Auditor changes following big eight mergers with non-big eight audit firms

This paper examines the reaction of clients of “non-Big Eight” audit firms to mergers of their auditors with “Big Eight” firms. We postulate that a non-Big Eight audit firm's clients will retain a Big Eight acquirer following a merger if they benefit from the Big Eight firm's specialized services and/or reputation. Clients that do not have these economic incentives to retain the Big Eight firm are more likely to change to another non-Big Eight audit firm following the merger. Empirical tests of the characteristics of clients that remain with a Big Eight acquirer or change to another smaller auditor following an audit merger generally support our hypotheses.     

Market Liquidity,Investor Participation,and Managerial Autonomy: Why Do Firms Go Private?

We focus on public-market investor participation to analyze the firm's decision to stay public or go private. The liquidity of public ownership is both a blessing and a curse: It lowers the cost of capital, but also introduces volatility in a firm's shareholder base, exposing management to uncertainty regarding shareholder intervention in management decisions, thereby affecting the manager's perceived decision-making autonomy and curtailing managerial inputs. We extract predictions about how investor participation affects stock price level and volatility and the public firm's incentives to go private, providing a link between investor participation and firm participation in public markets.     

Last resort gambles, risky debt and liquidation policy

This paper develops a real option model in which the interaction between debt, liquidation policy and risky investments is studied. We consider a manager who owns the firm and faces the opportunity to invest in risky projects which may boost current profits at the cost of bankruptcy if they turn out to be unsuccessful. These investments are “last resort gambles” in the sense that, if successful, they save the company from insolvency, while, if unsuccessful, they make liquidation unavoidable. It is shown that last resort gambles delay liquidation. We study how the liquidation trigger and the last resort investment decisions are affected by the firm's capital structure.     

Insider ownership and corporate performance: Evidence from the adjustment cost approach

This paper examines the relation between insider ownership and corporate performance in the presence of adjustment costs and investigates how the adjustment costs are determined. In a model specification without adjustment costs, we find that insider ownership is significantly positively associated with corporate performance. But once we allow for adjustment costs, the relationship no longer exists. We find that insider ownership and corporate performance can be explained by their respective lagged values and that many firm characteristics that were previously useful in explaining these two variables turn out to be statistically insignificant. In addition, there is no evidence that insider ownership and corporate performance affect each other. This is consistent with the adjustment cost argument. It is also consistent with the “endogeneity” argument suggested by Demsetz [Demsetz, H. 1983. The structure of ownership and the theory of the firm. Journal of Law and Economics 26, 375–390.], Demsetz and Lehn [Demsetz, H., Lehn, K., 1985. The structure of corporate ownership: causes and consequences. Journal of Political Economy 93, 1155–1177.], and Demsetz and Villalonga [Demsetz, H., Villalonga, B., 2001. The ownership structure and corporate performance. Journal of Corporate Finance 7, 209–233.]. Finally, we document that the speed of adjustment of insider ownership is positively related to insiders' market timing but negatively to the number of insiders and that the speed of adjustment of Tobin's Q is positively associated with financial leverage and stock price volatility.     

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.     

INTEREST ON EQUITY CAPITAL AS AN EX POST COST: A COMMENT

This paper attempts to rebut some criticisms advanced by Amey against the conceptual basis of proposals to make an ex post imputation for the cost of equity capital in external fmancial reports. The principle argument is that 'implicit' opportunity costs are relevant not only ex ante, for decision-making, but also ex post, if suitably defined and measured, for performance evaluation. An allowance for the foregone earnings of the equity does, therefore, seem justified. But rather than a standardised imputation of 'interest', the need for comparability across firms suggests firm - or industry - specific allowances which would take account of each firm's gearing and overall riskiness.     

A re-examination of the index effect: Gambling on additions to and deletions from the S&P 500's ‘gold seal’

This study examines the abnormal returns, trading activity, volatility and long-term performance of stocks that were added to the S&P 500 index. By using a three-factor pricing model that allows for firm size and value characteristics as well as market risk, we are able to shed new light on the widely observed ‘index effect’. We find that the CAPM tends to overstate the performance of large firms and to understate the performance of small firms. We also find a transitory increase in trading volume between the announcement and a few days after the effective date. In terms of the firm's operating performance, we find a significant increase in earnings per share after inclusion, which combines with the stock price rise to leave the average price-earnings ratio largely unaltered. Examining a unique sample of deletions of international companies and replacements with US companies, we find that deleted stocks experienced a considerable and permanent fall in price, inconsistent with the Investor Recognition Hypothesis. The “seal” of S&P 500 index membership has very long-term effects and inclusion appears not to be an information-free event.     

