Structuring financial statement analysis projects to enhance critical thinking skills development

This paper documents a method of structuring financial statement analysis projects to enhance the development of students’ critical thinking skills. The project is structured in a cooperative learning framework in which a student accesses financial statement information from the World Wide Web, performs a financial statement analysis, and then engages in an exercise with other students who have analyzed firms in the same industry. Both the individual and team phases of the project offer opportunities for students to develop several important critical thinking skills.     

Research on the use of financial statement information for forecasting profitability

Research on the use of financial statement information for forecasting profitability has two objectives: (i) to generate improved forecasts of profitability and accurate estimates of firm value; and (ii) to identify market inefficiencies with respect to financial statement information. For these areas of research, this article describes the evolution, provides examples and shares implications of the research. It also discusses opportunities for future research. The article highlights that financial statement analysis research has slowly evolved and has received limited attention from academics. The article argues that there are vast opportunities for impactful research on fundamental analysis and market inefficiencies.     

Audit committee characteristics and financial statement comparability

Financial statement comparability enables weighing the similarities and differences in financial performance between firms. Prior studies mainly focus on the role of accounting standards in the production of comparability, but the role of economic agents has been largely overlooked. We find that a firm's audit committee size and financial expertise affect its financial statement comparability. Financial information tends to be more comparable among industry peers when audit committees are larger and more members have financial and accounting expertise. The effect of audit committee expertise on comparability is stronger for firms with less independent and smaller boards, for firms with non-Big 4 auditors and for firms with CEOs serving as the chairperson of the boards.     

Management earnings forecast and financial statement complexity

We investigate the manager’s earnings forecasting strategy when financial statement complexity becomes a significant issue in capital markets. We suppose that complexity in financial statements arises from complexity of firm’s business transactions (business complexity) or complexity of associated reporting standards (reporting complexity) as mentioned in Guay et al. (2016). We find that a manager’s forecasting strategy depends on whether financial statement complexity stems from business or reporting complexity. Specifically, we indicate, among other observations, that managers who initially announced optimistic earnings forecasts will revise and release pessimistic earnings forecasts when financial statement complexity stems from reporting complexity.     

Gender diversity and financial statement fraud

This study investigates the role of gender diversity in fraud commission and detection with a view to identifying whether companies with more female corporate leaders are less likely to be involved in financial statement fraud. Using a bivariate probit model, the role of female corporate leaders in financial statement fraud commission and detection is examined for Chinese listed companies from 2007 to 2018. The representation of female corporate leaders increases the likelihood of fraud detection, thus reducing firms’ propensity to engage in fraud. The finding confirms that women are risk averse and more committed to ethical practices than men in corporate leadership positions. Moreover, this impact of gender diversity is contingent upon the nature of ultimate controllers of listed companies: more female representation in top leadership roles can mitigate fraud commission or detect fraud effectively in non-state-owned enterprises, but not in state-owned enterprises. In addition, the recent anti-corruption campaign initiated by Chinese President Jinping Xi is a powerful form of public governance. Female corporate leaders play a more positive role in mitigating fraud commission and detecting fraud commission in the post-campaign period than in the pre-campaign period.     

Economic policy uncertainty and financial statement comparability

We examine the implications of economic policy uncertainty (EPU) for financial statement comparability. We posit that the increased difficulty of estimating future cash flows and the increased opportunity for earnings management with increased EPU reduce the quality of earnings and its comparability. Consistent with this reasoning, we find a negative relation between earnings comparability and lagged EPU. Further, the association between EPU and comparability is more negative for firms that have poorer accruals quality and higher earnings volatility. We do not find that accounting policy choice is systematically related to the association between EPU and comparability. These results suggest that cross-sectional differences in accounting estimates rather than accounting policies influence the relation between EPU and comparability.     

Using short stories to teach critical thinking and communication skills to tax students

Researchers and numerous groups stress the importance of incorporating communication skills development into accounting curricula. Although a number of formal and informal techniques are available to instructors to incorporate writing skills into the classroom, many students have both oral and writing communication apprehension (CA). Short stories are a flexible teaching tool to overcome boredom both inside and outside the classroom. This scenario approach combines education and entertainment to make learning easier and interesting. Students can be required to develop short stories where accountants are the key characters and heroes. The better short stories may be placed on the Internet for future students to review. What may be wearisome and unexciting information can become meaningful through mystery, intrigue, humour, and adventure.     

The Use of a Statement of Changes in Financial Position to Interpret Financial Data: An Empirical Investigation

This study provides empirical evidence on the use of a statement of changes in financial position by financial analysts to interpret and make judgments on information contained in annual reports. Analysts were required to answer five questions developed from claims made in a professional accounting standard about the purpose of the statement of changes in financial position. The results indicate that the statement of changes in financial position does not generally enhance financial analysis.     

