Does good corporate governance reduce information asymmetry around quarterly earnings announcements?

We examine the relationship between the quality of corporate governance and information asymmetry in the equity market around quarterly earnings announcements. We use the change in market liquidity (i.e., bid–ask spreads and depths) around the announcements as a proxy for information asymmetry. We use principal components analysis to identify three factors, board independence, board structure and board activity, that capture the information in the eight individual corporate governance variables we examine. We then use ordinary least squares and two-stage least squares to estimate the relations between market liquidity changes and the following four explanatory variables: directors’ and officers’ percentage stock holdings, board independence, board structure, and board activity. Our results indicate that changes in bid–ask spreads at the time of earnings announcements are significantly negatively related to board independence, board activity, and the percentage stock holdings of directors and officers. We also find that depth changes are significantly positively related to board structure, board activity, and directors’ and officers’ percentage stock holdings. Our results are consistent with the hypothesis that firms with higher levels of corporate governance have lower information asymmetry around quarterly earnings announcements.     

Small firms and the value of improvements in corporate governance mechanisms

Since 2002, many firms have been required to alter their board of directors and committees to increase management monitoring. Kinney and McDaniel (1989) and Chhaochharia and Grinstein (2007) provide empirical evidence suggesting that investments in corporate governance may differ based on firm size, and that under-investing in monitoring may be more pronounced in smaller firms. To further test whether the benefits of recent changes in companies' governance mechanisms accrue to smaller firms that have underinvested in governance, we examine the stock market reaction to changes in board structure over the twenty-four months following the passage of the Sarbanes–Oxley Act. We construct a new composite measure of board structure and regress buy-and-hold abnormal returns on changes that occur in the Board Structure Index, finding that improvements in corporate governance quality result in economically significant abnormal returns accruing only to the smaller firms with weak initial board structures.     

Inside the Black Box of IASB Standard Setting: Evidence from Board Meeting Audio Playbacks on the Amendment of IAS 19 (2011)

We provide evidence on the little researched internal sphere of private IASB standard setting, more specifically, on the dynamic of board discussions and the respective impact of exogenous input such as comment letters, the array of arguments evoked in IASB debates, individual board member contribution and board-staff relations. We conduct a content analysis of audio recordings of 14 IASB meetings on the amendment of IAS 19 Employee Benefits (2011) between November 2008 and February 2010. Our main findings comprise the argument-based handling of comment letters not being conditioned by the political or economic importance of the senders, the gatekeeper role of staff members in channelling exogenous input and their equal role in board discussions and the dominant reference to conceptual arguments there. We also point to the heterogeneous involvement of board members, their different attribution to key issues and to further observations regarding the meeting governance, board’s discussion culture and etiquette. Our paper adds to the literature on private IASB standard setting, pension accounting and group decision making.

Data: All data are available from the public sources identified in this paper     

Educational interventions for teaching the new auditor independence rules

The Sarbanes-Oxley Act of 2002 brought sweeping changes to the accounting profession. One important mandate was for the US Securities and Exchange Commission (SEC) to strengthen the rules of auditor independence. To meet its legal responsibility, the SEC issued Final Rule No. 68 [United States Securities and Exchange Commission (USSEC) (2003). Final Rule 68: Strengthening the commission’s requirements regarding auditor independence. Washington, DC: Government Printing Office [Issue Date: January 28, 2003 (www.sec.gov/rules/final/33-8183.htm and Retrieval Date: January 25, 2004)]], thereby adopting new independence rules for auditors of public companies.     

Does board structure in banks really affect their performance?

We study whether board structure (board size, independence and gender diversity) in banks relates to performance. Using a broad panel of large US bank holding companies over the period 1997–2011, we find that both board size and independent directors decrease bank performance. Although gender diversity improves bank performance in the pre-Sarbanes-Oxley Act (SOX) period (1997–2002), the positive effect of gender diminishes in both the post-SOX (2003–2006) and the crisis periods (2007–2011). Finally, we show that board structure is particularly relevant for banks with low market power, if they are immune to the threat of external takeover and/or they are small. Our two-step system generalised method of moments estimation accounts for endogeneity concerns (simultaneity, reverse causality and unobserved heterogeneity). The findings are robust to a wide range of other sensitivity checks including alternative proxies for bank performance.     

