Determinants of corporate social and environmental reporting in Hong Kong: a research note

The patterns and determinants of corporate social and environmental disclosure (CSED) in Hong Kong (HK) are examined by analysing 154 annual reports of 33 HK listed companies from 1993 to 1997. The research finds that industry difference has an impact on the amount, content theme and location of CSED. There is a positive correlation between company size and the level of CSED. Utility companies disclose more CSED than property and banking firms.     

IAS Versus U.S. GAAP: Assessing the Quality of Financial Reporting in South Africa,the United Kingdom,and the United States

In this study, we investigate whether financial reporting, using International Accounting Standards (IAS) results in quality disclosures, given differences in institutional and market forces across legal jurisdictions. This study contributes to the global accounting debate by utilizing U.S.-based companies complying with U.S. Generally Accepted Accounting Principles (U.S. GAAP) as a benchmark for measuring the quality of IAS as applied by South Africa (S.A.) and United Kingdom (U.K.) companies. Although South Africa, United Kingdom, and the United States are common law countries with strong investor protection, South Africa's institutional factors and market forces vary from that of the U.K. and the U.S. South Africa's financial market is less developed than that of the U.K. and the U.S. We compare the discretionary accruals of firms complying with U.S. GAAP to the discretionary accruals of U.K. and S.A. firms complying with IAS. This allows a comparison between companies (S.A. and U.K.) operating under different institutional factors and market forces that have adopted IAS versus U.S. companies that report under U.S. GAAP. Our sample, consisting of U.S., S.A., and U.K. listed firms, contains 3,166 firm-year observations relating to the period 1999–2001. The results of our study indicate that S.A firms utilizing IAS report absolute values of discretionary accruals that are significantly greater than absolute values of discretionary accruals of U.S. firms utilizing U.S. GAAP. In contrast, U.K. firms utilizing IAS report discretionary accruals that are significantly less than the discretionary accruals of companies in the United States reporting under U.S. GAAP. This study contributes to the literature by providing evidence of the quality of financial information prepared under IAS and its dependency on the institutional factors and market forces of a country.     

Stock Market Sensitivity to U.K. Firms' Pension Discounting Assumptions

New U.K. pension accounting regulations significantly increase the exposure of the balance sheets of U.K. firms to volatilities in pension fund valuations. We examine whether the abnormal returns of firms that voluntarily used market-based pension discount rates are significantly different from the abnormal returns of industry-matched pair samples of firms that retained traditional cost-based valuation assumptions during the period surrounding the release of the related exposure draft. We also examine the interest rate sensitivity of stock price returns over the 4-year period before and after the announcement date. Consistent with our hypotheses, U.K. stock price returns incorporate the effect of unexpected interest rate changes on sources of pension earnings for firms that voluntarily switched to market-based assumptions but do not incorporate these effects for firms that did not switch. These results suggest that unexpected changes in interest rates have a differential effect on a firm's sources of pension, financial, and core earnings.     

The Amount and Timing of Goodwill Write-Offs and Revaluations: Evidence from U.S. and U.K. Firms

This paper investigates criticisms that U.S. GAAP had given firms too much discretion in determining the amount and timing of goodwill write-offs. Using 1,576 U.S. and 563 U.K. acquisitions, we find little evidence that U.S. firms managed the amount of goodwill write-off or that U.K. firms managed the amount of revaluations (write-ups of intangible assets). However, our results are consistent with U.S. firms delaying goodwill write-offs and U.K. firms timing revaluations strategically to avoid shareholder approval linked to certain financial ratios.     

Cooperative social and environmental disclosure and financial performance of savings and credit cooperatives in Kenya

This study examines the association between cooperative social and environmental disclosure (CSED) and financial performance of deposit-taking savings and credit cooperatives (SACCOs) in Kenya. Using data comprising of 1272 observations for 212 deposit-taking SACCOs in Kenya over the period 2008–2013, panel OLS analyses are performed to establish the association between SACCOs' CSED levels and financial performance. The results reveal a relatively low level of CSED by deposit-taking SACCOs in Kenya at 29.3%. As a departure from findings in mainstream studies, the study reveals a negative association between CSED and financial performance. We argue that the negative association could be due to changed regulatory landscape or a signal that Kenyan SACCOs are transitioning to financially (profit) oriented goals. The results are useful to regulators and policy makers in designing an optimal disclosure policy for SACCOs.     

