Audit‐Firm Tenure and the Quality of Financial Reports*

This study examines whether the length of the relationship between a company and an audit firm (audit‐firm tenure) is associated with financial‐reporting quality. Using two proxies for financial‐reporting quality and a sample of Big 6 clients matched on industry and size, we find that relative to medium audit‐firm tenures of four to eight years, short audit‐firm tenures of two to three years are associated with lower‐quality financial reports. In contrast, we find no evidence of reduced financial‐reporting quality for longer audit‐firm tenures of nine or more years. Overall, our results provide empirical evidence pertinent to the recurring debate regarding mandatory audit‐firm rotation — a debate that has, to date, relied on anecdotal evidence and isolated cases.     

The Influence of Nonaudit Service Revenues and Client Pressure on External Auditors' Decisions to Rely on Internal Audit*

This paper investigates how external auditor provision of significant nonaudit services and client pressure to use the work of internal audit influence external auditors' use of internal auditors' work. More specifically, we study how external audit evidence gathering choices are influenced by nonaudit fees and client pressure. Our research is motivated by an observation that the magnitude of nonaudit services provided to audit clients introduces the risk that client management may leverage its position with the external auditor and potentially affect the audit process. We address this issue by extending prior research and focusing on the importance of various explanatory variables, including nonaudit service revenues, client pressure, internal audit quality, and coordination, to the external auditor's decision to rely on the work of internal audit. We use data primarily obtained through surveys completed by internal and external auditors. The survey responses represent 74 separate audit engagements. Our findings reveal that when significant nonaudit services are not provided to a client, internal audit quality and the level of internal‐external auditor coordination positively affect auditors' internal audit reliance decisions. However, when the auditor provides significant nonaudit services to the client, internal audit quality and the extent of internal ‐ external auditor coordination do not significantly affect auditors' reliance decisions. Furthermore, when significant nonaudit services are provided, client pressure significantly increases the extent of internal audit reliance. Thus, external auditors appear to be more affected by client pressure and less concerned about internal audit quality and coordination when making internal audit reliance decisions at clients for whom significant nonaudit services are also provided.     

Competition and Big 6 Brand Name Reputation: Evidence from the Ontario Municipal Audit Market*

The 1991 amendment to the auditor appointment requirement of section 86 of the Ontario Municipal Act removes certain barriers to entry into the Ontario municipal audit market. The purpose of this study is to provide evidence that the amendment has enhanced competition in this market. The results indicate that there is a general reduction in the real municipal audit fees compared with the pre‐amendment levels, and that the market has become more contestable following the amendment. Notwithstanding the heightened competition, the Big 6 audit firms continue to command audit fee premiums over the non‐Big 6 audit firms. This suggests that Big 6 audit fee premiums possibly reflect brand name reputation rather than monopoly/oligopoly rents.     

The Sarbanes‐Oxley Act of 2002 and Capital‐Market Behavior: Early Evidence*

The Sarbanes‐Oxley Act of 2002 (“the Act”) was enacted in response to numerous corporate and accounting scandals. It aims to reinforce corporate accountability and professional responsibility in order to restore investor confidence in corporate America. This study examines the capital‐market reaction to the Act and finds a positive (negative) abnormal return at the time of several legislative events that increased (decreased) the likelihood of the passage of the Act. We interpret this finding as evidence supporting the notion that the Act is wealth‐increasing in the sense that its induced benefits significantly outweigh its imposed compliance costs. We also find that the market reaction is more positive for firms that are more compliant with the provisions of the Act prior to its enactment.     

The Stock Market Reaction to the Reserve Quantity Disclosures of U.S. Oil and Gas Producers*

