The impact of CSR performance and CSR disclosure readability on investors’ earnings estimates

We investigate how the valence of corporate social responsibility (CSR) performance and the readability of CSR disclosure impact investors’ earnings estimates. Ninety-seven part-time MBA students participate in an experiment, in which we manipulate the valence of CSR performance (positive versus neutral) and the readability of CSR reports (high versus low), while holding financial information constant. Our findings reveal that investors make more positive earnings estimates when CSR performance is positive. The readability level of CSR reports also influences investors’ decision-making process. Moreover, by using an eye-tracking device, we are able to observe investors’ different reading behaviours upon the different levels of readability.     

The impact of revolving door practice and policy on nonprofessional investors’ perceptions of auditor independence

This study investigates whether an ex-auditor’s employment with an audit client impairs nonprofessional investors’ perceptions of auditor independence, and whether the strength of the US revolving door policy improves their perceptions of auditor independence. Despite nonprofessional investors owning over one-third of the US equity holdings, the literature has not examined how revolving door policy impacts their perceptions of auditor independence. Two between-subjects experiments examine these issues. The first experiment finds that investors perceive the ex-auditor’s integrity to be significant in explaining the firm’s decision to manage earnings, irrespective of the firm’s previous working relationship with the ex-auditor. The results from experiment two indicate that strengthening the revolving door policy above that of the American Institute of Certified Public Accountants’ policy does not improve perceptions of auditor independence. Academics may be interested in triangulating the independence ‘in appearance’ results of this study to the independence ‘in fact’ results of other studies, since the Securities and Exchange Commission asserts that both facets of independence are equally important. The results may also be of interest to academics and practitioners, as prior research suggests that restricting auditors’ moves to management positions with the client impairs firms’ abilities to hire quality auditors.     

Consumer Bankruptcies and the Bankruptcy Reform Act: A Time-Series Intervention Analysis, 1960–1997

The Bankruptcy Reform Act of 1978, effective on October 1, 1979, significantly altered the basic rules by which consumers file for bankruptcy. Between 1979 and 1997, the number of nonbusiness bankruptcies filed annually rose from 200,000 to 1.35 million, and the rate of bankruptcies per 100,000 adults increased from 129 to 715. A controversial aspect of bankruptcy is how much of this increase can be attributed to the 1978 act. Early empirical studies provide estimates ranging from a low of 6% to a high of 75% for the immediate post-act period. However, two recent studies using longer data series report that none of the increase was due to the act. Previous studies suffer from several econometric problems, including inadequate attention to stochastic properties and stationarity of the data series, as well as data errors due to reporting changes. This paper uses an ARIMA intervention analysis to estimate the impact of the 1978 act. Using adjusted quarterly data for 1960:3 to 1995:4, the data first are examined for unit roots. The tests reject the presence of seasonal unit roots but confirm the presence of a nonseasonal unit root. The empirical analysis therefore is based on logged first differences of bankruptcy filings and filing rates per capita. An ARIMA model is estimated using the preintervention data for 1960:3 to 1979:3. This model is re-estimated for 1960:3 to 1995:4 with the intervention terms included. The intervention model estimates indicate that the 1978 act increased consumer bankruptcies by 36% in the post-act period relative to the pre-act period, or about 72,400 additional bankruptcies per year. Overall, the net impact of the 1978 act was modest compared to the substantial rise in bankruptcies that has occurred since 1979.     

Herding by mutual funds: impact on performance and investors’ response†

In this paper we investigate whether herding by actively managed equity funds affects their performances and flows over the 1980–2013 period. We show that during the herding quarter, on average, funds that trade with the herd benefit from this behavior. Although this does not directly translate into a positive association between the extent to which funds herd and their subsequent performance, we find that the funds that follow the herd earn negative abnormal returns whereas the ones that lead earn no abnormal returns. Our results also indicate that investors react adversely to follower funds while they are neutral towards the leader funds.     

The impact of energy-exporting countries’ EPUs on China’s energy futures investors: Risk preference,investment position and investment horizon

This study brings some new insights into EPU risk management. By categorizing China’s energy futures (CEF) investors by risk preference, investment position and investment horizon, we identify how EPU in four energy-exporting countries affects CEF investors. The Russian EPU mainly produces influence on short-run investors and risk-seeking investors. The Australian EPU affects risk-seeking investors heavily, while the Brazilian EPU acts on risk-seeking investors with short positions. In terms of China’s coking coal futures, changes in Russian EPU generate the weakest impact on various types of investors, while the US EPU affects medium-run risk-averse and long-run investors. The Australian EPU’s impact on investor types covers a wide range, while the Brazilian EPU affects short-run risk-averse and long-run investors. Moreover, for medium-run CEF investors, energy-exporting countries’ EPU risk characteristics is most dynamic. Changes in the EPU risk impact type mainly occurred during the US-China trade war and the outbreak of COVID-19.     