The accounting of interpretations and the interpretation of accounts: The communicative function of “the language of business”

The objectivistic philosophical assumptions which underlie contemporary research in accountancy, as well as economics and elsewhere, are challenged and an interpretive alternative is proposed. A “hermeneutical” view of decision-making is examined, first with regard to science in general, and then concerning the human sciences in particular, and finally with regard to economics. Human decisions are not seen as objective, mechanical or behavioristic but as meaningful utterances of minds, as part of a bidirectional communicative process. That is, scientific decisions, like everyday decisions, are mutually interpretive processes of communication in language. Although it is true that much of mainstream neoclassical economics is incompatible with this interpretive approach, the “Austrian” school can be seen as an interpretive version of neoclassicism. This school of economics indicates a way to understand the communicative function the accounting “language” itself serves in the economic process. The professional judgments made by both accounting researchers and practicing accountants, then, are treated as “matters of interpretation,” but as not, thereby, arbitrary.     

The external organizational environment and its impact on management information systems

It is argued in this paper that organizations are “living purposeful” or “adaptively rational” systems whose survival depends on their ability to interact successfully, on a continual basis, with the surrounding environment. Three states of the external organizational environment — controllable, partially controllable and uncontrollable — are identified, and the information characteristics of each state are discussed. The approaches that organizations can adopt to collect information on the environment are also discussed; these approaches use externally-based data sources and modeling and/or analytic techniques. On these bases, we consider effective strategies and methodologies which organizations can adopt for processing, evaluating and communicating information about the external environment to satisfy decision-making requirements.     

Professionalism, organizational commitment and job satisfaction in an accounting organization

With growth in the number of professionals employed in organizations, concern has been expressed over potential conflict between the professionalism of these employees and their commitment to the organization. Empirical studies examining the relationships between professionalism, organizational commitment and job satisfaction have reported inconsistent results. This paper examines these variables in an organization setting involving several field offices of a “Big Eight” U.S. accounting firm. Accountants who reported high levels of professionalism also reported high levels of organizational commitment. Additionally, both professionalism and organizational commitment were strongly related to job satisfaction.     

Managerial ownership and firm performance: A re-examination using productivity measurement

The role of productivity in firm performance is of fundamental importance to the US economy. Consistent with the corporate finance approach, this paper uses the ownership stake of a firm's managers as an argument in estimating the firm's production function. Accordingly, this paper brings together the corporate finance and productivity literature. Using a large sample of randomly selected manufacturing firms that does not suffer from any survivorship or large firm size biases, we find that managerial ownership changes are positively related to changes in productivity. We also find a higher sensitivity of changes in managerial ownership to changes in productivity for firms who experience greater than the median change in managerial ownership. These results are robust to including lagged estimates of production inputs, year dummies and separate dummies for each firm to control for unobservable firm characteristics. In addition, we find that the stock market rewards firms with increases in firm value when these firms increase their level of productivity.     

The interaction between national and organizational cultures in accounting firms

This paper reports the results of an empirical study of the interaction between national and organizational cultures at the firm level. Using Hofstede's Value Survey Module, the concept of culture was operationalized in six accounting firms in The Netherlands. Three of these firms were local offices of international “Big Eight” accounting firms with a strong U.S.-orientation in their organizational philosophies and policies, whereas the other three firms were Dutch in origin and organization. All six firms work virtually entirely with Dutch employees. We were specifically interested in any influences of the U.S. culture upon the Big Eight firms. For two Hofstede's four cultural dimensions, i.e. Uncertainty Avoidance and Masculinity, significant effects of the U.S. culture upon the organizational cultures of the Big Eight firms were found. Further analysis showed that these results may rather be due to (self-)selection than to socialization mechanisms.     

Maximizing the firm's value to society through ethical business decisions: Incorporating ‘moral debt’ claims

We argue that all three forms of justice (economic, legal, distributive) require to be incorporated into the firm's business decisions in order to protect stakeholders’ alienable and inalienable rights. In addition, the firm has ‘moral debt’ obligations which require to be distributed fairly amongst all stakeholders. We develop a model that demonstrates that just distribution of stakeholders’ ‘moral debt’ and residual claims leads to the maximization of the firm's value to society in the long-run.     

