Does auditor tenure affect accounting conservatism? Further evidence

Accounting regulators are concerned about the potential threat of long-term auditor–client relationships on auditor independence, leading to lower audit quality. Jenkins and Velury (2008, hereafter JV) document a positive association between the conservatism in reported earnings and the length of the auditor–client relationship. A primary objective of this study is to extend JV by providing evidence that the relationship between conservatism and auditor tenure is not unique for all firms. In particular, this study finds that the positive association only exists for large firms or firms strongly monitored by their auditors, while for smaller firms or firms weakly monitored by their auditors, I observe a significantly negative association between auditor tenure and conservatism.     

Does accounting conservatism pay?

We investigate whether or not there is a link between conservative accounting practices and the sensitivity of executive pay to accounting performance. Using several accrual‐based measures of accounting conservatism as well as alternative measures of accounting performance, we estimate an econometric model of CEO compensation that incorporates the interaction of accounting conservatism and accounting performance. Consistent with optimal contracting theory, we find that the sensitivity of executive pay to accounting performance is higher for firms that report conservative accounting earnings. These results support the hypothesis that accounting conservatism, by limiting earnings management opportunities and improving the reliability of accounting performance measures, allows firms to formulate contracts that tie executive compensation more closely to accounting performance.     

Does accounting conservatism deter short sellers?

Review of Quantitative Finance and Accounting - We examine the impact of the corporate information environment on short selling by testing the relationship between short interest and accounting...     

Does accounting conservatism improve the corporate information environment?

This study investigates whether and how accounting conservatism improves the corporate information environment. We argue that conservatism facilitates the flow of firm-specific information from corporate insiders to outsiders and leads to a high-quality information environment. Using the Basu (1997) model to capture the extent of accounting conservatism and firm-specific return variation to proxy for the quality of information environment, we find that conservatism is positively associated with the improvement of the corporate information environment in our sample of 43 countries. We also find that the information role of conservatism is more pronounced in countries with weaker protection of private property rights, suggesting that conservatism substitutes for legal institutions in ensuring the quality of information environment.     

Does accounting comparability affect corporate employment decision-making?

This paper investigates whether accounting comparability affects corporate employment decision-making. We find that firms with greater accounting comparability experience a lower degree of inefficiency in labour investments. Further, our results show that accounting comparability affects labour investments via improved external monitoring and internal governance mechanisms. Additional analyses indicate that our findings are not driven by non-labour investments and are robust to alternative explanations and endogeneity concerns. Collectively, the results are consistent with the view that comparability is an effective monitoring tool, which mitigates agency conflict and thereby reduces opportunistic employment decision-making.     

Does short sales deregulation affect qualitative information disclosure?

We examine the impact of short sales deregulation on firms' disclosure of non-financial qualitative information. Our simple analytical model predicts that, after short sales deregulation and when the cost of disclosing proprietary qualitative information to the firm and its executives is sufficiently high, shortable firms respond by disclosing less proprietary and more non-proprietary qualitative information than non-shortable firms. Using a textual analysis of qualitative information about the supply chain, available in the management disclosure and analysis sections of the annual reports of a sample of Chinese firms, and applying a staggered difference-in-differences research design, we find evidence consistent with the model's prediction.     

How does banking sector globalization affect banking crisis?

A key feature of financial services liberalization is increasing banking-sector globalization.Using different measures to capture this phenomenon, the present study examines its impact on banking crisis for a dataset of 138 nations spanning the period 1998–2013, while controlling for other banking-industry specific, macroeconomic and external factors. Employing different econometric models and several robustness checks, I find greater banking sector globalization to reduce the occurrence of banking crisis. Moreover, greater bank asset concentration, diversification, credit flows, real interest rates, inflation rates, M2-to-foreign exchange reserves and nominal exchange rate depreciations significantly increase the likelihood of banking crisis, while higher bank profits, real GDP growth, economic development and economic freedom lower such chances. The results are further examined for nations across different levels of economic development and with different degrees of foreign bank penetration. The findings underscore that foreign bank presence provides greater financial stability in the banking industry of host nations.     

Are corporate governance attributes associated with accounting conservatism?

This article investigates the association between the board of directors, the audit committee and the external auditor (as well as an aggregate governance index) and the extent of conservatism evident in Australian firms’ financial reporting. Overall, the results provide only weak evidence that firms with certain governance characteristics report more conservatively. Evidence of any such link is restricted to measures of board composition and leadership, and even then the results are sensitive to the method used to measure the extent of conservatism in financial reporting.     

