Conservatism,SEC investigation,and fraud

We present evidence on the relationship between firms that have engaged in fraudulent financial reporting and accounting conservatism. We empirically investigate the extent to which US firms identified by the SEC in their Enforcement Releases demonstrate higher levels of conditional conservatism in order to mitigate information asymmetry and agency problems. Specifically, by assessing the timing of changes in the litigation risk environment for fraud firms, we document how differences in heightened legal liability guide changes in conservative accounting behavior. Compared to a matched non-fraud control sample, we document that fraud firms have significantly lower levels of accounting conservatism in the pre-fraud period. Consistent with changes in potential legal liability, we find an increase in accounting conservatism for fraud firms during the SEC investigation period. Subsequently, during the public discovery of fraud, any increases in accounting conservatism are marginal and appear to converge back to lower levels compared to the SEC investigation period. Overall, our findings suggest more temporary changes in conservative reporting in the short-term for fraud firms. We also document that increased levels of accounting conservatism for fraud firms are not due solely to the passage of the SOX Act. Our findings aid in explaining fraud firms’ incentives and opportunities for accounting conservatism and lend support for why standard setters, regulators and auditors should continue to monitor and re-evaluate conservatism’s short-term effects that are conditioned on changes in a firm’s risk environment.     

Debtholders’ Demand for Conservatism: Evidence from Changes in Directors’ Fiduciary Duties

Debtholders’ demand has been widely discussed as a key determinant of conservatism but clear causal evidence is not yet established. Using a natural experiment setting, wherein a Delaware court ruled that the fiduciary duties of directors in near insolvent Delaware companies extend to creditors, we predict and find that firms subject to the ruling significantly increased their accounting conservatism. In addition, our results suggest that the increase in conservatism is more pronounced in near insolvent Delaware firms with stronger boards, confirming that the court ruling takes effect through the channel of the board of directors. Our results are robust to using alternative measures of conservatism and near insolvency status, and controlling for potential confounding factors and other stakeholders’ demand for conservatism. Overall, our study provides empirical evidence to support the causal relation between debtholders’ demand and accounting conservatism previously suggested in the literature, and offers some insights into the role of the board of directors in financial reporting.     

Accounting conservatism and voluntary corporate governance mechanisms by Australian firms

This study examines the relationship between voluntary adoption of selected corporate governance mechanisms and accounting conservatism for a sample of firms listed on the Australian Securities Exchange (ASX) over the 11‐year period prior to the promulgation of the ASX Corporate Governance Council Good Governance Principles and Best Practice Recommendations in 2003. Using four accounting and market‐based accounting conservatism measures, our results provide evidence of both conditional and unconditional conservatism in accounting reporting for Australian firms. We find that voluntary audit committee formation, increasing board independence and decreasing board size are positively associated with unconditional accounting conservatism and negatively related to the degree of conditional conservatism. Our results support the contention that firms voluntarily adopting perceived best practice corporate governance mechanisms employ unconditional accounting conservatism as a complimentary agency control device and are consistent with the observed negative association between the unconditional and conditional forms of accounting conservatism practice.     

The effect of government industrial policies on corporate accounting conservatism

This study examines whether and how firms adjust their accounting conservatism in response to government support through industrial policies, which reduce firms’ dependence on external financing from the capital market. Based on China’s unique economic programme called ‘Five-Year Plan’ from 1991 to 2015, we observe a decline in accounting conservatism among firms covered by government industrial policies. The decline is more pronounced in covered firms, which face higher ex-ante financial constraints, and in the subsample of firms which receive higher government support. These findings are robust to alternative specifications of accounting conservatism and policy timing. Our evidence implies that government industrial policies can have unintended consequences for corporate financial reporting.     

