The Influence of Remuneration Structures on Financial Reporting Quality: Evidence from Australia

This cross‐sectional study investigates the influence of remuneration structures on financial reporting quality, based on a sample of companies listed on the Australian Securities Exchange (ASX). Compliance with Remuneration Principle eight issued by ASX (providing recommendations on formation, operation and disclosure of remuneration committees) is expected to improve financial reporting quality represented by a decreased level of earnings management. This study expands the corporate governance literature by examining an under‐researched mechanism to address the agency problem. Earnings management, as a consequence of the agency problem, is measured using the level of absolute discretionary accruals. In this study, we use the modified Jones model to measure the level of discretionary accruals and the existence of reduced earnings management. The study is conducted using a random sample of 214 firm‐year observations selected from the ASX listed companies. Our findings show a higher level of compliance with the principle on remuneration is associated with lower levels of earnings management. The findings support the efficient functioning of the ASX‐proposed remuneration structure in reducing earnings manipulations.     

The runaway taxpayer

In order to analyze the determinants of tax evasion, the existing literature on individual tax compliance typically takes a ‘prior-to-audit’ point of view. This paper focuses on a ‘post-audit, post-detection’—so far unexplored—framework, by investigating what happens after tax evasion has been discovered and noncompliant taxpayers are asked to pay their debts. We first develop a two-period dynamic model of individual choice, considering an individual that has been already audited and detected as tax evader, who knows that Tax Authorities are looking for her to cash the due amount. We derive the optimal decision of running away in order to avoid paying the bill, and show that the experience of a prior tax notice reduces the probability to behave as a scofflaw. We then exploit information on ‘post-audit, post-detection’ tax compliance provided by an Italian collection agency for the period 2004–2007 to empirically assess the relationship between prior tax notices and unlawful behavior. The evidence from alternative logit model specifications supports our theoretical prediction: successful tax notices are negatively correlated with the probability of running away.     

A Lobbying Approach to Evaluating the Sarbanes‐Oxley Act of 2002

We evaluate the impact of the Sarbanes‐Oxley Act (SOX) on shareholders by studying the lobbying behavior of investors and corporate insiders in order to affect the final implemented rules under SOX. Investors lobbied overwhelmingly in favor of strict implementation of SOX, while corporate insiders and business groups lobbied against strict implementation. We identify firms most affected by the law as those whose insiders lobbied against strict implementation. Such firms appear to be characterized by agency problems, rather than motivated by concerns over compliance costs. Cumulative stock returns during the five and a half months leading up to SOX passage were approximately 7% higher for corporations whose insiders lobbied against SOX disclosure‐related provisions than for similar non‐lobbying firms, consistent with an expectation that SOX would reduce agency problems. Analysis of returns in the post‐passage implementation period suggests that investors' positive expectations with regards to the effects of these provisions were warranted.     

Corporate governance and the informativeness of disclosures in Australia: a re‐examination

We re‐examine the association between corporate governance and disclosures reported by Beekes and Brown (2006), using an extended time series of Australian data. Since the ASX corporate governance guidelines were introduced in 2003, firms generally have increased their disclosure frequency and demonstrated an improvement in the timeliness of bad news relative to good news, indicating a levelling of disclosure practices and greater transparency. Better governed firms have become more cautious in their disclosure practices. However, they continue to be more balanced with respect to good and bad news timeliness. Changes to disclosure laws have also influenced company practices.     

Co‐evolved genetic programs for stock market trading

The profitability of trading rules evolved by three different optimised genetic programs, namely a single population genetic program (GP), a co‐operative co‐evolved GP, and a competitive co‐evolved GP is compared. Profitability is determined by trading thirteen listed shares on the Johannesburg Stock Exchange (JSE) over a period of April 2003 to June 2008. An empirical study presented here shows that GPs can generate profitable trading rules across a variety of industries and market conditions. The results show that the co‐operative co‐evolved GP generates trading rules perform significantly worse than a single population GP and a competitively co‐evolved GP. The results also show that a competitive co‐evolved GP and the single population GP produce similar trading rules. The profits returned by the evolved trading rules are compared to the profit returned by the buy‐and‐hold trading strategy. The evolved trading rules significantly outperform the buy‐and‐hold strategy when the market trends downwards. No significant difference is identified among the buy‐and‐hold strategy, the competitive co‐evolved GP, and single population GP when the market trends upwards.     

