The Effects of Strategy–Management Control System Misfits on Firm Performance

The purpose of this study is to investigate the effects of misfits between business strategy and management control systems on performance. We address the following research question: Do firms that align their management control systems with the specific requirements of their business strategy perform significantly better than those that do not achieve the required match? We define a misfit as the degree to which management control systems deviate from empirically derived optimal configurations for a given type of business strategy. We use the two‐stage approach proposed by Ittner and Larcker (2001) to measure misfit and to investigate the impacts of misfit on performance. Based on a questionnaire survey of executives from 109 banks, we hypothesize and find that the strategy–control systems misfit has a significantly negative correlation with both self‐rated and publicly available performance measures.     

Antecedents and Consequences of Eco‐Control Deployment: Evidence from Canadian Manufacturing Firms

Environmental issues have become an important consideration for a growing number of organizations. Eco‐control may represent a valuable tool to help organizations address such issues. The aim of this study is to provide an overview of the eco‐control practices adopted by Canadian organizations and to understand the antecedents and consequences of their adoption. More specifically, this study examines (i) the extent to which eco‐control practices are deployed within organizations, (ii) the factors and motivations that lead organizations to implement eco‐control practices, and (iii) the impact of adoption on firms’ managerial and operational environmental actions as well as on environmental and economic performance. Using survey data from a sample of 249 Canadian manufacturing firms, this article shows that environmental missions, environmental policies, environmental strategic planning, environmental budgets and environmental performance indicators are the most frequently adopted eco‐control practices among the investigated firms, while environmental incentives seem to be less frequently adopted. The results of this study also suggest that competitive and ethical motivations as well as size, environmental exposure and stakeholder pressure are all important factors in explaining eco‐control practice adoption by Canadian manufacturing firms. Moreover, the results of this study show that organizations that have undertaken more intensive managerial and operational environmental actions have also adopted more intensive eco‐control practices. Organizations adopting more intensive eco‐control practices perform better both environmentally and economically performance than firms adopting less intensive eco‐control practices.     

Accounting Students’ Planning,Writing, and Performance on a Time‐Constrained Case Analysis: Effects of Self‐Talk and Prior Achievement

When writing a case analysis, most students first allocate time to plan the content and structure of their response, and then proceed to write with differing degrees of urgency, the outcomes of which are case responses of differing quality. This study examines the extent to which planning time influences writing urgency and, ultimately, the quality of case responses in a time‐constrained setting. It also investigates whether these behaviors and outcomes depend on students’ frame of mind, by experimentally inducing differing types of pre‐examination self‐talk. Analyses show that planning time was negatively associated with writing urgency; students who spent more time planning subsequently wrote with less urgency. Writing urgency was positively associated with case response quality and, after controlling for differences in writing urgency, planning time was positively associated with response quality. Results indicate that different planning and writing behaviors can be induced by different forms of self‐talk prior to the writing task. Relative to interrogative self‐talk (“Will I …?”), exclamatory self‐talk (“I will …!”) caused higher‐achieving students to spend more time planning, but then write with less urgency and subsequently produce lower‐quality case responses. Conversely, after engaging in exclamatory rather than interrogative self‐talk, lower‐achieving students spent less time planning but then wrote with greater urgency and produced higher‐quality responses. These results indicate that (i) planning significantly affects writing and performance, (ii) students can influence their own planning behavior through pre‐task self‐talk, but (iii) pre‐task self‐talk can be beneficial or detrimental depending on students’ prior achievement.     