Director–Liability–Reduction Laws and Conditional Conservatism

We study nonofficer directors’ influence on the accounting conservatism of U.S. public firms. Between 1986 and 2002, all 50 U.S. states enacted laws that limited nonofficer directors’ litigation risk but often left officer directors’ litigation risk unchanged. We find that conditional conservatism decreased after the staggered enactments of the laws, which we attribute to less nonofficer director monitoring of financial reporting in affected firms. Conservatism fell less when shareholder or debtholder power was high, consistent with major stakeholders moderating the influence of nonofficer directors. We verify that our results stem from reductions in the asymmetric timeliness of accruals and, specifically, its current assets components. We also show that affected firms switched away from Big N auditors more often, which reduced these firms’ commitment to conservative financial reports.     

Has Australian financial reporting become more conservative over time?

This study examines whether Australian financial reporting became more conservative over the period of 1993–2009. Unlike the United States and European evidence in Givoly and Hayn (2000) and Grambovas et al. (2006) , the Australian evidence is not consistent with the notion that conservatism has increased over time. The degree of conservatism fluctuates without any obvious trend over the 17‐year period, especially for the constant sample of firms appearing throughout the period. We also examine the impact of mandatory International Financial Reporting Standards (IFRS) adoption on accounting conservatism in Australia. Our evidence suggests the adoption of IFRS has led to a decrease in conditional conservatism (i.e. asymmetric timeliness).     

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.     

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.     

S&P 500 Membership and Managers’ Supply of Conservative Financial Reports

Our study is motivated by economic theory and the debate among practitioners, standard setters, and academics on the role of conditional conservatism in financial reporting. We find that managers provide less conditionally conservative financial reports after their firms are added to the Standard and Poor's (S&P) 500 index. S&P 500 membership is expected to reduce information asymmetry between managers and outside stakeholders due to an increased flow of public and private information. As a result, the contracting benefits of conservative accounting choices are reduced, and managers are less willing to provide conditionally conservative reports. In contrast, we find that managers provide more conditionally conservative financial reports after their firms are deleted from the index. Firms being deleted from the S&P 500 index probably incur an increase in information asymmetry. Overall, our results provide evidence consistent with conditional conservatism being a response by managers to the information needs of financial statements users.     

会计稳健性、公司治理与社会责任报告印象管理

以2009-2014年披露社会责任报告的A股上市公司为样本,研究会计稳健性与公司治理对企业社会责任报告印象管理的交互影响.结果表明:企业会计稳健性越高,社会责任报告印象管理程度越低;公司治理水平越高,社会责任报告印象管理程度越低;公司治理水平越高,会计稳健性对社会责任报告印象管理的抑制作用越小;反之,公司治理水平越低,会计稳健性对社会责任报告印象管理的抑制作用越大.会计稳健性和公司治理均有助于抑制企业社会责任报告印象管理行为,且具有替代关系,这种替代关系在非国有企业中更为显著.     

Stakeholder demands and corporate social responsibility: Evidence from the Olympic Games

We propose that stakeholder demand can explain firms’ corporate social responsibility (CSR) activities and empirically test our proposition using 2002–2016 panel data from multiple countries. We select the Olympic Games as our experimental context and use a difference-in-differences design. We find that firms domiciled in countries that host the Olympic Games subsequently experience a significantly smaller increase in CSR commitment than firms in countries that unsuccessfully bid to host the Olympics. We also find that firms domiciled in cities that host the Olympic Games exhibit a significantly smaller increase in CSR than those domiciled in other cities in the same country. Additional tests indicate that firms in host countries with greater increases in the levels of happiness tend to experience an even smaller increase in CSR. Our findings are consistent with the stakeholder demand explanation, as stakeholders are less likely to require local firms to invest in CSR if utilities, such as those from environmental improvement, increase.Running head: Olympic Games and CSR.     

Corporate social responsibility and degrees of operating and financial leverage

We examine the relationship between corporate social responsibility (CSR) and firms’ degrees of operating (DOL) and financial leverage (DFL). Combining the enlightened value maximizing and capital structure theories, we hypothesize that CSR as firms’ strategic choice to internalize the cost from implicit contracts between the firms and their non-investing stakeholders affects firms’ operating and financial leverage. We find empirical evidence that CSR and CSR strengths are positively (negatively) related to firms’ DOL (DFL). CSR concerns are positively related firms’ DOL and DFL. We also document that CSR is positively related to firms’ operating cost and we find evidence that CSR acts as a substitute for corporate debt tax shield when firms’ financial leverage is low.     

