretionary accruals, are more likely to manage earnings down, and use fewer income-decreasing special items. These results are consistent with follower firms reporting earnings that reflect a decrease in pressure to meet earnings expectations. Our study contributes to the academic literature on social learning where individuals base their decisions on the prior actions of others. We also contribute to the literature on intra-industry information transfer and suggest that management’s incentives to manipulate earnings should be considered in future extensions of this research.
DECISION-MAKING ON STEWARDSHIP – AN ANALYSIS OF THE STANDARD-SETTERS’ PROCESS OF IDENTIFYING THE OBJECTIVE OF FINANCIAL REPORTING
PELGER, CHRISTOPH
Category: FR = Financial Reporting
In their joint project to create a revised conceptual framework, IASB and FASB decided to define valuation usefulness as the single objective of financial reporting while not stating stewardship as a separate objective. This paper addresses the question why the standard-setters decided that way. Based on the theoretical foundation of Foucault’s concept of governmentality, a qualitative case study is employed to shed light on the rationales present in the discourses of the boards and its constituents. The detailed process-tracing builds on a comprehensive (content) analysis of all documents available from the due process and on interviews with key actors who participated in the framework development. It is revealed that different interpretations of stewardship and different views on its appropriateness as a separate objective exist among board members and constituents. In the end the US view of the supremacy of valuation concerns prevailed as most board and staff members were not convinced that a separate stewardship objective “mattered”. Pressures arising from the financial crisis and convergence also contributed to keeping a straight identity based on valuation usefulness. Regarding the standard-setting process the study underlines the political nature of standard-setting by revealing the importance of personalities - which refers to both staff and board members - for the results of due processes.
THE SOCIAL VARIABLE: A PROPOSAL OF ACCOUNTING MEASUREMENT
PEÑA, ANGÉLICA
SILVA, CARLA ; SILVA, HANS ; TORRES, ISABEL
Category: SE = Social and Environmental Accounting
Until this moment it has not been possible to develop an accounting system which considers social and environmental variables. From this result society as a whole will be able to social and environmental impact of firms. This research describes a proposal of accounting Sustainability model focused on social variable. We will validate this model through quantitative research methodology. These variables involve factors and indicators which allow us to observe the Chilean mining sector’s social variable. The proposed model is a social variable’s measuring tool. This model is a practical contribution supported by those scholars who claim that the importance of measuring social variable. This has been a theoretical problem which will be solved by this model. At the same time it involves a set of standards for sustainability reports. This model based on Chilean copper mining sector, can be adapted to whatever industry. We propose a set of generic variable which can be adapted considering particular characteristics in other industries. This model allows us to structure social variable information necessary to collect and expose to stakeholders and society as a whole.
THE VALUATION IMPLICATIONS OF OVER-PRODUCTION UNDER INVENTORY ACCOUNTING STANDARD REFORM
PENG, CHIH-WEI
Category: MA = Management Accounting
A inventory management system reform, the U. S. Statement of Financial Accounting Standard No. 151, stipulate that firm should recognize idle facility expenses when it’s actual production is lower than its normal level. Using a sample of U.S. manufacturing firms during the period 2002-2009, this study indicates that after the adoption of SFAS No. 151, the number of firms engaging in opportunistic over-production experiences in the current period declines with regard to their future accounting performance. In addition, this study further indicates that financial analysts are aware of this phenomenon and appropriately reduce their forecasts of future earnings per share (EPS) after the adoption of SFAS No.151.
EXPLORING THE MARKETING/ACCOUNTING INTERFACE: IS CUSTOMER ACCOUNTING INFORMATION INTEGRATED IN THE ORGANIZATIONAL ARCHITECTURE?
PEREGO, PAOLO
BONACCHI, MASSIMILIANO
Category: MA = Management Accounting
This paper reports the results of an international Web-based survey appraising the impact of customer accounting on organizational architecture. Using a sample of customer-centric firms for which customer information is supposed to be available, we explore how the relationships between marketing and accounting influence a firm’s organizational architecture and ultimately affect the value creation process. Our preliminary findings indicate that performance measurement systems are increasingly embracing the use of customer lifetime value and other advanced customer metrics. However, we find evidence of a weak integration of these metrics in compensation and incentives systems. The structure of decision-making authority in the firms examined further shows a propensity to formally appoint an ad-hoc organizational unit in charge of customer accounting information, yet the ownership of these data rarely resides by the Accounting or Finance function.
MINIMUM TRADE UNIT REGULATION AND MARKET QUALITY
PEROTTI, PIETRO
FREDELLA, ROBERTA; GOZLUKLU, ARIE; RINDI, BARBARA
Category: FA = Financial Analysis
Financial market regulators often impose a minimum trade unit (MTU) to facilitate order execution. This paper examines the effects of the unique natural experiment of Borsa Italiana, where in 2002 the MTU was exogenously reduced by the exchange to one unit. After the reduction, we observe an improvement in liquidity, measured by a decrease in the bid-ask spread and in the price impact of orders as well as by an increase in market depth; we also document a decrease in adverse selection costs whereas informational efficiency is not affected by the microstructure change. The results are consistent with a model in which asymmetrically informed traders can choose their order size.