The impact of accruals and lines of business on analysts’ earnings forecast superiority

In this paper, we examine the linkage between analyst advantage (AA) (compared to the seasonal random walk model) in the prediction of quarterly earnings-per-share (EPS) and a broad set of economic determinants. Specifically, we employ a pooled cross-sectional time-series regression model where AA is linked to a set of firm-specific economic determinants that have been employed in extant work (e.g., Brown et al. in J Account Res 22:49?C67, 1987; Kross et al. in Account Rev 65:461?C476, 1990). We refine this set of independent variables by including a new variable (RATIODEV) based upon Sloan (Account Rev 71(3):289?C315, 1996) who documents that differential levels of accruals impact future earnings performance. This variable is particularly salient in explaining AA since analysts may be in a position to identify the permanent component of accruals via fundamental financial analysis. Additionally, we refine the measurement of lines of business??consistent with the reporting requirements of SFAS No. 131 relative to extant work that operationalized proxies for this variable based upon SFAS No. 14. Parameters for these aforementioned variables are significantly positively related to AA, consistent with theory.     

The effects of disclosing critical audit matters and auditor tenure on nonprofessional investors’ judgments

In an effort to provide more meaningful information to financial statement users, the Public Company Accounting Oversight Board (PCAOB) recently adopted sweeping changes to the audit report, requiring the audit firm to disclose whether or not it identified a critical audit matter (CAM) and its tenure with the client. To our knowledge, ours is the first study to explore how nonprofessional investors’ judgments are influenced by (1) the relative effects of a CAM disclosure versus a disclosure that the auditor did not identify a CAM, and (2) the disclosure of the audit firm’s tenure. We find that, relative to disclosing that no CAMs were identified, disclosing a CAM reduces investment intentions. We do not find a significant effect of tenure disclosure on investment intentions, despite evidence that participants attended to and understood the tenure manipulation. Concerning investors’ cognitive processes, we find that perceptions of both risk of material misstatement and management disclosure credibility mediate the effect of CAM disclosure on investment intentions, while perceived audit quality suppresses this effect. Our contributions include furthering the understanding of cognitive mechanisms through which CAM disclosure influences investment intentions, identifying a relatively unique setting in which perceptions of management disclosure credibility and audit quality move in opposite directions, and providing evidence that auditor tenure disclosure does not appear to affect investment intentions. Our findings should be of interest to regulators, auditors, issuers, and investors.     

Underwriters’ price support regulation and institutional investors’ trading: The case of the putback option

We examine a period in Korea during which a price supporting regulation called the putback option was imposed on the IPO underwriter. Under the regulation, individual investors of IPO had put options which can be exercised at 90% of IPO price. We find that during the regulation period, institutional investors’ flipping activity is evident not on the days following the IPO but on the days following the expiration of putback option. Our study shows that the regulation results in merely delaying the institutional investors’ documented trading behavior and provides evidence that the relationship between the underwriter and the institutional investors affects the trading of institutional investors.     

The role of investors’ objective financial knowledge on the assessment of risk disclosures in mutual fund advertisements

This study examined the role of investors’ objective financial knowledge in processing risk disclosures in mutual-fund advertisements. Investors were exposed to a mutual fund advertisement containing either a disclaimer mandated by regulatory bodies or a strongly worded warning label. Overall, the results showed that mandated disclaimers were ineffective in reducing investors’ return expectations and attitudes toward the advertised fund, regardless of the investors’ level of financial knowledge. However, strongly worded warning labels effectively impacted the return expectations and attitudes of low-knowledge investors, but not high-knowledge investors. That is, the impact of warning labels was dependent on the level of an investors’ financial knowledge; specifically, high-knowledge investors failed to discount past performance as a heuristic cue in their judgments. Importantly, this behavior of high-knowledge investors was not due to a familiarity effect; the risk disclosures were properly encoded and processed by knowledgeable investors. These results suggest that high-knowledge investors either possessed strongly held beliefs (for example, the ‘hot hand’ effect) that persevered even when exposed to the strongly worded warning, or they were overconfident in their judgments.     

