Risk-based forecasting and planning and management earnings forecasts

This study examines the association between a firm’s internal information environment and the accuracy of its externally disclosed management earnings forecasts. Internally, firms use forecasts to plan for uncertain futures. The risk management literature argues that integrating risk-related information into forecasts and plans can improve a firm’s ability to forecast financial outcomes. We investigate whether this internal information manifests itself in the accuracy of external earnings guidance. Using detailed survey data and publicly disclosed management earnings forecasts from a sample of publicly traded U.S. companies, we find that more sophisticated risk-based forecasting and planning processes are associated with smaller earnings forecast errors and narrower forecast widths. These associations hold across a variety of different planning horizons (ranging from annual budgeting to long-term strategic planning), providing empirical support for the theoretical link between internal information quality and the quality of external disclosures.     

Usefulness of comprehensive income reporting in Canada

In January 2005 the Canadian Accounting Standards Board (AcSB) issued three new accounting standards that require Canadian firms to mark-to-market certain financial assets and liabilities and recognize the holding gains and losses related to these items as other comprehensive income or as part of net income. The Board’s objectives for issuing the new standards are (i) to harmonize Canadian GAAP with US and International GAAP, (ii) to enhance the transparency and usefulness of financial statements, and (iii) to keep pace with changes in accounting standards in other countries that are moving towards fair value accounting. This paper investigates empirically whether requiring Canadian companies to report comprehensive income and its components provides the securities market with incremental value-relevant information over the traditional historical-cost earnings approach.Previous empirical studies provide mixed evidence on the value relevance of other comprehensive income and its components. This mixed evidence may be attributed partially to the use of as if methodology to construct an ex-ante measure of other comprehensive income prior to the implementation of SFAS 130, which introduces measurement error. In contrast, this study uses actual data on other comprehensive income for a sample of Canadian firms cross-listed in the US in the period 1998–2003. We find evidence that available-for-sale and cash flow hedges components are significantly associated with price and market returns. We also find that aggregate comprehensive income is more strongly associated (in terms of explanatory power) with both stock price and returns compared to net income. However, we find that net income is a better predictor of future net income relative to comprehensive income. Our findings suggest that mandating all Canadian firms to adopt the new accounting standards is expected to enhance the usefulness of financial statements. Our findings, therefore, should be of interest to Canadian accounting policy makers as they provide ex-ante evidence on the potential usefulness of mandating firms to report comprehensive income and the components of other comprehensive income in their financial statements.     

信息过载是否影响投资者对公开信息的使用——来自季度盈余的实证证据

首季季报之所以可能导致投资者的信息过载原因有二 :一是许多公司在同一天披露其季报 ;二是公司的年报和季报有可能同时披露。我们的结果说明了信息的集中披露本身并不妨碍投资者对信息的及时利用 ,这些发现对我国资本市场上信息披露监管机构有着直接的政策性含义。     

The Israeli XBRL Adoption Experience

eXtensible Business Reporting Language (XBRL) is a language for the electronic communication of business and financial data which is revolutionizing business reporting around the world. It is a tool to bridge potential language barriers and unify financial reporting. This has appeal to foreign investors, among others, who can rely on information in XBRL‐tagged financial reports to make investment decisions without having to translate financial statements from local language. In 2008, Israel required most public companies to adopt International Financial Reporting Standards (IFRS) for financial reporting and to use XBRL‐tagged reporting format, as part of an aggressive effort to make its capital markets more transparent and attractive for foreign investors. In this paper, we study all Israeli public companies and analyze the accuracy and reliability of their XBRL‐tagged financial statements that are available on MAGNA, the Israel Securities Authority's electronic system. We describe the process by which the XBRL‐based data were collected and reported. We document, categorize, and analyze deficiencies in the XBRL‐tagged filings, and inconsistencies between them and the Hebrew‐based annual reports. We observe pervasive data entry errors resulting in inaccurate XBRL‐generated financial reports, which went undetected for over one year. Further, first year XBRL reporting (in conjunction with IFRS adoption) did not increase foreign investment in the Israeli capital markets. This analysis allows us to better understand the benefits and challenges of the adoption of XBRL.     

