AUDITORS’ RECOGNITION AND DISCLOSURE MATERIALITY THRESHOLDS: THEIR MAGNITUDE AND THE EFFECTS OF INDUSTRY

Materiality thresholds are the dividing line between material and immaterial information. Recognition materiality thresholds are the dividing line between what is recorded and what is not recorded in the accounts. Disclosure materiality thresholds are the dividing line between what is separately disclosed in the financial statements and what is not separately disclosed. Auditors materiality thresholds are important because they have a significant influence on what information is recorded in the accounts and disclosed in financial statements and hence available for decision making by external parties. However, there are no research findings about recognition thresholds, and those in relation to disclosure thresholds show a lack of consensus. Hence the motivation for this research. The objective of the research is to study auditors’ recognition and disclosure thresholds within the context of industry, which is divided into the industry of the firm and the industry specialization (experience) of the auditor. The results of the study show that: (1) Recognition thresholds are significantly lower than disclosure thresholds. (2) The mean thresholds are 5·7% (recognition) and 8·7% (disclosure). These are in the 5% to 10% guideline provided by Australian accounting standards. (3) The thresholds appear to vary with industry market risk. (4) Auditors appear to use the thresholds from the industry in which they specialize, in an industry in which they do not specialize. The paper discusses the implications of these findings.     

THE ASSOCIATION BETWEEN ANALYSTS’ FORECAST REVISIONS AND EARNINGS COMPONENTS: THE EVIDENCE OF FRS 3

This study examines whether the earnings components as required by FRS 3 help UK analysts to predict firms’ earnings changes by investigating the statistical association between analysts’ forecast revisions and firms’ unexpected earnings components. I find that analysts’ forecast revisions made in different time horizons are consistently associated with unexpected earnings components as required by FRS 3. UK analysts are able to incorporate current-year unexpected earnings components into their current and future earnings forecasts even before firms officially release this information. However, empirical results also show that current-year unexpected earnings components are not fully incorporated into analysts’ forecasts of future earnings. Analysts appear to wait for more information releases regarding firms’ future earnings and delay their revisions of future earnings forecasts. This is consistent with the evidence that the cumulative revisions of current earnings forecasts are generally associated with prior-year unexpected earnings components, and the association appears to be stronger as time progresses. Overall, this study provides evidence suggesting that the earnings components as required by FRS 3 help UK analysts to identify firms’ permanent and transitory earnings changes over different forecast horizons. This study also provides strong evidence supporting the informativeness of earnings components for analysts’ forecasts and the information set perspective of FRS 3 that highlights the importance of earnings components in predicting a reporting entity’s future performance.     

THE INTRA-INDUSTRY EFFECTS OF OPEN MARKET SHARE REPURCHASES: CONTAGION OR COMPETITIVE?

We examine the extent to which announcements of open market share repurchase programs affect the valuation of competing firms in the same industry. On average, although firms announcing open market share repurchase programs experience a significantly positive stock price reaction at announcement, portfolios of rival firms in the same industry experience a significant and contemporaneous negative stock price reaction. This suggests that perceived changes in the competitive positions of the repurchasing firms occur at the expense of rival firms and dominate any signals of favorable industry conditions. Thus, the competitive intra-industry effects of open market repurchases outweigh any contagion effects. In addition, cross-sectional tests indicate that these competitive effects are more pronounced in industries characterized by a lower degree of competition and less correlation between the stock returns of the repurchasing firm and its rivals.     

STOCK MARKET OPENNESS AND MARKET QUALITY: EVIDENCE FROM THE SHANGHAI–HONG KONG STOCK CONNECT PROGRAM

We study the impact of capital market openness on high-frequency market quality in China. The Shanghai–Hong Kong Stock Connect program (SHHKConnect) opens China's stock market to foreign investors and offers a natural experiment to investigate this question. Using a difference-in-differences approach, we find that market liberalization leads to lower quoted spread, lower effective spread, lower market depth, and higher short-term volatility. Our findings imply that opening the markets to more sophisticated foreign investors is associated with higher competition and more cross-market arbitrage activities, narrowing the spread and reducing liquidity providers’ profits, but increasing the price impact and short-term volatility of connected stocks.     

DERIVATIVES AND THE FASB: VISIBILITY AND TRANSPARENCY?

In June 1998, the Financial Accounting Standards Board issued its Statement No. 133 addressing the accounting for derivative instruments and for hedging activities.This Statement addresses old issues regarding the way companies report their activities in derivatives and how those instruments are used to hedge some types of risks. However, the impact of this standard could be very negative, and it could be not useful for investors and creditors for making good decisions. In fact, SFAS 133 presents serious problems and the Board doesn’t appear to have obtained its goals of increased financial statements transparency and comparability.The problems of implementing this standard are commented in this article. At the same time, an alternative is offered to improve the issue of comparability among different companies using derivatives to hedging purposes.     