Value Relevance of Environmental Provisions Pre‐ and Post‐IFRS

The purpose of this paper is to compare the value relevance of environmental provisions as recorded under Canadian/U.S. GAAP and IFRS accounting frameworks with consideration of the impact of voluntarily issuing stand‐alone sustainability reports. The value relevance of environmental provisions is tested using a modified Ohlson (1995) model. We exploit IFRS reconciliations as a quasi‐experimental setting to conduct this comparison. Results indicate that environmental provisions recorded under either framework only act as liabilities for oil and gas firms that release stand‐alone sustainability reports. For other firms in the oil and gas industry, and the mining industry, the liability nature of these provisions appears to be discounted by the market. Furthermore, for firms in the oil and gas industry that do not have stand‐alone CSR reports, provisions appear to be interpreted by the market as a costly signal about future growth. Instead of downwardly affecting market values, this information is associated with higher market values. In terms of the transition to IFRS, we find that, while the IFRS provisions are significantly higher than under former GAAP, they do not improve value relevance for investors. Accounting standard setters should consider examining the changes in the current standards from the original Canadian environmental provision reporting requirements under Capital Assets section 3060.39, as it was rightfully shown to be a relevant proxy for unbooked liabilities (Li and McConomy, 1999; Bewley, 2005) rather than earnings expectancy. The study builds upon prior research to examine the value of accounting standards that have gone through significant changes.     

Paper and Hill: An In‐Class Corporate Governance Case

Corporate governance is a set of rules and processes that help ensure that firms are effectively run for the benefit of their stakeholders. Good corporate governance is predicated on having directors fulfill their fiduciary duties while acting as stewards of the corporation. The fact that good corporate governance is essential to a well‐functioning and prosperous society is reflected in CPA Canada's Strategy and Governance competency. Unfortunately, there are few in‐class Canadian corporate governance cases that instructors can use to help accounting students improve their understanding of these three fundamental governance concepts: director duty of care, director duty of loyalty, and the business judgment rule. This Canadian corporate governance case is based on the actual events regarding the approval of Steven Hill's employment contract as the Chair of Paper Enterprises Inc. The case is presented using PowerPoint slides, rather than in a traditional narrative format, as it intended to be used as an in‐class case that does not require advance student preparation.     

Three Decades of IPO Markets in Canada: Evolution,Risk and Return

This article explores the extent that the long‐run returns following initial public offerings (IPOs) can explain the asserted decrease in IPOs in Canada. The causes of such a decrease remain controversial, in part because of our limited knowledge of this market. We first describe in detail the evolution of Canadian IPOs on the senior and the venture stock exchanges over three decades (1986–2016). This evolution differs considerably between natural resource and non‐natural resource firms. Second, using other junior markets as a benchmark, we show that the Canadian IPO market is very particular, mainly because it lists very small firms at an early development stage. Third, using 2,145 Canadian IPOs, we provide evidence that these IPOs generate three‐year negative average abnormal returns, and more than 70 percent report negative abnormal returns. Large issuers reporting profits constitute the only subsample that provides fair returns, but they account for less than 5 percent of IPOs. Such a market probably survived for many decades because of investors' preference for skewness and the characteristics of the returns' distribution. We observe a high level of skewness of abnormal returns, consistent with the behavioral finance proposition that investors are often unduly optimistic when valuing lottery stocks.     

Behavioral effects of fairness in performance measurement and evaluation systems: Empirical evidence from France

The measurement and evaluation of employee performance are crucial aspects of the management accounting system because of their effects on employee motivation. It is therefore important for management accountants to understand how such effects occur. Fairness may be a key explanatory factor. This study proposes that the effects of the fairness of employee performance measurement and evaluation procedures on employee job satisfaction and organizational commitment are indirect. The results, based on a sample of 60 French managers, support these expectations. For the relationship between procedural fairness and job satisfaction, the effects are indirect through trust and fairness of outcomes. For the relationship between procedural fairness and organizational commitment, the effects are indirect through fairness of outcome, trust and job satisfaction. The results also indicate that affective effects through trust and satisfaction are substantially stronger than that through fairness of outcome. Fair performance evaluation procedures therefore do more than the mere provision of equitable outcomes among French managers.     

Audit Committee Financial Expertise,Litigation Risk,and Auditor‐Provided Tax Services*

The Sarbanes‐Oxley Act (SOX) greatly expanded audit committees' oversight responsibilities by requiring that they preapprove all non‐prohibited non‐audit services (NAS). Using data from 2003 to 2011, we find that tax NAS are significantly lower when accounting financial experts (ACT‐FEs) serve on the audit committee, suggesting that ACT‐FEs consider auditor independence risk, perceived and/or real, more than other members, including supervisory experts, to the point of not accepting any tax NAS, not even compliance. However, in firms with higher ex ante litigation risk, ACT‐FEs approve relatively more tax NAS than other members, suggesting that they accept the costs of a perceived lack of auditor independence from tax NAS in return for the potential benefits of increased financial reporting quality arising from tax NAS. Our analysis by subperiod (2003–2006 vs. 2007–2011) shows that this result is significant only in the second period. ACT‐FEs' differential evaluation of the trade‐off between the benefits and costs of joint audit and tax NAS provision between the two periods suggests the need for additional research in later post‐SOX years.     

