Technological advances and the decision to invest

Technological advances impact a firm’s investment decision, as they affect the investment cost. They can also affect the profitability due to demand shocks. We study a firm’s optimal investment decision when technological advances occur as surprises and induce uncertain reductions in the investment cost and in earnings. Despite this complex setting we derive closed-form solutions for the investment option value and the investment threshold. When technological advances only impact the investment cost, we demonstrate significant contributions compared to existing research, which restricts the analysis by keeping the expected investment cost path constant. For example, we show that, albeit the investment threshold is constant, the option value is very sensitive in the expected impact of technological advances. Leaving the restrictive setting, we obtain more intuitive results, e.g. that more frequent technological advances increase the option value. When technological advances impact future earnings we find important long-term effects: the investment threshold increases, whereas the option value decreases. Finally, earnings volatility postpones investment, while uncertainty due to technological advances expedites investment.     

Stock market investors' use of stop losses and the disposition effect

The disposition effect is an investment bias where investors hold stocks at a loss longer than stocks at a gain. This bias is associated with poorer investment performance and exhibited to a greater extent by investors with less experience and less sophistication. A method of managing susceptibility to the bias is through use of stop losses. Using the trading records of UK stock market individual investors from 2006 to 2009, this paper shows that stop losses used as part of investment decisions are an effective tool for inoculating against the disposition effect. We also show that investors who use stop losses have less experience and that, when not using stop losses, these investors are more reluctant to realise losses than other investors.     

Impact of intelligent decision aids on expert and novice decision-makers' judgments

Businesses have invested tremendous resources into intelligent decision aid development. A good match between user and aid may improve the expert decision‐maker's decision quality. However, novices may be prone to poorer decision‐making if intelligent decision aids are more expert than the user. The present paper provides an empirical test of the impact of decision aids on subjects with differential expertise levels. The results support the contention that intelligent decision aids aggravate bias in novices’ decision‐making but mitigate bias in experts’ decision‐making processes. Intelligent decision aids may be best viewed as complements to expert decision‐makers during complex problem analysis and resolution.     

The effects of analyst forecasts and earnings trends on perceptions of management forecast credibility

We examine whether analyst forecasts influence investors’ perceptions of the credibility of a good news management earnings forecast. We hypothesize that the effect of analyst forecasts will depend on whether the analyst forecast confirms management’s forecast and the extent to which management’s forecast is consistent with the prior earnings trend. Findings indicate that the positive effect of a confirming analyst forecast is greater when the management forecast is trend inconsistent than when it is trend consistent. The negative effect of a disconfirming analyst forecast does not differ based on management forecast trend consistency.     

The effect of disclosure on the pay-performance relation

We examine whether greater transparency leads to improved evaluation and rewarding of management. We posit that disclosure improves board effectiveness at monitoring executives and in strengthening the link between pay and performance. We use management guidance as our empirical proxy for disclosure and document the following. We predict and find higher sensitivity of CEO compensation to performance (both accounting and stock returns) for firms that issue management guidance than for firms that do not. Our results are robust to multiple tests that address the potential endogeneity of management’s decision to issue guidance (using a Heckman self-selection model, employing a matched-sample approach, and identifying a subsample of firms in which increased disclosure is likely to be exogenous), tests that control for alternative explanations, and tests that use conference calls as an alternative disclosure metric.     

Isolating the effect of disclosure on information risk

This study examines companies with two classes of shares that entitle their holders to identical cash flow and voting rights but that are available to mutually exclusive sets of investors: A shares to domestic investors and B shares to foreign investors. Price differences between A and B shares are higher in firms with a greater disparity in the disclosures that they make to domestic and foreign investors. This association is more pronounced when the cost (benefit) of information transfer is higher (lower). The results suggest that disclosure disparity creates meaningful differences in investors' average information precision across A and B shares and thus influences the cross-sectional variation in price differences.     

