Accounting-based regulation in emerging markets: The case of China's seasoned-equity offerings

In China, listed companies are required to achieve a minimum return on equity (ROE) before they can apply for permission to issue additional shares through seasoned-equity offerings (SEO). We document two benefits of this accounting-based regulation in China. First, this regulation limits the increase in the supply of shares and the dilution of existing share prices. The Chinese stock market reacted positively to the announcement of this accounting-based regulation. Moreover, investors' reactions to SEO, announcements are less negative since the accounting-based regulation was introduced than before the regulation was enacted. The second benefit is that the regulation reduces adverse selection in SEO, as shown by the finding that prior to this regulation, firms below the ROE threshold underperformed the market after their SEO, much like what has been observed in other markets; while those above the threshold outperformed the market. Thus, although positive accounting theory predicts that regulations based on accounting numbers create incentives for managers to manipulate their accounting numbers, accounting-based regulations in China seem to serve some useful purposes.     

The life and death of the Australian permanent building societies

Throughout the nineteenth and twentieth centuries permanent building societies have been important providers of housing finance in Australia. Despite their long history Australian building societies have been disappearing at a steady rate since the early 1980s as they have converted into banks or become involved in mergers. The purpose of this paper is to give a background account of the history of Australian building societies and put forward explanations for their past popularity and more recent disappearance from Australian housing finance markets.     

CFO tenure,CFO board membership and accounting conservatism

We examine the influence of chief financial officer (CFO) tenure and CFO board membership on accounting conservatism among Australian listed companies. The study uses market-based (i.e., timeliness of earnings to news) and accounting-based (i.e., accrual-based loss recognition) measures of conservative accounting. The results show that while longer CFO tenure and CFO board membership increases accounting conservativism, this is not the case when CFOs become entrenched through long board-membership tenure. This entrenchment appears to lead to the use of aggressive accounting practices. Overall, the results indicate that CFO tenure and CFO board membership improve financial-reporting quality by increasing accounting conservatism in organizations, providing evidence of the importance of recognizing these two governance characteristics in policymaking and in regulation.     

Estimates of economic rates of return for the U.S. pharmaceutical industry, 1976–1987

Estimation procedures are designed to consider features of publicly-available financial accounting information which allegedly compromise its use to estimate economic internal rates of return. These procedures, which focus on cashflows rather than conventional accounting income measures, are used to investigate the relative profitability of the U.S. pharamaceutical industry. Results indicate that pharmceutical returns exceed returns for comparable U.S. industrial firms during the period encompassed by the study. Differences for these comparisons are substantially less than what is implied by an uniformed use of accounting information, however. In particular, differences in implied internal rates of return of 2.1% to 3.8%, whereas differences in accounting rates of return are 4.0% to 5.6%. Results are robust for a wide variety of assumptions about industry growth rates and investment payout profiles, characteristics which potentially cause accounting-based return measures to differ from underlying internal rates of return.     

The Significance of the Profit and Loss Account in Nineteenth-Century Britain: A Reassessment

This article presents a reassessment of the development of regulated financial disclosure in nineteenth-century British companies legislation. Most accounting historians have emphasized the importance of the balance sheet under the disclosure requirements of various Acts. The relative importance of the profit and loss account has been largely neglected by historians. This paper contends that the profit and loss account was a considerably more important document in the financial regulation of companies than previously contemplated. In fact, the profit and loss account was required in the disclosure regulations of numerous Acts, including the Joint Stock Banks Act (1844), the Regulation of Railways Act (1868), the Life Assurance Companies Act (1870) and the Building and Friendly Societies Act (1874).     