Women in leadership: an analysis of the gender pay gap in ASX‐listed firms

This study provides evidence that after several decades of fighting for equal pay for equal work, an unexplained gender pay gap remains amongst senior executives in ASX‐listed firms. After controlling for a large suite of personal, occupational and firm observables, we find female senior executives receive, on average, 22.58 percent less in base salary for the period 2002–2013. When executives are awarded performance‐based pay, females receive on average 16.47 percent less in cash bonus and 18.21 percent less in long‐term incentives than males. The results are robust to using firm fixed effects and propensity‐score matching. Blinder–Oaxaca decomposition results show that the mean pay gap cannot be attributed to gender differences in attributes, including job titles. Instead, the results point to differences in returns on firm‐specific variables, in particular firm risk.     

Accounting and Auditing Activities of the Ontario Securities Commission, 1960s to 2008 Part 3: The Fifth Chief Accountant, 1996–2008

We present Part 3 of a historical review and analysis of the role played by the Ontario Securities Commission (OSC) in accounting and auditing from the 1960s onward. Part 1 dealt with the period from the 1960s to 1985 (Zeff and Radcliffe, 2010a). Part 2 reviewed the work of the first four chief accountants, from 1986 to 1996 (Zeff and Radcliffe, 2010b). This third and final part reviews the work of the fifth chief accountant, John A. Carchrae, from 1996 to 2008. It began with the reorganization of the OSC and the reassignment of functions. The chief accountant position was now that of a permanent employee, albeit still as head of a very small department. The second part of Carchrae's tenure was dominated by the need to respond to the financial crises of the early 21^st century with extensive regulatory change as well as addressing the shift to international accounting standards in Canada.     

Credibility Attributes and Investor Perceptions of Non‐GAAP Earnings Exclusions

Recent empirical evidence suggests that investors focus more on non‐GAAP (Generally Accepted Accounting Principles) than on traditional GAAP earnings because non‐GAAP earnings are believed to proxy for a firm's ongoing profitability, a measure useful for valuation. Managers determine these non‐GAAP earnings by excluding certain items from their GAAP income. However, because these non‐GAAP earnings are both unaudited and may be disclosed by a firm to manage investors’ perceptions as opposed to inform, investors must infer the credibility of the disclosure through observable firm attributes. In this study we examine whether firms with stronger credibility attributes (corporate governance, higher‐quality auditors, and higher historical information quality) will be perceived as providing more credible non‐GAAP exclusions than those with weaker attributes. Our expectation is that the market reaction to non‐GAAP earnings exclusions of firms with stronger credibility attributes will be greater than for those with weaker attributes. Our results support our expectation.     

Do Restatements Improve the Persistence of Earnings and Its Components?

We examine the persistence of earnings in the pre‐ and postrestatements periods and find that restatements generally improve the persistence of earnings. We also examine how the persistence of earnings is influenced by restatements that are voluntarily initiated by managers (voluntary restatements) and those forced onto firms by outsiders (mandated restatements). Our analysis shows that voluntary restatements are followed by improvement in the persistence of earnings and that mandated restatements are not followed by improvement in earnings persistence. We find results that are consistent with the main finding when we decompose earnings into accruals and free cash flows. We use a difference‐in‐difference research design and confirm that the improvement in the postrestatement persistence of earnings components exceeds that of control firms only for voluntary restatements. Further, we show that our results are robust after controlling for endogeneity of voluntary restatements by including a two‐stage model using the Heckman ( 1979 ) method where we first estimate the likelihood of manipulation detection and analyze change in persistence conditional on the first stage analysis. The improvement in earnings persistence around voluntary restatements is not driven by the level of earnings decomposition or a subgroup of voluntary restatements. The results support our hypothesis that voluntary restatements have distinctly different economic consequences from mandated restatements.     

Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and UPS

This case illustrates the effects of the proposed new lease standard by the Financial Accounting Standards Board and the International Accounting Standards Board on existing outstanding operating leases. Specifically, the case examines the effects of the proposal that all firms report existing operating leases as capital leases upon the initial adoption of the proposed standard. By applying a constructive capitalization model to two firms who rely on operating leases for financing, FedEx and UPS, we found that both companies would have to record billions of dollars of liabilities that had only appeared in the footnotes of their financial statements under the current lease standards. In addition, the firms would experience a decline in retained earnings and key financial ratios, such as the debt‐to‐equity, return‐on‐assets, and interest coverage ratios, by reporting operating leases as capital leases under the new proposed standard. Furthermore, the magnitude of the lease capitalization impact is much smaller for UPS than for FedEx.     

Equity‐based incentives and shareholder say‐on‐pay

We study the relationship between CEO pay‐performance sensitivity, pay‐risk sensitivity, and shareholder voting outcomes as part of the “say‐on‐pay” provision of the 2010 US Dodd‐Frank Act. Consistent with our hypothesis, we provide evidence that shareholders tend to approve of compensation packages that are more sensitive to changes in stock price (pay‐performance sensitivity). Our findings are consistent with theoretical predictions that outside owners approve of equity incentives as a means of aligning managers' interests with those of shareholders. We also document that future changes to equity‐based incentives are related to voting outcomes and that shareholders incorporate CFO incentives into their votes. Collectively, these results provide evidence of the importance of equity‐based incentives from the perspective of those most concerned with firm value and of the effectiveness of say‐on‐pay as a governance mechanism.     

Corporate Social Responsibility,Tax Aggressiveness,and Firm Market Value

This paper examines the relationship of corporate social responsibility (CSR), tax aggressiveness, and firm market value. An economic model has been developed to show that profit‐maximization firms are willing to incur additional costs in CSR, such as paying more taxes, as long as they can differentiate their products from non‐CSR firms, and that socially conscious consumers will buy products from CSR firms at prices higher than those of non‐CSR firms. The empirical study in this paper indicates that the higher the CSR ranking of a firm, the less likely a firm is to engage in tax aggressiveness. It also indicates that a reputation of higher CSR will enhance firm market value. Using Canadian companies listed in the S&P/TSX 60 index, I find that both firms’ five‐year effective tax rates and annual effective tax rates are positively associated with their overall CSR scores as well as with their social scores. Firms’ five‐year effective tax rates are also positively associated with their governance index. I also find that firms’ overall CSR ranking and governance scores are positively associated with their market value.     

The Credibility of Earnings Forecasts in IPO Prospectuses and Underpricing

This paper provides empirical evidence of the impact of the voluntary disclosure of management earnings forecasts in IPO prospectuses and of the credibility of these forecasts, as perceived by investors at the time of the IPO. We measure forecast credibility ex ante with two approaches: (i) a vector of determinants of credibility that are observable by market participants at the time of the issue and (ii) the predicted value of the forecast error based on some of these determinants. Controlling for the firm's decision on whether or not to issue a forecast, we find that the issue of a forecast reduces underpricing. We find that the quality of the firm's governance and of the auditor and underwriter associated with the issue seems to act as a substitute to the disclosure of an earnings forecast in the prospectus, so that they significantly decrease the level of underpricing only for non‐forecasters. However, despite our various approaches to measure ex ante credibility, we find no association between the pricing of the issue and perceived forecast credibility at the time of the IPO.     

