Accrual Accounting,Informational Sufficiency,and Equity Valuation

This paper studies accrual accounting and equity valuation in the context of a firm that makes repeated and overlapping investments in productive capacity. The analysis identifies a particular accrual accounting (depreciation) rule that is termed replacement cost accounting because the book value of existing capacity assets is set equal to the value that such assets would have if a competitive market were to exist for used assets. It is shown that replacement cost accounting aggregates past investment decisions of the firm without a loss of value‐relevant information. The intrinsic value of the firm can then be expressed as a function of current accounting data and certain parameters of the firm’s operating environment. Further, it is shown that replacement cost accounting is essentially the only accounting rule with this informational sufficiency property.     

Auditors’ Liability,Investments, and Capital Markets: A Potential Unintended Consequence of the Sarbanes‐Oxley Act

To restore investors’ confidence in the reliability of corporate financial disclosures, the Sarbanes‐Oxley Act of 2002 mandated stricter regulations and arguably increased auditors’ liability. In this paper, we analyze the effects of increased auditor liability on the audit failure rate, the cost of capital, and the level of new investment. We focus on a setting in which, with imperfect auditing, a firm has better information than investors about its prospects and seeks to raise capital for new investments in a lemons market. The equilibrium analysis derives corporate reporting and investing choices by the firm, attestation opinions by the auditor, and valuation by rational investors. Three empirically testable predictions emerge: although increasing auditor liability decreases the audit failure rate and the cost of capital for new projects, it also decreases the level of new profitable investments.     

Beyond CAPM: estimating the cost of equity considering idiosyncratic risks

The present study proposes a new evaluation approach aimed at estimating the cost of equity through standardized models which consider an innovative set of firm-specific information on the main unsystematic risks which are typical of any business. Our objective is extending the Capital Asset Pricing Model (CAPM) by defining a standard formula for quantifying the premium for certain idiosyncratic risks as a function of a new set of firm-specific quantitative information. We define two econometric models, for listed and non-listed firms respectively, which consider five idiosyncratic risk factors: firm size, value factor, operating risks, financial structure and stock market price volatility. The models were tested on a sample of European non-financial companies. The empirical results show that while the CAPM systematically underestimates the cost of equity, the proposed models correctly estimate its expected value; furthermore, they show a slight improvement also in terms of estimates’ volatility. Due to their efficacy and ease of use, the proposed models represent a valid practical tool for investors, analysts and professional evaluators. This work contributes to the existing literature by proposing a typologically innovative extension of the CAPM set of explanatory variables, defining and testing new models for the estimation of the unsystematic risks’ spread of the cost of equity based on an original set of firm-specific accounting and market information.     

The impact of XBRL adoption on local bias: Evidence from mandated U.S. filers

This paper investigates how eXtensible Business Reporting Language (XBRL) adoption affects the information advantage of local investors relative to their non-local counterparts. By employing the recent staggered SEC mandates of XBRL as a natural shock, we show that institutional investors’ local bias decreases after firms adopt XBRL when preparing their financial statements. These results hold in a difference-in-difference research design with firm and year fixed effects or using matched nonadopting firms as controls, as well as a regression discontinuity design. The impact of XBRL adoption on reducing local bias can be explained by three economic channels: decreased information processing costs, increased corporate disclosures, and improved analyst coverage. We further find that institutions’ superior stock returns in geographic proximate equity investments significantly reduces after the XBRL mandate. The observed reduction in institutional investors’ local bias within U.S. companies following the XBRL mandate also applies to the international setting. Overall, our findings support regulators’ claim that XBRL adoption levels the playing field between local and non-local investors.     

Financial development,corporate governance and cost of equity capital

Existing research suggests that external governance is more relevant than internal governance in affecting a firm’s value. We contribute to the literature by explicitly examining the interactive role played by country-level financial development and legal institutions in influencing the impact of firm-level governance on the cost of equity capital. Using a comprehensive sample of 7380 firm years drawn from 22 developed countries, we show that firm-level corporate governance attributes affect the cost of equity capital primarily in the Common Law countries with high levels of financial development. Our study is the first to highlight the complementary effects of legal origin, financial development and firm-level governance attributes in influencing the cost of equity capital.     

