Are all non-GAAP disclosures created equal?

Publicly traded companies in the U.S. must prepare financial statements in accordance with the requirements of U.S. Generally Accepted Accounting Principles (U.S. GAAP). However, many companies also report non-GAAP measures—those calculated outside the requirements of U.S. GAAP—in their earnings announcements, annual reports, and SEC filings. The SEC began regulating the release of non-GAAP measures in 2003 and has expressed ongoing concern regarding firms’ disclosure of the same, but the use of non-GAAP measures continued to increase nonetheless. A 2018 Audit Analytics report found that in 2006, 76% of SEC filers included non-GAAP measures, but in 2017 that percentage rose to 96%. This installment of Accounting Matters provides an overview of the SEC regulations regarding non-GAAP measures, examines how investors react to non-GAAP disclosures, and provides guidance regarding how companies can avoid receiving a non-GAAP disclosure comment letter from the SEC.     

Is it U.S. GAAP or IFRS? Understanding how R&D costs affect ratio analysis

While financial reporting standards under U.S. GAAP and IFRS are fundamentally similar, differences do exist that may affect our analysis of company financial statements. This is particularly true when comparing a U.S. company following U.S. GAAP to a firm that uses IFRS. To illustrate, we compare research and development (R&D) accounting methods under both sets of standards and illustrate how they affect the analysis of financial results of firms in a specific industry—automotive manufacturers. Our results provide insight into settings in which differences in R&D accounting may have the greatest impact on financial analysis.     

利率市场化与资产证券化兴起：来自美国经验的启示

资产证券化是20世纪最重要的金融产品创新之一,历经四十余年发展资产证券化产品日渐成熟．规模可与公司债市场匹敌。通过系统梳理美国资产证券化市场的发展脉络可以看出：资产证券化是美国支持房地产融资、解决贷款资金来源的盘活存量之道;利率市场化是资产证券化兴起的催化剂：信托法律关系的创新完善是美国资产证券化大规模发展的必要条件;投资银行持续创新产品设计使其更能为投资者接受。这为中国金融市场的发展提供了参考。     

Misleading Disclosure of Pro Forma Earnings: An Empirical Examination

The Sarbanes–Oxley (SOX) Act was passed in 2002 in response to various instances of corporate malfeasance. The Act, designed to protect investors, led to wide-ranging regulation over various actions of managers, auditors and investment analysts. Part of SOX, and the focus of this study, targeted the disclosure by firms of “pro forma” earnings, an alternate (from GAAP earnings), flexible and unaudited measure of firm performance. Specifically, SOX directed the Securities and Exchange Commission (SEC) to craft regulation which would reduce – and preferably eliminate – any pro forma earnings disclosure which might be “misleading”. Examining earnings press releases over a 3-year period, this study addresses three questions. Were firms disclosing pro forma in a potentially misleading manner, what was the nature of this potentially misleading disclosure, and did SOX affect the disclosure practices? We find the following. In 2001 (prior to SOX), 53 firms – over 10% of all U.S. S&;P 500 firms – were disclosing pro forma earnings in a potentially misleading manner. This was being done most commonly by using traditional GAAP terminology (e.g., “net income”) in the press release headline to describe what was later in the press release revealed to be a pro forma amount (i.e., “net income excluding special items”). By 2003 (subsequent to the SEC regulation), potentially misleading disclosure practices were seen in less than 1% of the earnings press releases of S&;P 500 firms. This significant reduction suggests that managers, prior to the regulation, were either careless in their pro forma reporting practice, or were intentionally – and unethically – attempting to mislead investors. Either way, we conclude that the SEC regulation was both necessary and effective.     

Determinants of the round-to-round returns to pre-IPO venture capital investments in U.S. biotechnology companies

I propose that pre-IPO venture-backed biotech companies offer a useful new setting through which to evaluate the relative merits of theories for why firm size and book-to-market explain variation in stock returns. This is because pre-IPO biotech firms have large and rapidly evolving growth options relative to assets-in-place. Such attributes align closely with the key features of the model by Berk et al. [Berk, J.B., Green, R.C., Naik, V., 1999. Optimal investment, growth options, and security returns. Journal of Finance 54 (5), 1553–1607] of the endogenous relations between growth options, optimal investment actions and expected equity returns, where firm size and book-to-market emerge as sufficient statistics for the aggregate risk of a firm's assets-in-place. Using venture capital investments in pre-IPO U.S. biotech companies during 1992–2001, I find that equity returns between financing rounds (‘round-to-round’ returns) are reliably negatively related to firm size and positively related to book-to-market ratios. I interpret these results as being most consistent with the theory of Berk et al., and less consistent with alternative explanations such as financial distress, behaviorally biased investors or data snooping.     