AUDIT QUALITY, IFRS AND PERCEIVED BANK RISKS UNDER HETEROGENEOUS REGULATIONS
PETTINICCHIO, ANGELA
POZZA, LORENZO; PROVASOLI, ANGELO; ZAGONOV, MAXIM
Category: AU = Auditing
The recent turmoil in global financial markets has accentuated the need to better understand the underlying bank risks and their determinants. A vast literature has emerged to analyse this issue in depth. Surprisingly, the role of auditing in monitoring and shaping bank risk has not hitherto been considered. This research fills this gap by examining the link between audit quality and the market’s assessment of bank risk in the G10 countries. We also analyse whether this relationship is affected by cross country regulatory differences and the IFRS introduction in 2005. We find that higher audit quality is associated with a lower level of bank risk taking. This link is stronger in countries with weaker regulations. Further, our findings suggest that the IFRS introduction was received favourably by the market with banks reporting under the IFRS having lower level of risk. This favourable market reaction is more pronounced for banks employing a Big audit firm. Overall, our empirical findings bear important strategic implications for bank regulators and supervisors with an interest in improving auditing standards and banking sector policies.
COMMON CONSOLIDATED CORPORATE TAX BASE – ANALYSIS OF THE FORMULARY APPORTIONMENT FACTORS
PETUTSCHNIG, MATTHIAS
Category: TX = Taxation
This paper aims at evaluating the effects of the allocation procedure proposed for the Common Consolidated Corporate Tax Base (CCCTB) on an individual entity of a corporate group applying the CCCTB. The paper compares the traditional income determination used in the majority of EU member states’ tax systems (Separate Accounting) with the proposed consolidation and formulary apportionment. This paper evaluates the effects of this prospective apportionment procedure on any given corporate group entity and finds that the share of the group’s income allocated to a particular entity using the apportionment formula does regularly not equal the pre-consolidation income of the respective group entity. In doing so the paper focuses on the differences between income determination factors (revenues and expenditures) and income apportionment factors. The analysis shows a number of differences between these factors. It shows that various components of income determination factor are not represented in the formula apportioning the consolidated income and on the other hand the apportionment factors contain definitions that are not represented in the income determination.
FROM METICULOUS PROFESSIONALS TO SUPERHEROES OF THE BUSINESS WORLD: A HISTORICAL PORTRAIT OF A CULTURAL CHANGE IN THE FIELD OF ACCOUNTANCY
PICARD, CLAIRE-FRANCE
DUROCHER, SYLVAIN; GENDRON, YVES
Category: AU = Auditing
The purpose of this paper is to examine the relative cultural shift from professionalism to commercialism in the accounting profession, based on an analysis of the advertising material used by the Ordre des comptables agréés du Québec (Institute of Chartered Accountants of Québec), over the last forty years, to attract new members. The specific objectives are: (1) to examine accountancy’s cultural representations as promoted in advertising material; (2) to evaluate the extent to which these representations are indicative of the commercialist shift as documented in the literature; and (3) to establish whether the representations under study provide further insight into the nature of the cultural shift. Drawing on the semiological approach developed by Roland Barthes, our analysis is predicated on the idea that adverts, though often simple in appearance, constitute complex representations that convey meaningful information about influential values and cultural change. We found that commercial values are increasingly apparent through the celebration of multidisciplinary services and the emphasis on generous compensation and high dynamism. In addition to confirming the relative shift towards commercialization, we discuss our study’s implications from the angle of significant contemporary social trends: globalization, naturalization, and marketization.
THE NATIONAL ACCOUNTING MATRIX WITH ENVIRONMENTAL ACCOUNTS FOR CATALONIA, 2001
PIE, LAIA
LLOP LLOP, MARIA
Category: SE = Social and Environmental Accounting
The objective of this paper is to construct a social and environmental accounting matrix for Catalonia for the year 2001 (referred to below as NAMEA01). A NAMEA (National Accounting Matrix using Environmental Accounts) is simply a double-entry table in which the rows contain the origins of the economic resources and the columns show the uses that economic agents give to the resources concerned. In a NAMEA, this information is linked to the environmental consequences of economic activity such as pollution and the use of natural resources. A NAMEA, therefore, enables to visualize the network of direct interconnections found in the economy and in society, i.e. between branches of activity and institutional sectors, and between the former and the environment. When constructing this matrix, we define the economic structure of Catalonia in terms of economic, social and environmental accounting aspects.