Is better banking performance associated with financial inclusion and mandated CSR expenditure in a developing country?

Motivated by legislation mandating CSR expenditure to improve social equality and economic development in India, we examine the association of CSR expenditure and financial inclusion with the performance of banking firms in the period after introduction of the legislation. We study whether mandated CSR expenditure and/or financial inclusion measures are associated with better financial performance, using both accounting and stock market measures of performance, for Indian banks during 2015–2017. Our results demonstrate that level of CSR expenditure and degree of financial inclusion is not associated with banks’ financial performance when performance is measured in accounting terms. However, a significant negative association is found when performance is measured by stock market return. These results suggest that the current design of the legislation is unlikely to achieve its purpose. This is the first study to present clear evidence on the associations of mandatory CSR spending and firm‐level financial inclusion with accounting‐based and market‐based bank performance.     

Examining the Patterns of Goodwill Impairments in Europe and the US

We examine the patterns of goodwill impairments in Europe and in the US over the period from 2006 to 2015, for a sample of more than 35,000 firm-year observations. We define the timeliness of goodwill impairments as the frequency of accounting impairments conditional to indications of economic impairments. We measure indications of economic impairment with three metrics: equity market value minus equity book value less than goodwill, market-to-book smaller than one and negative earnings before interest, tax, depreciation and amortisation (EBITDA). Our research strategy leads us to draw very different conclusions than those in the recent EFRAG (2016) study. While median levels of goodwill on the books between US and European firms are relatively similar, we find several indications that US firms recognise timelier impairments, at least during 2008 and 2009, that is, the early years of the financial crisis. We further document that US impairers write down a much greater percentage of their beginning balance of goodwill than European impairers. During the financial crisis, the median level of impairment by US firms was 63% of opening goodwill in 2008 and 40% in 2009, whereas median European write-downs were only 6% and 7% of opening goodwill, respectively. Even though European firms are more likely to impair over multiple years, the cumulative impairments never come close to the level of US firms, be it in a single year or cumulative over multiple years. We also find that the frequency of accounting impairment is small compared to the number of firms presenting evidence of economic impairment: only 20–25% of firms recognise impairments depending on the measure of economic impairment. This has often been interpreted by academics as a sign of untimely write-offs. Accounting differences between US Generally Accepted Accounting Principles and International Financial Reporting Standards are unlikely to explain our results. One caveat of our analysis is that it does not allow us to draw conclusions on whether the observed differences between US and European firms are driven by differences in conditional conservatism and/or big bath accounting practices.     

Value relevance of conservative and non-conservative accounting information

The present paper examines effects of reporting conservatism on the value relevance of accounting earnings of a sample of Greek firms over the period from 1989 to 2003. The results of the paper indicate that conservatism is a salient feature of the Greek Accounting System. Moreover, the results depict that the level of conservatism has increased after the market crisis of 1999, potentially as a result of the additional regulation, imposed by the market authorities during the post-crisis period. Finally, the results show that there is a non-linear association between conservative reporting and value relevance of earnings. In particular, value relevance increases when moving from low-conservative firms to medium-conservative firms and decreases when moving further to high-conservative firms. Overall, the results of the paper lend empirical support to the theoretical underpinnings of Watts (2003a) who, on the one hand, report a number of arguments in favor of conservatism but, on the other hand, questions the practice of excessive conservative reporting as being a potential cause of the distortion of the earnings-returns relation.     

Does corporate social responsibility help the survivorship of SMEs and large firms?