Nonprofessional investors' perceptions of the incremental value of continuous auditing and continuous controls monitoring: An experimental investigation

In this study, we investigate nonprofessional investors' perceptions of the incremental value of additional assurance provided by continuous auditing (CA) and continuous controls monitoring (CCM) relative to traditional periodic auditing. We also examine whether nonprofessional investors' perceptions of incremental value of CA and CCM depend on whether the procedure is performed by internal or external auditors, given that external auditors are likely to be perceived as more independent and objective than internal auditors. We conduct two experiments, one using 120 nonprofessional investors recruited by a national survey company, and the second using 184 participants recruited via Amazon's Mechanical Turk platform. The first experiment employed a 2 × 2 between-participants design in which we manipulate the type of assurance (CA or CCM) and the source of assurance (internal or external auditors). The second experiment was identical to the first experiment, with the addition of a fifth condition to test a conjecture stemming from the results of the first experiment. The results from both experiments indicate that although nonprofessional investors believe that continuous auditing decreases the likelihood of material errors and asset misappropriation, nonprofessional investors do not concomitantly increase their investment upon learning about the implementation of these sophisticated continuous assurance techniques. Evidence from the second experiment provides support for the contention that the reason why nonprofessional investors do not increase their investment pursuant to implementation of CA or CCM is due to the salience of the additional costs of these techniques. These results have important implications for firms considering the implementation of additional assurance procedures such as CA and CCM.     

Internal control audits: Judges' perceptions of the credibility of the financial reporting process and likely auditor liability

This paper reports the results of a study in which fifty-seven sitting United States judges participated in a behavioral experiment to assess the perceived credibility of the financial reporting process and the legal risk auditors bear under conditions where they provide an internal control audit report (vs. no report) under two corporate governance environments. We find that participating judges believe internal control audits provide enhanced assurance that intentional misstatements do not exist and also serve to provide elevated protection to the public, but only under conditions of a strong corporate governance environment beyond current regulatory requirements. We also find that, after being informed of an undetected material fraud, judges who currently have high expectations of the auditing profession find auditors more liable when an internal control audit report has been issued (as compared to when no such report has been issued).     

The effect of globalization and legal environment on voluntary disclosure

We examine how interactions with foreign capital, product, and labor markets affect the disclosure practices of non-U.S. multinational firms. Drawing on literature related to multinationals, country-level legal institutions, and accounting disclosures, we expect that the relation between globalization and voluntary disclosure will be conditioned by the legal environment in a firm's home country. Specifically, while firms from countries with a strong legal environment (e.g., common-law countries) already face pressure for good disclosure, globalization can increase the benefits associated with good disclosure to firms from weak legal environments (e.g., civil-law countries). We use a self-constructed voluntary disclosure index and hand-collected disclosure and foreign activity data for 643 non-U.S. firms from 30 countries for 2003. We find a significant interaction between globalization and the legal environment. This indicates that for the same level of globalization, there is more voluntary disclosure for firms based in weak legal environments. Our results suggest that globalization is an important variable that has been overlooked in much of the previous cross-country research.     

Student perceptions of the profession and its effect on decisions to major in accounting

Changes in the business environment have created a perceived need for more creative individuals in the accounting profession. This study asserts that to attract these people, we will have to change existing perceptions of the profession. To test this assertion, we examine the relationship between students' inherent creativity, perceptions of the accounting profession, and decisions to major in accounting. We also examine the extent to which experience in an introductory accounting course changed students' perceptions and major choices. Findings indicate that students hold traditional views of the profession and this deters interest. Business and accounting students tend to be less creative than the general university population. Experience in introductory accounting drew less creative students to the major despite changing perceptions toward more modern views. Overall, the results indicate that perceptions of precision and thoroughness in the profession and the heavy work load in the introductory course discouraged creative personalities from pursuing an accounting major.     

The effect of Sarbanes-Oxley on the timely disclosure of restricted stock trading

Our paper investigates the effect of the Sarbanes-Oxley Act (SOX) on the disclosure timeliness of restricted stock trading. Insiders selling restricted stock are required to file a Form 144 because the stock is restricted and also a Form 4 because they are an insider. We confirm that mandatory filing requirements under Section 403 of SOX reduced the Form 4 disclosure delay for restricted stock transactions from 24 days in the pre-SOX period to the mandated 2 days in the post-SOX period. Although SOX did not mandate changes to Form 144 filings, we expect that disclosure timeliness of Form 144 filings is likely impacted by SOX. We find that Form 144 filings of restricted stock sales have become less timely. In the post-SOX period, Form 144, the intent to sell restricted stock, is almost always reported after the Form 4 disclosure of the executed trade. Thus, an unintended consequence of SOX is that by making the Form 4 filing more timely than the Form 144, market participants will know about a trade sooner, but have less information about the type of equity traded. An implication of this finding is that Section 403 of SOX may not have unambiguously improved investor protection as intended.     

