Emerging Derivatives Markets: The Case of Chile

We compare the performance of firms affiliated with diversified business groups with the performance of unaffiliated firms in Turkey, an emerging market. We address the question of whether group-affiliated firms create internal capital markets or control large cash flows. Our findings indicate that group affiliation improves a firm's accounting performance, but not stock market performance. Deviation of cash-flow rights from voting rights has a negative but insignificant effect on accounting performance, but a significant effect on market performance. We also find that a firm's accounting, but not stock market, performance increases with the level of group diversification. Our results show that internal capital markets play an important role for the existence of business groups in an emerging market context.     

Corporate Lobbying,Visibility and Accounting Conservatism

In this study, we examine the relationship between a firm's lobbying activities and financial reporting quality using a US setting where public scrutiny of corporate political activities is high. More importantly, we examine whether and how a firm's visibility shapes the relationship between its corporate lobbying activities and accounting conservatism. Adopting annual lobbying expenditure data to measure firms’ lobbying activities, and using a propensity‐score‐matching methodology to control for differences in firm characteristics between lobbying and non‐lobbying firms, we find a positive relationship between a firm's lobbying intensity and the degree of accounting conservatism in its financial reporting. We further find this positive relationship to be more pronounced in lobbying firms with a higher level of visibility. These results are robust after controlling for a firm's political connections, across various conditional conservatism measures, and across a number of visibility measures including firm size, the number of analysts following the firm, the age of the firm, the number of foreign stock exchanges that the firm is cross‐listed in, and the level of the firm's media coverage. Together, our findings add to the literature on how firms’ political activities shape their accounting practices in general, and accounting conservatism in particular. More importantly, our findings suggest that the heightened public attention paid to political activities in the US yields incentives for firms to be more conservative in their accounting practices.     

An Ohlson valuation framework for valuing corporate governance: The case of Taiwan

We examine the relation between a firm's market value, financial performance, and corporate governance as a cointegrated system in the Ohlson (1995) valuation framework. Using a comprehensive set of 29 governance measures in 4 categories for Taiwanese firms, we find that governance related to ownership structure and divergence between cash flow rights and control rights are important for a firm's market valuation. In particular, information about shareholdings of board directors and supervisors, shareholdings of controlling family, and voting rights are influential for firm value. Controlling for book value and residual incomes in the model, these governance measures track much of the remaining firm valuation that is unrelated to a firm's financial performance. Our findings provide some insight into the intrinsic value of corporate governance and the types of corporate governance mechanisms that are especially important for firms with similar ownership structure and controls.     

The Degree of Internationalization and the Stock Market Valuation of Earnings

In this paper, we examine the impact of the degree of internationalization on a firm's ability to reduce risk and increase profits. Our study seeks to overcome three limitations of many previous studies on the value of internationalization: use of a single measure of internationalization, accrual-basis accounting measures of firm performance, and a small sample size. We use a multi-measure index, stock market assessment, and a large sample size of various firms. Our findings indicate that (1) a firm's degree of internationalization has a positive impact on the investor response to the earnings changes and (2) the market's positive response to the value of internationalization is confined to a high level of internationalization. Our results do not support the argument that, at high levels of internationalization, the costs of internationalization exceed the benefits.     

会计信息可比性与企业商业信用融资——基于企业市场地位和行业竞争环境的双重考量

不同于传统的基于资本市场情境进行的会计信息可比性经济后果研究,将研究场景拓展至商品市场中企业供应链层面,考察企业会计信息可比性能否影响供应链伙伴的商业信用政策制定,进而反映到企业的商业信用融资水平.研究发现:会计信息可比性越高的企业,其商业信用融资水平也越高;会计信息可比性对商业信用融资的促进作用只在市场地位较低、所处行业竞争程度较高的企业中存在.进一步的拓展研究证实,提高会计信息可比性可以有效缓解我国中小微企业普遍存在的融资难问题.     

Effects of air pollution on accounting conservatism

We examine the impact of air pollution on a firm's accounting policy conservatism. We hypothesize that, in response to risks associated with increased air pollution, firms apply more conservative accounting practices and utilize more conservative estimates in their reporting. Using a sample of Chinese firms, accounting conservatism measures, and a satellite-based air pollution metric, we confirm the validity of our hypothesis. Additional analysis suggests that the impact of air pollution on accounting policy conservatism is more salient for firms in high-pollution industries, firms under severe financial constraint, firms with higher environmental risk, and firms that receive high media coverage. Further, we document that air pollution does not significantly affect a firm's return on assets, year-on-year sales growth, or Tobin's Q measure. Hence, it is management's risk perception, not objective performance concern, that is driving accounting conservatism. Finally, specifically investigating accounting conservatism, we discover that, for firms with higher pollution levels, selling general and administrative expenses, liabilities provision, accrued expenses, and asset impairment loss are significantly higher.     