Ratio Analysis and Equity Valuation: From Research to Practice

Financial statement analysis has traditionally been seen as part of thefundamental analysis required for equity valuation. But the analysis has typicallybeen ad hoc. Drawing on recent research on accounting-based valuation, this paperoutlines a financial statement analysis for use in equity valuation. Standardprofitability analysis is incorporated, and extended, and is complemented with ananalysis of growth. An analysis of operating activities is distinguished from theanalysis of financing activities. The perspective is one of forecasting payoffs to equities. So financial statement analysis is presented as a matter of pro formaanalysis of the future, with forecasted ratios viewed as building blocks offorecasts of payoffs. The analysis of current financial statements is then seen asa matter of identifying current ratios as predictors of the future ratios thatdetermine equity payoffs. The financial statement analysis is hierarchical, withratios lower in the ordering identified as finer information about those higher up.To provide historical benchmarks for forecasting, typical values for ratios aredocumented for the period 1963–1999, along with their cross-sectionalvariation and correlation. And, again with a view to forecasting, the time seriesbehavior of many of the ratios is also described and their typical long-run,steady-state levels are documented.     

Financial development and barriers to the cross-border diffusion of financial innovation

This paper explores the determinants of financial development by focusing on the role played by barriers to the diffusion of financial technology. These barriers are measured using human genetic distance from the technology frontier. The results based on cross-sectional data for 123 countries suggest that genetic distance to the global frontier has an economically and statistically significant effect on financial development, in that countries that are genetically far from the technology leader tend to have lower levels of financial development. Genetic distance is found to have the largest effect, even after controlling for other determinants of financial development established in the literature. These findings indicate that cultural barriers to the diffusion of financial technology across borders impact financial development by influencing the follower countries’ ability to adopt and adapt innovations from the frontier.     

A Bayesian analysis of log-periodic precursors to financial crashes

A large number of papers have been written by physicists documenting an alleged signature of imminent financial crashes involving so-called log-periodic oscillations–oscillations which are periodic with respect to the logarithm of the time to the crash. In addition to the obvious practical implications of such a signature, log-periodicity has been taken as evidence that financial markets can be modelled as complex statistical-mechanics systems. However, while many log-periodic precursors have been identified, the statistical significance of these precursors and their predictive power remain controversial in part because log-periodicity is ill-suited for study with classical methods. This paper is the first effort to apply Bayesian methods in the testing of log-periodicity. Specifically, we focus on the Johansen–Ledoit–Sornette (JLS) model of log periodicity. Using data from the S&P 500 prior to the October 1987 stock market crash, we find that, if we do not consider crash probabilities, a null hypothesis model without log-periodicity outperforms the JLS model in terms of marginal likelihood. If we do account for crash probabilities, which has not been done in the previous literature, the JLS model outperforms the null hypothesis, but only if we ignore the information obtained by standard classical methods. If the JLS model is true, then parameter estimates obtained by curve fitting have small posterior probability. Furthermore, the data set contains negligible information about the oscillation parameters, such as the frequency parameter that has received the most attention in the previous literature.     

Hull House: An autopsy of not-for-profit financial accountability

Analyzing financial information for Hull House, an iconic not-for-profit organization, students are asked to explore the clues to its unfortunate demise. Hull House filed for bankruptcy in 2012 after 123 years of service to the Chicago community. Evaluating the reported financial data from Internal Revenue Service (IRS) Forms 990, we seek to determine causes for this event and identify issues the board of trustees might have addressed in the years leading up to Hull House’s ruin that may have changed the outcome for this not-for-profit organization and its 60,000 clients. We also investigate the changing responsibilities of an organization’s leadership as it enters the “zone of insolvency.” This case requires real-life application of financial analysis to the not-for-profit accounting data provided by IRS Forms 990, which are publicly available on the website www.GuideStar.org.     

The role of financial development in exchange rate regime choices

We make the first attempt in the literature to empirically investigate the role of financial development in the choice of exchange rate regimes. Using a binary choice model, we first show that financially less developed countries are more likely to adopt a fixed exchange rate. To further examine the impact of financial development on the conditional probability of exiting from an existing pegged system to a flexible one, we then employ hazard-based duration analysis. We find strong evidence that countries with higher levels of financial development are more likely to exit a pegged system, and, interestingly, financial development only matters to orderly exits but not disorderly exits. Our results are robust to controlling for endogeneity and sample selection.     

Out-West Products, Inc.: A financial modeling and decision analysis case

The Out-West Products, Inc. instructional case requires students to build a comprehensive financial model to support planning and decision-making. Part 1 of this team-oriented Excel project requires students to construct a baseline model, while Part 2 provides sensitivity analysis and decision-making extensions. The case incorporates cost-volume-profit, accounting income versus cash flow, and benchmarking analyses. Case objectives provide students with a realistic financial modeling experience that includes: building models; linking data across financial statements; testing solutions and analyzing scenarios; and improving critical thinking skills. These objectives closely align to the AICPA Core Competency Framework for Entry into the Accounting Profession. The case can be used in introductory and upper-division managerial accounting, upper-division cost accounting, and MBA managerial accounting courses, and can be modularized to achieve instructor-specific objectives.     