Incorporating real-options analysis into the accounting curriculum

In this paper, we argue that accounting curricula should be expanded to cover the topic of real options. Our argument relies on reference to the [American Institute of Certified Public Accountants (AICPA) (1999) (Core Competency Framework, New York, NY: AICPA <http://ceae.aicpa.org/Resources/Education+and+Curriculum+Development/Core+Competency+Framework+and+Educational+Competency+Assessment+Web+Site/> Accessed 21.08.08], the framework for curriculum change espoused by [Arya, A., Fellingham, J. C., & Schroeder, D. A. (2003). An academic curriculum proposal. Issues in Accounting Education, 18(1) 29–35], a global study of core competencies for management accountants [International Federation of Accountants (IFAC), (2002). Competency profiles for management accounting practice and practitioners. New York, NY: International Federation of Accountants], a global capital-budgeting “best practices statement” [International Federation of Accountants (IFAC), (2008). International good practice guidance: Project appraisal using discounted cash flow. New York, NY: International Federation of Accountants], current specifications of the CMA exam [Institute of Management Accountants (IMA), (2008). Certified management accountant (CMA) learning outcome statements (effective 07/01/04), updated 07/2008. <http://www.imanet.org/pdf/CMA%20%20LOS.pdf> Accessed 29.10.08.], and elements of the Albrecht and Sack report [Albrecht, W. S., & Sack, R. J. (2000). Accounting education: Charting the course through a perilous future. Accounting education series, Vol. 16. Sarasota, FL: American Accounting Association]. We make special reference to the linkage of the topic of real options to two broad educational goals: decision-modeling and risk analysis. Existing resources that accounting faculty can use to incorporate real options into the curriculum are limited. As a response, we provide an extended example that accounting educators can use to cover the topic of real options. This example uses a set of binomial trees (one for cash inflows and another for cash outflows). The step-by-step approach presented in this paper allows students without a technical/mathematical background to extend discounted-cash-flow (DCF) decision models (e.g., NPV) to incorporate real options that are embedded in proposed investment projects.     

Has the likelihood of appointing a CEO with an accounting/finance background changed in the post-Sarbanes Oxley era?

Congress passed the Sarbanes–Oxley Act (SOX) in July 2002 to improve the accuracy and reliability of financial reporting. The Act increased boards of directors’ responsibilities for financial reporting and control. Did it consequently increase boards’ preferences for a CEO with financial experience to protect against the potential reputational and/or legal losses that directors incur when financial scandals happen? We investigated whether newly appointed CEOs in the post-SOX period were more likely to have accounting or finance experience than in the pre-SOX period. Using a sample of 264 CEO changes from 2001 to 2004, we found that the percentage of newly-appointed CEOs with accounting/finance backgrounds significantly increased in the post-SOX period compared to the pre-SOX period. Our results suggest that the events surrounding the passage of the Sarbanes–Oxley Act may have affected the CEO background experience preferred by boards of directors.     

Is the Virtual Integration of Financial Markets Beneficial in Emerging Markets? Evidence from MILA

This article analyzes whether the Latin American Integrated Market (MILA) has been beneficial for its participants. Using a dynamic conditional correlation (DCC) model proposed by Engle (2002), we found evidence that creating MILA increased the correlation levels in stock returns of member countries. Evidence indicates that this increase occurs mainly due to the increase in traded volume in the country with the least developed stock market—Peru.

In short, findings suggest that in an integration process such as MILA, as stock market members differ, in terms of stock market development, the markets will benefit from the integration. However, in the long term these benefits dissipate over time.     

IPSAS,ESA and the fiscal deficit—a question of calibration

The academic literature on IPSAS adoption is not clear whether this would lead to a fiscal deficit measure close to that reported in national accounts. This paper presents a case study which attempts to clarify this dilemma. The authors show that IPSAS compliance would result in yet another deficit measure that is nowhere close to the statistical measure, leading to even more confusion.

IMPACT

IPSAS compliance would neither simplify nor standardize the conversion exercise that EU member countries have to do to change a governmental accounting deficit to the EC’s required statistical deficit. Nor would it directly lead to more reliable statistical data. The authors therefore question the impact of the proposed EPSAS on the quality of macro-surveillance.     

