Seasoned equity offerings: Quality of accounting information and expected flotation costs

Flotation costs represent a significant loss of capital to firms and are positively related to information asymmetry between managers and outside investors. We measure a firm's information asymmetry by its accounting information quality based on two extensions of the Dechow and Dichev [2002. The quality of accruals and earnings: the role of accrual estimation errors. Accounting Review 77, 35–59] earnings accruals model, which is a more direct approach to assessing the information available to outside investors than the more commonly used proxies. Our main hypothesis is that poor accounting information quality raises uncertainty about a firm's financial condition for outside investors, though not necessarily for insiders. This accounting effect lowers demand for a firm's new equity, thereby raising underwriting costs and risk. Using a large sample of seasoned equity offerings (SEOs), we show that poor accounting information quality is associated with higher flotation costs in terms of larger underwriting fees, larger negative SEO announcement effects, and a higher probability of SEO withdrawals. These results are robust to joint determination of offer size and flotation cost components and to adjustments for sample selection bias.     

A Real Effects Perspective to Accounting Measurement and Disclosure: Implications and Insights for Future Research

Accounting measurement and disclosure rules have a significant impact on the real decisions that firms make. In this essay, we provide an analytical framework to illustrate how such real effects arise. Using this framework, we examine three specific measurement issues that remain controversial: (1) How does the measurement of investments affect a firm's investment efficiency? (2) How does the measurement and disclosure of a firm's derivative transactions affect a firm's choice of intrinsic risk exposures, risk management strategy, and the incentive to speculate? (3) How could marking‐to‐market the asset portfolios of financial institutions generate procyclical real effects? We draw upon these real effects studies to generate sharper and novel insights that we believe are useful not only for the development of accounting standards, but also for guiding future empirical research.     

Corporate Lobbying,Visibility and Accounting Conservatism

In this study, we examine the relationship between a firm's lobbying activities and financial reporting quality using a US setting where public scrutiny of corporate political activities is high. More importantly, we examine whether and how a firm's visibility shapes the relationship between its corporate lobbying activities and accounting conservatism. Adopting annual lobbying expenditure data to measure firms’ lobbying activities, and using a propensity‐score‐matching methodology to control for differences in firm characteristics between lobbying and non‐lobbying firms, we find a positive relationship between a firm's lobbying intensity and the degree of accounting conservatism in its financial reporting. We further find this positive relationship to be more pronounced in lobbying firms with a higher level of visibility. These results are robust after controlling for a firm's political connections, across various conditional conservatism measures, and across a number of visibility measures including firm size, the number of analysts following the firm, the age of the firm, the number of foreign stock exchanges that the firm is cross‐listed in, and the level of the firm's media coverage. Together, our findings add to the literature on how firms’ political activities shape their accounting practices in general, and accounting conservatism in particular. More importantly, our findings suggest that the heightened public attention paid to political activities in the US yields incentives for firms to be more conservative in their accounting practices.     

Renegotiation of cash flow rights in the sale of VC-backed firms

Incomplete contracting theory suggests that venture capitalist (VC) cash flow rights, including liquidation preferences, could be subject to renegotiation. Using a hand-collected data set of sales of Silicon Valley firms, we find common shareholders do sometimes receive payment before VCs’ liquidation preferences are satisfied. However, such deviations from VCs' cash flow rights tend to be small. We also find that renegotiation is more likely when governance arrangements, including the firm's choice of corporate law, give common shareholders more power to impede the sale. Our study provides support for incomplete contracting theory, improves understanding of VC exits, and suggests that choice of corporate law matters in private firms.     

The spillover effect of financial information in mergers and acquisitions

In this study we investigate whether and how a firm's investment activities are affected by the financial information of peer firms on merger and acquisition (M&A) efficiency. Using changes in M&A accounting performance to measure efficiency, we find a positive association between the post-M&A accounting performance of an acquiring firm and that of previous peer acquirers. We show that this spillover effect is derived from peer firms with improved rather than poorer post-M&A accounting performance. We also find that the spillover effect varies with the characteristics of both the acquiring and the peer firms. The effect is stronger when the peer firms are larger, are non-SOEs (vs. SOEs), have improved accounting performance after M&As and undertake M&As with unrelated (vs. related) entities, and when the acquiring firms are smaller, non-SOEs (vs. SOEs) and have poorer accounting performance before M&As.     

Exploring the Causes of Accounting Restatements by Family Firms

Prior research shows that family firms have better earnings quality than non‐family firms in common‐law countries and highly developed markets. In contrast, we do not find a significant difference in the financial reporting quality between family and non‐family firms in the context of a civil‐law system and less developed market. We show that the financial reporting quality of family firms is conditioned on: (1) the divergence between the controlling shareholders’ voting rights and their cash flow rights, and (2) the firm's reputation for integrity, while these two conditions do not explain the restatement likelihood for non‐family firms. Moreover, when accounting irregularities are detected in the case of family firms, they are associated with more serious accounting restatements. Together, these results imply that the severity of the conflict between ultimate and minority shareholders, and a lack of integrity, explain the propensity for making financial restatements among family firms in a regime characterized as having weak investor protection and concentrated ownership structures.     