Abstract. The purpose of this study is to examine the information content of the components of the annual change in the quantity of proved reserves reported by U.S oil and gas (O&G) producers. In particular, it investigates the contemporaneous association between the unexpected portions of discoveries, production, net purchases, and revisions of prior quantity estimates and unexpected security returns during the release week of the 1984 to 1988 annual reports or forms 10-K of these firms. The empirical results suggest that (1) disaggregating the net change in the quantity of proved reserves into its components conveys additional information beyond that contained in the net change in total proved reserves itself, (2) discoveries are highly associated with security returns even after controlling for production, and (3) revisions, net purchases, and production have a modest influence on security returns. The findings of this study are interpreted within the context of the economic environment of the O&G industry during the test period. Résumé. L'auteur examine le contenu en information des éléments du changement annuel de la quantité de réserves prouvées dont font état les producteurs pétroliers et gaziers des États-Unis. Il s'intéresse en particulier, pour la période 1984–1988, à l'association que l'on établit maintenant entre, d'une part, la portion inattendue des découvertes, la production, les achats nets et la révision des estimations antérieures de quantité et, d'autre part, les rendements imprévus des titres au cours de la semaine de publication des rapports annuels ou des formulaires 10-K des entreprises. Les résultats empiriques donnent à penser que (1) la décomposition en ses différents éléments du changement net dans la quantité des réserves prouvées livre davantage d'information que le changement net global lui-même, (2) les découvertes sont associées de très près aux rendements des titres, même une fois contrôlée la variable production, et (3) les révisions, les achats nets et la production ont une modeste influence sur les rendements des titres. Les résultats de cette étude sont interprétés dans le contexte économique du secteur pétrolier et gazier au cours de la période d'analyse.     

The relationship between U.S. and eurodollar interest rates: Evidence from the futures market

The Relationship between U.S. and Eurodollar Interest Rates: Evidence from the Futures Market. — This paper analyzes the lead/lag relationship in the Granger-cause sense between U.S. and Eurodollar interest rates in futures contracts. It shows that yields on U.S. Treasury bill and Eurodollar futures are cointegrated with the TED spread as the cointegrating vector for the period January 1987–July 1993. The error correction model indicates that the U.S. market leads the Eurodollar market. However, the presence of this unidirectional causality does not improve the forecasting of Eurodollar yields. Other evidence given in the paper suggests that the hypothesis of contemporaneous relationships, at least on daily base, is not rejected.     

A Reexamination of Behavior in Experimental Audit Markets: The Effects of Moral Reasoning and Economic Incentives on Auditor Reporting and Fees*

This study uses experimental markets to investigate how moral reasoning influences auditor reporting under different levels of economic incentives. In each multiperiod market, auditor subjects could either (1) misreport low observed outcomes as high and thereby reap economic advantages at the expense of third‐party investors, or (2) truthfully report low observed outcomes as low but thereby forgo the economic advantages of misreporting. We extend the Calegari, Schatzberg, and Sevcik 1998 experimental‐markets setting to incorporate moral reasoning, and test hypotheses based on the economic model of Magee and Tseng 1990 and the neo‐Kohlbergian moral reasoning framework of Rest, Narvaez, Bebeau, and Thoma 1999. We document a significant effect of moral reasoning on auditor behavior. Specifically, we find that misreporting and premium fees are more likely with higher than with lower moral reasoning subjects, and the moral reasoning effect diminishes as economic penalties increase in the market. These findings provide valuable insights for specifying the determinants of auditor misreporting, the observable behaviors that signal its existence, and the institutions that can prevent its occurrence in the market. We conclude that the relation between moral reasoning and behavior is more complex than commonly assumed in the accounting literature, and identify directions for future research.     

The Effect of Limited Liability on the Informativeness of Earnings: Evidence from the Stock and Bond Markets*

Previous empirical research on the informativeness of earnings has focused on stockholders, and has not examined differences in earnings' informativeness for stockholders and bondholders. Because stockholders are residual claimants and bondholders are fixed claimants, the informativeness of earnings should differ for these two types of investors. When a firm's default risk is low, changes in its financial condition should be of limited relevance to bondholders, but should be relevant to stockholders. In contrast, as the likelihood of financial distress increases, stockholders' limited liability allows them to abandon the firm to the bondholders (Fischer and Verrecchia 1997). Accordingly, as a firm's default risk increases, changes in its financial condition should be increasingly important to bondholders and less important to shareholders. Because earnings provide information on firm value, the stock return-earnings association should decrease as the firm's financial strength declines, while the bond return-earnings association should increase. We use two measures of a firm's financial strength: the firm's bond rating and its reporting of a loss. Consistent with our hypotheses, we find that the association between stock returns and changes in annual earnings decreases as bond ratings decline, while the association between bond returns and changes in annual earnings increases. These results suggest that as the company's financial condition deteriorates, earnings become less relevant for stock valuation and more relevant for bond valuation. When we partition firms based on their loss status, we find a stronger association between stock returns and annual earnings changes for firms with positive earnings (profit firms) than for firms with losses, consistent with earlier studies. In contrast, we find that the association between bond returns and earnings changes is greater for loss firms than for profit firms. These results suggest that losses reduce the informativeness of earnings for stockholders but increase informativeness for bondholders, suggesting that investors view losses as indicating increased credit risk.     

