Corporate Social Responsibility,Firm Value and Corporate Governance Code Revisions: The Asian Evidence*

The present study examines the relationship between corporate social responsibility (CSR) and firm value, and the effects of corporate governance code revisions on the relationship. We examine this relationship for: (i) a high‐income country, Japan; (ii) middle‐income countries China, Malaysia and Thailand; and (iii) low‐income countries India and Indonesia. We use the Heckman two‐stage sample selection bias approach for the empirical analysis. We find that Japanese stakeholder CSR and environmental CSR have a smaller positive effect on firm value compared to the middle‐income countries, but we do not find any statistically significant association for the low‐income countries. In addition, we find that only Japanese corporate governance code revisions significantly contribute to the positive relationship between CSR and firm value, which concurs with the new recommendations documented in the revised codes of corporate governance. The present study reveals that foreign major shareholders matter to the value creation of CSR in Japan and the middle‐income countries of China, Malaysia and Thailand.     

REGIONAL FINANCIAL INTEGRATION IN SUB‐SAHARAN AFRICA – AN EMPIRICAL EXAMINATION OF ITS EFFECTS ON FINANCIAL MARKET DEVELOPMENT

This article examines the effects of political agreements on regional financial integration (RFI) on financial market development and access to and cost of finance in Sub‐Saharan Africa (SSA). Our results suggest that RFI positively affects financial development – measured very broadly as ratio of liquid liabilities to gross domestic product (GDP) – when combined with a sufficient level of institutional quality. If institutional quality is below a threshold level, RFI apparently has negative effects on financial development. However, we cannot find any significant effects of RFI on the ratio of private credit to GDP or on the efficiency of the banking sector. Regarding the effects of RFI on access to and costs of finance of enterprises in SSA, our results are mixed. We can find no significant effect of RFI on access to finance for all firms in the aggregate, but the results indicate that RFI actually impedes small firms' access to finance. Furthermore, there is a significant positive influence of foreign bank involvement on the severity of the credit constraint for small enterprises, while we do not find such an influence for large enterprises. These results provide some support for the foreign bank barrier hypothesis in the context of RFI.     

Firm Productivity,Innovation, and Financial Development

How do firm‐specific actions—in particular, innovation—affect firm productivity? What is the role of the financial sector in facilitating higher productivity? Using a rich firm‐level data set, we find that innovation is crucial for firm performance as it directly and measurably increases productivity. The impact of innovation on productivity is larger in less‐developed countries. Evidence of financial sector development influencing the innovation‐productivity link is weak, but the effect is difficult to identify due to correlation between indicators of a country's financial and nonfinancial development. Furthermore, we find evidence that the innovation effect on productivity is more significant for high‐tech firms than for low‐tech firms.     

Do Mutual Fund Investors Care About Auditor Quality?

We study the influence of perceived auditor quality on investment decisions by bond mutual fund investors. Audits of bond mutual funds require significant auditor expertise. Fund managers estimate daily the fair market values of holdings that are often opaque and illiquid. Managers can use their discretion to manipulate their fund's performance results. While it is known that investment flows into funds that report good past performance, little evidence exists about whether investors' confidence in the reliability of fund financial reports is influenced by auditor quality. Using hand‐collected data from SEC filings, we find that the positive association between reported performance and investment flows is stronger for funds with auditors who are industry specialists and are longer‐tenured, as well as for funds that pay higher audit fees. We do not find that auditor office size strengthens the association. We also find that the presence of industry‐specialist auditors, long‐tenured auditors, and higher audit fees lead to additional disclosure in the form of emphasis‐of‐matter. This study contributes to the streams of research investigating perceived audit quality, fund investment decisions, and auditing for financial services.     

