Publicly traded versus privately held: implications for conditional conservatism in bank accounting

Compared with privately held banks, publicly traded banks face greater agency costs because of greater separation of ownership and control but enjoy greater benefits from access to the equity capital market. Differences in control and capital market access influence public versus private banks’ accounting. We predict and find that public banks exhibit greater degrees of conditional conservatism (asymmetric timeliness of the recognition of losses versus gains in accounting income) than private banks. We predict and find that public banks recognize more timely earnings declines, less timely earnings increases, and larger and more timely loan losses. Although public ownership gives managers greater ability and incentive to exercise income-increasing accounting, our findings show that the demand for conservatism dominates within public banks and that the demand for conservatism is greater among public banks than private banks. Our results provide insights for accounting and finance academics, bank managers, auditors, and regulators concerning the effects of ownership structure on conditional conservatism in banks’ financial reporting.

Director Compensation and CEO Bargaining Power in REITs

We analyze director compensation for Real Estate Investment Trusts (REITs) and investigate the relations between director compensation and other measures of the board independence and board monitoring. Using 136 REITs in 2001, we find that REITs that pay higher equity-based compensation to their board members are associated with higher financial performance. Our data indicate that board equity-based compensation is positively related to the existence of an independent nomination committee, however, it has no significant relationship with board size, proportion of outside directors, CEO duality and CEO tenure and ownership.

Trading Intensity and Real Estate Performance

This paper investigates whether it is possible to create value through the active management of direct property portfolios. Using data from the USA, the UK and Australia, we examine whether trading intensity and portfolio growth explain the risk and return characteristics of listed property companies. The results suggest that beating the market by pursuing tactical asset selection and investment timing strategies is difficult even when acquiring and disposing of properties in illiquid private property markets. When the property type in which the firm specializes is included as a control variable in the regressions, none of the portfolio management intensity indicators developed in this paper is significantly associated with abnormal performance or systematic risk.

The influence of growth opportunities on the relationship between equity ownership and leverage

This study investigates whether the association between ownership structure and leverage varies with the magnitude of growth opportunities. According to the free cash flow hypothesis, managers receive utility from increasing firm size and the over-investment problem is more severe for firms with fewer growth opportunities. Considering the disciplinary role of leverage on the over-investment problem and ownership structure as a control mechanism to affect financing decisions, we hypothesize that the association between ownership structure and leverage is stronger for firms with fewer growth opportunities. We find that the association between equity ownership and leverage is significant for low-growth firms, but not for high-growth firms. The results mostly hold when sample firms are partitioned into large and small firms to directly control for the effect of firm size on the association between ownership structure and leverage.

The effect of controlling shareholders’ excess board seats control on financial restatements: evidence from Taiwan

This study examines the relation between controlling shareholders’ excess board seats control and financial restatements. An analysis of a sample comprising 106 Taiwanese listed firms (53 restating firms vs. 53 non-restating control firms) shows that financial restatements are more likely to occur when there is a greater divergence between controlling shareholders’ board seats control rights and ownership rights. We also find that the excess board seats control of controlling shareholders is positively associated with the materiality and pervasiveness of financial restatements. Overall, these results suggest that the entrenchment incentive from controlling shareholders’ excess control motivates firms to adopt aggressive accounting policies.

Voluntary disclosure of accruals in earnings press releases and the pricing of accruals

This study investigates firms’ decisions to disclose accruals information in earnings press releases versus to provide it only in 10-Q filings and the impact of this disclosure on the pricing of accruals. I find that firms disclose accruals in their press releases when earnings alone are a weak indication of cash flow performance and that following these disclosures the accruals information is fully impounded into stock prices. The evidence suggests that when investor demand for accruals is likely to exist and firms disclose the information in earnings press releases, the mispricing typically associated with accruals is mitigated.