Auditors' and governmental financial officers' views on expanding the Sarbanes–Oxley Act provisions to state and local governments

This paper examines whether certain provisions of the Sarbanes–Oxley Act (SOX, 2002) should be expanded to include state and local governmental entities. Surveying governmental financial officials (GFOs) and their external auditors to gauge support for SOX-like legislation for governmental entities, we find the strongest support for auditor independence rules similar to SOX, management assessment of, and reporting on, internal controls, and severe penalties for destruction of records, fraud, and failure to report fraud.     

The impact of intangibles on firms’ financial and market performance: UK evidence

This study provides empirical evidence about the effect of intangible assets on firms’ current and future financial and market performance by utilizing a sample the UK FTSE 150 nonfinancial companies. Generally, the findings of this examination reported a strong evidence on the role of intangibles in boosting firms’ performance. In particular, the results indicate that while goodwill (GW) does have a statistically positive effect on firms’ current and future performance, research and development (R&D) is only associated with firms’ future performance. The results of the current research is consistent with the market-based and resources-based theories which posits that intangible investments are the main driving factors of wealth creation in the long-run; Specifically, R&D operations can create new technologies and products that would enhance firms’ performance and value. In addition, the results reveal that both GW and R&D can explain variations in firms’ financial performance measures suggesting that such investments can enhance firms’ earning leading to capitalization such earnings in the market value. Finally, the results of this research provide practical implication for policy makers and managers.     

The impact of accounting standards convergence on Chinese firms’ overseas mergers and acquisitions

This paper investigates how accounting standards (AS) convergence influences Chinese firms’ overseas mergers and acquisitions (M&As) and shows that this convergence significantly promotes Chinese firms’ overseas M&As. Specifically, we find that both the probability of success and the value of transactions increases significantly in countries that implemented International Financial Reporting Standards (IFRS) prior to 2007. These results suggest that accounting standards (AS) convergence can improve the comparability of accounting information between China and other countries that have adopted IFRS. Moreover, we find that the impact of accounting standards (AS) convergence on state-owned enterprise (SOE) acquirers is weak. These findings demonstrate that accounting standards (AS) convergence can facilitate Chinese firms’ overseas M&As by improving the comparability of accounting information between China and target countries.     

The impact of FIFA’s official announcements on the stock market of Qatar: The case of the 2022 World Cup

This study examines the impact of the FIFA’s official announcements on Doha Stock Exchange (DSE) of Qatar with respect to the 2022 World Cup. Using the abnormal unsystematic volatility method of Hilliard and Savickas (2002), our empirical findings reveal that the DSE market is sensitive to FIFA’s announcements about the 2022 World Cup. We find that four out of six FIFA announcements act as primary drivers to the DSE market volatility. The significant reactions of the DSE market to these announcements unveil the investors’ sentiments about the fate of the governmental and private expenditures on medium- and long-term projects undertaken in anticipation of hosting the 2022 World Cup. The results have some implications to investors in this newly emerging market related to this global sporting event. Any future announcements, good or bad, are likely to impact share prices in DSE market and trigger portfolio reallocation by local and international investors, leading to increased volatility.     

The impact of SEC investigations and accounting and auditing enforcement releases on firms’ cost of equity capital

I study the impact of an SEC investigation (as captured by accounting and auditing enforcement releases) on a firm’s cost of equity capital. AAERs are often used in accounting literature as a proxy for fraudulent financial reporting. Fraudulent financial reporting should lead to an increase in cost of equity capital as a firm’s future cash flows become less certain. Overall, this study provides evidence of changes in cost of equity capital for firms targeted by an SEC AAER on the date the investigation is first made public.     

The impact of multi-dimensional corporate transparency on us firms’ credit ratings and cost of capital

This study examines corporate transparency in the US market for a sample of 319 S&P 500 firms. We examine whether a number of disparate measures of corporate transparency used by other researchers are distinct, cohere as measures of a single factor of corporate transparency, or capture multiple different dimensions. Next, we begin to examine the impact of corporate transparency, conceived in the broadest sense, and not limited to financial reporting, on US firms. We develop a model of corporate transparency based on a broad definition and framework proposed by Bushman, Piotrowski and Smith, which we extend in several ways, and then study the effect of corporate transparency on cost of debt, credit rating, and cost of equity. First, we find that corporate transparency is neither a unitary concept nor merely an ambiguous term for multiple distinct concepts: factor analysis of ten corporate transparency variables identifies four independent underlying dimensions: public disclosure information, intermediary information, earnings quality information and insider information. Second, we find that corporate transparency has significant power to explain cross-sectional variation in credit rating and cost of capital. More specifically, (i) credit rating, cost of debt, and beta are significantly associated with disclosure information transparency; (ii) credit rating, cost of equity, and beta are significantly associated with intermediary information transparency; and (iii) cost of equity and beta are significantly associated with insider information transparency. Our findings offer a more comprehensive evaluation of corporate transparency than prior studies, and we demonstrate direct economic implications for both US firms and markets.     