Pro forma accounting disclosures: The effect of reconciliations and financial reporting knowledge on nonprofessional investors' judgments

Regulation G requires companies that report non-GAAP or “pro forma” earnings provide a reconciliation. While nonprofessional investors are a large, heterogeneous population with varying degrees of financial reporting knowledge, previous research treats them as a homogenous group. The study examines how differences in financial reporting knowledge and information viewing behavior affect the influence of reconciled pro forma earnings disclosures on nonprofessional investors' judgments. Lower-knowledge investors appear to incorporate information on differences between GAAP and pro forma earnings in their judgments as long as they view this information in the reconciliation. However, higher-knowledge investors appear to consistently incorporate information on differences between GAAP and pro forma earnings in their judgments regardless of the relative amount of time they spend viewing the reconciliation relative to other disclosures. Our results suggest that knowledge differences influence how nonprofessional investors acquire and use information on differences between GAAP and pro forma earnings.     

Voluntary disclosure of reasons for auditor changes and the capital market reaction to information disclosure

This study examines the association between firm attributes and management’s voluntary disclosure of the reason(s) for auditor changes and evaluates the capital market reaction to information disclosure of the auditor change events accompanied by preexisting red flag and non-red flag issues. We find that managers are more likely to disclose the reason(s) for auditor changes when those changes occurred because of benign business reasons or if the reasons do not indicate the presence of any underlying operating or financial reporting problem. On the other hand, managers are less likely to disclose the reason(s) for auditor changes when those changes are preceded by red-flag situations. Furthermore, auditor changes accompanied by preexisting red-flag situations are viewed negatively by the capital market, implying that the full disclosure of reasons for auditor changes is informative to investors. This observation is supported further by our market-based analyses, which consistently show that auditor changes accompanied by prevailing red flag issues are valued incrementally in the market above and beyond the reportable events (under FRR No. 31) and auditor-initiated changes. The study contributes to the recent policy debate related to mandating the disclosure of the reason(s) for auditor switches. Specifically, the results support the recent debates that the current voluntary disclosure regime results in selective disclosure practices that are likely to contribute to the general lack of transparency with respect to auditor changes.     

The effect of stock-based incentives and governance mechanisms on voluntary disclosure of intangibles

The purpose of this study is to investigate the role of stock-based incentives in encouraging more voluntary disclosures about firm-specific intangibles. I also examine whether corporate governance, previously found to be related to voluntary disclosures, is a complement to or substitute for stock-based incentives. Using content analysis of annual reports of a sample of high-tech firms, I find that stock-based incentives are positively associated with firms' voluntary disclosures about intangibles. With regard to the effect of governance mechanisms, I find that corporate governance does not have a relationship with disclosures when stock-based incentives are low. On the other hand, better governance will strengthen the positive effect of stock-based incentives on disclosures, suggesting that governance and incentives mechanisms are complements instead of substitutes. The results also show that this complementary effect primarily results from the internal monitoring provided by the board of directors.     

The effect of fair disclosure regulation on timeliness and informativeness of earnings announcements

This paper examines the effect of Korea’s fair disclosure regulation on the timeliness and informativeness of earnings announcements. The present regulation for Korean listed firms requires that if a company’s sales revenue, operating income (or loss) and net income (or loss) have changed by over 30% compared to the prior year, the firm must disclose this information through a preliminary financial report (PFR) even before the company is audited by external auditors. To analyze the effects of this policy, we first investigate the timeliness of preliminary financial report disclosures. We examine the extent to which Korean listed companies actually comply with the requirement for prompt notification of information concerning material changes in financial performance. Second, we investigate the informativeness of preliminary financial reports by analyzing differential stock market reactions to different timings of preliminary financial report disclosures. Our empirical results reveal that more than half of our sample firms release their preliminary financial reports after external audits are completed, thereby potentially invalidating the effectiveness of the regulation. In addition, we find that preliminary financial reports have information value only if they are disclosed prior to annual audit report dates. This finding supports the notion that timeliness increases the informativeness of preliminary financial report disclosure by curbing insiders’ ability to potentially profit from their information advantage.     