Using a sample of 2480 firms from 51 countries covering the period 2010–2015, we find that firms with more effective corporate governance mechanisms are more likely to be more engaged in CSR. Consistent with the stakeholder theory and the conflict resolution model, this result suggests that managers adopt effective governance mechanisms together with CSR engagement in an attempt to mitigate conflicts among stakeholders. Moreover, after controlling for endogeneity and simultaneity issues, we find that both CSR engagement and corporate governance mechanisms have a significantly negative influence on the firms' risk of financial distress measured by the Altman et al. model (1995). Our results also show that the favorable influence of CSR on the firms' capability of survivorship is more pronounced in SMEs than in large firms.     

Corporate Social Responsibility,Shariah-Compliance,and Earnings Quality

This study examines the effect of two potential sources of ethical principles on earnings quality: corporate social responsibility (CSR) and membership in a Shariah index. We define membership in a Shariah index as the adherence to an ethical code that relates to Islam. Our sample comprises firms in ten European Union countries for the period from 2003 to 2013. The empirical results show that firms with a high degree of CSR are less likely to manage earnings. In contrast, membership in a Shariah index leads to earnings manipulation. Our results are robust after using several alternative quality metrics for earnings. Furthermore, our empirical results indicate that highly rated CSR firms that are not Shariah-compliant are less likely to engage in earnings manipulation. Further, institutional factors are also important in determining the link between CSR, Shariah-compliance, and the quality of financial reporting.     

Accounting disclosure and firms' financial attributes: Evidence from the UK stock market

This paper focuses on the disclosure of accounting information in the financial statements of UK firms. The primary objective of the study is to analyse the financial characteristics of firms that provide extensive disclosures, and assess the financial impact of their motives, such as for example the need to raise equity finance. The study examines the financial attributes of firms that disclose information about key accounting issues including risk exposure, changes in accounting policies, use of international financial reporting standards and hedging practices. Firms are inclined to disclose accounting information in order to assure the market participants that their accounting policies are consistent with the accounting regulation and meet the information needs of their stakeholders. The study shows that in order to raise finance in the capital and debt markets, firms tend to provide extensive accounting disclosures. Firms that provide informative accounting disclosures appear to display higher size, growth and leverage measures. The findings also show that the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementation of international financial reporting standards enhances the quality and the comparability of financial statements; hence it promotes consistency and reliability in financial reporting and facilitates companies in raising capital internationally.     

Analyst forecast,accounting conservatism and the related valuation implications

This study investigates whether financial analysts incorporate accounting conservatism into their earnings forecasts and whether it is more difficult for them to forecast earnings for less conservative firms, and then examines the impact of the findings on the return predictability of the value‐to‐price (V/P) ratio. After controlling for the other factors affecting forecast accuracy, such as earnings predictability and information uncertainty, I find that analysts incorporate accounting conservatism into their earnings forecasts and that forecasting earnings is more difficult for less conservative firms. Consequently, the return predictability of the V/P ratio is stronger for more conservative firms, and previously reported return predictability of the V/P ratio is an average across firms with differing levels of conservatism.     

Accounting conservatism of cross-listing firms in the pre- and post-Sarbanes Oxley periods

This study investigates the level of accounting conservatism of a sample of cross-listed firms, American Depository Receipts (ADRs), during the pre- and post-Sarbanes Oxley (SOX) periods. After examining two proxies for accounting conservatism, Basu's [Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics 24(1), 3-37.] conservatism measure and abnormal accruals, we find that the SOX-exposed Levels II and III ADRs become more conservative during the post-SOX period while the SOX-unexposed Level I ADRs have no increase in the level of accounting conservatism. Further, we investigate whether such an increase in accounting conservatism is associated with different levels of shareholder protection in ADRs' home countries, and find that only Levels II and III ADRs from code law (weak shareholder protection) countries become more conservative and Levels II and III ADRs from common law (strong shareholder protection) countries have no change in accounting conservatism. These results suggest that SOX-exposed cross-listing firms from weak shareholder protection countries are most greatly influenced by the stringent requirements in SOX, and hence respond by increasing conservatism in their financial reporting.