Leveraged Buyouts in the U.K. and Continental Europe: Retrospect and Prospect

The markets for management buyouts in the U.K. and continental Europe have experienced dramatic growth in the past ten years. In the U.K., buyouts accounted for half of the total M&A activity (measured by value) in 2005. And as in the U.S. during the‘80s, the greatest number of U.K. buyouts in recent years have been management‐ and investor‐led acquisitions of divisions of large corporations. In continental Europe, by contrast, the largest fraction of deals has involved the purchase of family‐owned private businesses. But in recent years, increased pressure for shareholder value in countries like France, Netherlands, and even Germany has led to a growing number of buyouts of divisions of listed companies. Like the U.K., continental Europe has also seen a small but growing number of purchases of entire public companies (known as private‐to‐public transactions, or PTPs), including the largest ever buyout in Europe, the €13 billion purchase this year of the Danish corporation TDC. In view of the record levels of capital raised by European private equity funds in recent years‐which, until 2005, exceeded the amounts invested in any given year‐we can expect more growth in private equity investment in the near future. In continental Europe, the prospects for buyouts remain especially strong, given both the pressure from investors to restructure larger corporations and the possibilities for adding value in family‐owned firms. But, as the authors note, today's private equity firms face a number of challenges in earning adequate returns for their investors. One is increased competition. In addition to the increased activity of U.S. private equity firms, local private equity investors are also facing competition from hedge funds and new entrants such as government‐sponsored operators, family offices, and wealthy entrepreneurs. Another major challenge is finding value‐preserving exit vehicles. Although an IPO is an option for the largest buyouts with growth prospects, most buyout investments are harvested either through sales to other companies or, increasingly, other private equity firms. The latter transactions, known as “secondary” buyouts, now account for a significant share of new funds invested by private equity firms across Europe.     

Managerial Entrenchment and Corporate Social Performance

Abstract:  We examine empirically the relationships amongst managerial entrenchment practices, social performance, and financial performance. We hypothesize that entrenched managers may collude with non-shareholder stakeholders in order to reinforce their entrenchment strategy; this is particularly so in firms that have efficient internal control mechanisms. Moreover, we prove that the combination of entrenchment strategies and the implementation of socially responsible actions have particularly negative effects on financial performance. We test these contentions with a sample of 358 companies, from 22 different countries, for the period 2002–2005.     

When the Japanese stock market meets COVID-19: Impact of ownership,China and US exposure,and ESG channels

We identify factors affecting the Japanese stock market during the COVID-19 pandemic period. First, we focus on the ownership structure. We find that indirect ownership through the exchange-traded fund purchasing program by the Bank of Japan has a positive impact on abnormal returns. Foreign ownership is negatively associated with abnormal returns, whereas ownership by traditional business groups is positively associated with abnormal returns. Second, we examine the impact of global value chains and find that stock returns are lower for companies with China and U.S. exposure. Third, in terms of environmental, social, and governance (ESG) engagement, there is no evidence that firms that have highly rated ESG scores have higher abnormal returns, but firms with ESG funds outperform those without.     

Cash holdings and share repurchases: International evidence

In this study, we examine the patterns and determinants of share repurchases using firm-level data from seven major countries—Australia, Canada, France, Germany, Japan, the U.K., and the U.S.—over the period 1998–2006. We find that while non-U.S. firms do not repurchase shares as much as U.S. firms do, both U.S. and non-U.S. firms display a common set of share repurchase behaviors. For example, across countries, firms use share repurchases as a flexible means of distributing cash. More importantly, large cash holdings are significantly associated with the amount of share repurchases in all countries. There is evidence that large cash holdings held by repurchasing firms represent excess cash. Firms tend to experience substantial increases in cash holdings prior to share repurchase as a result of reductions in capital expenditures. Overall, our evidence lends support to two hypotheses: (i) firms discharge excess capital to reduce agency conflicts and (ii) firms use repurchases to distribute temporary cash flows.     

Standalone CSR reporting by U.S. retail companies

We investigate first-time use of standalone CSR reporting in the U.S. retail industry. We find it is limited to publicly traded companies and that environmental rather than other social disclosures are most prominent. We document that firms focus on discussing CSR initiatives and programs as opposed to providing performance data, suggesting the reports are more about image enhancement than transparent accountability. We explore impacts of the choice to disclose, and our findings suggest that standalone CSR reporting by the retail companies appears to positively influence perceptions of company reputation, and may be leading to increased appeal to socially responsible investors.     