Does deregulation induce competition in the market for corporate control? The special case of banking

Using a sample of 936 acquisitions of commercial banks, we examine the relation between the probability to engage in value-reducing acquisitions and corporate governance structures, as well as the relation between acquirer announcement-period abnormal stock returns and antitakeover indices and measures, and how these relations were affected by the change in the market for corporate control, caused by deregulation due to the implementation of the Interstate Banking and Branching Efficiency Act of 1994 and the Financial Service Modernization Act of 1999. We find that prior to deregulation there is no relation between probability to engage in value destroying acquisitions or acquirer returns and antitakeover indices, whereas after the adoption of the FSMA, probability to engage in value destroying acquisitions and the stock market reaction to bidder M&A announcements are both significantly related to governance indexes and measures. Our findings further confirm the linkage between the market for corporate control, antitakeover indices and firm value.     

How do institutional investors influence accounting conservatism in China?

Using a sample of Chinese listed firms from 2003 to 2015, we find that domestic mutual funds have negative effects while qualified foreign institutional investors (QFIIs) have positive effects on firm accounting conservatism. These effects become stronger when their ownerships are closer to that of the controlling shareholder, respectively. Furthermore, these results are more pronounced when institutional investors are more able to monitor managers and compete with controlling shareholders. Our findings suggest that the influence of institutional investors on accounting conservatism in China is subject to their identities as well as the control contestability against the controlling shareholders.     

Do analysts who understand accounting conservatism exhibit better forecasting performance?

This study investigates the performance of analysts when they match the asymmetric timeliness of their earnings forecast revisions (i.e., asymmetric forecast timeliness) with the asymmetric timeliness of firms’ reported earnings (i.e., asymmetric earnings timeliness). We find that better timeliness‐matching analysts produce more accurate earnings forecasts and elicit stronger market reactions to their forecast revisions. Further, better timeliness‐matching analysts issue less biased earnings forecasts, more profitable stock recommendations and have more favorable career outcomes. Overall, our results indicate that analysts’ ability to incorporate conditional conservatism into their earnings forecasts is an important reflection of analyst expertise and professional success.     

Does workload and institutional pressure on accounting educators affect academia at Australian universities?

This paper examines accounting academics’ perceptions as to whether institutional pressure has increased in the previous 5–10 years subsequent to changes in the higher education environment, encouraging universities to adopt private sector managerialism. Results from 87 respondents indicated that workload pressures have increased and they experienced pressure to perform acts related to a student-as-customer model, which have negatively affected their well-being and work quality. The majority are not actively seeking to leave academia, but believe it is not a good time for others to aspire to such a career. This paper contributes to the debate about the sustainability of accounting academia at Australian universities.     

How does foreign entry affect domestic banking markets?

Using 7900 bank observations from 80 countries for the 1988–1995 period, this paper examines the extent and effect of foreign presence in domestic banking markets. We investigate how net interest margins, overhead, taxes paid, and profitability differ between foreign and domestic banks. We find that foreign banks have higher profits than domestic banks in developing countries, but the opposite is the case for developed countries. Estimation results suggest that an increased presence of foreign banks is associated with a reduction in profitability and margins for domestic banks.     

Does interest rate and its volatility affect banking sector development? Empirical evidence from emerging market economies

This study investigates the relationship between interest rate, interest rate volatility, and banking sector development in 12 emerging market economies located around the world. For this purpose, panel data analysis was conducted using annual data from 1980 to 2014. In parallel to the financial development literature, which asserts that banking sector development, as a broad and complex concept, cannot be measured by a single indicator, this study adopts a set of measures of banking sector development. The empirical results reveal that while interest rate has a positive impact on all banking sector indicators, this relationship weakens at higher interest levels, showing a concave relationship between interest rate and banking sector development. In addition, the empirical results provide evidence that interest rate fluctuations have a negative impact on most banking sector development (BSD) indicators, suggesting that the banking sectors of emerging countries are vulnerable to interest rate risks. Furthermore, all measures of the banking sector indicators are positively affected by economic growth rates, while this association weakens at higher levels of income, confirming a nonlinear relationship. Thus, the results have important implications for policymakers in improving the banking system and promoting the economic growth of these emerging economies.     

