Financial distress and bankruptcy prediction: An appropriate model for listed firms in Vietnam

This paper aims to develop a comprehensive model, the first of its kind in Vietnam, for the purpose of predicting financial distress and bankruptcy at Vietnamese listed firms. The period 2003–2016 is used to study the likelihood of financial distress in different scenarios. Various factors are utilized, including (1) accounting factors in the emerging market score model; (2) market factors in the distance-to-default model; and (3) macroeconomic indicators. The area under the receiver operating characteristics (AUC) curve is used to compare the usefulness of various models that predict financial distress and bankruptcy. Empirical findings from this study show that accounting and market factors, together with macroeconomic fundamental factors, both affect financial distress when they are considered in isolation. However, in a comprehensive model, the effects from accounting factors appear to be more significant than those from market-based factors. The default prediction model, which includes accounting factors with macroeconomic indicators, appears to perform much better than the model comprising market-based factors with macroeconomic fundamentals.     

The Relevance of Financial versus Non-Financial Information for the Valuation of Venture Capital-Backed Firms

This study examines the relevance of financial and non-financial information for the valuation of venture capital (VC) investments. Based on a hand-collected data set on venture-backed start-ups in Germany, we investigate the internal due diligence documents of over 200 investment rounds. We document that balance sheet and income statement items capture as much economic content as verifiable non-financial information (e.g. team experience or the number of patents) while controlling for several deal characteristics (e.g. industry, investment round, or yearly VC fund inflows). In addition, we show that valuations based on accounting and non-accounting information yield a level of valuation accuracy that is comparable to that of publicly traded firms. Further analyses show that the industry-specific total asset multiples outperform the popular revenue multiples but lead to significantly less accurate results than those obtained from the more comprehensive valuation models. Overall, our findings might inform researchers and standard-setters of the usefulness of accounting information for investment companies and provide additional evidence to gauge the overall valuation accuracy in VC settings.     

Does audit report information improve financial distress prediction over Altman's traditional Z‐Score model?

We analyze empirically the usefulness of combining accounting and auditing data in order to predict corporate financial distress. Concretely, we examine whether audit report information incrementally predicts distress over a traditional accounting model: the Altman's Z‐Score model. Although the audit report seems to play a critical part in financial distress prediction because auditors should warn investors about any default risks, this is the first study that uses audit report disclosures for predicting purposes. From a dataset of 1,821 Spanish distressed private firms, we analyze a sample of distressed and non‐distressed firms and develop logit prediction models. Our results show that while the only accounting model registers a classification accuracy of 77%, combined models of accounting and auditing data exhibit considerably higher accuracy (about 87%). Specifically, our findings indicate that the number of disclosures included in the audit report, as well as disclosures related to a firm's going concern status, firms’ assets, and firms’ recognition of revenues and expenses contribute the most to the prediction. Our empirical evidence has implications for financial distress practice. For managers, our study highlights the importance of audit report disclosures for anticipating a financial distress situation. For regulators and auditors, our study underscores the importance of recent changes in regulation worldwide intended to increase auditor's transparency through a more informative audit report.     

The association between continuing professional education and financial performance of public accounting firms

This study investigates the relationship between continuing professional education (CPE), a mechanism of professional training, and financial performance of public accounting firms. Both training subject (partner and assistant) and training location (internal and external) are included. Public accounting firms are categorized as big, medium, and small-sized ones. Empirical data are obtained from the 1992–1995 Survey Report of Public Accounting Firms in Taiwan, published by the Financial Supervisory Commission, Executive Yuan, Taiwan, ROC. Univariate test and multiple-regression model are employed to examine the financial performance effects of CPE. Main results indicate that both professional training of assistants and external professional training are positively related to financial performance in big-sized firms. Next, we document a significantly positive association between internal training of assistants and financial performance in either big-, medium-, or small-sized firms. Finally, both external professional training of partners in big-sized firms and external professional training of assistants in small-sized firms are positively related to financial performance. Few prior studies investigate professional training of public accounting firms by a regression model due to availability of empirical data. Accordingly, evidences obtained in this study provide useful information to partners for decision-making in public accounting firms under the considerably competitive audit market.     