Top executive gender diversity and financial reporting quality

We examine whether gender diversity of chief executive and chief financial officers (CEOs and CFOs) is associated with financial reporting quality. The CEOs and CFOs of publicly traded companies are both required to certify the appropriateness of their financial statements and annual disclosures. We argue that gender diverse dyads (groups) of executives can bring different perspectives and professional skepticism to financial reporting. Using a sample of different CEO/CFO gender dyads during 2006–2019, we postulate and find evidence of higher accruals quality among firms led by gender-diverse dyads compared to accruals quality reported by firms led by all-male CEO/CFO pairs. Additional analyses reveal that the auditors of firms with gender-diverse executive dyads issue audit reports later, charge higher audit fees, and are more likely to be one of the Big 4 firms. These findings support the view that top executive gender diversity enhances financial reporting quality, which has important implications for corporate governance mechanisms.     

Relevance of U.S.-GAAP for Japanese companies

We use differences in U.S.-GAAP and Japanese-GAAP accounting measures to evaluate the value-relevance of U.S.-GAAP reports. We show data provided in U.S.-GAAP financial statements of Japanese firms is value-relevant beyond that contained in domestic-GAAP statements. Our results complement extant research and support the proposition that U.S. reporting methods provide value-relevant data. Understanding the value-relevance of data from Japanese firms is important in its own right because of the major role these firms play in intenational markets. We also provide evidence on significant transnational firms that voluntarily provide U.S.-GAAP statements.     

Are IFRS and U.S. GAAP converging? : Some evidence from People's Republic of China companies listed on the New York Stock Exchange

This research investigates the comparability and convergence of two sets of accounting standards from 1996 to 2002: United States’ Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). The investigation involves a sample of companies from the People's Republic of China (PRC) that are listed on the New York Stock Exchange (NYSE). PRC companies traded on the NYSE generally prepare IFRS financial statements and provide a limited reconciliation to U.S. GAAP, creating a unique quasi-experimental opportunity to examine differences between two sets of accounting numbers produced by two different sets of accounting standards while holding the company constant. Comparability is measured by using Gray's index of comparability, and a set of measures are introduced to capture several dimensions of convergence over time in reported net income, net assets, return on net assets, and earnings per share. The evidence shows lack of comparability, caused largely by the revaluations of property, plant and equipment permitted under IFRS, but not permitted under U.S. GAAP. There is, however, substantial evidence of convergence over time.     

Informed trading in public debt markets

This study examines the occurrence of informed trading in public debt issued by companies in the United States. I find that earnings surprises are positively associated with bond price changes prior to the release of financial report data to the public, for firms with non‐investment‐grade ratings. Additionally, I find that the effect appears to be driven by firms with publicly traded equity. Evidence further indicates an increase in trading activity during the time window between report period end date and filing date, for firms with larger earnings surprises.     

Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market

Using a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors, and whether International Financial Reporting Standards (IFRS) are more value-relevant than domestic generally accepted accounting principles (GAAP). These issues are key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements. The study provides evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP financial statements are more value-relevant than IFRS. Finally, this paper documents the important role of model specification in value-relevance studies.     

The Role of Holding Company Financial Information in the Insurer-Rating Process: Evidence From the Property-Liability Industry

We examine data for the year ended December 31, 1997 for 80 publicly traded property‐liability insurers that have Best financial strength ratings of their consolidated insurance‐operating subsidiaries. These firms employ a holding company structure, in which a parent owns the stock of multiple insurance‐operating subsidiaries. The operating subsidiaries prepare a consolidated annual report using the Statutory Accounting Principles (SAP), and an analogous set of financial statements based on the Generally Accepted Accounting Principles (GAAP) is released by the parent. We find that the financial characteristics important in determining ratings at the individual firm level—capitalization, liquidity, profitability, and size—are also important at the group level. Further, financial ratios from holding company statements are incrementally useful in the ratings' process, after group‐level ratios have been taken into account. Robustness tests based on a subsample of holding companies with minimal investment outside of the property‐liability industry reinforce our conclusion that parent company statements influence consolidated group ratings. However, our data do not allow us to separate the relative contribution of the GAAP model and underlying transactions to the ratings decision.     