Litigation reform,accounting discretion,and the cost of equity

In this paper, we isolate a context – the 1995 Public Securities Litigation Reform Act – where information risk (accruals quality) is likely to change, and investigate whether the increase in accounting discretion associated with litigation reform is viewed by investors as basically opportunistic (i.e., as distorting reported earnings) or as improving the ability of reported earnings to reflect economic value. We measure accounting discretion using both positive (i.e., income-increasing) as well as absolute performance-adjusted abnormal accruals. Our analysis focuses on a constant sample of firms over a 10-year (1992–2001) period, and is structured in two stages. In the first-stage, we utilize an instrumental variable technique that isolates the increase in accounting discretion associated with the 1995 Act. In the second-stage, we relate the predicted increase in accounting discretion associated with litigation reform – obtained from the first-stage regression – to the ex ante equity risk premium for Big N audit clients. Our results suggest that the increase in accounting discretion associated with the 1995 Act was viewed by investors as basically opportunistic. Further, the exogenous nature of the 1995 Act suggests that the observed increase (and pricing) of accounting discretion is related to litigation reform rather than some omitted firm-specific operating characteristic. Overall, our findings suggest that litigation reform affects firm value through managers’ exercise of accounting discretion and cost of equity capital channels.     

Index investors and the return of stewardship accounting

Passive asset managers, seeking to deliver investment returns that mirror market indices, now control and vote about 30% of all managed U.S. shares. When bad news surfaces, index investors do not sell a company's shares. Instead, these beneficial owners protect the value of equity investments by influencing governance practices to restore long-term value creation. Interviews with stewardship offices at leading index investment firms suggest that passive investors do not use financial accounting information to value securities. The implication of this study is that the current focus of accounting standard setting – predicated on the idea that the purpose of financial reporting is to permit prediction of future cash flows – does not meet the needs of a particular group of financial statement users who have considerable influence over the governance of leading listed companies around the world.     

Structural properties of the price-to-earnings and price-to-book ratios

We examine the structural properties of a firm’s price-to-earnings (P/E) and price-to-book (P/B) ratios and the relation between these two ratios. A benchmark result is obtained under the hypothesis that firms use replacement cost accounting to value their operating assets, so that the P/B ratio coincides with Tobin’s q. The firm’s P/E ratio can then be expressed as a convex combination of the P/E ratios suggested respectively by the permanent earnings model and the Gordon growth model, with the relative weight to be placed on these two endpoints determined entirely by Tobin’s q. Under current financial reporting rules, the accounting for operating assets is likely to be more conservative than replacement cost accounting. Our findings characterize how the magnitude and behavior of the P/E and P/B ratios are jointly shaped by several key variables, including both past and anticipated future growth, economic profitability, and accounting conservatism     

Seasoned equity offerings: Quality of accounting information and expected flotation costs

Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev [2002. The quality of accruals and earnings: the role of accrual estimation errors. Accounting Review 77, 35–59] earnings accruals model, which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings (SEOs), we show that poor accounting information quality is associated with higher flotation costs in terms of larger underwriting fees, larger negative SEO announcement effects, and a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.     

从净收益视角看公允价值和历史成本计量属性的作用

论文在决策有用性的会计目标框架下,以权益投资者的企业价值评估为视角,探讨了会计计量属性的选择和应用问题。在资产负债会计体系下,即便采用公允价值计量也无法反映企业的整体经济价值。企业价值需要借助金融模型估计,传统收入费用会计体系下的净收益指标是模型中的关键变量,但资产负债表中公允价值的引入使净收益的计量失去了逻辑一致性。这对权益估价模型的应用造成了干扰,从而损害了财务报告对投资者的有用性。论文认为对投资者提供公允价值信息的最佳方式是单独披露,而不是表内确认。最近FASB为应对金融危机对有关会计准则的修订反映了计量方法多样化的趋势,但计量方法的优势并不取决于该计量方法是否符合计量对象的具体特点,而是是否符合会计系统的整体目标。     

The quality of financial reporting in China: An examination from an accounting restatement perspective