The impact of risk-based regulation on European insurers’ investment strategy

This paper examines the impact of Solvency II on the attainability of target returns, the attainability of portfolio efficiency and the asset allocation of European insurers. I start with a brief introduction to the Solvency II Directive, focusing on the rules for calculating solvency capital requirements (SCR) according to the Solvency II standard formula. The subsequent numerical analysis includes several portfolio optimizations focusing on six relevant asset classes for the 1993–2017 time period. I derive optimal portfolios with respect to the Solvency II capital requirements, with respect to conventional risk measures, and I combine both optimization problems. My results show that the capital requirements according to Solvency II are not adequately calibrated. Nevertheless, due to a solid equity base, the majority of European insurers are still able to attain high target returns and mean-variance-efficiency. However, undercapitalized insurers are not able to hold risk-optimal allocations of equities, real estate and hedge funds any longer. In an environment of very low interest rates, these insurers may also face difficulties obtaining their target returns. To the best of my knowledge, this is the first paper to explicitly incorporate the solvency capital requirement as a numerical constraint into the insurers’ portfolio optimization problem. As a result, my approach first provides insights about the attainable target return and the asset weights as a direct function of insurers’ equity.     

Who likes jargon? The joint effect of jargon type and industry knowledge on investors’ judgments

We experimentally investigate how jargon affects investment willingness for investors with different industry knowledge, and whether such effects vary with good or bad jargon. We find that for investors without industry knowledge, jargon decreases investment willingness because it decreases understanding. However, for investors with some but low industry knowledge, jargon increases investment willingness because it increases perceived product premium. Such effects exist whether good or bad jargon is used. Finally, investors with high industry knowledge differentiate between good and bad jargon, and reduce investment willingness only when bad jargon is used. These findings have implications for regulators, managers, and investors.     

The joint impact of accountability and transparency on managers’ reporting choices and owners’ reaction to those choices

We report the results of an experiment designed to investigate the fundamental conflict of interest between managers and owners in a financial reporting setting. In our setting, owners seek accurate reports of financial performance whereas managers have incentives to distort performance reports in a self-serving fashion. Regulatory responses to such conflicts often call for improved disclosure, including more accountability and transparency (e.g., Sarbanes-Oxley Act and Dodd-Frank Act). We use the term accountability to imply answerability—wherein managers are required to reconcile the difference between reported and actual performance. We predict and find that when managers’ incentives are transparently disclosed, accountability does not rein in managers’ opportunistic reporting. By comparison, when managers’ incentives are less transparently disclosed (opaque), accountability dampens managers’ propensity to misreport. However, this reduction in opportunistic reporting due to accountability comes about because managers offset higher reporting bias in compensation periods with lower reporting bias in other periods. Therefore, not only are the benefits of accountability restricted to the setting where managers’ incentives are opaque, but the reduced reporting bias might arise due to window-dressing. Although managers seem to care enough about accountability to engage in window-dressing, financial incentives seem to dominate accountability, at least in our setting. We also find that managers’ payoffs are higher when their incentives are opaque, but owners’ payoffs are invariant regardless of whether incentives are transparent or opaque. Our analyses suggest that owners may be relying on accountability to curb opportunistic reporting by managers—a reliance that may be misplaced. Our findings have implications for regulatory responses aimed at addressing conflicts of interest.     

The impact of directors’ and officers’ insurance on audit pricing: Evidence from UK companies

This paper examines the impact of directors’ and officers’ (D&O) insurance on audit pricing in a large sample of UK companies. The existence of D&O insurance is expected to exert a dual impact on auditors’ pricing decisions. The presence of an additional source of funds to satisfy stakeholder claims in the event of audit client failure suggests that audit fees in insured companies should be lower. Alternatively, recent research has identified a positive link between the presence of D&O insurance and a number of characteristics traditionally associated with more expensive audits. The main objective of this study is to ascertain which of these influences pre-dominates. Analysing a sample of 753 UK listed companies in the early 1990s, when companies were obliged to disclose the presence of D&O insurance, this study shows that D&O insurance is associated with higher audit fees. It also confirms that insured companies are larger, more complex and present a greater audit risk (using a range of measures) than uninsured companies. Further analysis suggests that the impact of D&O insurance on audit fees may be influenced by company size, auditor size, and the extent of non-executive presence on the company's board.