Market Reactions to Tangible and Intangible Information

The book‐to‐market effect is often interpreted as evidence of high expected returns on stocks of “distressed” firms with poor past performance. We dispute this interpretation. We find that while a stock's future return is unrelated to the firm's past accounting‐based performance, it is strongly negatively related to the “intangible” return, the component of its past return that is orthogonal to the firm's past performance. Indeed, the book‐to‐market ratio forecasts returns because it is a good proxy for the intangible return. Also, a composite equity issuance measure, which is related to intangible returns, independently forecasts returns.     

Performance choice,executive bonuses and corporate leverage

This study examines the causal link between a firm's leverage decisions and the characteristics of its CEO bonus plans. Results from a simultaneous equations model strongly suggest that highly levered firms are less likely to use return on equity (ROE) or ROE-based accounting performance measures to determine executive bonuses. Estimates also indicate that firms with fewer debt covenants, higher interest rates on debt, and a greater proportion of executive pay in the form of stock options are less likely to adopt ROE-based measures for use in CEO bonus plans. These findings lend strong support to the efficient contracting hypothesis. The conflicting interests of corporate stakeholders, especially between stockholders and creditors, encourage firms to tie executive pay to performance metrics like return on assets (ROA) that will strike the optimal balance between the agency costs of debt and the agency costs of equity.Data availability: all data are available from public sources.     

Sensitivity of executive pay to accounting performance measures in all-equity firms

We investigate the relation between chief executive officer compensation and accounting performance measures as a function of the firm's capital structure. We specifically analyse pay–performance relationships for all‐equity firms relative to high‐levered firms. We find a significant positive association between return on equity and the level of compensation for all‐equity firms. Consistent with optimal contracting theory, we cannot discern any such relationship for high‐levered firms. Because of agency costs of debt, managerial compensation in high‐levered firms plays the role of a precommitment mechanism in addition to its conventional role of aligning management incentives with shareholder interest.     

Interrelación de la cultura,flexibilidad laboral,alineación estratégica,innovación y rendimiento empresarial

The objectives of this research are to understand the relationships between the organizational practices related to alignment strategies (AE), organizational culture (CO), innovation initiatives (INN), and flexible labor practices (PFL), with the perceived firm's performance from the worker's perspective. To achieve these goals, we use a quantitative analysis with a sample of 98 people working on a firm with more than 500 employees. We define firm's performance using five alternative definitions: Creativity and initiatives (IC), goals achieved (OA), workers’ satisfaction (ST), fast workers’ advance (EO), and resources’ efficient use (AR). Preliminary results indicate that CO and AE positively affect firm's performance under the five alternative definitions used. However, INN and PFL have asymmetric effects in firm's performance, which are sensitive to the firm's performance definition used. Particularly, firms face a tradeoff between performance objectives selection and the organizational flexible processes they pursue. In summary, innovation processes and flexible labor practices work in opposite directions in pursuing the firm's goals achievement, and consequently do not lead to the development of a unidirectional development of a sustainable competitive advantage.     

The Information Content of Corporate Pension Funding Status in Japan

This paper tests if a firm's pension funding ratio (pension assets/PBO) reveals the management's private information about the firm's operation when the firm can exercise discretion in pension funding. The lax enforcement of pension funding rules and the prevalence of management forecasts make Japanese firms an ideal testing ground. We show that, among firms with large business uncertainty, large accruals, or high effective tax rates, the pension funding ratio predicts the firm's management forecast errors significantly beyond conventional control variable and the effects of pension accounting management. However, the stock market does not appear to incorporate this information immediately.     

CEO turnover in China: the role of market-based and accounting performance measures

We investigate the relationship between chief executive officer (CEO) turnover and firm performance in China's publicly traded firms. We provide evidence on the use of accounting and market-based performance measures in CEO turnover decision. We also investigate the moderating roles of noise in performance measures, firm growth opportunities, state-owned enterprises, and corporate governance reform on the weights attached to these performance measures. We observe that Chinese listed firms rely more on accounting performance than on stock market performance when determining CEO turnover. Firms with noisier performance measures and larger growth opportunities rely less on both accounting performance and stock market performance in CEO replacement decision. State-controlled firms are more likely to use accounting performance to determine CEO turnover. Finally, we observe that the weight attached to the accounting performance measure is significantly reduced and the weight attached to the stock market performance measure is significantly increased after the governance reform. We also observe that the reform has different impact on state-owned firms and private firms in terms of the sensitivity of CEO turnover to firm performance.     

The choice of equity selling mechanisms: PIPEs versus SEOs

We examine the firm's choice between an SEO and a PIPE, an innovation in follow-on equity selling mechanism seen in the late 1990s. Our primary finding indicates that the rapid rise of the PIPE market fills the capital needs of firms which may not have access to more traditional alternatives. This lack of access is driven mainly by information asymmetry and weak operating performance. We also show that firms are more likely to choose PIPEs when the general market and the firm's stock are performing poorly. Furthermore, we find that selected firms with access to the public market may prefer a PIPE due to specific cost considerations.     