The ‘public auditor’: an experiment in effective accountability

Mutual associations were created to provide, through a system of self-help, for the welfare of members of the British working class increasingly separated from the family unit characteristic of an agricultural-based economy. The appropriate method for protecting the resources required at some future date by the poorly off in conditions of need produced a challenge for Parliament. This paper examines the development of the concept of the ‘public auditor’ to describe the individuals considered suitable to undertake the audit of mutual associations, and the increasing statutory emphasis on the desirability of appointing a person ‘carrying on publicly the business of an accountant’ to certify the annual returns made to the Registrar of Friendly Societies. This paper argues that statutory recognition of the accountant as a member of a skilled occupational group represents an important stage in the professionalisation process. This paper shows that the concept of the public auditor was rejected by most mutual associations, while the larger organisations made the voluntary decision to appoint professional accountants to undertake the audit function.     

Contextualizing the Process of Accounting Regulation: A Study of Nineteenth-Century British Friendly Societies

Friendly societies date from the seventeenth century and have been the subject of statutory recognition and regulation since 1793. These societies developed rapidly in the nineteenth century as a mechanism of self-help for the emerging industrial working class. This article embraces an historical examination of the social, economic and political contexts within which a discourse on the issue of their regulation took place and reveals the ideologies underpinning the disciplinary framework that was constructed. Ideas of the philosophical radicals were influential in making friendly societies the subject of closer regulation. This development came at a time when laissez-faire as a guide to government action gave ground to the acceptance of the need for state control in the endeavour to enhance the common good. The concepts of paternalism and financial safety are found to have influenced the decision to regulate friendly societies, and the disciplinary framework constructed is located within the range of provisions applying to organizational entities operating in nineteenth-century Britain.     

The Role of Analysts’ Forecasts in Accounting-Based Valuation: A Critical Evaluation

This paper critically evaluates the use of analysts forecasts in accounting-based valuation. Specifically, I assess the usefulness and the limitation of analysts forecasts in predicting future earnings and in explaining the market-to-book ratio, in light of a comprehensive set of 22 explicit information items, including: economic rent proxies, conservative accounting proxies, earnings quality signals, transitory earnings proxies, industry characteristics, and risk and growth proxies. While analysts forecasts capture 45–83% of the information from these sources depending on model specifications, they do not appear to fully incorporate certain information items. In particular, proxies for conservative accounting and transitory earnings are incrementally useful in predicting future earnings; proxies for economic rents, conservative accounting, and risk are incrementally useful in explaining the market-to-book ratio. Collectively, these results validate the use of analysts forecasts as a parsimonious proxy for forward-looking information in accounting-based valuation and suggest how to improve on their use.JEL Classification: D4, G12, M4     

ON LINEAR DISCRIMINATION WITH ACCOUNTING RATIOS

Much research in Accounting and Finance is concerned with using the linear discriminant function (LDF) to model accounting-based ratios to predict financial events and other variables. Little attention has been given to the conditions under which the model is optimal, and to any resultant biases in model output associated with accounting ratios that do not meet optimality. This study lists conditions for LDF optimality, and discusses the potential problems when accounting numbers do not meet such conditions. This knowledge is extended by reported results of an empirical study which show that the cross-sectional properties of some ratios arr not temporally stable. Finally, suggestions are offered to improve modeling efforts.     

Interrogating an accounting-based intervention on three axes: Instrumental, moral and aesthetic

Accounting research is beginning to concern itself with mapping the operation of accounting in specific empirical settings. This paper has a similar aim — to track the effects of an accounting-based intervention in a rationalized lifeworld that is constituted by three cultural spheres with their associated modes of rationality —instrumental, moral and aesthetic (Habermas, J., The Theory of Communicative Action, Vol. 1, Heinemann, 1984). The institutional setting chosen is the U.S. health-care industry and the empirical event focused upon is the introduction of a prospective payment system in 1983. The empirics raise some interesting suggestions for future research. It appears that accounting struggles as an instrumental technology but enables action by providing a way out of moral dilemmas and in so doing enacts substantive power effects upon human bodies, both individual and collective.     

