Foreign exchange exposure of “domestic” corporations

Unlike prior studies on foreign exchange risk that have focused on multinational companies, this paper documents that domestic companies face significant foreign exchange exposure. Indeed, we document that on average domestic company foreign exchange exposure is not significantly different from the exposures faced by multinational firms. As expected, the number of domestic firms with significant foreign exchange exposure increases with the exposure estimation horizon. More interestingly, the level of domestic firm exposure is significantly negatively related to firm size and asset turnover, and positively related to the market to book ratio and financial leverage. Our results have important implications for managers, policy makers, and accounting standards.     

Fund Management and Systemic Risk – Lessons from the Global Financial Crisis

Fund managers play an important role in increasing efficiency and stability in financial markets. But research also indicates that fund management in certain circumstances may contribute to the buildup of systemic risk and severity of financial crises. The global financial crisis provided a number of new experiences on the contribution of fund managers to systemic risk. In this article, we focus on these lessons from the crisis. We distinguish between three sources of systemic risk in the financial system that may arise from fund management: insufficient credit risk transfer to fund managers; runs on funds that cause sudden reductions in funding to banks and other financial entities; and contagion through business ties between fund managers and their sponsors. Our discussion relates to the current intense debate on the role the so‐called shadow banking system played in the global financial crisis. Several regulatory initiatives have been launched or suggested to reduce the systemic risk arising from non‐bank financial entities, and we briefly discuss the likely impact of these on the sources of systemic risk outlined in the article.     

Capital regulation and bank risk‐taking – new global evidence

This study investigates the link between capital regulation and bank risk‐taking. Using a sample of over 1,800 banks in 135 countries, I find that the relationship between capital regulation and bank risk‐taking (measured by z‐score) is an inverse ‘U’ shape. That is, as capital ratios increase, a bank will take less risk initially, then more risk. These results are robust to numerous additional tests, including estimation methods. I also find that more stringent regulations mitigate the effect of higher capital on lowering bank risk‐taking. Increased capital requirements, even when risk‐based, induce risk‐taking at higher levels, irrespective of whether banks are well‐ or under‐capitalised.     

‘RE‐OPENING THE BLACK BOX’: THE STORY OF IMPLEMENTING A RISK ANALYSIS METHOD IN A FRENCH LOCAL GOVERNMENT

This research is a study of the implementation of a risk analysis method (RAM) in a French local government. Based on the sociology of translation framework, this study shows that the success of the implementation of this management device is due to the transformation of its initial characteristics. Indeed, the RAM was initially designed to analyze the risks of outsourcing public services and thereby to aid elected officials with decision making. But in the hands of the actors in charge of its implementation, it progressively became a means for the members of the administrative services to inform elected officials about the consequences of their choices. This paper thus describes the ‘trajectory’ of this management device in a local government and, in doing so, emphasizes how it progressively became what it is (and what it is not) at present in this local government.     

The civil justice system and going concern audit reports: Comments on “Auditors’ decision-making under going concern uncertainties in low litigation risk environments: Evidence from Hong Kong”

Lam and Mensah [Lam, K., Mensah, Y.M., 2006. Auditors’ decision-making under going concern uncertainties in low litigation risk environments: Evidence from Hong Kong. J. Account. Public Pol. 25 (6), this issue] provide some valuable insight on auditors’ choice of going concern audit reports in an environment where the civil justice system affords, from the standpoint of the plaintiff, fewer remedies and is more difficult to file a complaint than it is in the US. Hence, from the auditor’s standpoint, this environment can appropriately be described as a “low litigation risk environment”. In this comment, I first question whether a disclaimer of an opinion is any indication of either a quality audit or professionalism. Secondly, three alternative explanations for the empirical regularities are discussed. The Gatekeeper Story suggests auditors are simply not willing to risk reducing their reputational capital by acquiescing to clients that are not likely to survive their own financial distress. The Herding Story suggests that, when auditors are faced with uncertainties or a gap in the authoritative literature, auditors will herd together to form a common response that mimic one-another. The Value of Incumbency Story holds that as the value of incumbency declines with the client’s inability to survive, auditors will have fewer incentives to incur the incremental costs to gather sufficient competent evidential matter necessary to support an unqualified opinion.     

Skinner's “Interpretation Panel”— A Means to Balance “Power”

The rules versus principles debate and the vital importance of context ‐ the circumstances‐specific nature of judgment ‐ are at the heart of Ross Skinner's suggestion for an “interpretation panel". International considerations and developments involving governance and regulation have created imbalances in power, expertise, and impartiality, increasing the importance of and need for such a panel. This analysis considers the nature of the problem, how professional judgment has been characterized, and why a panel would be appropriate to address, among other concerns, the audit committee's dilemma when accounting disputes arise. Evidence is provided that management turnover is higher in cases involving multiple restatements, governance problems, or regulators' sanctions. Although, intuitively, management turnover is likely to be associated with widely publicized restatements, some patterns suggest that it is a function of entity size, scope of management changes considered, and the manner in which the restatement was identified. Specifically, an identifiable source of discovery, as well as external involvement, is associated with a greater propensity for management change. In contrast, restatements linked to changes in available guidance from regulators are less likely to result in such turnover. One implication is that effective control design and monitoring to facilitate internal discovery of errors can decrease the likelihood of multiple restatements and reduce fault finding that leads to management change. The judgmental nature of restatements suggests that an infrastructure supporting “right‐mindedness” does have merit. An interpretation panel would increase the feasibility of principles‐based standards, facilitating timely resolution of accounting‐associated disputes and thereby enhancing the information environment underlying the allocation of capital.