日美经济关系的失衡及其教训

20世纪50年代以来,随着日本经济的快速发展,日美两国之间出现严重的经济摩擦。日美经济关系从不断升级的贸易摩擦转为金融领域的摩擦,日本被动地调整汇率和货币金融政策,并引发国内经济萧条。日美经济关系失衡的根本原因在于国际与日美国内金融领域的深刻变化。为此,中国应汲取日本的历史教训,及时调整经济、金融的发展战略。     

The economics of conditional heteroskedasticity: Evidence from canadian and U.S. stock and futures markets

This paper provides insight into the sources of time variation and persistence in volatility by presenting new evidence concerning the price behavior of three index futures contracts and associated stock price indexes (the New York Stock Exchange Composite index, Standard and Poor's 500 index, and Toronto 35 index). Although persistence in the second moments of stock returns distribution is widely documented, the economic explanation for generalized autoregressive conditional heteroskedasticity is not established. Cross-sectional differences in measured persistence indicate that market characteristics thought to impede information flows may not play a significant role in explaining generalized autoregressive conditional heteroskedasticity effects.     

The Role of Race and Birth Place in Welfare Usage among Comparable Women: Evidence from the U.S.

There is evidence that women are more likely to live in poverty than men. Given the fact that the poor are more likely to use welfare, it becomes useful to consider welfare usage among women. A-priori welfare programs are set up in such a way that welfare usage should be based primarily on economic needs and health concerns. However, it is possible that an individual’s experiences could affect their perception and inclination for using government assistance. In this scenario, differences in welfare usage will exist for individuals with similar characteristics but different experiences. We explore this possibility among women and investigate if race/ethnicity and birthplace still have a role to play in the decision to use welfare even after controlling for income, health and other demographic factors like employment and household size, which are typical predictors of welfare usage. We find that race does not matter for welfare usage among comparable women. In addition, we do not find significant differences in welfare usage among women based on birthplace—suggesting that comparable naturalized and native born women share similar inclination for welfare.     

The Circumstances and Legal Consequences of Non‐GAAP Reporting: Evidence from Restatements*

Our study examines the circumstances of non‐GAAP financial reporting by 492 U.S. companies that announced restatements from 1995 to 1999. We focus on income statements to analyze the occurrence and resolution of litigation over restatements and explore the role of accounting items in bringing and resolving this litigation. We provide evidence on the pervasiveness of accounting misstatements, describe their nature, and show how, if at all, they affect litigation. We assess the nature of restatements by determining whether regular, recurring earnings from primary operations (core) or other components of earnings (noncore) are misstated, and we assess their pervasiveness by estimating the number of primary accounts misstated. In our sample, companies with core restatements have higher frequencies of intentional misstatements (fraud) and subsequent bankruptcy or delisting. Likewise, these companies have, on average, more material misstatements, more negative security price reactions to restatement announcements, and more negative security price changes over the six months preceding and following restatement announcements. However, controlling for these and other factors, we find a significant association between accounting items and litigation, whether occurrences or resolutions. Specifically, core restatements — driven primarily by misstatements of revenue, a component of core earnings — and more pervasive restatements each play a role, while misstatements of noncore earnings alone do not.     

The Impact of Legislative Tenure and Seniority on General Election Success: Econometric Evidence from U.S. House Races

The last four election-cycles in the U.S. House of Representatives (2004–2010) witnessed two shifts in political party control of that legislative body—from the Republicans to the Democrats in 2006 and then back to the Republicans in 2010. Nevertheless, U.S. House incumbents of both parties running for re-election tended to enjoy a sizeable advantage over their general-election challengers during the period. The advantage is even greater for incumbents who are members of the leadership, key committees, or have lengthy tenure. Our results show that, ceteris paribus, membership in the House leadership is worth on average 6.8 percentage points towards the incumbent’s expected vote-share, and that membership in either of the two top committees is worth an additional 1.3 such percentage points. A ten-term incumbent can expect another 2.0 percentage points of vote share. Lastly, our results also indicate the existence of a wave effect favoring Democratic incumbents in 2006, and a slightly smaller wave effect favoring Republican incumbents in 2010.     