Redacted Disclosure

In this paper we investigate a firm's decision to redact proprietary information from its material contract filings. Information redaction results when the Security and Exchange Commission (SEC) grants a firm's request to withhold information from investors in its material contract filings, presumably because the information is proprietary. We hypothesize that when firms redact information, measures of adverse selection deteriorate. That is, the redaction of proprietary information from material contracts should be associated with: a larger adverse selection component of the bid‐ask spread, reductions in market depth, and lower market turnover. In addition, we conjecture that the decision to redact depends on whether the firm plans on raising capital, the competitiveness of the firm's industry, and the performance of the firm. Overall the results of our analysis generally support our predictions. We find that when firms redact information, contemporaneous measures of the adverse selection component of the bid‐ask spread rise, and market depth and share turnover deteriorate; this suggests an increase in adverse selection. We also find firms are less likely to redact when they issue long‐term debt and are more likely to redact when they are in a competitive industry or experience losses.     

Imperfect Accounting and Reporting Bias

Errors and bias are both inherent features of accounting. In theory, while errors discourage bias by lowering the value relevance of accounting, they can also facilitate bias by providing camouflage. Consistent with theory, we find a hump‐shaped relation between a firm's propensity to engage in intentional misstatement and the prevalence of unintentional misstatements in the firm's industry for the whole economy and a majority of the industries. The result is robust to using firms’ number of items in financial statements and exposure to complex accounting rules as alternative proxies for errors and to using the restatement amount in net income to quantify the magnitude of bias and errors. To directly test for the two effects of errors, we show that when errors are more prevalent, the market reacts less to firms’ earnings surprises and bias is more difficult to detect. Our results highlight the imperfectness of accounting, advance understanding of firms’ reporting incentives, and shed light on accounting standard setting.     

More than words: Can tone of consumer product reviews help predict firms’ fundamentals?

Although financial market participants are increasingly interested in the financial value of unstructured qualitative information regarding the prospects of a firm, empirical evidence remains sparse on the properties of qualitative content in consumer product reviews and their capital market implications. Using a broad sample of consumer reviews posted on Amazon.com, I examine whether the linguistic tone of aggregate consumer product reviews conveys information that is associated with firms’ sales, earnings, stock returns and risk. I find that aggregate review tone successfully predicts a firm's forthcoming quarterly sales. Moderating analyses show that this predictability is stronger for firms operating in a highly competitive environment. I further find that review tone predicts a firm's quarterly earnings surprises, abnormal stock returns and risk. A path analysis shows that the effect of review tone on stock prices is partially channeled through its effect on firms’ earnings. I finally find that negative review tone is more informative and useful than positive tone in predicting a firm's fundamentals. Importantly, these results hold after controlling for other review characteristics, including review rating, review volumeand review dispersion. Overall, my findings highlight the importance of considering the tone of consumer reviews when evaluating a firm's prospects and value.     

The effect of supplier industry competition on pay-for-performance incentive intensity

We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm's own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm's benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).     

The association between human resource investment in IT controls over financial reporting and investment efficiency

This study investigates the association between human resource investment in information technology (IT) controls over financial reporting and its investment efficiency. To conduct the analysis, it uses novel hand-collected data on the number of IT control personnel. In particular, it uses the ratio of (1) the number of IT control personnel, (2) the number of IT control personnel who are certified public accountants to the total number of employees in a firm, and (3) the natural logarithm of average working experience of IT control personnel in months as a proxy for human resource investment in IT controls. This study finds that such investment is negatively associated with the firm's abnormal investment, suggesting that investing in IT control personnel enhances a firm's investment efficiency. Furthermore, not only quantitative but also qualitative investment in IT control personnel improves investment efficiency. We also find that the association between human resource investment in IT controls and a firm's investment efficiency is more pronounced for firms with lower financial reporting quality and information environment. The results of this study provide useful implications for management, regulators, and market participants, as they demonstrate the positive role of investment in IT control personnel on the firm's internal decision.     

REACTIONS TO REGULATION OF ACCOUNTING FOR GOODWILL

Regulations designed to achieve “uniformity in practice” in Australian firms' reporting of goodwill were first adopted in 1985 with the introduction of AAS18. Because of the requirement to amortise purchased goodwill, a number of firms either did not comply or took evasive actions to mitigate the effects of the standard. This paper documents and explains the pre-regulation cross-sectional variation in accounting practices. Reactions to the set of regulations introduced between 1985 and 1989 are then described and explained through a longitudinal study of accounting policy choice. We develop hypotheses which explain why the goodwill accounting rules reversed relations between the accounting methods adopted by firms and both the earnings effect of compliance and the market value of the firm's goodwill. The results are confirmatory.     

The role of social capital in price efficiency: International evidence

This study finds that firms with higher social capital and trust, as measured by firm environmental and social (E&S) performance, demonstrate better stock price efficiency. The result in a sample of 45 countries remains robust to alternative approaches addressing the endogeneity concerns. This relation is mainly derived from a firm's E&S engagements related to third parties and the whole of society, which regulate the firm's information environment after accounting for other influences. The positive role of E&S performance is further shaped by the firm's associated macro-level trust and social capital, as proxied by the market's cultural and institutional factors.