The Association Between Accounting Determined Risk Measures and Analysts' Risk Perceptions in a Medium-Sized Stock Market

This paper investigates the association between financial analysts' risk perceptions and accounting and market determined risk measures in Hong Kong. Analyses from a survey of risk perceptions among analysts reveal that:
(1) Accounting determined risk measures, together with a contextual variable, explain 0.77 of the variation in perceptions. The statistic is comparable to those reported for the US and UK stock markets.
(2) Analysts perceive higher risk in companies expected to exhibit a decline in earnings.
(3) Correlation between perceptions and p-e ratios is -0.74.
(4) Correlation between market beta and p-e ratios/perceptions is not significant.
The results suggest that earnings expectations play a substantial role in the formation of risk perceptions and that risk perceptions may be a superior surrogate for ex ante market risk than beta. Implications for stock valuation in medium-sized markets are discussed.     

The Risk-Relevance of Accounting Data: Evidence from the Spanish Stock Market

This paper analyses the relevance of accounting fundamentals to inform about equity risk as measured by the cost of equity capital. Assuming the latter is a summary measure of how investors make decisions regarding the allocation of resources, the strength of the association between the cost of capital and the accounting‐based measures of risk indicates how important these measures are for market participants when making economic decisions. To infer the cost of equity capital, we use the O'Hanlon and Steele's method, which is based on the residual income valuation model. Moreover, we use the insights from this model to provide a theoretical underpinning for the choice of the accounting variables related to risk. The sample refers to the non‐financial firms listed in the Madrid Stock Exchange along the period 1987–2002. Our results support our initial expectations regarding the association between the cost of equity capital and the accounting‐based risk variables, thereby supporting the usefulness of fundamental analysis to determine the risk inherent in share's future payoffs. In particular, we highlight the role of investing risk, which has been ignored in previous research. Our results are also robust to measures of risk other than the cost of capital such as the variability in total returns and the firm's systematic risk (β).     

Effects of Alternative Goodwill Treatments on Merger Premia: Further Empirical Evidence

In this study, we extend our analysis of the effects of international accounting diversity on market behavior. Specifically we examine whether national differences in the treatment of purchased goodwill are associated with differences in premia offered by non-U.S. acquirers other than the British when bidding for U.S. target companies. We find merger premia offered by foreign acquirors who enjoy advantageous accounting or tax treatments relative to U.S. acquirors to be higher, on average, than those offered by U.S. acquirors. Regression analyses show that goodwill accounting does explain merger premia. The higher coefficient on goodwill in German acquisitions, relative to Japanese acquisitions, indicates that merger premia are associated with accounting diversity among various countries in the sense that, while tax benefits are available in both Japan and Germany, more favorable accounting treatments are operative in the latter.     

Executive Compensation in Japan: Estimating Levels and Determinants from Tax Records

Most studies of executive compensation have data on pay but not total income. Because exchange‐listed Japanese firms (unlike exchange‐listed U.S. firms) need not disclose executive compensation figures in their securities filings, most studies on Japan lack even good data on pay. Through 2004, however, the Japanese tax office disclosed the tax liabilities of the 73,000 Japanese with the highest incomes. We obtained this data, and match the high‐tax list against the list of CEOs of the firms listed in Section 1 of the Tokyo Stock Exchange. We thus estimate salaries and risk exposure in a new way. We confirm survey and anecdotal evidence that Japanese executives earn less than American—about one‐fifth the pay, adjusting for firm size and outside income. Tobit regressions show that pay in Japan depends heavily on firm size (a .22 elasticity) and on accounting profitability, but not on stock returns. Additionally, family owned firms and those with large lead shareholders pay less to employee CEOs not in the family or with large shareholdings, as do firms whose directors have less tenure on the board.     

International Differences in GAAP and the Pricing of Earnings

This study investigates the information content of two alternative accounting earnings measures constructed under U.K. and U.S. GAAP. The analysis is based on the 20-F SEC filings by U.K. domiciled companies having ADRs listed in the U.S. The research design involves testing the association between U.K. stock returns and alternative accounting numbers. The evidence suggests that, for the sample examined, U.K. GAAP earnings changes have incremental information content after controlling for U.S. GAAP earnings changes, but that earnings levels measured under U.S. GAAP have some independent incremental information content after controlling for U.K. GAAP earnings. The results are consistent with GAAP adjustments having a significant transitory component. The empirical results display explanatory power which is broadly consistent with previous work and the GAAP earnings adjustments add marginally to the ability of earnings to explain returns.     