中国、俄罗斯与美国证券市场的联动效应——来自次贷危机爆发后三阶段的证据

本文采用时间序列多元GARCH模型,研究中国、俄罗斯与美国证券市场指数收益率波动之间的内生性联动效应,重点分析美国次贷危机发生后的三个主要阶段,这种联动效应的变化特征。并提出中国和俄罗斯规避可能风险的对策。结果显示:(1)若中国与俄罗斯加强证券市场的合作,形成比较稳定的风险联动机制,美国金融危机所引起的证券市场波动就不会对中国、俄罗斯市场产生传导影响。反之,(2)若中国和俄罗斯市场丧失了风险联动机制,金融危机对俄罗斯证券市场的影响就会变得非常显著,同时也会提高对中国证券市场风险传导的显著性。(3)美国证券市场的波动幅度呈现明显的上升趋势,风险在逐渐集聚,中俄两国必须引起高度关注。     

The Familiarity with and Perceived Quality of Accounting Journals: Views of Senior Accounting Faculty in Leading U.S. MBA Programs*

Abstract. Determining familiarity with and evaluating quality of accounting journals are of interest to various parties in accounting academia. In recent years, the number of accounting journals has grown, and many special-interest subgroups have arisen. This study surveys senior faculty at Business Week's “best 40 MBA programs” to determine their familiarity with and quality perceptions of 44 accounting journals. As to familiarity, 5 journals were nearly universally known, and a total of 15 had wide recognition. Financial, managerial, and auditing faculty exhibited similar familiarity patterns, while tax faculty had a somewhat different pattern. As to quality perceptions, relatively few journals achieved high quality evaluations. There was, however, general consensus across the different subject-area faculty as to the top journals. Special consideration was given to the newer (post-1980) journals. Six of the 19 newer journals in the study achieved high familiarity scores, and 3 achieved high quality evaluations. Résumé. Le degré de connaissance des publications comptables et la perception de la qualité de ces publications sont des sujets qui intéressent divers membres de la communauté universitaire ?uvrant dans le domaine comptable. Depuis quelques années, le nombre des publications comptables a augmenté, et maints sous-groupes d'intérêt particuliers ont vu le jour. Les auteurs ont réalisé un sondage auprès de professeurs d'expérience enseignant dans le cadre des quarante meilleurs programmes MBA répertoriés par Business Week, afin de déterminer dans quelle mesure ils connaissaient 44 publications comptables et quelle était leur perception de la qualité de ces publications. En ce qui a trait à la connaissance, 5 publications sont presque universellement connues et 15 au total ont un grand rayonnement. Les professeurs de finance, de gestion et de vérification ont affiché des profils de connaissance analogues, tandis que les professeurs de fiscalité présentaient un profil quelque peu différent. Quant à la perception, de la qualité, relativement peu de publications ont obtenu la cote ? qualité élevée ?. L'on a cependant observé un consensus général chez les professeurs des différentes disciplines ers ce qui a trait aux publications de prestige. Une attention particulière a été accordée aux publications plus récentes (postérieures à 1980). Six des 19 publications plus récentes de l'étude ont obtenu une cote élevée relativement au degré de connaissance, et 3 d'entre elles ont obtenu une cote élevée relativement à la qualité.     

The Effects of a Change in Market Abuse Regulation on Abnormal Returns and Volumes: Evidence from the Amsterdam Stock Market

The Market Abuse Directive came into effect on 1 October 2005. One of its purposes is to reduce illegal insider trading and leakage of information prior to official releases by increasing penalties. Applying an event study approach to a dataset of almost 5,000 corporate news announcements, the analysis reveals that the information value of announcements, measured by the announcement day abnormal return and abnormal volume, is not significantly different after the new regulation than it was before although the number of releases has increased significantly. Trading suspicious of illegal insider trading and leakage of information, measured in terms of cumulative average abnormal returns and volumes for the 30 days prior to the news announcement, has significantly declined for small capitalization firms, for announcements containing information about alliances and mergers and acquisitions and for firms in the technology sector.