Do institutional shareholder services (ISS) corporate governance ratings reflect a company's operating performance?

Little is known about the relation between the actual governance rating received by a firm and the firm's performance. In this study, we examine the relation between the actual corporate governance rating received by a firm and the firm's performance during the years 2002–2004. We use the institutional shareholder services (ISS) corporate governance quotient (CGQ) rating of a firm's corporate governance structure and analyze this rating in relation to the firm's operating performance. We compare the institutional shareholder services’ CGQ rating to two measures of the firm's operating performance, return on assets (ROA) and return on equity (ROE). Based upon our results, we do not find statistical evidence suggesting that the firms’ operating performance is related to the firms’ ISS corporate governance rating.     

Valuation of asset leasing contracts

This paper describes the relation among a variety of asset leasing contracts, including: (1) cancellable operating leases; (2) leases which grant the lesse an option to extend the life of the lease; (3) leases that grant the lessee an option to purchase the leased asset at a fixed price at the maturity date of the lease; (4) leases that grant the lessee the right to purchase the leased asset at its ‘fair market value’ at the maturity date of the lease; (5) leases that grant an option to the lessee to purchase the leased asset at a prespecified price anytime during the life of the lease; (6) leases that require the lessee to purchase the leased asset at a fixed price at the maturity date of the lease; and (7) leases that contain non-cancellation provisions. The paper uses a compound option pricing framework to develop a general model for valuing (or evaluating) each of the types of leasing contracts. Numerical examples are presented to illustrate the effect of the various elements of a leasing contract — including cancellation risk and residual value risk — on equilibrium rental payments.     

Reclassification of Financial Assets under IAS 39: Impact on European Banks' Financial Statements

In response to the financial crisis, the IASB issued on 13 October 2008 an amendment to IAS 39 which enables entities to reclassify non-derivative financial assets held for trading and financial assets available-for-sale. This paper examines the influence of this controversial amendment on the 2008 financial statements of 219 European banks which apply IFRS. I find that approximately one-third of the sample banks have taken extensive advantage of these reclassification opportunities. The mean reclassification amount is 3.9% of total assets and 131% of the book value of equity, respectively. I further document that reclassifying banks avoid substantial fair value losses, and hence, report significantly higher levels of return on assets (ROA), return on equity (ROE), book value of equity and regulatory capital. In particular, the mean ROE switches sign from a negative ROE of ?1.4% to a positive ROE of 1.3% due to gains from reclassifications. Overall, this paper documents a substantial impact of the amendments on banks' financial statements and suggests analysing these reclassifications with particular caution.     

LESSORS' DEPRECIATION AND PROFIT-AN APPROACH VIA DEPRIVAL VALUE

Lessor accounting raises intriguing problems. Its accepted methods spread depreciation, and thus profit, in yearly doses whose size jumps capriciously and with scant regard to any principle. Yet the economic qualities of an (asset do not change just because it is leased; the only new factor is the odd way in which tax and interest re-shape its cash flows. If the rules of deprival value are sound for familiar assets, they should be sound too for leased assets. But its arithmetic must expand to cover flows (tax and interest) that are not usually coupled with depreciation. Two results then follow: after-tax profit tends to be constant throughout the lease, and the full size of tax bounty becomes clear.     

Canadian Evidence on the Constructive Capitalization of Operating Leases*

One type of relevant ex ante research supporting the accounting standard‐setting process is the study of a proposed standard's impact on reported figures. The International Accounting Standards Board recently decided to review the lease accounting standard, which will naturally involve consideration of the G4 + 1 recommendation to capitalize all noncancellable lease contracts, including operating leases. National evidence of the impact of the G4 + 1 proposals provides feedback for the international standard‐setter. This study developed and used a refined constructive capitalization method, in which company‐specific assumptions — interest rate, total/expired/remaining lives of leased assets, and tax rate — were used to compute the impact of operating‐lease capitalization on key financial indicators for a sample of Canadian public companies. The results indicate that capitalizing operating leases would lead to the recognition of important additional assets and liabilities on the balance sheet. It would therefore significantly increase the debt‐to‐asset ratio and significantly decrease the current ratio. These results were noted across all industry segments in the sample. Income statement effects were generally less material. Significant impacts on return on assets, return on equity, and / or earnings per share were noted in only three industry segments: merchandising and lodging, oil and gas, and financial services. Intercompany comparability would not be affected overall nor within industries, because of similar rankings for each financial indicator before and after operating‐lease capitalization.     