Impact of foreign operations on reported effective tax rates: interplay of foreign taxes, U.S. taxes and U.S. GAAP

Effective tax rates can have a significant effect on a firm’s cash flows and reported earnings. As the operations of U.S. companies become increasingly global in scope, an important issue is how their foreign operations impact their effective tax rates, and, in turn, their reported earnings. This study describes how foreign taxes, U.S. taxes, and U.S. accounting principles interact to determine the impact of foreign operations on a firm’s effective tax rate. This analysis will assist users of financial statements in assessing the quality of earnings, making interfirm comparisons, evaluating the performance of management, judging the risks of additional tax assessments, and predicting future effective tax rates.     

Value relevance of earnings,book value and dividends in an emerging capital market: Kuwait evidence

This study examines the value relevance of book value, earnings and dividends for a sample of all non-financial firms listed on the Kuwait Stock Exchange (KSE) over the period 2003–2009. After controlling for the impact of the global financial crisis, empirical results provide evidence on the value relevance of book value and earnings in the KSE. The results indicate that dividends are not a value-relevant in the presence of earnings in the valuation model. However, when dividends are used as a substitute for earnings they become value-relevant. The explanatory power of the model including both book value and earnings is almost indistinguishable from that of book value and dividends. Furthermore, splitting earnings into dividends declared (or paid) and earnings retained results in each of the two variables becoming value-relevant. The average dividend pay-out ratio tends to increase over time, indicating that dividend policies do matter in the KSE and that dividends in Kuwait are used to boost investors' confidence and support share price, noticeably during the global financial crisis period.     

Corporate Financial Reporting in Nigeria

This paper reports on the extent of financial reporting by a sample of publicly quoted companies in Nigeria. Rather than examine the disclosure of specific items of information, the paper deals with the entire contents of the corporate annual report and highlights its different parts. The index of disclosure methodology is used to describe the trend of reporting practices between 1982 and 1986.     

The perceived credibility of forward-looking performance disclosures

We investigate the credibility of forward-looking performance disclosures (FLPDs) in the narrative sections of annual reports, as perceived by investors. Our proxy for these disclosures is an index of statements about future performance. We find that companies issue more FLPDs when raising debt or conveying bad news in the financial statements. In the presence of these managerial incentives, investor reliance on FLPDs increases with the quality of earnings reported in the audited financial statements. Our results suggest that firms derive a benefit in terms of higher credibility for their narrative disclosures from having a reputation for high quality earnings.     

How Do Large Banking Organizations Manage Their Capital Ratios?

U.S. banks hold significantly more equity capital than required by their regulators. We test competing hypotheses regarding the reasons for this “excess” capital, using an innovative partial adjustment approach that allows estimated BHC-specific capital targets and adjustment speeds to vary with firm-specific characteristics. We apply the model to annual panel data for publicly traded U.S. bank holding companies (BHCs) from 1992 through 2006, an extended period of increasing bank capital that ended just before the subprime credit crisis of 2007–2008. The evidence suggests that BHCs actively managed their capital ratios (as opposed to passively allowing capital to build up via retained earnings), set target capital levels substantially above well-capitalized regulatory minima, and (especially poorly capitalized BHCs) made rapid adjustments toward their targets.     

Audit firm size, public ownership, and firms' discretionary accruals management

In this study, we developed and tested three hypotheses concerning earnings management in Belgium (i.e., a continental European environment). The three hypotheses are about: (1) income smoothing, (2) Bix Six auditors, and (3) public ownership. The study is motivated by the finding by Becker, DeFond, Jiambalvo, & Subramanyam [Contemp. Account. Res. 15 (1998) 1] and Francis, Maydew, & Sparks [Audit. J. Pract. Theory 18 (1999) 17] that Big Six audit firms act as a constraint on both income-increasing and income-decreasing earnings management. The finding raises questions as to the determinants of earnings management in other institutional settings such as that of Belgium. Accordingly, we study publicly available financial statements of a matched sample of publicly and privately held Belgian firms. Following Francis et al. [Audit. J. Pract. Theory 18 (1999) 17], DeFond and Subramanyam [J. Account. Econ. 25 (1998) 35], and Becker et al. [Contemp. Account. Res. 15 (1998) 1], we use discretionary accruals as a measure of earnings management. We find that Belgian companies—both private and public—engage in income smoothing and manage earnings opportunistically to meet the benchmark target of prior-year earnings. The evidence is also supportive of the other two hypotheses, but only when companies have earnings that are above target and have incentives to smooth earnings downwards. The fact that our results on the impact of Big Six auditors and ownership type are different for above and below target firms in Belgium, and differ with findings on U.S. samples, can be explained by the Belgian institutional environment.     