Risk management,corporate governance,and bank performance in the financial crisis

The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks’ performance during the crisis.     

Voluntary forward-looking statements driven by corporate governance and their value relevance

This paper examines the impact of corporate governance on the level of voluntary disclosures of forward-looking statements in the narrative sections of annual reports. It also examines whether the forward-looking statements that are driven by governance are informative about future earnings. This analysis is drawn from a large-scale sample of UK FTSE All-Share companies for financial years ending within the period January 1996–December 2007. We find that corporate governance influences companies’ decisions to voluntarily disclose these statements. The main drivers are directors’ ownership, board size, board composition, and the duality of the CEO’s role. These results suggest that better corporate governance improves reporting practice. We further find that the forward-looking statements of well governed firms improve the stock market’s ability to anticipate future earnings. Our findings have important implications for policy makers and regulators because they confirm that the effectiveness of corporate governance in the practice of disclosure is a function of certain characteristics and that the voluntary forward-looking statements of well governed firms contain value relevant information for investors.     

Ranking Corporate Governance of Australia's Top Companies: A Decade On

The Horwath/University of Newcastle (UoN) Corporate Governance Reports commenced in 2002 and were among the first to assess Australia's largest companies on their corporate governance structures and policies. Initiated prior to the release of the 2003 Australian Securities Exchange Corporate Governance Council's Principles of Good Corporate Governance and Best Practice Recommendations, and at a time of increased focus on corporate governance failures, the reports attracted much attention from both the media and stakeholder groups. This paper reports the findings of applying the Horwath/UoN methodology to the relevant corporate governance disclosures of the 2012 annual reports of Australia's top 200 companies. Comparison to the original analysis of 2002 annual report disclosures shows a significant improvement across all areas of corporate governance by Australia's top companies. However, there remain some areas of concern, particularly in respect to board diversity, risk management and insider share trading policies.     

Investor perceptions of an auditor’s adverse internal control opinion

In response to recent corporate scandals, Congress passed the Sarbanes–Oxley Act of 2002 (SOX) which, among other things, requires that the auditor render an opinion as to the effectiveness of a company’s system of internal controls. The assumption implicit in this requirement is that the new internal control opinion provides investors with value-relevant information. Our evidence suggests that an adverse audit opinion on internal control over financial reporting provides incremental value-relevant information to investors beyond that contained in the financial statement audit opinion alone. Specifically we find that an adverse audit opinion on internal controls over financial reporting relative to an unqualified opinion is significantly associated with investors assessing a higher risk of financial statement misstatement, higher risk of a future financial statement restatement, higher information asymmetry, lower financial statement transparency, higher risk premium, higher cost of capital, lower sustainability of earnings, and lower earnings predictability. Overall, our empirical results support our hypotheses that the auditor’s opinion on the internal controls over financial reporting provides financial statement users with value-relevant information.     

Public service motivation and performance: The role of organizational identification

Although the association between public service motivation (PSM) and job performance has received increased attention, there is limited knowledge of the mechanisms underlying its effects. Utilizing data from Chinese civil servants and their supervisors, the authors found that PSM results in higher levels of organizational identification and leads to higher levels of job performance because civil servants perceive the organization’s fate and results as their own.

IMPACT

Our study demonstrates that organizational identification is a key mechanism that explains how public service motivation (PSM) leads to higher levels of performance. To improve performance, public agencies should create an environment that helps employees identify with the organization, for example by highlighting the distinct services that the organization provides for the public and by establishing socialization practices for newcomers.     

Surviving an executive MBA 'riot'

UK higher education institutes (HEIs) have widened participation of students from non-traditional backgrounds. These include students who are aged over 21, students in paid employment, and those with non-traditional qualifications, perhaps from other countries or access courses. This has led to a need to explore factors that might impact upon the learning of such students. A greater understanding of such factors might better enable HEIs to provide all students with opportunities to study accounting. The participants in this study are first year students studying accounting at a post-1992 UK university, which has a high proportion of students from non-traditional backgrounds. A series of interviews with such students and the lecturers who teach them explores what engages and what detaches them from learning when studying accounting. The study suggests factors, such as employment and other commitments away from university and the student's relationship with the university, which might impact on how students engage in learning. The Note discusses the findings with reference to Lucas's (2003, A National Teaching Fellowship Project: Introductory accounting: Achieving relevance interest and understanding, available at: http://www.uwe.ac.uk/bbs/research/research/ntfs/Jan03.pdf accessed 21 August 2004) call for research in the area to be more qualitative and Reay et al's. (2001) Sociological Research Online, 5(4), consideration of Bourdieu's concept of institutional habitus and its influence on HEIs.     