New evidence on the impact of financial leverage on beta risk: A time-series approach

The traditional estimation of a project’s cost of capital often requires leverage adjustments to beta. Several researchers have empirically investigated the relationship between the debt/equity ratio (D/E) and beta implied by such leverage adjustments. Typically, this has involved cross-sectional analysis of a sample of U.S. firms in selected industry classifications. The major contribution of the current study is to extend this evidence by investigating the relationship between financial leverage and beta using a time-series approach. This has several advantages over the cross-sectional approach. Our results reveal that while the estimated unlevered beta produced by the time-series approach is quite close to the theoretically implied unlevered beta, the mean difference between the two measures across our sample of 348 U.S. stocks is highly significant. The analysis also reveals that 30–40% of our full sample rejects a theoretical D/E restriction on the time-series model. Moreover, the results suggest that the restriction is much more likely to be rejected for stocks with high debt/equity ratios, which in general have low unlevered betas. Further, there is a considerable cross-sectional variation in the proportion of these rejections across industry groupings. Accordingly, these results suggest that due care needs to be applied when taking the traditional view of delevering beta risk.     

Corporate financial distress: The case of publicly listed firms in an emerging market economy

Occurrences of financial distress (FD) are not readily obvious yet can span several periods. This paper examines episodes of FD using industry‐relative (IR) firm‐/ accounting‐, market‐ and macro‐level information. Mixed logit regressions reveal that firm‐ and market‐based measures, as well as macro‐level variables explain the likelihood of FD in 263 publicly listed non‐banking firms in the Philippines during the period 1995 to 2018. Rates of identification of firms in financial distressed states of close to 69 percent are obtained at a cutoff probability of 0.30 in the model with time‐varying intercept and slope. This study shows the importance of recognizing heterogeneous firm behavior. The ability to more accurately predict the probability of FD and to determine the financial health of firms can help financial institutions in allocating funds and policy makers in predicting crises episodes.     

How Analysts Process Information: Technical and Financial Disclosures in the Microprocessor Industry

Abstract

Following Bradshaw (‘Analyst information processing, financial regulation, and academic research’ [2009], and Analysts' forecasts: What do we know after decades of work? [2011]), this paper examines how analysts process information, particularly in an information environment characterised by multiple and potentially complementary information sources. The setting is the microprocessor industry, one in which technical information is particularly significant and complex to digest. Based on 3837 analyst earnings-forecast revisions, issued by 134 analysts, we examine quantitatively the speed, magnitude, and information content of the reactions of individual analysts and subgroups of analysts to both periodic and timely technical disclosures, and as a complement to periodic financial disclosure. We find that analysts are much slower to react to timely technical disclosures than they are to periodic financial disclosures. We find also that technical and financial disclosures complement each other. Furthermore, we find that there is a ‘hierarchy’ of analysts in this particular industry, as evidenced through the strength of reaction to timely technical disclosures. Finally, we find that lower speed in reacting to timely technical disclosures and a higher intensity in the use of timely technical disclosure (in conjunction with periodic financial disclosure) result in greater accuracy, and that more experienced analysts tend to be less accurate. We suggest that the findings may have implications for other industries such as Bio-Tech Pharma.     

TrAffic LIght system for systemic Stress: TALIS3

For the purposes of financial stability, identifying financial institutions that, when in distress, could have a significant adverse impact on financial markets is important. A TrAffic LIght System for Systemic Stress (TALIS-cube) is proposed that provides a comprehensive color-based classification for grouping companies according to both the stress reaction level of the system when the company is in distress and the company’s stress level. TALIS³ can integrate multiple signals from the interaction between different risk metrics. Starting from specific risk indicators, companies are classified by combining two loss functions—one for the system and one for each company—evaluated over time and as a cross section. An aggregated index is also obtained from the color-based classification of companies. TALIS³ can be used to enhance the performance and robustness of existing systemic risk measures. An empirical analysis of the U.S. market is also provided.     

The Effect of Religion on Accounting Conservatism

This paper investigates whether religiosity, a key informal institutional factor, strongly influences a firm’s adoption of accounting conservatism. Using a sample from the U.S. stock market, we find that firms located in geographic areas with higher levels of religiosity tend to exhibit greater accounting conservatism. Further tests show that this effect is through the channel of engaging managers in activities that emphasize firms’ long-term growth, concern stakeholder interests, and avoid the risk of litigation. Moreover, we demonstrate that it is the religious environment in an area rather than the personal religious belief of a CEO that drives our baseline results. Finally, a supplementary test suggests that religiosity increases not only the conditional (ex post) conservatism of firms but their unconditional (ex ante) conservatism as well.     