中国寿险公司多元化经营的风险分析

选取新华、国寿、太平、泰康、平安等五家寿险集团公司从2001~2011年每年绩效指标中总资产收益率和净资产收益率的标准差作为度量公司风险的指标,将五家公司的业务线熵指数的均值作为多元化经营的指标进行实证分析。结果表明:多元化经营与寿险公司总资产收益率、净资产收益率的标准差之间存在一定的非线性关系,即多元化经营在一定范围内可以降低ROA和ROE的波动性,但在一定范围内又可能会增大这种波动性。     

Bringing leased assets onto the balance sheet

Pending changes in lease accounting standards will require firms to recognize obligations that have historically been kept off-balance-sheet (OBS). We examine the implications of this accounting treatment for a host of common risk and performance metrics. Conventional leverage, Z-Score, levered beta, return on capital and other asset utilization measures underestimate risk and overstate performance of firms relying heavily on OBS leasing. The distortion affects relative rankings as well as average levels and has increased over time. Proposed changes in reporting standards aim to mitigate future distortion, but necessitate adjustments for time-series comparisons. Under current reporting standards, investors, analysts, and researchers can estimate leased asset value and adjust accounting-based metrics to better reflect these fixed costs.     

Impact of corporate performance on stock price predictions in the UAE markets: Neuro-fuzzy model

Predicting stock price remains one of the challenges for investors' investment strategies. This study helps with accurate prediction and the main factors affecting variations in stock prices. It applies an adaptive neuro-fuzzy model on 58 listed firms from both the Abu Dhabi Securities Exchange and the Dubai Financial Market for the period 2014–2018 to estimate the predictive power of corporate performance measures and their significance. After examining four performance predictors—return on asset (ROA), return on equity (ROE), earning per share (EPS), and profit margin (PM)—the study finds that ROE is the most significant predictor and ROA is the least. EPS is the most influential profitability measure and PM the least.     

The relationship between net interest margin and noninterest income using a system estimation approach

This paper examines the determinants of bank net interest margin (NIM) and non-traditional banking activities (NII). A system estimation approach is employed to control for the simultaneity between NIM and NII for commercial banks in a group of 28 financially liberalized countries during the period between 1997 and 2004. We find a statistically significant negative relationship between NIM and NII for the period between 1997 and 2002. A generally positive but statistically insignificant association between NIM and NII is found for the subsequent period (2003–2004). Banks’ increasing involvement in non-traditional activities is negatively correlated with risk-adjusted profitability measures in the former subperiod, suggesting no obvious diversification benefits. However, the share of noninterest income is positively related to the return on assets (ROA) and the return on equity (ROE) for the latter subsample.     

Liquidity management,operating performance,and corporate value: evidence from Japan and Taiwan

This study examines the relationship between liquidity management and operating performance, and that between liquidity management and corporate value for firms in Japan and Taiwan. We observe that the cash conversion cycle (CCC)–returns on assets (ROA) and CCC–returns on equity (ROE) relationships are commonly negative and sensitive to industry factors. Both Japanese and Taiwanese firms with q>1 have significantly lower CCC than firms with q⩽1. In addition, Japanese firms with q>1 have significantly higher ROA and ROE than firms with q⩽1. Overall, the findings indicate that aggressive liquidity management enhances operating performance and is usually associated with higher corporate values for both countries in spite of differences in structural characteristics or in financial system of a firm.     

Gender-diverse board and the relevance of voluntary CSR reporting

In this paper, we focus on voluntary corporate social responsibility (CSR) disclosure, and we test the extent to which the value relevance of CSR reporting is affected by the appointment of female directors. Using a sample of French listed companies belonging to the SBF 120 index from 2001 to 2011, we control for differences in firm characteristics between firms with and without female board membership by using propensity score matching. Our results show that high CSR reporting is more relevant in terms of market value for firms with gender-diverse boards than for firms with completely male directors. This finding holds when we use the accounting-based performance measures, namely, return on assets (ROA) and return on equity (ROE). We also highlight that engaging an external assurance provider for CSR reporting is value relevant for firms without female directors but not value relevant for firms with female directors, suggesting a substitute relationship between gender-diverse boards and CSR assurance. Our results are stable when we consider the presence of at least two and three female directors.     

Enterprise resource planning systems: comparing firm performance of adopters and nonadopters

The current study examined the longitudinal impact of ERP adoption on firm performance by matching 63 firms identified by Hayes et al. [J. Inf. Syst. 15 (2001) 3] with peer firms that had not adopted ERP systems. Results indicate that return on assets (ROA), return on investment (ROI), and asset turnover (ATO) were significantly better over a 3-year period for adopters, as compared to nonadopters. Interestingly, our results are consistent with Poston and Grabski [Int. J. Account. Inf. Syst. 2 (2001) 271] who reported no pre- to post-adoption improvement in financial performance for ERP firms. Rather, significant differences arise in the current study because the financial performance of nonadopters decreased over time while it held steady for adopters. We also report a significant interaction between firm size and financial health for ERP adopters with respect to ROA, ROI, and return on sales (ROS). Specifically, we found a positive (negative) relationship between financial health and performance for small (large) firms. Study findings shed new light on the productivity paradox associated with ERP systems and suggest that ERP adoption helps firms gain a competitive advantage over nonadopters.     