Neutral Property Taxation Under Uncertainty

In a framework where no uncertainty arises, Arnott (J Publ Econ Theor 7:27–50, 2005) investigates a neutral property taxation policy that will not affect a landowner’s choices of capital intensity and timing of development. We investigate the same issue, but allow rents on structures to be stochastic over time. We assume that a regulator implements taxation on capital, vacant land, and post-development property so as to expropriate a certain ratio of pre-tax site value as well as to achieve neutrality. We find that the optimal taxation policy is to tax capital and subsidize properties before and after development. We also investigate how this optimal policy changes in response to changes in several exogenous forces related to demand and supply conditions of the real estate market.

Economic consequences of financial reporting changes: diluted EPS and contingent convertible securities

This paper examines the economic consequences of changes in the financial reporting requirements for contingent convertible securities (COCOs). Using a sample of 199 COCO issuers from 2000 to 2004, we find that issuers are more likely to restructure or redeem existing COCOs to obtain more favorable accounting treatment when the financial reporting impact on diluted earnings per share (EPS) is greater and when EPS is used as a performance metric in CEO bonus contracts. These results provide new evidence that managers are willing to incur costs to retain perceived financial reporting and compensation benefits. We also present evidence of significantly negative stock returns around event dates associated with the financial reporting changes, consistent with investor anticipation of the agency costs associated with the rule change.

IMF Bank-Restructuring Efficiency Outcomes: Evidence from East Asia

We report new findings on bank efficiency in East Asian countries for the pre- and post-IMF restructuring periods. We find that bank efficiency has improved, but only to the pre-IMF intervention level, and that restructured banks are not more efficient than their unrestructured counterparts. Different restructuring measures have different effects. Bank closures are economically justified, but mergers show short-term efficiency losses. Recapitalization and reprivatization of badly performing banks lead to efficiency improvement, but also increase government ownership. Ease of entry that has allowed for more foreign bank participation results in slightly improved performance of badly performing banks.

The Effect of Time-on-Market and Location on Search Costs and Anchoring: The Case of Single-Family Properties

Regarding single-family residential properties purchased for investment (non-owner occupied) we examine whether out-of-state buyers pay more than in-state buyers. We focus on the effects of search costs and anchoring. We use data on 2,828 Las Vegas non-owner occupied (investor) residences, 40% of which are purchased by non-local investors. We find that the location of the property affects the empirical results. Specifically, search cost and anchoring effects that appear significant when the location of the property is ignored disappear when location is introduced as an independent variable.

Firm valuation, abnormal earnings, and mutual funds flow

We examine the valuation effects of overall demand for corporate equities combined with the influence of abnormal earnings and unexpected funds flow. Our results indicate that the expected and unexpected net new total flow of funds into all stock mutual funds do not by themselves have a meaningful effect on firm equity valuation. However, we find the combination of unexpected funds flow and realized abnormal earnings have significant and important valuation effects. Importantly, the valuation impact is greatest for those firms with high earnings growth potential that also operate in an environment characterized by high information asymmetry.

Mortgage Put Options and Real Estate Markets

In this paper we offer direct evidence that financial intermediation does impact underlying asset markets. We develop a specific observable symptom of a banking system that underprices the put option imbedded in non-recourse asset-backed lending. Using a dataset for 19 countries and over 500 real estate investment trusts, we find that, following a negative demand shock, the “underpricing” economies experience far deeper asset market crashes than economies in which the put option is correctly priced.

The empirical relationship between ownership characteristics and audit fees

The present study examines the empirical relationship between ownership characteristics and audit fees. The basic premise is that the level of ownership sophistication and the extent to which ownership is large and substantial impact the effectiveness of stockholder monitoring on corporate affairs including the financial reporting process. Furthermore, high managerial ownership firms may experience a decline in agency problems in financial reporting due to a decrease in managerial propensity to misreport financial results. By employing a cross-sectional least squares regression analysis for a sample of 358 New York Stock Exchange-listed firms audited by the Big Five auditors, we find evidence of a significantly positive relationship between diffused institutional stock ownership (i.e., having less than 5% individual shareholding) and audit fees, and a significantly negative relationship between institutional blockholder ownership (i.e., having 5% or more individual shareholding) and audit fees. Finally, we document that managerial stock ownership is negatively associated with audit fees. We do not, however, find evidence of any relationship between noninstitutional blockholder ownership (with at least 5% individual stock ownership) and audit fees. The study's main results hold in various specification tests including when the effects of board-related and audit committee variables are factored in the analysis. Based on the observed relationship between the ownership variables and audit fees, we suggest that the ownership characteristics of a firm as a part of its governance mechanism constitute an important determinant of audit fees.