This study uses restatements to reveal the poor quality of past accounting information reported within China’s capital market. We show that up to a quarter of listed firms in mainland China explicitly admitted the poor quality of their financial information by restating their previous financial reports between 1999 and 2005. Many of these firms managed their earnings mainly via below-the-line items to avoid losses and promote survival, rather than to support refinancing goals. Such poor-quality financial reporting is more likely among firms that have weaker profitability and a shareholder base that is state-controlled, with diffused ownership and a relatively low proportion of shares held by institutional investors. Furthermore, we find the market to be relatively insensitive to such admissions. Investors’ reactions capture only the earnings information of the current reported year, rather than also reflecting the concurrently revealed correction of past financial reporting. However, the equity market does not completely ignore the earnings information. Investors’ reliance on earnings is merely low relative to the mature US market. These findings demonstrate that accounting credibility in China has low value; providing poor-quality financial information bears little cost because various market mechanisms fail to deter such behavior. Nevertheless, regulators’ ongoing efforts to enhance the quality of financial information and disclosure among listed firms are still fruitful. The frequency of restatements decreased over our sample period, which reinforces the current regulatory prospects and strategies for further improving China’s capital markets.     

The impact of SEC investigations and accounting and auditing enforcement releases on firms’ cost of equity capital

I study the impact of an SEC investigation (as captured by accounting and auditing enforcement releases) on a firm’s cost of equity capital. AAERs are often used in accounting literature as a proxy for fraudulent financial reporting. Fraudulent financial reporting should lead to an increase in cost of equity capital as a firm’s future cash flows become less certain. Overall, this study provides evidence of changes in cost of equity capital for firms targeted by an SEC AAER on the date the investigation is first made public.     

Is Financial Reporting Still Useful? Australian Evidence

There has been recent and growing criticism of the usefulness of financial reporting for investors, particularly the annual financial statements. In response, the IASB is pursuing several projects aimed at improving the relevance of financial information. To inform the IASB’s work, we investigate, using a mixed-method approach, the extent and nature of the use of annual financial statements by equity investors. We examine the relevance of financial reporting for equity valuation in Australia across time. We find that financial reporting (specifically, reported net income, shareholders’ equity, and operating cash flows) remains relevant for investment decisions. We further support this finding with evidence from field interviews that provide insight into how and why financial statements are used by equity investors. The field evidence also demonstrates that no one financial statement dominates in investor decision making. Given the increasing availability of more timely, forward-looking information from alternative sources, we examine the relevance of non-GAAP financial information and other non-financial information for investor decision making. We find that non-GAAP financial information (as proxied by EBIT and EBITDA) is more value relevant than statutory measures. We further find a broad range of non-financial information is utilized by investors in making investment decisions both as a ‘screen’ and for valuation purposes. Our findings inform regulators and other stakeholders as we provide evidence of the continuing relevance of financial statements and the complementary role of non-GAAP financial and other information. Our evidence provides a rebuttal to the recent criticism.     

Efficient Signalling with Dividends,Investment, and Stock Repurchases

The efficient mix of dissipative dividends, investments in real and financial assets, and repurchases of stock is computed for a continuum of firms with inside information about the return on risky real assets. In the efficient signalling equilibrium, the representative firm optimally distributes dividends, invests in risky real assets to maximize net present value, holds no financial securities, and sells new stock in the market. This firm finances its value-maximizing investment first from internal funds and second from stock sold to new investors.     

Controlling shareholder share pledging and the cost of equity capital: Evidence from China

We propose and test the incentive view—that the margin call pressure and ownership-control discrepancy associated with insider share pledging increase investors’ perceived risk, and thus also the cost of equity capital, in an emerging market. Using a controlling shareholder share pledging sample for Chinese listed firms, we find that firms with share pledging have a cost of equity capital that is 23.7 basis points higher than firms without share pledging. Further, share pledging increases the cost of equity capital through the information risks and agency conflicts channels. Cross-sectional analyses show that share pledging has a stronger effect on the cost of equity capital in non-state-owned enterprises, firms without monitoring of multiple large shareholders, firms with controlling shareholders assuming the position of chairperson, and firms with a weak institutional environment. In addition, using the global financial crisis and the outbreak of the coronavirus (COVID-19) as quasi-natural experiments, we disentangle the potential confounding effect of firm fundamentals and show that share pledging is positively associated with the cost of equity capital. Overall, the results are consistent with our incentive view that share pledging increases the cost of equity capital in an emerging market.     