Management Accounting Practices in the U.S. and Japan: Comparative Survey Findings and Research Implications*

In recent years, the success of Japanese firms in the global market has prompted efforts to understand the sources of their competitive advantage. It has been suggested that one such source is the Japanese firms' management accounting systems, and a number of articles have claimed that important differences do exist between U.S. and Japanese firms in this area. However, these claims have tended to be supported by anecdotal, rather than systematic, evidence. The objective of this article is to contribute further insights into similarities and differences between U.S. and Japanese firms' management accounting practices. Exhaustive searches of published surveys in the U.S. and Japanese literatures (much of which is in Japanese) provided the basis for U.S.-Japan comparisons on six aspects of management accounting practices. In turn, these comparisons were used for deriving implications for future research. Two major limitations of extant research and, thus, directions for future research are identified. First, future research needs to go beyond the simple use or non-use of techniques to investigate more detailed aspects of technique use. Second, since management accounting is only one component of a firm's total management system, attention also needs to be devoted to the organizational context, process, and goals of a firm's management accounting practices.     

The Effect of Aggregation of Accounting Information via Segment Reporting on Accounting Conservatism

In a sample of U.S. multiple-segment firms, we document a negative association between aggregation via segment reporting and timely loss recognition. A higher level of aggregation, as reflected in a firm’s reported organizational structure (the definition and characteristics of its segments), causes a multiple-segment firm to exhibit less cross-segment variation in profitability than a matched control portfolio of single-segment firms. We find that firms that engage in more aggregation report accounting numbers that provide less timely information about economic losses. We also observe that firms that provide more disaggregated segment data subsequent to adopting SFAS 131 experienced an increase in timely loss recognition. This result implies that higher quality segment reporting leads to an increase in timely loss recognition, which, per extant research, is associated with better governance. Our results complement results in Berger and Hann [2003. The impact of SFAS No. 131 on information and monitoring. Journal of Accounting Research, 41, 163–223] that show a decline in inefficient internal-capital-market transfers subsequent to the adoption of SFAS 131. Overall, we provide evidence supporting Beyer, Cohen, Lys, and Walther’s [2010. The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50, 296–343] contention that accounting conservatism is, in part, a function of managers’ aggregation choices.     

Information Consequences of Accounting Conservatism

Abstract

We study the information consequences of conservatism in accounting. Prior research shows that information asymmetries in capital markets lead to firm-level increases in conservatism. In this paper, we further argue that increases in conservatism improve the firm information environment and lead to subsequent decreases in information asymmetries between firm insiders and outsiders. We predict and test if this decrease in information asymmetries manifests itself through: (a) a decrease in the bid–ask spread and in stock-returns volatility, and (b) an improved information environment for financial analysts, leading to more precise and less dispersed forecasts, and to more analysts following the firm. Using a large US sample for the period 1977–2007 and several proxies for conservatism we find robust evidence consistent with our expectations. Our results are in line with conservatism being useful not only for debt-holders, but also for equity-holders.     

A true and fair view on a harmonious and well-balanced alliance: EAA and EIASM

Allegations of creative accounting by management of listed corporations in the UK do not abate. To the extent that these practices distort the underlying reported financial performance of firms, they conflict with the basic aims of accounting regulation – to provide consistent and comparable financial information to users. Studies have shown that accounting choices are influenced by a range of contracting, financing and operational factors. However, we still know little about what constraints exist against the practice of creative accounting and how effective these are. Issues such as the extent to which the press and analysts are successful in restraining creative accounting, and the role the ‘true and fair view’ principle and auditors play in the prevention of such practices still remain unresolved. This article explores these themes by examining the accounting practices of two UK companies which issued a creative financing instrument. Using a combination of interview, documentary, and financial statement information, the analysis shows that management took advantage of gaps in accounting standards to present a biased picture of financial performance. Auditors did not appear to restrain such practices, and the true and fair view principle, rather than unifying accounting practice, appears to tolerate a range of interpretations. Adverse media publicity appears to be a successful deterrent in the medium term, but since the press are not regulators, their reporting is not necessarily consistent or predictable. UK analysts at the time did not evaluate accounting practices in any significant detail, and thus this potential restraint was not effective. Overall, the influences and constraints on creative accounting are illuminated in this study in a way which provides new insights into our understanding of financial reporting.     

A Comparison of Relations Between Security Market Prices, Returns and Accounting Measures in Japan and the United States

We examine associations between accounting measures of earnings and stock returns in Japan over varying window lengths and compare them to those for the United States. Our results are consistent with the view that Japanese investors utilize less accounting information in their pricing of equities than do their U.S. counterparts. This was particularly evident in the 'boom' period of the mid to late 1980s when the fundamental values conveyed by accounting measures appear to have been largely ignored. The association increases with the inclusion of 1991, suggesting a return to more emphasis on fundamentals with the recent decline in stock prices.     