An equilibrium approach to financial stability analysis: the Colombian case

This paper studies in detail the performance of a general equilibrium model of the financial system when applied to the case of Colombia. This model was designed following closely the work by Goodhart et al. (Ann Fin 2, 1–21, 2006b). The results suggest that the model performs satisfactorily, especially in the prediction of short-run trends (2 years). A shortcoming of the results is a slight overestimation of several trends in the medium to long-term. There is however room to progress, particularly in terms of the incorporation of idiosyncratic features of the Colombian financial system into the model.      

The critical role of history in scenario thinking: Augmenting causal analysis within the intuitive logics scenario development methodology

The historian Eric Hobsbawm stated that ‘The safest empirical generalization about history is still that nobody heeds its obvious lessons much’. Whether at a macroeconomic level or within individual organisations there are numerous examples of this, such as the economic crash of 2008, the causes of which had many parallels with those that caused the great depression 80 years previously. On the other hand however, overly-relying on the past as a guide to the future has its own obvious dangers—not least that important future events may have no past precedent. As such, the present paper firstly provides a discussion of the advantages and disadvantages of using the past as a guide to the future. It then examines the role of history in scenario work, arguing that history should receive greater emphasis as part of the scenario planning process. We suggest changes to the standard Intuitive Logics (IL) approach to scenario planning which would render learning from history a more central component of the scenario process, in contrast to its current peripheral role. Rather than diminishing scenario planning’s ability to facilitate a consideration of how the future may differ from the past, we show how a greater emphasis on history can enhance consideration of the causality of future change. An adapted IL that has more emphasis on historical analysis can augment scenario planning’s effectiveness as a tool for consideration of the future.     

Random matrix ensembles of time-lagged correlation matrices: derivation of eigenvalue spectra and analysis of financial time-series

We derive the exact form of the eigenvalue spectra of correlation matrices derived from a set of time-shifted, finite Brownian random walks (time-series). These matrices can be seen as real, asymmetric random matrices where the time-shift superimposes some structure. We demonstrate that, for large matrices, the associated eigenvalue spectrum is circular symmetric in the complex plane. This fact allows us to exactly compute the eigenvalue density via an inverse Abel-transform of the density of the symmetrized problem. We demonstrate the validity of this approach numerically. Theoretical findings are then compared with eigenvalue densities obtained from actual high-frequency (5 min) data of the S&P 500 and the observed deviations are discussed. We identify various non-trivial, non-random patterns and find asymmetric dependencies associated with eigenvalues departing strongly from the Gaussian prediction in the imaginary part. For the same time-series, with the market contribution removed, we observe strong clustering of stocks into causal sectors. We finally comment on the stability of the observed patterns.     

The stabilizing effect of social distancing: Cross-country differences in financial market response to COVID-19 pandemic policies

COVID-19 has had far-reaching global effects on the health and wellbeing of individuals on every continent. The economic and financial market response has been equally disastrous with high levels of volatility observed. This study explores the temporal relations between structural breaks, market volatility and government stay-at-home policy interventions and social distancing measures for 28 countries and their respective indices. We present results which indicate the establishment of stay-at-home policies influence sharp discontinuities in 15 of 28 markets (53.57 %) and increase market efficiency in 30 of 49 cases observed (61.22 %). These results indicate a small, statistically significant degree of stabilization in international financial markets responding to government stay-at-home policies and social distancing measures, a promising result for political actors concerned with economic performance during the public health response to the coronavirus 2019 pandemic.     

The influence mechanism of financial shared service mode on the competitive advantage of enterprises from the perspective of organizational complexity: A force field analysis

Financial transformation is a major organizational change that enterprises face today. Under the influence of information technologies, financial shared service mode has become a better option for enterprise financial transformation. Financial shared service mode has a positive or negative influence on the competitive advantage of enterprises under the promotion of internal and external factors. At the same time, the ever-changing complex environment makes the influence of financial shared service mode on the competitive advantage of enterprises more uncertain.Based on organizational complexity theory, this paper uses both a multi-case study approach and a force field analysis to explore the influence mechanism of financial shared service mode on the competitive advantage of enterprises and constructs the force field model of the influence mechanism. Under the premise of being influenced by the driving forces and restraining forces in the force field model, this paper focuses on the moderating forces associated with organizational complexity on the relationship between financial shared service mode and competitive advantage.The research shows, it is evident that the driving forces and restraining forces in the force field model exert dominant and restrictive effects on competitive advantage respectively through the financial shared service mode. It is vital to find that organizational complexity factors in the force filed model have moderating effect on the influence relationship between competitive advantage and financial shared service mode. Enterprises need to seek solutions to deal with organizational complexity factors under the joint influence of driving forces and restraining forces to maximize the positive influence of financial shared service mode on the competitive advantage of enterprises.