Long-horizon abnormal performance following rights issues and placings: Additional evidence from the U.K. market

We revisit the long-horizon abnormal performance of U.K. firms following rights issues and placings over the period 1989-1997. We make the following contributions relative to prior research. First, we use, as far as we are aware, a more comprehensive data set of rights issues and placings than hitherto studied for the U.K. market. We thus exploit the fact that issuing new equity predominantly through rights issues is a feature of the U.K. equity market that differs from the U.S. and other markets, where public offers dominate seasoned equity issues. Second, we study both the pre- and post-offer long-horizon performance, complementing previous research that focuses only on announcement-day wealth effects. Third, we apply various metrics and revisit the evidence of long-horizon post-offer underperformance reported in previous research. We find, however, little evidence of long-horizon post-offer underperformance for U.K. firms following issues of equity through rights issues or by placings.     

The Influence of U.S. GAAP on the Harmony of Accounting Measurement Policies of Large Companies in the U.K. and Australia

U.S. GAAP has increasingly become an influence on accounting practices in other countries, even aside from those traditionally considered under direct U.S. influence. The change arises from the large number of U.S. accounting standards, non-U.S. companies listing on U.S. stock exchanges, and the amount of U.S. direct investment abroad. As the impact of U.S. GAAP varies across countries, it may affect international accounting harmony. This idea is tested by examining the level of international harmony for eleven accounting measurement policies in matched pairs of large companies from Australia and the U.K., two countries with historically strong cultural and economic links. It is argued that, in recent decades, accounting practice in Australia, more so than in the U.K., has become increasingly U.S.-oriented. The concepts of harmony of Tay and Parker (1990) and Archer et al . (1996) are employed. International harmony is measured by the between-country C index and chi-square test; national harmony by van der Tas's (1988) H index. While considerable national harmony is found in the U.K. for seven and in Australia for five accounting policies, there is considerable or complete international harmony for only three policies. Evidence is presented of the influence of U.S. GAAP as one factor explaining the poor degree of U.K./Australia international harmony. Australian companies appear to follow U.S. GAAP to a greater extent than do U.K. companies. The state of partial harmony thus existing restricts international comparability of accounting reports and may cause problems for regulators.     

Voluntary disclosures of intangibles information by U.S.-listed Asian companies

This paper provides evidence on the voluntary disclosure of intangibles information for U.S.-listed Asian companies. The paper examines the following issues: (1) the effect of firm size, ownership concentration, proportion of foreign revenue, and leverage on voluntary disclosures of intangibles information by U.S.-listed Asian companies; and (2) the use of international standards, and the effect of domestic and global culture on those disclosures. Results indicate that larger firms, firms with greater ownership dispersion, and firms with lower leverage provide more voluntary disclosure of intangibles information. The paper also documents that companies from countries that are more individualistic provide more voluntary disclosure of intangibles information than companies from countries that are collectivist. Therefore, it appears that domestic culture does affect the voluntary disclosure of intangibles information in the U.S. This paper uses the index developed for Portuguese companies by Oliveira, Rodrigues, and Craig (2006), to measure voluntary disclosures of intangibles information thereby providing external validity to their instrument.     

On the Foundations of Corporate Social Responsibility

Using corporate social responsibility (CSR) ratings for 23,000 companies from 114 countries, we find that a firm's CSR rating and its country's legal origin are strongly correlated. Legal origin is a stronger explanation than “doing good by doing well” factors or firm and country characteristics (ownership concentration, political institutions, and globalization): firms from common law countries have lower CSR than companies from civil law countries, with Scandinavian civil law firms having the highest CSR ratings. Evidence from quasi‐natural experiments such as scandals and natural disasters suggests that civil law firms are more responsive to CSR shocks than common law firms.     

Differential levels of disclosure and the earnings-return association: evidence from foreign registrants in the United States

Foreign companies listing on U.S. exchanges are required to report financial information under U.S. GAAP on form 20-F using either Item 17 or Item 18 disclosure rules. These two disclosure rules differ in that Item 17 allows many exemptions from U.S. GAAP, while Item 18 requires disclosure of all financial information in accordance with U.S. GAAP. This study examines the differential earnings-return association between Item 17 and Item 18 filers.We find significantly higher earnings-return associations for Item 18 filers than for Item 17 filers. While the earnings-return association of Item 18 foreign firms is not different from that of matched U.S. firms (which fundamentally use Item 18 rules), the earnings-return association of Item 17 foreign firms is significantly lower than that of matched U.S. firms. Overall, the results are consistent with the idea that higher levels of disclosure may be related to lower discount rates and higher earnings response coefficients (ERCs).     

Has Adoption of IFRS Increased Non–North American Institutional Investment in the Canadian Stock Markets?