The Information Content of Corporate Pension Funding Status in Japan

This paper tests if a firm's pension funding ratio (pension assets/PBO) reveals the management's private information about the firm's operation when the firm can exercise discretion in pension funding. The lax enforcement of pension funding rules and the prevalence of management forecasts make Japanese firms an ideal testing ground. We show that, among firms with large business uncertainty, large accruals, or high effective tax rates, the pension funding ratio predicts the firm's management forecast errors significantly beyond conventional control variable and the effects of pension accounting management. However, the stock market does not appear to incorporate this information immediately.     

Effects of air pollution on accounting conservatism

We examine the impact of air pollution on a firm's accounting policy conservatism. We hypothesize that, in response to risks associated with increased air pollution, firms apply more conservative accounting practices and utilize more conservative estimates in their reporting. Using a sample of Chinese firms, accounting conservatism measures, and a satellite-based air pollution metric, we confirm the validity of our hypothesis. Additional analysis suggests that the impact of air pollution on accounting policy conservatism is more salient for firms in high-pollution industries, firms under severe financial constraint, firms with higher environmental risk, and firms that receive high media coverage. Further, we document that air pollution does not significantly affect a firm's return on assets, year-on-year sales growth, or Tobin's Q measure. Hence, it is management's risk perception, not objective performance concern, that is driving accounting conservatism. Finally, specifically investigating accounting conservatism, we discover that, for firms with higher pollution levels, selling general and administrative expenses, liabilities provision, accrued expenses, and asset impairment loss are significantly higher.     

Do Firms Adjust Their Timely Loss Recognition in Response to Changes in the Banking Industry?

This paper investigates the impact of changes in the banking sector on firms’ timely recognition of economic losses. In particular, we focus on the entry of foreign banks into India during the 1990s, which likely causes an exogenous increase in lender demand for timely loss recognition. Analyzing variation in both the timing and the location of the new foreign banks’ entries, we find that foreign bank entry is associated with more timely loss recognition and this increase is positively related to a firm's subsequent debt levels. The change appears driven by a shift in firms’ incentives to supply additional information to lenders and lenders seem to value this information. The increase in timely loss recognition is also concentrated among firms more dependent on external financing: private firms, smaller firms, and nongroup firms. Overall, our evidence suggests that a firm's accounting choices respond to changes in the banking industry.     

会计信息可比性与企业商业信用融资——基于企业市场地位和行业竞争环境的双重考量

不同于传统的基于资本市场情境进行的会计信息可比性经济后果研究,将研究场景拓展至商品市场中企业供应链层面,考察企业会计信息可比性能否影响供应链伙伴的商业信用政策制定,进而反映到企业的商业信用融资水平.研究发现:会计信息可比性越高的企业,其商业信用融资水平也越高;会计信息可比性对商业信用融资的促进作用只在市场地位较低、所处行业竞争程度较高的企业中存在.进一步的拓展研究证实,提高会计信息可比性可以有效缓解我国中小微企业普遍存在的融资难问题.     

An Analysis of Accounting Frauds and the Timing of Analyst Coverage Decisions and Recommendation Revisions: Evidence from the US

This paper provides a comprehensive exploration of the types of accounting fraud committed by firms over the period 1995–2009. Using detailed data from US SEC Accounting and Auditing Enforcement Releases (AAER), we examine the likelihood and timing of analyst coverage decisions and recommendation revisions related to fraud firms versus firms without accounting fraud. We find that analysts have a higher probability of taking the more severe action of dropping coverage rather than only revising down recommendations for firms with any type of accounting fraud and also for specific egregious types of accounting fraud. Through the use of competing hazards models, we also find that accounting frauds and their egregiousness are positively (negatively) associated with the timeliness of the analysts’ action to drop coverage (revise only). Overall, we find that analysts’ actions may be useful in determining the occurrence of accounting fraud prior to the public announcement of the fraud.     

Accounting conservatism and corporate social responsibility

In this paper, we examine whether a firm's stakeholder orientation, as manifested by its social responsibility endeavors, matters for its choice of accounting conservatism. We find that the level of conservatism in financial reporting significantly increases with socially responsible activities. This result is robust to several conservatism aspects, including market-based conservatism measure, the aggregate of R&D reserves, advertising reserves, and LIFO reserves, and accrual-based conservatism construct. Moreover, our two-stage regression results validate that conservatism is more pronounced for firms that devote more resources to social responsibility programs. Consistent with stakeholder theory, these findings indicate that CSR-oriented firms are more likely to use accounting conservatism to credibly commit to acting in the interests of stakeholders. As a whole, our results provide a novel implication that the extent of accounting conservatism can be entailed by a firm's efforts to enhance stakeholder relations.     

Financial statement comparability and accounting fraud

We examine the association between financial statement comparability and the likelihood of accounting fraud. Prior research documents a negative association between the quality of a firm's reporting environment and accounting fraud. We build on this literature and show that poor financial statement comparability is associated with a greater likelihood of accounting fraud. We also find that accounting comparability declines over time as the year of fraud detection approaches and that the association between comparability and fraud becomes more negative over this time. In addition, we find that financial statement comparability improves after fraud detection, consistent with the notion that managers improve their financial reporting quality after fraud.     