Stochastic automatic differentiation: automatic differentiation for Monte-Carlo simulations

In this paper we re-formulate the automatic differentiation (and in particular, the backward automatic differentiation, also known as adjoint automatic differentiation, AAD) for random variables. While this is just a formal re-interpretation it allows one to investigate the algorithms in the presence of stochastic operators like expectation, conditional expectation or indicator functions.

We then specify the algorithms to efficiently incorporate non-pathwise operators (like conditional expectation operators). Under a comparably mild assumption it is possible to retain the simplicity of the backward automatic differentiation algorithm in the presence of conditional expectation operators. This simplifies important applications like - in mathematical finance - the application of backward automatic differentiation to the valuation of Bermudan options or calculation of xVA's.

We give the proof for a generalized version of the result. We then discuss in detail how the framework allows dramatic reduction of the memory requirements and improves the performance of a tapeless implementation of automatic differentiation (while the implementation brings advantages similar to ‘vector AAD’ (sometimes called tape compression) for free, it allows improvements beyond this. We present the implementation aspects and show how concepts from object-functional programing, like immutable objects and lazy evaluation enable additional reductions of the memory requirements.     

Glocalization of accounting standards: Observations on neo-institutionalism of IPSAS

This paper defines and then observes processes of glocalization surrounding the adoption of International Public Sector Accounting Standards (IPSAS) for public sector financial reporting. Glocalization can be best understood using sociological institutionalism, because this theory focuses on the retention of identity, and processes of legitimacy, during adaptation (diffusion) of standards. The paper discusses the history of standard-setting for the public sector in New Zealand to explain why this theory has value.

IMPACT

This paper defines and describes the utility of the concept of glocalization in analysing the implementation of IPSAS, with a New Zealand focus. The value of the paper is in its combination of a jurisdiction-specific experience with an understanding of the broader issues of ‘global versus local’ and processes of sociological institutionalism. Such studies of IPSAS adoption can offer distinctive perspectives on global processes of isomorphism within neo-institutional theory. This paper explains the advantages of flexible strategies to standard-setters.     

What is the impact of corruption on audit fees?

This study examines the impact of country-level corruption on audit fees. Using a sample of 102,934 companies from 48 countries over the period 1998–2014, the authors find that audit fees are positively associated with higher levels of corruption. They also discovered that corruption adds a significant margin to the premium paid to Big 4 (Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young and KPMG) auditors. The study opens up a new line of research and adds significantly to the academic literature on the Big 4 audit premium.

IMPACT

The study has several important implications for academics and policy-makers. These include discussion of the factors driving corruption and the role of auditing. Knowledge of the factors driving corruption should guide policy-makers to adoption of polices that could reduce corruption. The finding that audit fees are positively associated with corruption, as well as with audit quality, points to the potential for auditing as a tool for corruption control beyond its traditional role as an assurance service.     

Examining the unintended outcomes of NPM reforms in Indonesia

This paper argues that despite Indonesia’s implementation of public sector reforms, the impact of these reforms has yet to achieve the goal of improving governance and preventing corruption. The obvious place to lay blame would be a lack of state capacity, but this study presents evidence to argue that the legacy of General Suharto’s authoritarian regime and the cultural ecology of Indonesian bureaucracy has compromised the government’s capacity to implement these public sector reforms in a meaningful way.

IMPACT

This paper highlights some fundamental points for public policy-makers using NPM techniques to improve accountability and to counter fraud. First, the cultural context and costs of reforms should be taken into account before implementing new accounting technology. Second, policy-makers should consult academic work on the implementation of new reporting systems and other NPM policies. Finally, the powers of local politicians (for example mayors or district heads) need to be controlled to ensure they do not undermine the role of accounting and auditing for better transparency, governance and corruption eradication.