Discretion in Financial Reporting: The Voluntary Disclosure of Compensation Peer Groups in Proxy Statement Performance Graphs*

We examine the 49 Standard & Poor's (S&P) 500 firms that voluntarily disclosed in their 1993 proxy statements, the composition of the comparison group used by each board's compensation committee to set executive compensation policies. We hypothesize that the net benefits of this disclosure are largest when (1) there is a high degree of stakeholder concern about compensation, (2) compensation policies are defensible, and (3) corporate governance is strong. Consistent with our stakeholder concern prediction, disclosing firms have higher compensation levels and are more apt to have received prior shareholder proposals about executive compensation. Contrary to this prediction, we find a negative association between financial press coverage of compensation policies and the probability of disclosure. Additionally, the disclosure decision is unrelated to the defensibility of compensation policies and the firm's corporate governance profile. Industry-adjusted firm performance, managerial entrenchment, CEO tenure, institutional holdings, and compensation committee independence variables are insignificant. We also compare the financial performance and compensation practices of compensation peers to two yardsticks — performance and pay practices at the sample firms and the corresponding S&P industry index firms. The compensation levels of compensation peers exceed those of the firms in the corresponding S&P industry indexes. Because (1) compensation levels and performance sensitivities at sample firms are more similar to those at compensation peers than to those at S&P industry index firms, and (2) the superior financial performance and higher performance sensitivities of disclosing firms justify high pay, this evidence suggests that the compensation peers of disclosing firms are an appropriate comparison group.     

The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts*

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), in their joint Financial Statement Presentation project, are reconsidering the basic format of financial statements. The Boards’ preliminary discussions related to this joint project indicate that they intend to modify the required financial statements to increase the proximity of performance‐related information for each reported period. We provide evidence related to this potential change by investigating the effects of financial statement information proximity on investors’ ability to learn the forecast‐relevant time series properties of reported cash flows and accruals. We also examine the role feedback plays in this relationship. Our experimental results suggest that nonprofessional investors are able to more quickly learn the relation between current period cash flows and accruals and future cash flow realizations when financial statement information is presented in a single statement rather than separated into two statements. In addition, we find that nonprofessional investors exhibit lower levels of absolute forecast errors and less forecast dispersion when financial statement information is unified into a single statement. Finally, we provide evidence that nonprofessional investors who receive extensive outcome feedback on a single page initially learn more quickly and later, after learning has leveled off, accurately forecast more consistently than do investors who receive extensive or limited feedback spread across two pages. Overall, our results provide evidence on the effectiveness of alternate financial statement presentation formats and the potential usefulness of receiving more extensive feedback.     

Audit Qualifications of Income‐Decreasing Accounting Choices*

In this study we conduct an experiment to examine how qualifying an income‐decreasing accounting change in years of strong financial performance affects financial report users' assessments of strategic reporting, current financial performance, and future financial performance (performance over the next three years). We find that without the qualification, users viewed the income‐decreasing accounting change as relatively nonstrategic and that user assessments of current and future performance were not different. In the presence of the qualification, users believed that the accounting change was relatively strategic, and they discounted the income effect of the accounting change. We find further that their assessments of future performance were below their assessments of current performance but no different from the assessments of future performance in the absence of the qualification. Although our findings suggest that audit qualifications encourage users to be skeptical of income‐decreasing accounting changes, we find no evidence that they impose negative consequences on management in terms of lower assessments of financial performance.     

Rethinking the impact of GDP on financial development: Evidence from heterogeneous panels

This paper examines the nonlinear impact of real GDP per capita on financial development in a panel of 125 countries. It also determines the moderating effect of inflation on the impact of GDP on financial development. It employs the dynamic panel system generalized method of moments (GMM) and the dynamic common correlated effects (CCE) to do both panel and country‐specific analysis, as well as control for cross‐sectional dependence, heterogeneity and endogeneity. This study shows that GDP has a positive impact on financial development in the entire panel. However, when we split the panel into different income groups, we find a positive impact in the high‐ and middle‐income groups while the impact is insignificant in the low income group. Although we find no evidence of a nonlinear impact of GDP on financial development in the panel, the country‐specific analysis reveals a significant nonlinear relationship between GDP and financial development in 73 countries. We also show that inflation adversely moderates the positive impact of GDP on financial development in middle‐income countries. This study implies that the relationship between GDP and financial development depends on the levels of GDP and inflation rate. We recommend some policy options based on the findings.     