Accounting and the Truth of Earnings Reports: Philosophical Considerations

This paper investigates the philosophical nature of accounting reports of earnings. Standard setters' authoritative pronouncements (conceptual frameworks, GAAP, EITFs, etc.) hold to the realist philosophical view that true earnings reports are ex post representations of some ex ante out-there, preexisting, extra-linguistic real economic increase in the enterprise's wealth. Contra this view, in practice financial accounting executives, in league with investment analysts, routinely engage in earnings management and manipulation in order to satisfy the capital market's insatiable demands for earnings levels which will support and enhance the enterprise's stock market price. The paper considers this state of affairs from Harold Frankfurt's truth, lies and ‘bullshit’ treatise (2005, 2006). It sees earnings reports as ‘short of lies’, and so the accountants can only be faulted for their indifference to the truth and for giving the impression that they are trying to present the truth. A poststructuralist philosophical perspective, however, problematizes this conclusion on the basis that accounting language is not a transparent medium but rather is the material used to manufacture accounting ‘truths’. It sees accounting ‘truths’ as contingent upon linguistic doctrinal accounting discourses currently ceded place of privilege by standard setters and upon the subjective considerations of accountants when they produce reports of earnings. The paper concludes that both Frankfurt's perspective and that of poststructuralist philosophers can provide valuable insights into this ironic state of affairs.     

IN SEARCH OF EXCELLENT MANAGEMENT

Despite important advances in recent years, no agreement exists concerning what constitutes management excellence. Specific knowledge of how managerial behaviour is perceived and evaluated by others will help to resolve unsettled questions about what is meant by management excellence and improve the actual decisions of managers. This article examines the determinants of managerial excellence as perceived by corporate CEOs, directors, and financial analysts in Fortune magazine's annual survey of the best-managed American firms in 33 industries. While the firms perceived to be best managed are more profitable and less risky, and grow faster and reward their stockholders more than less well-managed firms, these variables explain only about 30 per cent of the variance in management ratings. the firms perceived to be best managed have more involvement in international markets and research and development, while large firm size and firm diversification reflect negatively upon perceived managerial quality. the relative inability of conventional financial measures of firm performance to explain perceptions of managerial excellence underlines the complex nature both of these perceptions and strategic behaviour. the results support Varadarajan and Ramanujam's conclusion that excellent management depends upon a diverse set of competencies and values, as well as Chakravarthy's contention that the most important characteristic of firm performance is management's ability to transform the firm and adapt to a rapidly changing environment. By contrast, little support is found for the maximization of stockholder wealth criterion of Rappaport.     

The Choice of Accounting Policy In Japan

The purpose of this study is to investigate factors which potentially influence Japanese managers' choices of accounting policies. Several factors have been posed to affect the choice of accounting policy of U.S. managers (e.g., Watts and Zimmerman's (1986) positive accounting theory). However, the general business characteristics of the U.S. environment differ, sometimes drastically, from those in Japan. Factors affecting the choice of accounting policy in the U.S. may not similarly affect the choice of accounting policy in Japan. At the same time, new factors may be identified in the Japanese business environment.
Income strategy models are developed for each firm according to the type (income increasing or income decreasing) of accounting policies employed. The results suggest that both the size and debt/equity hypotheses are significant, even for keiretsu firms. These results are surprising given (1) the close relationship between firms and the government, (2) regulations of the commercial code which serve to protect the interests of debtholders, and (3) the tight relationship between banks and firms within keiretsu groups which protects firms from bankruptcy and takeover. Variables representing firms' effective tax rate, ability to finance operations internally, and foreign political costs are also shown to significantly affect Japanese managers' choices of accounting policy. The bonus hypothesis is not significant in the Japanese environment. Furthermore, the choice of accounting policy is explained more by individual firm characteristics than by keiretsu membership or industry membership.     

Evaluating the statistical significance of de facto accounting harmonization: a study of European global players

Two different forces are involved in the international harmonization of accounting: institutional endeavours to harmonize accounting internationally by developing common accounting rules and reporting standards, and spontaneous efforts by ‘global players’ to adopt accounting methods that will improve communication with users in other countries. These two developments are proceeding side by side, generally reinforcing one another but occasionally moving independently. This paper is primarily concerned with the process of harmonization of financial accounting within the European Union. The hypothesis we want to test is that, in spite of the obstacles to the harmonization of regulations in the European Union, there has been greater conformity in recent years in the accounting practices of companies which operate on the international stage. If so, the implications for the harmonization strategies of the international bodies are important. In this study, we first carry out a critical analysis of previous research on accounting harmonization, summarizing the methods used in empirical studies of de facto harmonization and the results obtained. We note that the major deficiency in the index-based methods of measuring harmonization is that no test of significance has been included in prior research. In this paper, we propose a bootstrapping test of the C index as a way of measuring the significance of the change in its value. We consider a sample of eighty-five ‘global players’ from thirteen countries and we analyse their financial statements with regard to four accounting issues (deferred taxation, goodwill, leasing and foreign currency translation), providing estimates of the significance of de facto accounting harmonization for the periods from 1991–2 to 1996–7.