Corporate Governance and Investor Reaction to Reported Earnings: An Exploratory Study of Listed Chinese Companies

This study explores the determinants of listed Chinese companies’ governance practices. It also examines how these companies’ governance practices affect domestic investors’ reaction to their earnings reports. Using publicly disclosed financial information and data directly collected from 148 domestically listed Chinese companies, the findings are consistent with investors in these companies basing their valuation decisions, at least in part, on these companies’ earnings reports. This is indicated by the significant relationship between “unexpected” earnings and cumulative abnormal returns. However, the hypothesized effects of governance practice/choice are, on the whole, not supported. There also is no systematic relation between governance choice and ownership structure. We interpret these findings to imply that in the Chinese securities market, the institutional factors and infrastructure (e.g., legal liability, information intermediation, market for managers, and takeovers) are not yet sufficiently developed to permit individual domestic investors to exert significant influence via their actions in the capital markets.     

Short Sellers and Financial Misconduct

We examine whether short sellers detect firms that misrepresent their financial statements, and whether their trading conveys external costs or benefits to other investors. Abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed, particularly when the misconduct is severe. Short selling is associated with a faster time‐to‐discovery, and it dampens the share price inflation that occurs when firms misstate their earnings. These results indicate that short sellers anticipate the eventual discovery and severity of financial misconduct. They also convey external benefits, helping to uncover misconduct and keeping prices closer to fundamental values.     

The impact of hedging on the market value of equity

We examine the annual stock performance of firms that disclose the use of derivatives to hedge over the period 1995 to 1999. We find that only 21.6% of publicly traded U.S. corporations in our sample hedged with derivative instruments over this period and their use is concentrated in the larger companies. Similar to other studies we find that when derivatives are used, interest rate and currency securities are used much more frequently than commodity products. Our sample of 1308 companies that hedge outperforms other securities by 4.3% per year on average over our sample period. This result is robust to several alternative methods of estimating abnormal returns. When we segment performance by the type of hedge used, however, we find that the over-performance is due entirely to larger firms that hedge currency. We find no abnormal returns for firms hedging either interest rates or commodities. The abnormal returns in firms hedging currency is robust to alternative models that seek to control for exchange rate fluctuations and global equity returns; however, we find no significant abnormal returns to currency hedgers when using an augmented model that controls for the role of intangible assets.     

Blockholders Are More Common in the United States Than You Might Think*

Finance scholars have long characterized the large publicly traded U.S. company as having a fragmented ownership structure with a diffuse shareholder base—significantly more diffuse than comparable companies in most other countries. But the findings of the author's recent study, which incluudes large amounts of “hand-collected data” on the share ownership of U.S. companies, are strikingly at odds with this characterization. As reporteed in the study, 96% of a sample of 375 randomly chosen, publicly traded U.S. corporations—including companies like American Express and McDonald's—had at least one shareholder who owned at least 5% of the firm's common stock. In fact, such blockholders as a group owned almost 40% of the typical U.S. company. There was, to be sure, an inverse relation between ownership concentration and firm size, but ownership was unexpectedly concentrated even among the largest companies, with 89% of the S&P 500 companies in the sample having at least one 5% blockholder. What's more, the ownership concentration of U.S. public companies turned out to be remarkably similar to the average ownership concentration of large samples of listed companies from 22 European and East Asian countries. More specifically, the ownership structure of U.S. companies—after controlling for differences in company size—appears to all in the middle of the distribution of those countries, whether one looks at the proportion of companies with block-holders or the blockholders' average percentage holdings.