Are Financial Development and Trade Openness Complements or Substitutes?

This article studies the long‐ and short‐run relationships between financial development and trade openness. Using the pooled mean group estimator of Pesaran, Shin, and Smith (1999) for unbalanced panel data for 87 countries over the 1960–2005 period, our empirical results indicate that long‐run complementarity between financial development and trade openness coexists with short‐run substitutionarity between the two policy variables. But when splitting the data into OECD and non‐OECD country groups, this finding can be observed only in non‐OECD countries. For OECD countries, financial development has negligible effects on trade. In addition, we find nonlinearity in the relationship in that long‐run responses of trade decrease with financial development. The article further finds coexistence of negative trade effects of financial fragility and positive trade impacts of financial depth.     

Quality of Corporate Governance on Dividend Payouts: The Case of Nigeria

Corporate governance (CG) safeguards shareholders’ portfolios and ensures optimal returns in terms of dividend payouts (DPs) on investment. The association between CG and DPs could be significant in relation to risk exposure, operational and financing activities across firms and sectors. The relationship between CG and DPs has been well documented, however; the role of industry classification on the relationship has not been given adequate consideration in the literature. This study, therefore, examines the moderating effects of sector classification of CG on DPs in Nigeria. Agency theory underpins the model which captures the effects of CG on DPs. Governance indicators and dividend per share of 97 non‐financial listed companies in Nigeria from 1995–2012 are utilized. The system generalized method of moments estimation technique is employed in the analysis. The empirical findings indicate a positive association between CG and DP. Additionally, the analysis underlines the importance of the mode of operations (sector classification) in the relationship between CG practices and DPs in Nigeria. Based on the results of the study, it is suggested that more independent directors should be on the boards of corporate firms and the proportion of institutional shareholding also be increased to improve monitoring.     

Who Plays the Key Role among Shanghai, Shenzhen and Hong Kong Stock Markets？

In this paper we examine the daily frequency stock market indices of Shanghai, Shenzhen and Hong Kong from January 2000 to June 2012, and use the Morlet wavelet coherence model to determine who is playing the most important role in the financial markets of China. We find that there are significant comovements between these stock markets in the medium and long run. This provides investors with opportunities to increase their capital gains. The Hong Kong stock market plays a leading role in the long run, but its leader position is threatened by fast‐growing Chinese mainland stock markets, especially the Shanghai Stock Exchange. Based on our analysis, the following suggestions apply to the Chinese stock markets: establish and improve international and regional finance centers in Chinese mainland; encourage more qualified institutional investors; reposition the market relations among Hong Kong, Shanghai and Shenzhen; and increase deregulation and internationalization to speed up the integration of financial resources.     

Pain or Gain? Chinese Experience of Capital Account Liberalization

The neoclassical growth model predicts that capital account liberalization could potentially enhance economic performance; however, there is no consistent empirical evidence to support this positive association. Using a novel dataset of Chinese capital account openness, this paper demonstrates a positive relationship between capital account liberalization and aggregate economic performance. The difference‐indifferences method is used to capture the causal effect of capital account liberalization on economic performance by taking advantage of variations in both external financial dependence and the progress of capital account openness. We investigate three channels that could strengthen this positive relationship using a firm‐level dataset. We find that capital account liberalization could: (i) alleviate the degree of resource misallocation, and this effect is more significant in industries relying heavily on external finance and in regions with more favorable business environments; (ii) enhance firms’ total factor productivity; and (iii) promote innovation. Our findings suggest that a strategy of gradual openness will leave some leeway not only for improvement in domestic markets but also to mitigate exposure to unfavorable global shocks.     