Mandatory IFRS adoption and executive compensation:Evidence from China

This study investigates how the mandatory adoption of International Financial Reporting Standards(IFRS) affects the contractual benefits of using accounting information to determine executive compensation in China. After controlling for firm and corporate governance characteristics, we find strong evidence supporting the positive role of mandatory IFRS adoption on the accounting-based performance sensitivity of executive compensation. Subsample analysis suggests that improvements in accounting-based performance sensitivity after IFRS adoption differ across regions with various levels of institutional quality and across firms that are affected to a different extent by the adoption. Additional analysis supports the argument that the positive effects of IFRS adoption on the use of accounting performance in executive compensation are driven by the reduction in accounting conservatism associated with IFRS adoption.     

Multi-Period Lead Relations between Price-to-Book Ratios and Accounting Rates-of-Returns: Korean Evidence

Using a sample of Korean firms, this paper investigates the relations between price-to-book ratios and their determinants identified by Ohlson's (1995) accounting-based valuation model. A particular emphasis is placed on thequestion of whether and how the impact of future accounting rates-of-returns on current price-to-book ratios decays within a finite time horizon. Our results reveal that any current price-to-book ratio is significantly relatedto current and future accounting rates-of-returns over the five subsequent years.The relation between the two is stronger when accrual earnings are used for measuring accounting rates-of-returns than it is when cash flows or dividend flows are used. Further, the strength of this multi-period lead relation tends to decrease substantially in magnitude and significance with the time horizon, and becomes insignificant beyond a certain time horizon.     

A Rejoinder to the long road to publishing: A user-friendly exposé1

The focus of this paper is an investigation into the approaches to studying of Portuguese students of introductory accounting using the short version of the ASSIST instrument. In doing so, it also examined the impact upon the strategy adopted of the discipline area of students and gender. The results validate the use of the inventory with students of accounting in Portuguese higher education and add weight to the use of translated versions of this instrument elsewhere. The findings indicate that Portuguese students of introductory accounting favour a strategic approach over either a deep or a surface approach and suggest that both the individual student's discipline area and gender have an impact upon the adopted approaches to studying.     

The change on the foundations of the Turkish accounting system and the future perspective

Accounting is a social construct and shaped by the society in which it operates. Needs of society are the most important influencing factors in the development of accounting in a country. Though in today's open system societies, the change in the accounting is inevitable, it should not be forgotten that accounting is not only a practice but also a discipline which has got theoretical and historical backgrounds. In this regard, this paper notes the changes in Turkish accounting system from the theoretical and historical perspectives.     

The Incidence of Accounting-based Covenants in UK Public Debt Contracts: An Empirical Analysis

Accounting-based covenants are of particular interest to accounting researchers in view of their potential to influence management's accounting policy choices and their attitudes to new accounting standards. This exploratory paper provides evidence on the incidence of accounting-based covenants in 108 UK public debt contracts for the period 1987-1990. Thirty percent of the agreements contain such covenants, the majority of which are affirmative gearing covenants. Focusing on the institutional differences between the UK and the US, the paper examines relationships between the presence of accounting-based covenants and (a) characteristics of the issuing firm, and (b) other control mechanisms included in the debt agreement. UK firms raising public debt are of good credit quality and UK insolvency procedures afford unambiguous protection to secured creditors. As a result, accounting-based covenants are associated with long-term unsecured debt and with firms having high values for assets-in-place but, in contrast with US findings, are unrelated to gearing. Convertibility appears to reduce the need for accounting-based covenants, especially when the debt is also subordinated. The relationship between accounting- based covenants and security depends on the nature of the security (fixed or floating). Longer term non-convertible debt agreements are, therefore, particularly likely to contain covenants that could influence management's accounting behaviour. This paper provides a starting point for further research into these issues.     

