Does corporate philanthropy exist?: business giving to the arts in the U.K.

This paper addresses the question of the existence of corporate philanthropy. It proposes a framework for analysing corporate philanthropy along the dimensions of business/society interest and primary/secondary stakeholder focus. The framework is then applied in order to understand business involvement with the arts in the U.K. A unique dataset of 60 texts which describe different firms' involvement with the Arts is analysed using formal content analysis to uncover the motivations for business involvement. Cluster analysis is then used in order to identify motivational groupings. Two broad types of involvement are identified – advertisers and legitimators. Only in one case of the 60 is there the potential to observe pure altruism. The contribution of this paper is twofold. First, it provides a clear framework to understand the motivations for corporate giving and applies this using empirical data. Secondly, this research finds little evidence, if at all, of corporate philanthropy in the context of firms giving to the Arts in the U.K.     

The Audit Report under Going Concern Uncertainties: An Empirical Analysis

This study explores the value of the audit report in the context of the going concern qualification (GCQ) decision along the joint dimensions of auditor competence and independence. Likelihood of company failure, auditor switch rates, the self-fulfilling prophecy argument and audit firm size are analysed as variables potentially affecting the value of the audit report in a GCQ situation. This study focuses on the outcomes of such decisions: the presence or absence of a GCQ, for a large sample of UK quoted companies over the decade 1977–86. Our results suggest that, unless the likelihood of failure is very high, the probability of a GCQ is very low. We find some evidence in support of an association between the presence of a GCQ and auditor switching but no support for the self-fulfilling prophecy argument. In addition, smaller UK audit firms do not appear to exhibit lower GCQ rates than do large firms. There is some evidence that the issues of auditor competence and independence may be a cause for concern in this context in the UK.     

Creative Accounting and Investment Analyst Response

This paper investigates the impact of window dressing on stockbroker analyst evaluation of a company's annual accounting numbers. A new methodological approach is used involving a laboratory experiment in which a large sample of experienced investment analysts drawn from five of the top London houses processes real company accounts. The research was conducted in the first half of 1990 at the end of a long bull market. The participating analysts were not overly concerned about the quality of published accounting information and creative accounting was not then viewed as a serious problem. Contrary to our prior expectations we found little evidence of window dressing adjustments being made by the subjects in general. However, those subjects who did correct were significantly more experienced. Possible explanations for our results and potential implications for capital market behaviour and information processing are discussed.     

Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations

Abstract:  This paper tests whether sell-side analysts are prone to behavioural errors when making stock recommendations as well as the impact of investment banking relationships on their judgments. In particular, we analyse their report narratives for evidence of cognitive bias. We find first that new buy recommendations on average have no investment value whereas new sell recommendations do, and take time to be assimilated by the market. We also show that new buy recommendations are distinguished from new sells both by the level of analyst optimism and representativeness bias as well as with increased conflicts of interest. Successful new buy recommendations are characterised by lower prior returns, value stock status, smaller firms and weaker investment banking relationships. On the other hand, successful new sells do not differ from their unsuccessful counterparts in terms of these measures. As such, we provide evidence that analysts are prone both to behavioural bias as well as potential conflicts of interest in their new buy stock recommendation decisions. We also show that these two explanations of analyst behaviour are to a great extent independent of each other. Consequently, the recent attempts by regulators to address potential conflicts of interest in analyst behaviour may have only limited impact.     

Comparing the performance of market-based and accounting-based bankruptcy prediction models

Recently developed corporate bankruptcy prediction models adopt a contingent claims valuation approach. However, despite their theoretical appeal, tests of their performance compared with traditional simple accounting-ratio-based approaches are limited in the literature. We find the two approaches capture different aspects of bankruptcy risk, and while there is little difference in their predictive ability in the UK, the z-score approach leads to significantly greater bank profitability in conditions of differential decision error costs and competitive pricing regime.     

The predictability of debt-servicing difficulties among less developed countries

In this article, multivariate statistical models are derived for forecasting the emergence of arrears of debt-service among less-developed countries. The emphasis of the article is on prediction, and the criterion variable differs from that generally used in earlier research, which focuses on rescheduling. Out-of-sample tests are used to establish theex ante predictive utility of the derived models, which are found to have low error rates. Moreover, the predictive ability appears to be stable over time.     

Ethical Behaviour in the U.K. Audit Profession: The Case of the Self-Fulfilling Prophecy Under Going-Concern Uncertainties

External auditors owe a professional duty to the company's stockholders and to society in general. However their remuneration is determined by management. The resulting conflicts of interest are particularly acute in distressed companies where the auditors are required to disclose uncertainties regarding future survival. We focus on the consequentialist self-fulfilling prophecy argument whereby auditors may fail to disclose such uncertainties due to the belief that the disclosure itself would precipitate the company's bankruptcy. We find no empirical support for such beliefs for a sample of distressed U.K. companies with audit reports published between 1986 and 1993. Companies whose auditors disclose going concern uncertainties are no more likely to fail than those without such disclosures; indeed three out of four reports containing going concern uncertaintiesare not followed by failure before publication of a subsequent set of accounts. Instead we find that it is the degree of financial distress that drives both bankruptcy and the auditor's going concern disclosure rather than that the disclosure itself causes failure. Belief in the self-fulfilling prophecy effect nevertheless persists, and this despite the profession's clear ethical guidelines that audit opinions should provide an objectively true and fair view, paying no regard to possible consequences. It may be that the continued attractiveness of the self-fulfilling prophecy belief is due to its providing a means of resolving intense auditor/management conflict in what is a particularly complex decision situation. We argue that, if the profession's clear ethical guidelines are to play a greater role in this area, issues such as enforcement will need to be addressed.