Do Clients Get What They Pay For? Evidence from Auditor and Engagement Fee Premiums

Despite the intuitive appeal, prior research finds mixed evidence on whether higher audit fees translate to superior audit quality. Under the assumption that product differentiation between auditors is based, in large part, on the level of financial statement assurance, we propose more refined measures of excess audit fees that separate auditor premiums from other fee premiums. Consistent with our conjecture, we identify significant variation in audit pricing across auditors (i.e., auditor premiums) that relates positively to audit quality. Conversely, we find no evidence that higher engagement‐specific fee premiums (i.e., fee model residuals) are positively related to proxies for audit quality. Additional tests indicate that our results do not simply reflect premiums attributable to auditor characteristics evaluated in prior research (e.g., Big 4 membership, office size, and industry expertise). In fact, our findings suggest that the positive association between auditor premiums and audit quality is better captured at the auditor level than it is at the auditor “tier,” office, auditor‐industry, or engagement levels. In sum, our results suggest that auditors charging higher fees, on average, deliver superior levels of financial statement assurance, but engagement‐specific fee premiums do not reflect quality‐enhancing audit effort. These contrasting results provide a possible explanation for the mixed findings in prior research.     

Corporate Cash Holding in Asia

In this paper, we analyze the determinants of corporate saving in the form of changes in cash holdings for 11 Asian economies using firm‐level data from the Oriana Database for the 2002–2011 period. We find some evidence that cash flow has a positive impact on the change in cash holdings (i.e. that the cash flow sensitivity of cash is positive) and that the positive impact of cash flow on the change in cash holdings is larger and more significant in the case of smaller and presumably more constrained firms than in the case of larger and presumably less constrained firms in both developed and developing economies. Both of these findings corroborate the importance of financial constraints in Asian firms. In addition, we find that the cash flow sensitivity of cash declined after the global financial crisis and that Tobin's q has a positive impact on the change in cash holdings, especially in the case of larger and presumably unconstrained firms.     

How do leverage ratios affect bank share performance during financial crises: The Japanese experience of the late 1990s

This study investigates the relationship between leverage ratios and bank share performance for a sample of Japanese banks during the period of financial crisis in the late 1990s. We differentiate between two types of leverage ratios: book leverage and market leverage. We show that market leverage instead of book leverage observed before the crisis has statistically and economically significant predictive power for the cross-sectional variation in bank performance during the crisis, even after controlling for a variety of other indicators reflecting bank’s characteristics and financial conditions. We also find that banks with lower market leverage ratios were affected more adversely by the failure announcements of large financial institutions during the crisis. The results are robust across alternative model specifications, statistical methodologies, lengths of sample intervals, and measures of bank share performance during the crisis. Our results therefore have important implications for regulators in identifying distressed banks that are vulnerable to the deterioration in conditions of the financial system.     

The Relation Between Earnings Management and Non‐GAAP Reporting

Managers have a variety of tools at their disposal to influence stakeholder perceptions. Earnings management and the strategic reporting of non‐GAAP earnings are just two of the available menu choices. We explore how real earnings management and accruals management influence the probability that a company will disclose a non‐GAAP adjusted earnings metric in its earnings press release and the likelihood that it will do so aggressively. We first investigate situations where managers already meet analysts’ expectations either based on strong operating performance or after employing real and accruals management. We find that when solid operating performance alone allows firms to meet expectations, managers do not employ earnings management or non‐GAAP reporting. However, when managers meet expectations using real and accruals management, they are significantly less likely to report a non‐GAAP earnings metric. Next, we explore scenarios where companies fall short of expectations. We find that when they just miss expectations after managing GAAP earnings, they are significantly more likely to employ non‐GAAP reporting, suggesting that the timing and relatively costless nature of non‐GAAP reporting allows managers to appear to meet expectations on a non‐GAAP basis when managed GAAP earnings fall short. Moreover, we find that companies are more likely to report non‐GAAP earnings (and to do so aggressively) when (i) they are unable to use real or accruals earnings management, (ii) are constrained by prior‐period accruals management, and (iii) their operating performance is poor. Taken together, our results are consistent with a substitute relation between non‐GAAP reporting and both real and accruals management.     