Is the decline in the value relevance of accounting driven by increased conservatism?

This paper examines the association between conservatism and the value relevance of accounting information over the 1975 through 2004 period. We measure conservatism using approaches developed in Penman and Zhang, The Accounting Review 77:237–264, (2002) and Beaver and Ryan, Journal of Accounting Research 38:127–148, (2000) and value relevance using (1) adjusted R ² from regressions of price on earnings and book values, (2) adjusted R ² from regressions of returns on earnings and changes in earnings, and (3) returns earned by perfect foresight of earnings and book values. We find no evidence that firms with increasing conservatism exhibit greater declines in value relevance. Rather, we observe most significant declines in value relevance for firms where conservatism has not increased. When we adjust financial statements for the effects of conservatism, we find that the value relevance of adjusted numbers is generally lower and trends in value relevance unaffected. Based on these results, it is implausible that increasing conservatism drives the decline in value relevance.     

CEOs’ experience of the Great Chinese Famine and accounting conservatism

This study investigates how a CEO's early-life experience of the Great Chinese Famine affects corporate accounting conservatism. We find that companies whose CEOs had experienced famines in early life adopted more conservative accounting policies. This famine experience effect is more pronounced in high uncertainty environments proxied by non-SOEs, politician turnovers and the adoption of International Financial Reporting Standards (IFRS). Additional tests indicate that CEOs with famine experience tend to support conservative accounting practices for contingencies and accelerate the recognition of asset impairments in negative events. Overall, consistent with imprinting theory, our results highlight the role of early-life traumatic experiences in shaping CEOs’ risk preferences and financial reporting policies.     

Does Form 20-F reconciliation elimination for IFRS filers affect the risk forecasting ability of accounting numbers?

This study investigates the effect of the elimination of Form 20-F reconciliation items on the risk relevance of accounting information. Using a sample of U.S. companies and American depositary receipts adopting domestic standards that are generally in accordance or fully compliant with IFRS, this paper finds that IFRS better reflect macroeconomic fluctuations after Form 20-F reconciliation elimination. This paper also finds that Form 20-F reconciliation elimination has no negative effect on the usefulness of accounting data under IFRS in the formulation of superior risk forecasts. Further, this paper finds that the elimination of Form 20-F reconciliation items is associated with lower idiosyncratic risk. Overall, the findings indicate some benefits from Form 20-F reconciliation elimination.     

Does geographic dispersion affect firm valuation?

We find that the geographic dispersion of a corporation affects its firm valuation. Firms with subsidiaries located in different regions of the United States experience a valuation discount of 6.2% after controlling for the impact of both global and industrial diversifications. The valuation discount increases as firms expand their operations to different regions nationwide. Results show that firms with more anti-takeover provisions are more likely to be geographically diverse, and that these firms experience greater value discounts compared with their counterparts with fewer such provisions. Our overall evidence suggests that the geographic location of corporate activities is an essential component of corporate policies and has important market valuation implications.     

Does banking system transparency enhance bank competition? Cross-country evidence

There seems to be a consensus among regulators and scholars that in order to improve the functioning of a banking system it is necessary to raise the level of bank information disclosure. However, its influence on bank competition – which is an important factor affecting the efficiency and stability of the banking system – is left out of consideration. To test whether greater bank information disclosure is associated with both lower market power and lower concentration in the banking markets, we use country-level data covering the years 1998, 2001, 2005 and 2010. Our findings show that countries with higher levels of bank transparency have lower levels of bank concentration, while the link between transparency and market power is less pronounced. We also show that the reduction of competition due to stricter disclosure requirements depends on bank credit risks and the relationship is U-shaped.     

Do differences in national cultures affect cross-country conditional conservatism behavior under IFRS?

The purpose of this paper is to explore whether international differences in cultural dimensions of individualism and uncertainty avoidance affect how managers from different countries implement International Financial Reporting Standards (IFRS) and influence cross-country conditional conservatism behavior. We analyze the conditional conservatism behavior of publicly listed firms in 14-member countries of the European Union (EU) during the period 2006-2016. The results confirm the relationship between the individualism and uncertainty avoidance dimensions of national culture and conditional conservatism in the post-IFRS period. Particularly, conditional conservatism is higher in countries where individualism is lower and where uncertainty avoidance is higher.