Advertising Spending Efficiency of Beauty-Care Product Companies: Comparison Between Local Companies and Multinational Companies in the U.S. Market

ABSTRACT

In this study, the authors apply data envelopment analysis (DEA) to evaluate the financial efficiency of U.S. beauty-care companies and foreign companies based on their media advertising expenditures in eight key media outlets (i.e., magazines, newspapers, outdoor, network TV, spot TV, syndication TV, cable TV, and radio) and their revenues in the U.S. market. The analyses revealed that 47.4% of the companies examined advertised efficiently. Companies that advertised inefficiently could save, on average, 75% of their advertising spending. The results also indicated that although U.S. companies are more efficient overall than are non-U.S. companies in terms of advertising spending, the competitiveness of non-U.S. companies should not be underestimated because some of them advertised efficiently (e.g., Kao Corporation from Japan) or almost efficiently.     

上市公司盈余质量评价及影响因素研究

盈余质量是公司财务报告中盈余信息相关性和可靠性的表现。尽管一家公司的财务决策并不只依赖盈余质量一个标准,但它已逐渐成为投资者掌握公司价值的有效工具。随着证券市场参与主体的日渐成熟,上市公司的盈余质量必将受到各方的关注,对公司的经理人而言,通过盈余管理行为美化公司的账面盈余,会降低盈余的质量,不一定有利于公司的股价;对投资者而言,不能只看到盈余的表面数据,更要对深层次的盈余质量加以关注,才能做出正确的投资决策。     

Financialization and the non‐financial corporation: An investigation of firm‐level investment behavior in the United States

Changes in the portfolio and financing behavior of non‐financial corporations (NFCs) over the post‐1970 period in the U.S. economy point to the financialization of the NFC and raise the question of accompanying changes in fixed investment behavior. Using a firm‐level panel, this article econometrically investigates the relationship between financialization and investment, exploring the implications of changes in financing behavior, increasingly entrenched shareholder value norms and rising firm‐level demand volatility for NFC investment in the U.S. economy between 1971 and 2013. Shareholder value orientation is, in particular, identified as a characteristic of the post‐1970 U.S. economy associated with a statistically and economically significant decline in NFC investment rates. The stock of financial assets, conversely, is found to be a positive correlate of firm investment. The analysis also highlights key differences by firm size. In particular, shareholder value norms are found to primarily influence the investment behavior of large NFCs, while rising volatility most substantially impacts small firms.     

美国会计准则体系的重大变革及启示

安然事件及近年来的金融危机暴露出美国会计准则体系结构混乱、难以检索、难以应用的缺陷,因此美国对其会计准则体系作出重大变革,重整公认会计原则(GAAP)结构,正式启用,从根本上消除了美国以往由多个机构以多种形式发布多种准则文献的状况.这一举措将极大改善美国会计准则的质量,减少"准则超载"现象.降低准则复杂性,并推动美国会计准则与国际准则的趋同,最终将对各国会计准则的制定形式、格局和走向产生重大影响.     

Influence of dividend tax policy tied to investment horizon on stock price stability: Evidence from the 2015 dividend tax reform in China

We examine how the dividend tax cut policy tied to the investment horizon enforced on September 8, 2015, influences stock price stability in China's A-share market. As the new dividend tax policy waives the tax on cash dividends for investors holding a stock for more than a year, it encourages long-term investment behavior. From 2013 to 2017, we find that stock turnover, return volatility, and turnover volatility decrease after the policy enforcement, especially for stocks with high dividend yields. This result shows that dividend tax reforms increase investors' stock investment horizons and help stabilize the market. However, our findings demonstrate that stock crash risk increases after policy enforcement. Further analysis shows that earnings management through real activities manipulation for stocks with a higher dividend yield contributes to an increase in stock crash risk. Therefore, one externality of the dividend tax cut policy tied to the investment horizon is that top managers of firms with a higher dividend yield may take advantage of investors' passive longer-term investment behavior and engage in more earnings management. This result suggests that regulatory agencies should pay attention to top managers' earnings management behavior after enacting policies that encourage long-term investment.     