The effect of more rules‐based guidance on expense disclosure under International Financial Reporting Standards

International Financial Reporting Standards (IFRS) are often described as principles‐based; however, we show that IFRS and Australian pre‐IFRS expense‐related standards are more rules‐based than pre‐IFRS expense disclosure in New Zealand. Thus, we examine expense disclosure in New Zealand and Australia around IFRS adoption to provide evidence on the effect of more or less rules‐based standards on voluntary disclosure. First, we add to the rules versus principles‐based standards debate by finding higher voluntary expense disclosure under more rules‐based standards (e.g. IFRS). This contrasts with expectations, as we would expect fewer voluntary disclosures under more rules‐based standards as there would be fewer possible voluntary disclosures. Second, we document that New Zealand firms have significantly less voluntary expense disclosure than size‐ and industry‐matched Australian firms in both the pre‐ and post‐IFRS period. However, all measures of expense disclosure significantly improved post‐IFRS for New Zealand, whilst little change occurred for Australian firms. Thus, there is greater financial statement comparability across these countries post‐IFRS, but not full harmonization. Third, we show that the relationship between most firm characteristics and expense disclosure is weaker post‐IFRS. In addition, cross‐listed firms and loss‐making firms have a higher level of expense disclosure, as contrasted with firms in the investment and property industry which have a lower percentage of unspecified expenses but also report fewer voluntary expenses.     

Evaluating business credit risk by means of approach‐integrating decision rules and case‐based learning

This research utilizes a new approach which uses a hybrid learning system that combines two representations of knowledge: the first in a form of decision rules referring to general knowledge, and the other of single cases corresponding to exceptions or untypical situations. The Explore algorithm was chosen as a tool for inducing general rules. It generates all simple and sufficiently strong general rules from a given data set. Examples discovered by these rules are then used to identify exceptions and untypical cases. The paper discusses problems connected with tuning parameters of this approach and introduces a new procedure for this task. This methodology is applied to solve the problem of evaluating the risk of business credit applications in a Polish commercial bank. Using information about business credit applications, as described by 35 economic parameters and using five groups of banking risk, a knowledge base consisting of 70 decision rules and 15 specific cases was induced. Testing this model in the standard ‘leaving‐one‐out’ way we achieved the best classification accuracy of 81%. A comparative study showed that results obtained by other machine‐learning algorithms resulted in significantly worse classification accuracy. Copyright © 2001 John Wiley & Sons, Ltd.     

Impact of earnings performance on price‐sensitive disclosures under the Australian continuous disclosure regime

This study examines the relation between accounting earnings and the frequency of price‐sensitive corporate disclosure under Australia's statutory continuous disclosure requirements. Despite low litigation threats and excepting loss‐making firms, results show that firms with earnings declines (bad news) are more likely to make continuous disclosure than firms with earnings increases (good news). This suggests that market forces and regulators’ scrutiny are sufficient to induce a ‘bad news’ disclosure bias. This study also examines the ‘materiality’ requirement under the continuous disclosure requirements and finds a positive relation between disclosure frequency and the magnitude of earnings news. The earnings–return correlation is positively associated with disclosure frequency for the financial services industry.     

Growth Capital‐Backed IPOs

Growth capital investing is the financing of growing businesses that are investing in tangible assets and the acquisition of other companies. Growth capital is common in retailing, restaurant chains, and health care management, and represents 12% of all venture capital (VC)‐backed initial public offerings (IPOs). Since 1980, investing in growth capital‐backed IPOs has produced mean three‐year style‐adjusted buy‐and‐hold returns of +25.2%, in contrast to style‐adjusted returns of approximately zero for other VC‐backed and buyout‐backed IPOs. One‐third of growth capital‐backed IPOs are rollups and these have produced much higher returns for investors than rollups without a financial sponsor.     

Cultural Secrecy and Anti‐corruption Disclosure in Large Multinational Companies

This paper analyses the relation between countries’ cultural characteristics and anti‐corruption disclosure. In particular, it extends prior research and examines whether country‐level secrecy also appears to impact differences in this type of disclosure, while controlling for factors previously shown to matter. Using Transparency International ratings of disclosures on anti‐corruption efforts by large multinational firms and an ordinal regression analysis, the paper documents that companies from more ‘secretive’ countries have significantly lower levels of anti‐corruption disclosure.     

Compliance with pension‐related mandatory disclosures and debt financing

Using hand‐collected data on the level of pension‐related mandatory disclosures required by International Accounting Standard 19 Employee Benefits, we test whether compliance levels with these disclosures convey information that affects firms’ access to the public instead of the private debt market, as well as the cost of their new debt issues. We document a higher tendency to access the public debt market for firms with higher levels of pension‐related disclosure. Furthermore, we find that firms with higher levels of pension‐related disclosure enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues. Thus, the benefits of disclosure in reducing information risk are only realisable when creditors rely heavily on financial statements in their decision making, due to the limited access to private information. Additional tests reveal that high compliance levels effectively mitigate the negative effect of pension deficits on the cost of public debt. These findings provide novel evidence in the extant literature on the role of mandatory (and, in particular, pension‐related) disclosures on firms’ debt financing. They also have important policy implications.     

The Piotroski F‐score: evidence from Australia

A market‐neutral strategy that is long [short] stocks with a high [low] Piotroski F‐score generates an index‐weighted 0.8 percent pm on S&P/ASX 200 stocks and 1.4 percent pm on smaller stocks. Equal‐weighted returns are higher and in all cases returns are statistically significant. However, the Carhart model alphas are not statistically significant except in the case of equal‐weighted small cap portfolios. For such portfolios, however, most of the alpha comes from the short side and most institutional investors would find them uninvestable due to capacity constraints. A range of tests indicate that analyst neglect does not explain the F‐score premium.     