CEO organizational identification and firm cash holdings

As the decision-makers and implementers of a firm’s financial strategy, executives play a critical role in cash holding activities, and their psychological characteristics have a major impact on cash holdings. This paper investigates the association between CEO organizational identification and firm cash holdings. The empirical results show that CEO organizational identification is negatively associated with firm cash holdings, and the negative association is more pronounced when the level of financial development is higher and economic uncertainty is lower. Further analysis reveals that the higher a CEO’s organizational identification, the higher the firm’s R&D investment and capital expenditure, and high CEO organizational identification can increase the value of firm cash holdings. Overall, our findings supplement the literature on organizational identification and cash holdings, and on the effect of executives’ psychological characteristics on corporate financial decision-making.     

An empirical analysis of strategic competition and firm values the case of R&D competition

We operationalize a firm's competitive strategy through a new empirical measure, and develop a framework for empirical analysis of the market value of strategic behavior. Using this framework, we study announcement effects of R&D spending. The announcing firm's stock prices are positively influenced by a change in spending, and negatively by our competitive strategy measure (CSM). Competitors' stock prices are positively influenced by the interaction between the market's reaction to the announcing firm and the CSM. Our results are consistent with positive effects of ‘accommodating’ competition with strategic substitutes, and nonpositive effects of ‘tough’ competition with strategic complements.     

Stochastic CVP analysis as a gateway to decision-making under uncertainty

Although a substantial research literature on cost–volume–profit (CVP) analysis under uncertainty has accumulated since the seminal contribution of Jaedicke and Robichek [Accounting Review, 39 (1964), 917], this literature has been almost entirely ignored by authors of managerial and cost accounting textbooks. This is unfortunate because owing to the extreme simplicity of the basic deterministic CVP model, students are better able to understand the elements added by generalizing the model to an uncertainty situation. A CVP model that incorporated uncertainty would therefore provide a good entry point into the important but complicated topic of decision-making under uncertainty. This paper sets forth, analyzes and applies a CVP under uncertainty model specifically geared toward classroom instruction. It is a simpler model than many of those developed in the research literature, but it does incorporate one advanced component: an “economic” demand function relating the expected sales level to price. Price is neither a constant nor a random variable in this model but rather the firm's basic decision variable. The simplicity of the model permits analytical solutions for five “special prices”: (1) the highest price which sets breakeven probability equal to a minimum acceptable level; (2) the price which maximizes expected profits; (3) the price which maximizes a Cobb–Douglas utility function based on expected profits and breakeven probability; (4) the price which maximizes breakeven probability; and (5) the lowest price which sets breakeven probability equal to a minimum acceptable level. An example of application is presented in which the model is applied to pricing continuing education programs offered by Center for Management and Professional Development at the authors’ university.     

The illusion of managerial control

The design and implementation of organizational control systems based on a cybernetic model stand in need of revision. The revision is required by increasing numbers of reports of system ineffectiveness and, in some cases, failure. The paper suggests that a major reason for current difficulties resides in the “illusion of control” implied by theory and implemented in practice. An alternative definition of organizational control based in the concept of “multirationality” is proposed.     

The two faces of organizational information

Organizational information, i.e. “facts” given and taken, and inferences drawn and established by participants within an organizational situation, may be examined in terms of its import to the relationship between an organization and its environment. A “locus” for organizational information is established in which information is classified as: (a) either inner- or other-directed: (b) either internally- or externally-based; and (c) either self- or other-referencing. Examples of organizational information in each of the eight possible categories are readily identified. Much, if not most, organizational information is probably best regarded as “two-faced”, i.e. as the product of inner- and other-directed needs taken together. For this reason, the basis, or justification of any item of organizational information is often obscure. This is seen to have consequences for organizational self-learning and self-delusion, and for the maintenance of organizational credibility and organizational secrets.     

Derivatives and systemic risk: Netting, collateral, and closeout

In the U.S., as in most countries with well-developed securities markets, derivative securities enjoy special protections under insolvency resolution laws. Most creditors are “stayed” from enforcing their rights while a firm is in bankruptcy. However, many derivatives contracts are exempt from these stays. Furthermore, derivatives enjoy netting and closeout, or termination, privileges which are not always available to most other creditors. The primary argument used to motivate passage of legislation granting these extraordinary protections is that derivatives markets are a major source of systemic risk in financial markets and that netting and closeout reduce this risk. To date, these assertions have not been subjected to rigorous economic scrutiny. This paper critically re-examines this hypothesis. These relationships are more complex than often perceived. We conclude that it is not clear whether netting, collateral, and/or closeout lead to reduced systemic risk, once the impact of these protections on the size and structure of the derivatives market has been taken into account.