Regulatory procedures,investment opportunities and stock valuation

Electric utilities differ in their accounting procedures. By regulatory commission directive some use normalization and some use flow through to arrive at their earnings figures. Because regulation is on an allowed return on investment standard these reported earnings are relevant for stock valuation. Any variation in price/earnings ratios between flow through and normalizing companies therefore must be explained by differences in risk to equity investors, differences in investment opportunities, or market inefficiency involving erroneous restatement of earnings. Empirical work demonstrates that there is a difference in price/earnings ratios. Firms that normalize enjoy a premium. The evidence also indicates that the premium is not explained by risk difference. Because the perverse form of market inefficiency required as an explanation seems unlikely, the most reasonable conclusion is that the premium relates to investment opportunities associated with regulatory climate. If so it promises no excess return to stock buyers because it is already impounded in stock price.     

On Risk and Return in Asia-Pacific Stock Markets

ABSTRACT

This study evaluates the recent performance of stocks of major industry groups in the Asia-Pacific region. The objective of the study is to guide international investors who are exploring the possibility of investing in this region but are unsure of which specific industries to invest in. Risk-adjusted stock returns (expressed in U.S. dollars) are calculated for each industry group and sub-group in the region. Based on stock performance, recommendations are made for inclusion of specific industries in an Asia-Pacific investment portfolio.     

公允价值会计信息对银行贷款契约有用吗——基于上市公司数据的实证检验

本文以2007-2009年上市公司财务会计信息为样本,实证检验新会计准则引入的公允价值会计信息是否以及如何影响公司获取银行贷款,以探讨公允价值会计改革是否有利于提高会计信息的债务契约有用性。研究结果发现,银行贷款与公司核心盈利能力、偿债能力和贷款需求显著相关,企业取得的短期贷款规模与公允价值变动损益相关,但显著水平较低;长期贷款与公允价值变动损益信息无显著相关性;银行能够区分公允价值变动损失与资产减值损失稳定性不同。     

China's Soybean Imports Will Be Decreased 2009

In September 2008, Lehman Brothers＇ bankruptcy set off a global financial ＂tsunami＂, with the five major U.S. investment banks fell one after another： Bear .Stearns dosed down as early as in March, Lehman＇s bankruptcy, Merrill Lynch being acquired, Goldman Sachs and Morgan Stanley restructuring of commercial banks; the process of United States＇ ＂nationalization＂ was forced to speed up, with Fannie Mae, Freddie Mac and the American International Group （AIG） being taken over by the government; bank insolvency and reorganization were in gradual escalation, with Washington Mutual Bank de- claring bankruptcy and Wells Fargo purchasing Wachovia; starting in October, for more than a month＇s time, global stock market encountered a rare crash, with the major stock indexes such as Dow Jones, Nikkei and European indexes fell more than 20%. The top three declines in the stock market of the year are Iceland, Russia and China, with a decline of 90%, 78% and 73% respectively. This kind of collapse aroused great turbulence in the world economy and had badly shaken the confidence of the market. Fear was filled everywhere.     