Why do firms repurchase stock to acquire another firm?

This study investigates firms that repurchase their stock to finance an acquisition. Since research shows that cash-financed acquisitions perform better than stock-financed acquisitions, why do firms that have available cash initiate the extra transactional step. I find these firms are well compensated for their efforts, especially in the long run. On average, these firms have negative abnormal returns prior to their repurchase announcements and thus may choose repurchasing to signal undervaluation. Furthermore, the stock acquisition step allows these firms to share risk, counteract the negative effects of dilution, and enjoy a tax advantage for their efforts.

An integrated analysis of the association between accrual disclosure and the abnormal accrual anomaly

We find no evidence of accrual mispricing for firms that disclose accrual information at earnings announcements. For these firms, the market differentiates the discretionary from the nondiscretionary components of the earnings surprise. In contrast, the market fails to distinguish between the discretionary and the nondiscretionary components of the earnings surprise for firms that do not disclose accrual information at earnings announcements. These firms experience some stock price correction around the filing date. However, the correction is only partial, resulting in a post-filing drift.

Should more local governments purchase a bond rating?

We investigate whether issuers that choose to forgo a bond rating suffer an interest cost penalty greater than the cost of the rating. We use estimated ratings provided by Moody’s Investor Service to proxy for what the rating would have been if it had been purchased. We find that the primary factors associated with an issuer’s decision to purchase a rating are the rating expected by the issuer and the extent to which an issue is marketed locally. After controlling for self-selection bias, we find that the issuers that forgo a rating do not suffer an interest cost penalty.

Organized labor and information asymmetry in the financial markets

Prior results from the labor relations literature suggest that revealing information weakens management’s position in collective bargaining. Thus, when facing organized labor, management has an incentive to preserve the information asymmetry with outsiders. This study uses a sample from a large cross-section of the economy over several years to test this relation. Results are consistent with this prediction. Strong organized labor is associated with higher bid-ask spreads, higher probability of informed trading, lower trading volume and lower analyst coverage. These relations hold after controlling for numerous factors such as growth opportunities or risk.

Valuing corporate securities: some effects of bond indenture provisions—a correction

This paper identifies and corrects a typographical error in Black and Cox (J Finance 31:351–367, 1976). While the typographical error is seemingly trivial, the magnitude of the pricing error that it generates can be substantial.

Executive Compensation in UK Property Companies

We study the drivers of executive compensation in the listed UK property sector. The UK provides an excellent opportunity to analyze executive compensation due to high transparency in the different components of executive compensation. We show that company size is the most important variable in explaining the level of executive compensation. We find that absolute and relative share performance significantly explains long-term compensation, that management style has a distinct influence on the level of executive compensation, and that using alternative monitoring mechanisms (institutional shareholders, debtholders, and outside directors) leads to higher levels of long-term incentives. We find only weak evidence of pay-performance sensitivity for both cash and long-term compensation. Executive shareholdings provide a much stronger link between pay and performance than does executive compensation.

Corporate voluntary disclosure and the separation of cash flow rights from control rights

We find that corporate voluntary disclosure is negatively associated with the separation of cash flow rights from control rights. This result is consistent with the notion that as the separation of cash flow rights from control rights increases, controlling owners have larger incentives to expropriate the wealth of minority shareholders and low corporate disclosure constitutes a mechanism to facilitate controlling owners in masking their private benefits of control. The negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms with greater external financing needs. This result suggests that for firms with high separation of cash flow rights from control rights, those with greater external financing needs undertake higher firm-level voluntary disclosure to reduce information asymmetry. We also find that the negative association between voluntary disclosure and the separation of cash flow rights from control rights is less pronounced for firms that have a large non-management shareholder. Our result supports the role of large non-management shareholder in mitigating agency problems associated with the separation of ownership and control.