Corporate ownership structure and the choice between bank debt and public debt

This article examines the relation between a borrowing firm's ownership structure and its choice of debt source using a novel data set on corporate ownership, control, and debt structures for 9,831 firms in 20 countries from 2001 to 2010. We find that the divergence between the control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant negative impact on the firm's reliance on bank debt financing. In addition, we show that the control-ownership divergence affects other aspects of debt structure including debt maturity and security. Our results indicate that firms controlled by large shareholders with excess control rights may choose public debt financing over bank debt as a way of avoiding scrutiny and insulating themselves from bank monitoring.     

Corporate capital structure and the characteristics of suppliers and customers

We investigate the link between a firm's leverage and the characteristics of its suppliers and customers. Specifically, we examine whether firms use decreased leverage as a commitment mechanism to induce suppliers/customers to undertake relationship-specific investments. We find that the firm's leverage is negatively related to the R&D intensities of its suppliers and customers. We also find lower debt levels for firms operating in industries in which strategic alliances and joint ventures with firms in supplier and customer industries are more prevalent. Consistent with a bargaining role for debt, we find a positive relation between firm debt level and the degree of concentration in supplier/customer industries.     

Information,sell-side research,and market making

The interaction between an investment bank's research and market making arms may have important implications for the trading of a firm's stock. We investigate the impact that research has on the liquidity provided by the bank's market maker. Utilizing a large sample of Nasdaq firms, we show that market makers whose banks also provide research coverage provide more liquidity and contribute more to price discovery than do market makers without such research coverage. Finally, we show that such “affiliated” market makers are less affected by uncertainty following earnings announcements. Our results provide new evidence on the sources of liquidity improvements for Nasdaq firms, and suggest that the information produced by banks in the sell-side research process is beneficial to their market makers.     

Additional Evidence on Analysts’ Decision to Issue Disaggregated Earnings Forecasts: Strategic Biasing

This study examines why analysts issue disaggregated earnings forecasts to I/B/E/S. Some recent studies suggest that analysts with superior forecasting ability issue disaggregated earnings forecasts to build reputation in the marketplace and stop forecast disaggregation once their reputation has been established. Based on an analysis of I/B/E/S forecast data for U.S. firms from 1998 to 2008, we find that, in a given year, about 20%–34% of analysts disaggregate for some, but not for all the firms that they follow. This evidence of selective disaggregation by analysts suggests that reputation building alone does not fully explain the decision to disaggregate forecasts. We hypothesize that the decision to disaggregate earnings forecasts is at the firm‐level as well and is systematically related to the analysts’ bias in the issued forecasts. Our findings are that (a) analysts’ overall optimistic bias and forecast errors decrease monotonically with the level of forecast disaggregation, and (b) analysts that selectively disaggregate their forecasts for some firms or who do not persistently disaggregate a given firm's forecasts exhibit more positive bias and larger forecast errors. Our findings are consistent with the notion that the analysts who issue biased forecasts, for example, to curry favour with the management, are less likely to provide disaggregated information as part of the forecast.     

RISK AND HEDGING BEHAVIOR: THE ROLE AND DETERMINANTS OF LATENT HETEROGENEITY

The notion of heterogeneous behavior is well grounded in economic theory. Recently it has been shown in a hedging context that the influence of risk attitudes and risk perceptions varies for different segments using a generalized mixture regression model. Here, using recently developed individual risk attitude measurement techniques and experimental and accounting data from investors with differing decision environments, we examine the determinants of heterogeneity in hedging behavior in a concomitant mixture regression framework. Allowing for latent heterogeneity, we find that risk attitudes and risk perceptions do not influence behavior uniformly and that the heterogeneity is influenced by manager's focus on shareholder value and the firm's capital structure.     

Do managers intentionally use repurchase tender offers to signal private information? Evidence from firm financial reporting behavior

Signaling is the most commonly cited explanation for stock repurchases in the academic literature. Yet, there is little evidence on whether managers intentionally use repurchases as signaling devices. Using a firm's financial reporting behavior to infer managerial intent, we find evidence suggesting that managers intentionally use fixed-price repurchase tender offers to signal undervaluation. In contrast, we find no evidence that managers use Dutch-auction tender offers to signal undervaluation. Instead, firms engaging in Dutch-auction repurchases act as if they are trying to deflate their earnings prior to the repurchases to further reduce the repurchasing price.     

Analyst coverage and earnings management

What is the role of information intermediaries in corporate governance? This paper examines equity analysts’ influence on managers’ earnings management decisions. Do analysts serve as external monitors to managers, or do they put excessive pressure on managers? Using multiple measures of earnings management, I find that firms followed by more analysts manage their earnings less. To address the potential endogeneity problem of analyst coverage, I use two instrumental variables based on change in broker size and on firm's inclusion in the Standard & Poor's 500 index, and I find that the results are robust. Finally, given the number of covering analysts, analysts from top brokers and more experienced analysts have stronger effects against earnings management.