Organic salmon farming: risk perceptions, decision heuristics and the absence of environmental accounting

This paper reports on interviews with salmon farmers exploring their decision as to whether to adopt organic production methods. Organic salmon farming has the potential to considerably reduce the social, environmental and economic risks associated with salmon farming. Salmon farming is an industry subjected to intense scrutiny and is highly controversial. The combination of these two factors was expected to reveal the use of environmental accounting in evaluating this potentially difficult, expensive strategic decision, responding to the barrage of public criticism, driven by changing environmental regulations and a potential value shift by key actors.However, interviews revealed that going organic was regarded as a normal agricultural decision, largely based on price forecasts. The shift to organic was relatively easy, unproblematic and not too expensive. The environmental pressure groups campaigns had very little impact on this decision and it was not subjected to systematic accounting evaluation. The interviews described a sector exhibiting many of the characteristics of Beck's Risk Society thesis (1992, 1995, 1996).Decision makers’ risk perception is identified as important for considering what factors are thought to be legitimate/illegitimate and powerful/weak in the decision making process. Unless risks are considered ‘real’ by the decision makers then the associated costs/benefits of doing or not doing something are not going to figure in the decision heuristics, regardless of the nature of their calculation. Environmental accounting could play a part, not necessarily at the individual farm level, but as part of a reflexive process in reconstructing the underlying knowledge of the social, environmental and economic risks of salmon farming as a whole.     

The influence of mood on the willingness to take financial risks

The purpose of this study was to determine whether support could be found for either the Affect Infusion Model or the Mood Maintenance Hypothesis regarding how mood influences financial risk tolerance. An ordinary least‐squares regression model was used to determine if people who exhibited a happy mood at the time they completed a survey scored differently than those who were not happy. In a sample (n = 460) of employed mid‐western respondents between the ages of 18 and 75 years, being in a happy mood was positively associated with having a higher level of financial risk tolerance, holding biopsychosocial and environmental factors constant. Support for the Affect Infusion Model was obtained.     

Transparency and fund governance efficacy: The effect of the SEC'S disclosure rule on advisory contracts

In June 2004, the SEC required mutual fund boards to disclose additional information about the inputs and processes involved in advisory contract approvals to help investors make more informed decisions and to encourage independent directors to act more independently when negotiating advisory fees. We find that CEF advisory fees are more likely to decrease after the 2004 SEC amendments, especially for those CEFs with high advisory fees and low investment performances. After the 2004 SEC amendments, CEF advisory rates decrease on average and the magnitudes of their decreases increase. We find that more board meetings and the likelihood of a decrease in advisory fees after the amendments increases with the number of board meetings. Our results are not only supported by textual analysis and type of filing downloads but are also robust to time-series placebo tests, changes in the ratios of independent directors, and funds belonging to “scandal” families. Overall, our results are consistent with the notion that the 2004 SEC amendments successfully encouraged independent fund directors to exert more effort and to act more independently in negotiating advisory fees with fund advisors.     

The industry effect and the decision to integrate vertically in a crisis context

ABSTRACT

The objective of this work is twofold: firstly, to study if the characteristics of the industry affect certain financial and strategic decisions of manufacturing firms and, secondly, to determine if the strategy of diversifying the activity through vertical integration generates good financial results in times of crisis, depending on the industry. To this end, an analysis is carried out with panel data from 9,523 firms in the period between 2008 and 2013. The results show that there are different strategies that firms must follow, depending on the industry to which they belong. In sectors with lower operational risk, those firms characterized by greater specificity and better product quality obtained higher profitability. However, in riskier sectors, firms with more specific assets assumed too many risks and in times of crisis have seen their profitability fall. Likewise, it is observed that the decision to integrate vertically has mitigated the weak points of each sector, allowing firms to better weather the economic–financial crisis in which this research is framed.