Performance of Canadian banks and oil price movements

We employ dynamic panel data models to examine the performance (profitability and asset quality) of a large sample of Canadian banks from 1996Q1 to 2018Q2. Profits, measured as return on assets (ROA), depend on bank factors (capital adequacy, loan loss provisions (LLP) and non-interest income), the slope of the yield curve, and several oil price measures. Our findings suggest that the persistence of profits is estimated to be around 0.40 and the direct impact of oil prices tends to be positive on profits. When oil interacts with non-interest income, there is a strong positive relationship. This can be interpreted as oil price increases leading to more banking transactions (derivatives, fees) and then higher profits. Our evidence also suggests that positive oil price changes increase the asset quality of Canadian banks by reducing the ratio of LLP.     

Prospect theory and the risk-return paradox: some recent evidence

There is extensive evidence indicating a negative risk–return relation when a firm’s performance is measured based on accounting measures such as return on asset (ROA) and return on equity (ROE). Previous studies show that the risk-return paradox can be explained by the prospect theory, which predicts that managers’ risk attitudes are different for firms of different performances. However, those studies mostly use earlier data from the COMPUSTAT database, which suffers from a survivorship bias. Failure to account for delisting firms may understate the risk–return relation. We reexamine the mixture of risk-seeking and risk-averse behaviors based on an updated 20-year sample period that is free from the survivorship problem. Interestingly, our results show stronger and robust evidence supporting the prospect theory during the period from 1984 to 2003.     

Do the Investment and Return‐on‐Equity Factors Proxy for Economic Risks?

We study the information content of two new return factors, the investment factor (IA) and the return‐on‐equity factor (ROE), as proposed by Chen, Novy‐Marx, and Zhang in 2011. First, IA is a strong predictor for future gross domestic product (GDP) growth despite the presence of other financial and economic variables. IA subsumes the pricing power of the GDP factor for the cross section of asset returns. Second, ROE is closely related to innovations in dividend yield and term spread. When modeled together with innovations in state variables that forecast future investment opportunities, IA and ROE lose their explanatory power.     

Using Asset Turnover and Profit Margin to Forecast Changes in Profitability

Financial statement analysis textbooks advocate disaggregating profitability into asset turnover and profit margin in performing financial analysis. In spite of the prominence of this technique, there is no evidence demonstrating its usefulness in a forecasting context. We provide evidence that disaggregating return on assets into asset turnover and profit margin does not provide incremental information for forecasting the change in return on assets one year ahead, but that disaggregating the change in return on assets into the change in asset turnover and the change in profit margin is useful in forecasting the change in return on assets one year ahead.     

The effect of domestic to foreign ownership change on firm performance in Europe

This paper examines the relationship between ownership change from domestic to foreign and firm performance. Using European private company data for the period of 2008–2014 and the propensity score matching method, we pair 850 companies that experience ownership change with similar companies that do not. Consistent with the managerial discipline hypothesis, the results show that foreign investors acquire larger and less profitable firms and come from bigger, wealthier, and better-governed countries. After matching firms on propensity scores for country, industry, size, return on assets and leverage, we find that, in the short term, ownership change is associated with higher sales growth but lower return on assets (ROA) and profit margin. In the long term, however, ownership change is positively related to operational efficiency (sales per employee and asset turnover). Our results also show that the origin of the acquirer matters for firm performance; the targets acquired by foreign owners from better-governed countries experience better performance improvement compared to targets acquired by foreign owners from countries with weaker governance.     

Market's perception of deferred tax accruals

This study investigates the value relevance and incremental information content of deferred tax accruals reported under the ‘income statement method’ (AASB 1020 Accounting for Income Taxes) over the period 2001–2004. Our findings suggest that deferred tax accruals are viewed as assets and liabilities. We document a positive relation between recognized deferred tax assets and firm value using the levels model, while the results from the returns model suggest that deferred tax liabilities reflect future tax payments. The balance of unrecognized deferred tax assets provides a negative signal to the market about future profitability, particularly for companies from the materials and energy sectors and loss‐makers.     

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.     

Asset liquidity and financial contracts: Evidence from aircraft leases

Financial contracting theories agree that more-liquid assets decrease the expected cost of external financing, thus making leasing more attractive and reducing lessors’ equilibrium return. However, the literature has ambiguous predictions about the effect of liquidity on the maturity of leases. These predictions are further complicated by the existence of two types of lease contracts—operating and capital—that differ in whether asset ownership transfers to the lessee at the end of the contract. Using data from commercial aircraft, I find that more-liquid assets (1) make leasing, operating leasing in particular, more likely; (2) have shorter operating leases; (3) have longer capital leases; and (4) command lower markups of operating lease rates.