AUDITOR CONCENTRATION AND MARKET SHARES IN THE US: 1988–1999 A DESCRIPTIVE NOTE

This paper examines from a historical perspective the effects of the Big Eight and Big Six accounting firm mergers on concentration measures and market share percentages of major accounting firms in the US large company audit market. Concentration ratios and Herfindahl indices reflect an increasingly concentrated audit market, though individual firms differ in their success at capturing market shares in the three exchanges examined, as well as in their ability to capture newly listed companies or companies switching auditors over the 1988 to 1999 period.     

BOND MARKET REACTION TO STOCK REPURCHASES: IS THERE A WEALTH TRANSFER EFFECT?

We reexamine the bondholder wealth impact of stock repurchases with a focus on the wealth transfer effect. We do not detect any transfer of wealth from bondholders to shareholders surrounding open market stock repurchases. For the overall sample (1994–2002), using daily data we document a significant decrease in bond yields surrounding repurchase announcements. Subsamples classified by attributes that capture wealth transfer propensity also do not reveal evidence consistent with a wealth transfer effect. Correlation analysis between bond and stockholder wealth effects similarly is not supportive of a wealth transfer effect. Contrary to the wealth transfer hypothesis, we document a greater proportion of bond rating upgrades than downgrades in the three months following a repurchase announcement. Our results are robust to alternate bond price data and event return methodology.     

THE FUTURE OF STATE INSURANCE REGULATION: CAN IT SURVIVE?

Abstract: As Congress continues to debate the future of financial services affiliations, state insurance regulators are faced with blurred lines of regulatory authority and the opportunity of federal banking regulators to preempt their decisions and their enforcement of consumer protection statutes. This article attempts to remind readers of the history and significance of state insurance regulation and provide clear evidence of its continued importance in the future of the conglomerated financial services marketplace.     

“GETTING BY” AND “GETTING ON” IN SERVICE WORK: LESSONS FOR THE FUTURE OF ACCOUNTING?

The use of educated labour which can multi-task, make decisions and act responsibly facilitates the real subsumption of labour. By presenting data from an ethnographic study of students working in unskilled service jobs in the UK, we show that such workers are not subsumed totally but exhibit a resistant medium by extending their own frontiers of control and developing self-help policies. As many accounting students will have worked in the kinds of jobs reflected in our study, these experiences have important implications for the future of accounting in the USA and elsewhere where work within and outside the profession has been deskilled and educated labour is increasingly used to undertake lower skilled work     

HOW WELL DO MARKET TIMING,CATERING, AND CLASSICAL THEORIES EXPLAIN CORPORATE DECISIONS?

An important debate in corporate finance is whether chief executive officers (CEOs) exploit equity mispricing. In this article I construct a measure of the unexplained change in the CEO's stockholdings of the firm to empirically test the contrasting predictions of market timing, catering, and classical theories of corporate decisions. Consistent with the predictions of classical theories, I find that the firm increases its investments and even uses expensive capital to finance investments when there is an unexplained increase in the CEO's stockholdings. However, I find no empirical support for catering predictions and weak empirical support for market timing predictions.     

DO INSTITUTIONAL INVESTORS IN THE UK ADOPT A DUAL STRATEGY FOR MANAGING FOREIGN EXCHANGE RISK?

In recent years, the gradual increase in international portfolio diversification within the UK institutional investment community has led to a growing need to manage foreign exchange (FX) risk. This paper reports on the findings of a postal questionnaire survey relating to FX risk management practices in UK institutional investment organisations. The findings demonstrate an increasing awareness of the FX risk management problem and indicate that UK investment institutions actively manage FX risk within their investment portfolios. The paper also focuses on the interesting question of whether UK institutional investors manage their own portfolio's FX risk, simultaneously concerning themselves with their investee companies’ FX risk management practices. Overall, the findings indicate that institutional investors adopt adual strategyfor managing FX risk; not only managing their own FX risk, but also requiring that their investee companies manage FX risk. There is also evidence to suggest that the institutional investors require their investee companies to disclose information relating to their FX risk management policies.     

ARE THE STRUCTURAL CHANGES IN MUTUAL FUNDS INVESTING DRIVING THE U.S. STOCK MARKET TO ITS CURRENT LEVELS?

We examine the long-run equilibrium relation between the net flow of funds into equity mutual funds and the S&P 500 index. Applying the Engle and Granger error correction methodology followed by a state space procedure, we find that the levels of the stock market are influenced by the net flow of funds into equity mutual funds. Our findings indicate that the U.S. equity market appears to be rationally adjusting to a structural change in the behavior of the U.S. investing public.