Costs and regulation in the U.K. telecommunications industry

This article is written in the belief that it is important to encourage research into accounting for regulated industries. It seeks to illustrate this by considering as an exemplar the use of Accounting Separation (using regulated industry nomenclature) and hierarchical costing systems in the U.K. telecommunications industry concentrating on their use by BT and the telecommunications regulator. Accounting Separation seeks to use accounting means to partition the organization into elements as independent as possible from other parts of the organization. The published output of this system is meant to inform competitors of BT's costs for the regulated network components they use. These costs are also used in setting interconnection charges. These are charges that other operators pay for connecting with and using the BT system. This is not the accounting system used in decision making by BT. Nor does it represent the only accounting information obtained by the regulator. The focus of this article is upon how far the BT accounting system satisfies the accounting conditions required to allow the incremental costs and stand alone costs of the partitioned elements of the organization to be determined in a setting using a hierarchical accounting system. Methods of overcoming some of the identified problems are suggested. The importance of correct approaches to joint costs is highlighted concentrating on the treatment of joint costs in regulation. The accounting ideas discussed here would seem to have application well beyond regulated firms but seem neglected generally in management accounting.     

Accounting comparability and relative performance evaluation in CEO compensation

We investigate whether accounting comparability is associated with the likelihood that CEO compensation is tied to relative accounting performance (e.g., return on assets). We predict that higher accounting comparability increases the risk-sharing benefit of accounting-based RPE because peer firm performance better controls for common risk in RPE firm performance. Thus, firms that have higher accounting comparability with potential performance peers will be more likely to include accounting-based RPE as a component of the total CEO compensation contract. We find support for this prediction using (1) an explicit test design that relies on the ex ante terms of CEO compensation contracts obtained from proxy disclosures, and (2) an implicit design that relies on the actual realizations of CEO compensation. To provide further evidence, we examine the association between accounting comparability and the selection of performance peers when the CEO compensation contract includes an accounting-based RPE component. We find that higher comparability between the RPE firm and a potential peer firm increases (decreases) the potential peer firm’s likelihood of being selected into (dropped from) the peer group. Cross-sectional analyses show that this association is less pronounced, or not present, when the relative performance measure is price-based (as opposed to accounting-based), indicating that these results do not merely reflect a more general role of comparability in all RPE contracts.     

Evaluating the effectiveness of model specifications and estimation approaches for empirical accounting-based valuation models

This study considers the effectiveness of different model specifications and estimation approaches for empirical accounting-based valuation models in the UK. Primarily, we are interested in the accounting determinants of market value and, in particular, whether accounting-based valuation models can be estimated that not only have in-sample explanatory power but also potentially can be used as a tool of financial statement analysis in developing useful estimates of value out-of-sample. This requires models to be estimated on one sample, and tested for effectiveness on a different sample. Then, issues of model specification arise, together with choosing between methods of estimating the empirical models, in identifying the effectiveness of each combination. Using the criteria of bias and accuracy to capture effectiveness, we suggest estimation methods and models that, overall, provide the most effective models in this context.     

The Role of Accounting Information,Environment and Management Control in Multi-National Organizations

The results are reported of a replication and extension of the study by Brownell [1985], which focused on the effects of environmental complexity and dynamism on the use of accounting-based controls in the U.S. parent company of a large multi-national organization. The study reported here examines the Australian subsidiary of the company, and its results confirm previous findings, indicating that both job satisfaction and performance are enhanced in circumstances where heavy reliance on accounting-based controls is confined to situations of low environmental complexity. The results also indicate that non-accounting, “behavior” controls have a role in the foreign subsidiary but take on a form other than the placement of U.S. nationals in senior management positions in the subsidiary. Differences in the environment faced by the parent and subsidiary also produced predicted differences in reliance on accounting measures in performance evaluation.     

Predicting UK Takeover Targets: Some Methodological Issues and an Empirical Study

This paper examines the methodological issues of using accounting ratios to predict takeover targets. Certain improvements are suggested, notably the use of industry-relative ratios and the deterimination of an ex ante cut off point which maximizes returns. The empirical study suggests that industry-relative ratios are not an improvement upon industry-specific models and that, although the models perform better than chance, they do not perform sufficiently well as to earn excess returns. Unfortunately, the results are not sufficiently sensitive as to be significantly affected by the choice of cut off point.