Linking intrapreneurship activities to multidimensional firm performance in Turkish manufacturing firms: an empirical study

This study investigates the relationships among the external environment, intrapreneurship and performance of Turkish manufacturing firms. As a multidimensional construct, intrapreneurship is examined in terms of innovativeness, new business venturing, self-renewal, risk taking, and proactiveness. The environmental munificence and hostility are examined as the external determinants of intrapreneurship activities. Firm performance is considered as a multifaceted structure that covers financial and non-financial measures. Based on the data from 331 Turkish manufacturing firms, empirical results showed that environmental factors have statistically significant impact on the intrapreneurship activities of these firms. Profitability is negatively and significantly associated with self-renewal, while it is positively and significantly related with dimensions of innovation and risk taking. Growth is found to be significantly and positively correlated with only new business venturing. Finally, innovation is the only dimension that is positively and significantly associated with both customer and employee satisfaction, which are the main non-financial firm performance measures.     

Probability of default in collateralized credit operations

The goal of this paper is to identify the major determinants of the probability of default in a mortgage credit operation, which is backed by collateral. We use an exclusive data set with 268,036 loan contracts and apply logistic regression and Cox proportional hazards model in the estimation. The discriminatory power of the estimated models is analyzed by several accuracy indicators. The inclusion of time-dependent macroeconomic variables in addition to covariates representing characteristics of the contract and individuals improved the overall performance. Logistic regression showed a higher discriminatory power than Cox proportional hazards model according to all accuracy indicators. It is worth mentioning the negative relationship between the probability of default and the economy base interest rate. Decreases in the base interest rate lead banks to lose revenue from treasury operations and expand credit operations to compensate the loss. This strategy brings individuals with a higher probability of default to the financial market.     

上市公司资本结构调整速度的区域差异研究

本文针对上市公司资本结构的影响因素及调整速度问题,通过构建动态面板模型,采用广义矩估计(GMM)方法,选取1999～2011年非金融上市公司的财务数据为样本进行研究.研究结果表明,中国不同地区上市公司的资本结构不仅受到公司特征、宏观经济因素的影响,还受制度环境因素的影响;制度环境对资本结构的影响程度及资本结构调整速度存在区域差异;调整速度较快的地区呈“带状”分布在中国东部沿海和中部地区.     

Bank competition,financial development and macroeconomic stability: Empirical evidence from emerging economies

In this study, we investigate the potential contribution of bank competition to macroeconomic stability, and the interactive role of financial development. We classify macroeconomic stability into economic and financial stability. Economic stability is represented by the volatility of actual and unexpected output growth, whereas financial stability is assessed by the aggregate Z-score and volatility of the private credit-to-gross domestic product ratio. We employ two structural and two non-structural measures of bank competition in our analysis. Applying a two-step dynamic panel system (GMM) to macroeconomic data from 48 developing nations from 1999 to 2018, we find a bell-shaped relationship between bank competition and macroeconomic stability. The findings imply that a higher level of bank competition promotes macroeconomic stability by reducing output growth volatility, fluctuations in private credit, and the probability of bank default. There is an optimal level of bank competition beyond which it may foster economic and financial instability. Moreover, financial development enhances bank competition’s positive impact on macroeconomic stability.     

Market perception of sovereign credit risk in the euro area during the financial crisis

We study market perception of sovereign credit risk in the euro area during the financial crisis. In our analysis we use a parsimonious CDS pricing model to estimate the probability of default (PD) and the loss given default (LGD) as perceived by financial markets. In our empirical results the estimated LGDs perceived by financial markets stay comfortably below 40% in most of the samples. Global financial indicators are positively and strongly correlated with the market perception of sovereign credit risk; whilst macroeconomic and institutional developments were at best only weakly correlated with the market perception of sovereign credit risk.     

Explaining financial difficulties based on previous payment behavior,management background variables and financial ratios

Abstract

This paper shows evidence that it is possible to explain financial difficulties in small and medium sized firms based on non-financial variables. The results indicate that the estimated model based on non-financial variables classified firms even better than the financial ratio model, especially when classifying bankrupt firms and firms with payment delays. The best overall classification was achieved using the model combining financial ratios and non-financial variables. The non-financial variables measuring the number of payment delays were statistically the most important. The main implication of the results is that non-financial variables embrace important information in attempts to explain financial difficulties, and this should be of interest given that payment behavior variables (payment delays and payment disturbances) may occur more frequently than the publication of intermittent financial statements.     