投资性房地产公允价值计量的财务影响与决定因素:以北辰实业为例

以北辰实业为例,本文分析了企业在投资性房地产成本模式与公允价值计量模式之间选择的财务影响及其决定因素。与成本模式相比,投资性房地产公允价值计量将大幅提高其账面价值,加剧了企业当期净利润的波动。北辰实业在A股年报中采用成本模式,而在H股年报中采用公允价值计量,这主要源于以下因素:(1)香港会计准则与我国会计准则的差异;(2)两地监管机构对公允价值会计的态度不同;(3)两地投资性房地产信息披露的差异;(4)资本市场成熟度与投资者的理性程度的差异。最后我们总结了本案例对于企业选择公允价值计量模式、监管层推行公允价值会计与应对会计国际趋同三个方面的政策含义。     

Discretionary Accounting Choices: A Debt covenants Based Signalling Approach

This paper seeks to explain the discretionary accounting choices made by managers in a world characterised by asymmetric information between managers and investors. It considers a firm whose capital structure consists of both debt and equity, a manager who protects the interests of the firm's existing shareholders, and a financial market. The manager is committed to engage in an investment opportunity and needs to raise some equity to finance it. He is furthermore endowed with some private information about his firm's future earnings. The paper shows how, under certain conditions, the manager may credibly communicate his private information to investors through his accounting choices. In this equilibrium, the selection of balance sheet strengthening and income increasing accounting choices signals unfavourable information while the use of balance-sheet weakening and income- decreasing accounting choices signals favourable private information. The latter firms should thus experience positive abnormal returns around the announcement dates of their accounting choices.     

Good disclosure doesn't cure bad accounting—Or does it?: Evaluating the case for SFAS 158

This paper investigates whether the newly required recognition of the funded status of defined benefit (DB) plans under SFAS 158 is incrementally value relevant in its adoption year (2006) relative to the corresponding amounts which were previously disclosed from both equity investor and credit rating perspectives. In equity valuation models, we use a sample of 878 firms (1756 firm years) offering DB plans in 2005 (disclosure year) and 2006 (recognition year), and find no incrementally significant association with market prices of newly recognized amounts under SFAS 158 over the same information that was disclosed pre-SFAS 158. Our credit rating tests, using a sample of 428 DB firms (856 firm years) for 2005 and 2006 also show no differential impact of recognition over disclosure. Overall, we find that equity investors price the SFAS 158-imposed pension differential while credit rating agencies do not, regardless of whether such information is recognized or disclosed in the financial statements. Our results are consistent with efficiency in both equity and credit markets with respect to pension information and suggest that SFAS 158 has not changed the way market participants in aggregate use pension-related financial statement information.     

The 2007–2009 financial crisis and bank opaqueness

Doubts about the accuracy with which outside investors can assess a banking firm’s value motivate many government interventions in the banking market. Although the available empirical evidence is somewhat mixed, the recent financial crisis has reinforced a common assessment that banks are unusually opaque. This paper examines bank equity’s trading characteristics during “normal” periods and two “crisis” periods between 1993 and 2009. We find only limited (mixed) evidence that banks are unusually opaque during normal periods. However, consistent with theory, crises raise the adverse selection costs of trading bank shares relative to those of nonbank control firms. A bank’s balance sheet composition significantly affects its equity opacity, but we cannot detect specific balance sheet categories that have robust effects.     

Social disclosure, financial disclosure and the cost of equity capital

We test the relation between financial and social disclosure and the cost of equity capital for a sample of Canadian firms with year-ends in 1990, 1991 and 1992. We find that, consistent with prior research, the quantity and quality of financial disclosure is negatively related to the cost of equity capital for firms with low analyst following. Contrary to expectations, there is a significant positive relation between social disclosures and the cost of equity capital. This positive relationship is mitigated among firms with better financial performance. We consider some biases in social disclosures that may explain this result. We also note that social disclosures may benefit the firm through its effect on organizational stakeholders other than equity investors.