We investigate whether non–North American (non‐NA) institutional investment in firms listed on the Canadian stock markets increased between the pre‐ and post‐IFRS adoption periods relative to such investment in firms listed on the U.S. stock markets. Prior to IFRS adoption, Canada had high‐quality financial reporting standards that were similar to the U.S. standards. As consequences of IFRS adoption, Canadian financial statements became more comparable with European and other IFRS country financial statements and less comparable with neighboring U.S. financial statements. Thus, a question of interest is whether the enhanced comparability with non‐NA companies was beneficial in terms of attracting non‐NA investment to Canadian companies versus U.S. companies. We find that there was no significant change in non‐NA institutional investment in Canadian firms relative to U.S. firms for the very largest (fifth quintile) and for smaller (first, second, and third quintiles) Canadian companies. However, intermediate‐sized Canadian companies in the fourth size quintile lost non‐NA institutional investment relative to their U.S. peer companies, suggesting that non‐NA investors cared more about comparability with U.S. peer companies than non‐NA peer companies for companies in this size quintile.     

Can Language Predict Bankruptcy? The Explanatory Power of Tone in 10‐K Filings

We examine whether the language used in 10‐K filings reflects a firm's risk of bankruptcy. Our sample contains 424 bankrupt U.S. companies in the period 1994–2015 and we use propensity score matching to find healthy matches. Based on a logit model of failing and vital firms, our findings indicate that firms at risk of bankruptcy use significantly more negative words in their 10‐K filings than comparable vital companies. This relationship holds up until three years prior to the actual bankruptcy filing. With our investigation, we confirm the results from previous accounting and finance research. 10‐K filings contain valuable information beyond the reported financials. Additionally, we show that 10‐Ks filed in the year of a firm's collapse contain an increased number of litigious words relative to healthy businesses. This indicates that the management of failing firms is already dealing with legal issues when reporting financials prior to bankruptcy. Our results suggest that analysts ought to include the presentation of financials in their assessment of bankruptcy risk as it contains explanatory and predictive power beyond the financial ratios.     

The exchange rate exposure of U.S. and Japanese banking institutions

In this paper, we examine the foreign exchange exposure of a sample of U.S. and Japanese banking firms. Using daily data, we construct estimates of the exchange rate sensitivity of the equity returns of the U.S. bank holding companies and compare them to those of the Japanese banks. We find that the stock returns of a significant fraction of the U.S. companies move with the exchange rate, while few of the Japanese returns that we observe do so. We next examine more closely the sensitivity of the U.S. firms by linking the U.S. estimates cross-sectionally to accounting-based measures of currency risk. We suggest that the sensitivity estimates can provide a benchmark for assessing the adequacy of existing accounting measures of currency risk. Benchmarked in this way, the reported measures that we examine appear to provide a significant, though only partial, picture of the exchange rate exposure of U.S. banking institutions. The cross-sectional evidence is also consistent with the use of foreign exchange contracts for the purpose of hedging.     

Private Equity and Portfolio Companies: Lessons from the Global Financial Crisis

Critics of private equity have warned that the high leverage often used in PE‐backed companies could contribute to the fragility of the financial system during economic crises. The proliferation of poorly structured transactions during booms could increase the vulnerability of the economy to downturns. The alternative hypothesis is that PE, with its operating capabilities, expertise in financial restructuring, and massive capital raised but not invested (“dry powder”), could increase the resilience of PE‐backed companies. In their study of PE‐backed buyouts in the U.K.—which requires and thereby makes accessible more information about private companies than, say, in the U.S.—the authors report finding that, during the 2008 global financial crisis, PE‐backed companies decreased their overall investments significantly less than comparable, non‐PE firms. Moreover, such PE‐backed firms also experienced greater equity and debt inflows, higher asset growth, and increased market share. These effects were especially notable among smaller, riskier PE‐backed firms with less access to capital, and also for those firms backed by PE firms with more dry powder at the crisis onset. In a survey of the partners and staff of some 750 PE firms, the authors also present compelling evidence that PEs firms play active financial and operating roles in preserving or restoring the profitability and value of their portfolio companies.     

Gentlemen do not talk about money: Remuneration dispersion and firm performance relationship on British boards

Using a sample of 781 U.K. firms over the period 2000–2008 we study the relationship between remuneration dispersion at executive board level and firm performance. We find that this relationship is sensitive to nationality composition of the executive boards. In contrast with findings on American data, British companies are characterized by a negative dispersion–performance relationship, i.e., the greater the dispersion is, the worse firm performance is, however, boards with American CEOs or at least 30% of American nationality non-CEO executives are characterized by a positive dispersion–performance relationship. The results are robust when controlling for various firm, board and CEO characteristics, including cross-listing on U.S. exchanges and having sales in the U.S. Implications for executive remuneration reforms and board diversity are discussed.