Voluntary profit forecast disclosures,IPO pricing revisions and after-market earnings drift

Prospectus profit forecasts (PPF) constitute one of the most important discretionary disclosure items in an IPO. I examine such disclosures in the Hong Kong market, where both IPO activity and PPF disclosure rates are at high levels. The median forecast typically ‘underestimates’ future earnings by around 6%. More importantly, PPF disclosure exhibits a strong inverse association with pre-listing owners' retained equity levels (Hughes, 1986; and Li and McConomy, 2004). PPF disclosure is thus more likely in IPOs raising more capital and generating larger floats. I also demonstrate a strong link between PPF disclosure and post-IPO earnings drift.Ensuing forecast errors also bear strong connection with IPO coordinators' initial price determinations as well as with subsequent investor returns. This area usefully extends the related literature (Cheng and Firth, 2000; Chen, Firth and Krishnan, 2001; Jog and McConomy, 2003; Chong and Ho, 2007; and Gounopoulos, 2011), which stresses an association between forecast errors and initial investor returns but ignores the preceding price ‘determination’ process. It also suggests that forecast errors serve as a valuable ex-post proxy for the amount of ex-ante uncertainty surrounding issuer value (Beatty and Ritter, 1986; Falconieri, Murphy and Weaver, 2009). This study also demonstrates a connection between final offer price ‘determinations’ and the information content and “superiority” of PPFs (Brown, Richardson and Schwager, 1987). Finally, and in contrast to final offer price ‘determinations’, initial investor returns strongly anticipate post-IPO earnings drift.     

Exits,Performance, and Late Stage Private Equity: the Case of UK Management Buy‐outs

Using a hand‐collected dataset of 1,225 buy‐outs, we examine post buy‐out and post exit long term abnormal operating performance of UK management buy‐outs, during the period 1980–2009. Our univariate and panel data analysis of post buy‐out performance conclusively show positive changes in output. We also find strong evidence for improvements in employment and output and a lack of significant changes in efficiency and profitability following initial public offerings (IPO) exits. IPOs from the main London Stock Exchange (LSE) market outperform their counterparts from the Alternative Investment Market (AIM) only in terms of changes in output. For secondary management buy outs (SMBOs), performance declines during the first buy‐out but in the second buy‐out performance stabilises until year three, after which profitability and efficiency fall while employment increases. Although private equity (PE) backed buy‐outs do not exhibit either post buy‐out or post exit underperformance, they fail to over‐perform their non‐PE backed counterparts. In the subsample of buy‐outs exiting via IPOs on the AIM, PE firms do not outperform non‐PE buy‐outs. Our findings highlight the importance of tracing the overall performance of buy‐outs over a longer period and controlling for sample selection bias related to the provision of PE backing.     

Exploring the Board Structures and Member Profiles of Top ASX Companies in Australia: An Industry‐level Analysis

Using published data from the top 166 ASX companies and 1244 corporate board members, this paper presents an industry‐level analysis of board structures and member profiles, and assesses them in terms of the ASX (2014, 2003) principles and recommendations. The analysis reveals that the average board size was seven, non‐executive director (NED) representation on boards was 70%, women held 14% of seats on corporate boards, 17% of NEDs were women and 2% of firms had chairperson/CEO duality positions. The Financial, Industrial and Energy sectors consisted of a majority of executive directors from business and the accounting field and NEDs from the engineering field with work experience of 20 to 30 years. A greater degree of diversity in the field of study and previous experience in the same and different sectors was found in relation to board members in the majority of industrial sectors. The analysis reveals that board characteristics such as board size, having a clear majority of NEDs on boards, decreasing trends in chairperson/CEO duality position, board member diversity in terms of qualifications and previous experience in the same and different sectors were largely consistent with the ASX principles and corporate governance practices.     

Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.     

Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.     

Venture capital‐backed and commitments test entity initial public offerings on the ASX

This paper examines initial returns to venture capital (VC) backed and non‐VC‐backed IPO companies on the Australian Securities Exchange (ASX). We find support for the theoretical predictions of Rossetto (2008), by providing empirical evidence that VC‐backed CTE IPOs exhibit greater wealth losses to pre‐IPO investors compared to non‐VC‐backed CTE IPOs during hot issue markets. We also find that greater retained ownership increases IPO underpricing. In the subsample of IPOs with below the median level of retained ownership IPOs, VC‐backed CTE IPOs and VC‐backed, non‐CTE IPOs have significantly higher levels of underpricing and wealth loss compared to non‐VC‐backed, non‐CTE IPOs.     

Risk disclosure noncompliance

We examine companies’ compliance with IFRS risk disclosure rules for the first fiscal year following 2007. For a sample of 383 firms from 20 European countries, we find that average risk disclosure compliance is only 62 percent. Countries’ enforcement strength is generally positively associated with risk disclosure compliance and even more effective in the presence of outsider monitoring. We highlight that cross-country differences in enforcement must be properly accounted for to ensure consistent risk disclosure compliance.