Research and Development,Uncertainty, and Analysts’ Forecasts: The Case of IAS 38

This study analyzes the consequences of the capitalization of development expenditures under IAS 38 on analysts’ earnings forecasts. We use unique hand‐collected data in a sample of highly research and development (R&D)‐intensive German‐listed firms over the period 2000–2007. We find that the capitalization of development costs is significantly associated with both higher individual analysts’ forecast errors and forecast dispersion. This suggests that the increasing complexity surrounding the capitalization of development costs negatively impacts forecast accuracy. However, for firms with high underlying environmental uncertainty, forecast errors are negatively associated with capitalized development expenditures. This indicates that the negative impact of increased complexity on forecast accuracy can be outweighed by the information contained in the signals from capitalized development costs when the underlying environmental uncertainty is high. The findings contribute to the ongoing controversial debate on the accounting for self‐generated intangible assets. Our results provide useful insights on the link between capitalization of development costs, environmental uncertainty, and analysts’ forecasts for accounting academics and practitioners alike.     

The financial investment decision of non-financial firms in China

This paper constructs a portfolio model to analyze the determinants of the financial investment decision of non-financial firms in China. Unlike the literature assuming that financial investments are riskless, our model allows risks in both fixed and financial investments. We show that this extension provides an analytically similar but economically different model from the literature. In particular, it is relative risk and risk-adjusted return gap, not pure risk and simple return gap that enter into firms’ financial investment decision model. Using firm-level panel data of 1902 firms listed in Chinese stock market over the period from 2006 to 2016 with semi-annual frequency, we find that the ratio of fixed investment risk over total risk dominates financial investment decisions of non-financial firms. However, rates of risk-adjusted return gap between financial and fixed investments play no role in Chinese firms’ financial investment decisions, which is in stark contrast to the results using a model assuming riskless financial investments. The baseline findings are robust to alternative measures of financialization and investment risk and different firm sizes, ownership structures and time periods.     

Modern pandemic crises and default risk: Worldwide evidence

This article examines the relationship between modern health pandemic crises and financial stability. Specifically, it collects data on 250,223 firms in 43 countries (or regions) during five modern pandemic crises, SARS (2003), H1N1 (2009), MERS (2012), Ebola (2014), and Zika (2016), and finds that pandemic crises significantly increase the default risk of enterprises. Further analysis shows that formal and informal institutions acted as a “cushion” against the pandemic crisis. The earlier a country adopts IFRS, the more unimpeded access to information, and the more stable religious and ethnic relations within the country can reduce the negative impact of a pandemic on financial stability. This article addresses the hitherto inadequacy of COVID-related data. In addition, this article argues that governments should build sound state institutions to withstand macroeconomic shocks and highlights the heterogeneity of default risk for enterprises operating in countries with different institutions.     

To Disclose or Not to Disclose? An Investigation of the Antecedents and Effects of Open Book Accounting

Open book accounting (OBA) is the regular disclosure of management accounting information beyond corporate borders. Prior contributions have mainly concentrated on identifying its antecedents in individual or small numbers of organizations with exploratory cases. My paper responds to the call to investigate OBA on a wider empirical basis and focuses simultaneously on the explanatory variables of OBA and its influence on both financial and non-financial performance. I thus also explore the mediating role of OBA in linking key antecedents and performance within a unified theoretical framework. I empirically test my model using survey data from a sample of European companies, which are then analyzed through structural equation modeling. My findings indicate that the extent of OBA use is explained by a firm’s willingness to work together with its counterparts in the long run, that is, a relational factor, and the presence of sophisticated cost accounting systems, that is, a technical prerequisite. My evidence also suggests a positive association between OBA and firm performance. Additionally, I find that OBA is a partial mediator that explains how a firm’s long-term commitment to its external partners and the sophistication of its cost accounting system may become associated with performance.     

Environmental,social and governance disclosure and default risk

We investigate whether environmental, social and governance (ESG) disclosure is related to default risk. Using a sample of US nonfinancial institutions from 2006 to 2017, we find that ESG disclosure is positively related to Merton's distance to default and is negatively related to the credit default swap spread, which suggests that firms with a higher ESG disclosure have lower default risk. Our analysis further indicates that the inverse effect of ESG disclosure on default risk is through increased profitability and reduced performance variability and cost of debt. We also document that the negative impact of ESG disclosure on default risk is existent only for mature and older firms. These results are important for all stakeholders of firms, including shareholders and bondholders to consider firm's ESG disclosure in conjunction with life cycle stage before making their investment decisions.     

Why adopt now? Multiple case studies and survey studies comparing small,medium and large firms

While a number of factors have been highlighted in the innovation adoption literature, little is known about whether different factors are related to innovation adoption in differently sized firms. We used preliminary case studies of small, medium and large firms to ground our hypotheses, which were then tested using a survey of 94 firms. We found that external stakeholder pressure and non-financial readiness were related to innovation adoption in SMEs; but that for large firms, adoption was related to the opportunity to innovate. It may be that the difficulties of adopting innovations, including both the financial cost and the effort involved, are too great for SMEs to overcome unless there is either a compelling need (external pressure) or enough in-house capability (non-financial readiness). This suggests that SMEs are more likely to have innovation “pushed” onto them while large firms are more likely to “pull” innovations when they have the opportunity.     