MANAGERIAL OVERCONFIDENCE AND ACCOUNTING BEHAVIOR AROUND CEO TURNOVER
PIERK, JOCHEN
BURG, VALENTIN; SCHEINERT, TOBIAS
Category: FR = Financial Reporting
This paper investigates the relationship between managerial overconfidence and accounting behavior around CEO turnover. We find that overconfident managers are less likely to engage in big bath accounting. This finding is consistent with the hypothesis that overconfident managers systematically perceive their companies to be undervalued and therefore believe that costs of big bath accounting outweigh their benefits. Furthermore, incoming overconfident CEOs increase discretionary accruals in response to the perceived undervaluation. Our results are robust to various measures of discretionary accruals, big bath accounting, and managerial overconfidence, to the endogenous choice of hiring an overconfident manager, and to alternative explanations of accounting behavior around CEO turnover, such as turnover type (routine vs. non-routine), managerial compensation and corporate governance mechanisms.
INSTITUTIONAL ENTREPRENEURSHIP AND MANAGEMENT ACCOUNTING CHANGE IN A PORTUGUESE GOVERNMENT AGENCY
PIMENTEL, LUIS
MAJOR, MARIA
Category: MA = Management Accounting
This paper relates to an investigation concerning a case study in a specific Portuguese government agency. Based on the concept of institutional entrepreneurship and on the role of an individual actor as change agent, this research draws on the model of the process of institutional entrepreneurship (Battilana et al., 2009). In this organization a deep change process occurred. Consequently, a new management model and several innovative management accounting frameworks (among others, a quality programme, a balanced scorecard and a strategic plan) were implemented. This divergent process was developed by an institutional entrepreneur who initiated, implemented and triggered the change process. Later this change process involved the whole organization, and thus it became consolidated and rooted in the organization. This case study showed the importance of other characteristics and factors relevant to divergent change implementation (and to institutional change) that were not visualized in Battilana et al.’s model (2009): i) actors’ organizational and structural capabilities – social skills and symbolic power; ii) communication; iii) cooperation; iv) motivation. This is the main contribution of the paper. But it also contributes to reduce some gaps identified in literature. The case study is an individual and intra-organizational study, the process evolved to a collective change process, used texts and language to a great extent, and emphasized communication and motivation.
ACCOUNTING FOR INNOVATION BETWEEN HYPERCONNECTIVITY AND NOVELTY – ON THE DEVELOPMENT OF A NETWORK OF NONFINANCIAL MEASURES FOR RADICAL INNOVATIONS
PLÜSCHKE, BORIS D.
MARKUS , GROTTKE
Category: MA = Management Accounting
Estimating the future market success of radical innovations is extremely challenging for strategic innovation management. We provide a new approach to capture the likelihood of market success of radical innovations measuring the readiness of a potential target market to absorb the innovation (its hyperconnectivity) and the innovations’ perceived degree of novelty. The new theoretical approach is tested by an ensemble of case studies based on a German start-up company that has different potential target markets. Our results provide evidence that our nonfinancial measurement network is able to capture to which extend market participants are likely to adopt the new innovation.
AN INTEGRATED ACADEMIC LITERACY APPROACH TO ENHANCING STUDENTS’ UNDERSTANDING OF PLAGIARISM IN AN ACCOUNTING COURSE
POWELL, LISA
POWELL, LISA; SINGH, NISHANI
Category: ED = Accounting Education
Plagiarism is a serious concern in higher education. It is a multifaceted, highly complex issue that is further complicated by divergent views surrounding the definition, understanding of, causes, ways of addressing and preventing it. As a result it is difficult to identify effective strategies to reduce the incidence of plagiarism. Plagiarism was identified as a major issue for students enrolled in a core second year accounting course in the Bachelor of Commerce degree at an Australian University. Rather than adopting a detection and punitive approach, an intervention program was designed and implemented into this course to develop students’ awareness and understanding of referencing and plagiarism in professional writing. The purpose of this study was to evaluate the effectiveness of the intervention program and to determine its impact on students’ understanding of plagiarism. The participants of the study were students enrolled in a core second year accounting course. The key features of the intervention program were workshops assignments and surveys. Learning opportunities and activities were scaffolded to allow students to progressively acquire skills ranging from basic to advanced (Wood, Bruner & Ross 1976). The study found that students reported a better understanding of plagiarism after completing intervention program than before; students were better able to detect plagiaristic activities after completing intervention program than before and also were able to write a better definition of plagiarism after completing intervention program than before. In addition, the majority of students agreed that those specific aspects of the intervention program had improved their ability to understand plagiarism. The conclusions of the study were that an educative approach to helping students understand plagiarism was successful.
DEVIATIONS FROM THE MANDATORY ADOPTION OF IFRS IN THE EUROPEAN UNION: IMPLEMENTATION, ENFORCEMENT, INCENTIVES, AND COMPLIANCE
POWNALL, GRACE
WIECZYNSKA, MARIA
Category: FR = Financial Reporting
In this paper, we evaluate the common assertion that EU firms began using IFRS by 2005 when the EU formally adopted IFRS. We find that although the incidence of firms using local (or some other) GAAP has declined between 2005 and 2009, it is still nontrivial. F