Ethics Failures in Corporate Financial Reporting

Fraudulent financial reporting, financial statements with errors so material as to require restatement, and biased reporting marred by defects such as managed earnings have plagued financial reporting in many countries in recent years. All of those failures are ethics failures that represent breaches of fiduciary duties by individuals who accepted responsibilities but did not fulfill them. The financial reporting system practiced in America is viewed by the parties involved in it as generally satisfactory. However, according to another view, the interests of those primarily and secondarily responsible for those reports conflict with the interests of the intended beneficiaries, or users, of the corporate financial statements. A more realistic view of the actual operation of that reporting system shows that it is fundamentally flawed. Primary responsibility for failures rests with top management and financial management of the reporting corporation who are so strongly motivated to render favorable reports on their stewardship that they neglect their fiduciary responsibilities to investors. Secondary responsibility falls on independent auditors who are so heavily influenced by enterprise management that they, too, fail in carrying out their responsibilities to users of the audited financial statements. Ethics compromises are also found in the performances of academic accountants and members of accounting standards-setting bodies. The conflict between managements interest in reporting its performance in a favorable light and investors interest in decision-useful financial information will always exist and require regulation. However, changes in those regulations and in the basic governance arrangements involving shareholders, management, and auditors could reduce the opportunities and temptations for failures in carrying out fiduciary responsibilities. Most importantly, the close relationships between auditors and management must be loosened in favor of closer relationships between auditors and investors.     

Two Worlds of Venture Capital: What Happened to U.S. and Dutch Early Stage Investment?

European attempts at imitation of U.S. venture capital have been less successful in stimulating high tech start-ups. Our analysis of the differences between Dutch and U.S. developments points at institutional and organizational differences as explanatory factors. Disappointing longer term performances of Dutch IPOs have caused the closure of the Dutch Parallelmarket. Indeterminate length of life of Dutch vc funds contributed to a loss of trust in early stage IPOs. The U.S. – in contrast – benefitted from contractually fixed length of life of venture capital funds. The U.S. share of early stage investment displayed a wave-like pattern, which is positively related to the number of IPOs and of vc firms. Interconnectedness and follow-on funds depress early stage investment.     

A Consumer Perspective of the Investment Services Market

Some thirty million American consumers pursue their financial objectives through individual participation in the stock market. They clearly view the stock market as a savings alternative which offers at least normal returns to persons outside the circle of professional investors. In the absence of data reflecting the performance of personal portfolios it is difficult to assess the validity of this view. However, as an initial step this paper evaluates the performance of the market servicing individual investors. The evidence indicates that noninstitutional investors have reason to question stock brokerage pricing, service and sales practices. Moreover on the basis of more than 1,000 sampled investment recommendations, it appears that investment publications directed at individual investors have failed to identify superior investment alternatives.     

Evans,W. A. Advertising Today and Tomorrow. Great Britain: George Allen and Unwin, 1974

Abstract

This study reports on developments in the international advertising agency business during the 1970s. Findings suggest that U.S. agencies remain the dominant force in international advertising in contrast to the declining performance of U.S. industry in other sectors. Specifically, American agencies have found faster growth in their overseas markets leading to continually larger shares of their total billings; there has been a growing concentration in the international business of U.S. agencies and in the industry internationally; and, the international experience of U.S. agencies has led to a growing penetration of foreign markets, to growth in productivity, and to increasing domestic market power. Results of the study indicate however, that U.S. agencies may be facing increasing challenges from non-U.S. agencies in the future; notably from the West European, Japanese, and some developing countries.     

Trade openness, investment instability and terms-of-trade volatility

In the presence of economies of scale in the investment technology, trade openness may have non-conventional effects on the level of investment, its cyclical behavior, and the volatility of the terms of trade. Trade openness may lead to boom-bust cycles of investment supported by self-fulfilling expectations. The economy may oscillate between ‘optimistic’ expectations, ‘good’ terms-of-trade and investment boom to ‘pessimistic’ expectations, ‘bad’ terms-of-trade and investment bust. We also suggest that the likelihood of such oscillations is higher for developing than for developed economies, because the former may typically incur higher setup costs of investment. This phenomenon may help to explain the excessive volatility of the terms of trade of developing countries, relative to industrial countries.     

What is business in America?

This paper, presented at the Conference on Value Issues in Business at Millsaps College, is divided into three parts. The first sketches the logic of the evolution of U.S. business and suggests reasons for its remarkable success. The second assesses the power of U.S. business in modern society, both from an economic and political perspective. The third attempts to formulate the underlying philosophy of U.S. business using ideals such as the work ethic, entrepreneurism, democracy, and equality. Some of these ideals, the paper suggests, are irreconcilable. Thomas J. Donaldson is Associate Professor of Philosophy at Loyola University of Chicago. His publications in the area of business ethics include numerous articles and two books, Ethical Issues in Business co-edited with Patricia Werhane, and Corporations and Morality.