Note on Self‐Selection of Auditors in the Municipal Sector*

The objective of this article is to revisit the literature on Big‐N audit fee premiums in the municipal setting using a methodology that controls for self‐selection bias. Because auditor choices can be predicted based on certain client characteristics, using standard one‐stage ordinary least squares regressions to draw inferences about the presence or absence of such a premium in the extant public‐sector audit fee studies may not be appropriate. Results indicate that, after controlling for a self‐selection bias, Big‐6 (non‐Big‐6) municipal clients on average pay a fee premium, compared to the case if they were to retain a non‐Big‐6 (Big‐6) auditor. Results continue to hold when we conduct further analyses on a subset of municipalities with access to both Big‐6 and non‐Big‐6 auditors in a local market defined by a 60‐km radius, rather than over a province‐wide audit market. The existence of non‐Big‐6 audit fee premiums has not been documented previously in the private‐ or public‐sector audit fee literature. We surmise that it may be caused by the dominance (79.4 percent) of non‐Big‐6 auditors in the Ontario municipal market, compared to most private‐sector audit markets where their market share generally does not exceed 20 percent. The strong market position of non‐Big‐6 firms in turn may have allowed these auditors to command a fee premium for the subset of municipalities that self‐selects to be audited by them. An implication from our study is that Ontario municipalities often choose to be audited by more costly auditors, even though they could have paid lower audit fees by switching to an alternative auditor type. These results do not support those reported by Chaney et al. (2004) , who find that U.K. private firms are audited by the least costly auditor type. The conflicting findings may be attributable to the fact that the Ontario municipal audit market is subject to regulation by not just the audit profession but also the Ontario government and that, unlike business corporations, municipalities receive funding from provincial governments to fulfil much of their financial requirements. Thus, municipal clients may be relatively more willing to accept higher audit fees provided their chosen auditor (or auditor type) matches their needs.     

Performance attribution of mutual funds in India: outperformance or mis‐representation?

We conduct a novel holdings‐based performance attribution, particularly suited to emerging markets, for equity‐oriented active mutual funds in India. Although, we find significantly positive alphas for an average fund, the stated benchmarks are grossly mis‐specified. A style‐adjusted benchmark could beat the stated benchmarks by greater margins than the funds themselves. While funds’ trading activity consistently adds value, cash drag and market timing usually diminish value. Although, the best‐performing funds exhibit superior security selection abilities, their outperformance does not persist. However, despite the lack of persistence winner funds continue to generate significantly higher alphas than loser funds for quite some time.     

Audit Quality and the Market Valuation of Banks’ Allowance for Loan Losses*

The recent banking crisis has led market participants to focus on the adequacy and quality of banks’ balance sheet items such as the allowance for loan losses. Beaver and Engel (1996) document that the capital market prices the nondiscretionary component of loan loss allowance negatively and the discretionary component less negatively. Using data from the pre‐crisis period and three measures of audit quality, auditor type (i.e., Big 5 versus non–Big 5), auditor industry specialization/expertise, and audit and nonaudit fees paid to auditors, we examine the effect of audit quality on the market valuation of the discretionary component of the allowance for loan losses. We find that, relative to the nondiscretionary component, the market valuation of the discretionary component of loan loss allowance is higher for banks audited by Big 5 auditors than for banks audited by non–Big 5 auditors. We also find that the relative market valuation of the discretionary component of loan loss allowance is increasing in auditor expertise. Regarding the impact of fees paid to auditors, we find that banks paying higher audit fees have higher relative market valuation of the discretionary component of the allowance for loan losses, but banks that pay higher nonaudit fees do not.     

The Impact of Disclosures of Internal Control Weaknesses and Remediations on Investors' Perceptions of Earnings Quality

We hypothesize and find that firms making SOX‐mandated disclosures of material weaknesses in internal control over financial reporting (ICOFR) exhibit lower investor‐perceived earnings quality (IPEQ) than nondisclosers. We measure IPEQ using e‐loading, a market‐returns–based representation of earnings quality developed by Ecker, Francis, Kim, Olsson, and Schipper (2006). Firms do not exhibit decreases in IPEQ after initially disclosing material weaknesses. This is consistent with investors having anticipated ICOFR strength based on observable firm characteristics. However, firms exhibit increases in IPEQ after receiving their first clean audit reports that confirm the remediation of previously disclosed weaknesses. This indicates that, although investors do not find initial weakness disclosures to be incrementally informative, SOX motivates firms to remediate weak controls and provides a venue for credible remediation disclosures, thus enhancing investors' perception of financial reporting reliability. These findings are consistent with the existence of regulatory benefits associated with SOX's internal control disclosure and audit requirements.