Creditors’ and Shareholders’ Reporting Demands in Public Versus Private Firms: Evidence from Europe*

In this study we investigate whether the importance of accounting information in contracting and communication with shareholders and creditors affects earnings timeliness in publicly disclosed general‐purpose financial statements. To operationalize the relationship between timeliness demands and the importance of accounting information to shareholders and creditors, we compare the (asymmetry in) earnings timeliness of public firms with that of private firms. We attribute public versus private firm differences in timeliness to shareholders’ demands when a country’s institutions provide strong investor protection. Similarly, we attribute these differences to creditors’ demands when the institutions provide strong creditor protection. Our analysis of public and private firms in 13 Western European countries suggests that creditors and shareholders have different timeliness demands. In particular, we find that the public versus private firm difference in asymmetric timeliness is not associated with a country’s degree of investor protection but positively associated with a country’s degree of creditor protection. The results further suggest that shareholders demand symmetric rather than asymmetric timeliness. An important implication of our study is that general‐purpose financial statements are responsive to creditors’ reporting demands, which contrasts with the idea that these — primarily private — creditors would use special‐purpose reports.     

IMPLEMENTING A ROBUST RISK MODEL FOR SOUTH AFRICAN EQUITY MARKETS: A PEAK‐OVER‐THRESHOLD APPROACH

This paper implements a market risk model for the South African equity market using daily returns of the Johannesburg Stock Exchange All Share Index. Firstly, we separate positive returns from negative returns and model them using the peak‐over‐threshold (POT) method in order to compute the downside as well as upside risk measures separately. We thereafter compute the value‐at‐risk (VAR) and the expected shortfall (ES) estimates corresponding to upside and downside risks. We bootstrap these risk measures and compute their standard errors and confidence intervals (CIs) to see whether they fall inside these CIs. Secondly, we compute out‐sample forecasts of VAR estimates using the POT method and the generalised autogressive conditional heteroscedasticity process. Three backtesting methodologies are employed: the unconditional and conditional coverage tests and the counting of number of exceptions according to Basel II green zone. We find that all our VAR and ES estimates are well inside their CIs and that at lower quantiles, parametric ES estimates are equal to POT‐ES estimates, although the difference between the two is more pronounced at higher quantiles (99% or higher). Furthermore, our market risk model falls into the Basel II green zone, as it produces fewer exceptions in out‐sample space.     

Liquidity Crises and Corporate Cash Holdings in Chile

This paper addresses the heterogonous effects of adverse liquidity shocks on corporate cash holdings in an emerging market. We use a large panel dataset with quarterly financial information for Chilean firms during the period 1996–2009. We find three main results. First, liquidity crises have had a negative and economically significant effect on cash holdings, but mainly for small firms; medium‐sized and large firms have not been affected by liquidity crises. Second, liquidity crises reduce the ability of firms to adjust to optimal cash holdings. Finally, medium‐sized firms are less able to adjust cash holdings compared to small and large firms.     

Financial Reporting and Trade Credit: Evidence from Mandatory IFRS Adoption*

We investigate the effect of mandatory IFRS adoption on trade credit. We document that firms in countries that adopt IFRS receive more trade credit from their suppliers, consistent with improved financial reporting quality and comparability playing a role in facilitating informal financing. This increase is larger for countries with a low level of societal trust, a poor pre‐IFRS‐adoption information environment, and stronger legal enforcement. These cross‐sectional results suggest that the conditions under which higher‐quality information is made publicly available affect suppliers' decisions to provide trade credit. This increase is also larger for firms with greater exposure to foreign markets, a finding that highlights the importance of more comparable international financial reporting standards in facilitating cross‐country trade credit. We also find that IFRS adoption has a stronger positive effect on trade credit for firms with greater liquidity needs. Finally, we find that firms in countries that adopt IFRS also extend more trade credit to their customers. Overall, our results support the notion that financial reporting can have a causal effect on trade credit.