智力资本要素对企业价值影响之实证研究

本文以台湾信息电子产业为研究对象,先从理论及实证两方面文献选取智力资本之财务及非财务量化指标,再以2000至2007年共8年之数据利用线性回归方式检验相关指标对台湾信息电子业企业价值之贡献程度,尝试找出智力资本各构面之重要项目,以供企业做为未来提升自身智力资本项目之改进参考方向。实证结果显示员工年龄、员工教育程度、人力资本运用效率、前一年度研发密集度、以及主要顾客数皆对企业价值造成显著之影响。     

Derivatives Usage in Risk Management by US and German Non-Financial Firms: A Comparative Survey

This paper is a comparative study of the responses to the 1995 Wharton School survey of derivative usage among US non-financial firms and a 1997 companion survey on German non-financial firms. It is not a mere comparison of the results of both studies but a comparative study, drawing a comparable subsample of firms from the US study to match the sample of German firms on both size and industry composition. We find that German firms are more likely to use derivatives than US firms, with 78 percent of German firms using derivatives compared to 57 percent of US firms. Aside from this higher overall usage, the general pattern of usage across industry and size groupings is comparable across the two countries. In both countries, foreign currency derivative usage is most common, followed closely by interest rate derivatives, with commodity derivatives a distant third. In contrast to the similarities, firms in the two countries differ notably on issues such as the primary goal of hedging, their choice of instruments, and the influence of their market view when taking derivative positions. These differences appear to be driven by the greater importance of financial accounting statements in Germany than the US and stricter German corporate policies of control over derivative activities within the firm.     

Voluntary adoption of non-local GAAP in the European Union: A study of determinants and consequences

Abstract

This study examines the determinants and consequences of voluntary adoption of non-local accounting principles (non-local GAAP) by firms listed and domiciled in the European Union (EU). We restrict ourselves to the two predominant internationally accepted sets of accounting standards: International Accounting Standards (IAS) and United States generally accepted accounting principles (US GAAP). We have used various sources to identify EU firms that use non-local GAAP. We examine the 1999 annual reports of all these firms, because accounting standard choices in more recent years may be affected by the announcement of the proposal by the European Commission in February 2001 to mandate IAS usage from 2005 on. The maintained hypothesis is that firms that voluntarily adopt IAS or US GAAP expect to experience net benefits from adoption. The finding that 133 non-financial firms in the EU voluntarily used non-local GAAP in 1999 suggests that the majority of listed EU firms does not expect to benefit from non-local GAAP adoption. By studying the characteristics of non-local GAAP adopters this study provides insight into the determinants of non-local GAAP adoption. We find that firms voluntarily using non-local GAAP are more likely to be listed on a US exchange, the EASDAQ exchange in Brussels, and have more geographically dispersed operations. Furthermore, they are more likely to be domiciled in a country with lower quality financial reporting and where IAS is explicitly allowed as an alternative to local GAAP. We also study whether non-local GAAP adopters have lower levels of information asymmetry, a much cited benefit of using more transparent financial reporting, than non-adopters. We examine three proxies for information asymmetry: analyst following, cost of equity capital, and uncertainty among analysts and investors (forecast dispersion and stock return volatility). We document a positive effect of non-local GAAP adoption on analyst following, but fail to find evidence of a lower cost of capital for non-local GAAP adopters. Contrary to expectations, uncertainty among analysts and investors appears to be higher for firms using IAS or US GAAP than for firms using local GAAP. However, by comparing ‘early’ and ‘late’ adopters, we find some evidence that suggests that benefits take some time to fully materialise.     

Accounting Scandals in IPO Firms: Do Underwriters and VCs Help?

We examine whether underwriter reputation, venture capitalist (VC) backing, and VC reputation are related to the probability that a newly public firm has serious accounting problems. Using a novel data set, we find that the probability of restatement by an initial public offering (IPO) firm is positively related to underwriter reputation and negatively related to VC backing, VC reputation, and VC maturity. Our results do not appear to be driven by the endogeneity of underwriter reputation or VC backing. Our findings suggest that while VCs positively influence the financial reporting quality of IPO firms, underwriters’ concerns about revenue generation outweigh their concerns about reputation.