Does auditor tenure influence the reporting of conservative earnings?

In this study, we examine the relation between auditor tenure and the reporting of conservative earnings. Using several measures of conservatism, we document a positive association between the conservatism in reported earnings and the length of the auditor–client relationship. We further document an increase in conservatism between short and medium tenure that does not deteriorate over long tenure. Collectively, the results imply lower conservatism for short auditor tenure, which suggests that mandating auditor rotation may have an adverse affect on the conservatism in reported earnings.     

Does board gender diversity affect corporate cash holdings?

This paper examines whether board gender diversity affects corporate cash holdings using S&P 1500 index firms in the US for the period 2006–2015. We document a significantly negative relationship between board gender diversity and cash holdings. We also find a strong negative effect of female independent directors consistent with monitoring function. Moreover, in accordance with the critical mass theory, we find a negative effect of female directors’ presence and voice on cash holdings. Our findings are robust to alternative econometric specifications, alternative measures of cash holdings and corporate governance, difference‐in‐differences, propensity score matching, and two‐stage least squares. This study offers useful insights into the current global debate on gender diversity and its implications for firms.     

How do corporate political connections influence financial reporting? A synthesis of the literature

A large stream of research has analyzed the effects of corporate political connections (CPCs) on firms, including first evidence on their effects on financial reporting behavior. However, the evidence so far is inconclusive, and attempts to explain the causality of effects on reporting are limited. In this article, we present the results of a systematic review of the literature on CPCs. We draw on findings in the accounting, finance, and economics literature and derive a framework that identifies four channels through which CPCs affect financial reporting. Our review of the literature suggests that effects of political connections tend to be more ambiguous than suggested by individual studies that often offer directional hypotheses. We also identify eight distinct types of political connectedness and discuss their interrelations and the proxies used in the literature to measure them.     

Do corporate governance mechanisms matter for cash holdings and firm value?

This paper examines the relationships between firm-level corporate governance mechanisms and cash holdings; along with their combined effects on firm value for a sample of firms listed in Singapore and Malaysia. Firms with less effective governance attributes are found to be more inclined to accumulate cash than those with more effective governance. The results support the flexibility hypothesis in that an increase in agency conflicts between managers and minority shareholders leads to entrenched managers having more discretion to hoard cash reserves. In addition, the incremental value of holding excess cash is shown to be negative for firms with a single leadership structure, firms with a pyramidal ownership structure, as well as family-controlled firms. The discounts associated with these firms may reflect investors’ recognition of the possibility of managerial entrenchment.     

Does financing influence the sensitivity of cash and investment to asset tangibility?

Research shows that asset tangibility substantially impacts firms’ cash levels and investment. Using the deregulation of equity issuance in the U.S. as an exogenous shock to access to equity markets, we investigate the influence of financing on the dependence of cash and investment on asset tangibility. We show that financing dampens the sensitivity of cash and investment to asset tangibility, and promotes investment and firm growth. Our results suggest that greater access to financing allows financially constrained firms to invest in productive projects that may otherwise not be taken up. This provides evidence that public firms even in well-developed financial markets such as the U.S. benefit from financial deregulation that removes barriers to external financing, shedding light on the role of financial markets in fostering growth.     

Has the value of cash increased over time?

We document a dramatic increase in the market valuation of cash holdings of US firms from 1988 to 2013. The value of one dollar of cash has increased by $0.019 per year during the period, indicating that shareholders place more value on cash in recent years. We also find that the increasing trend in cash value is driven mainly by increases in institutional shareholdings and accounting conservatism. We further decompose cash change into cash flows from operation (CFO) and cash flows from investing and financing activities, and find that CFO is a significant driver of the increasing trend in cash value.     

Grabbing hand or financial constraint mitigation effect? A reexamination of the relationship between institutional development and cash holdings

This study reexamines the impact of institutional development on corporate cash holdings. Our findings confirm that institutional development has a negative effect on corporate cash holdings, which may be partially explained by the financial constraint mitigation effect of institutional development. Our empirical evidence also shows that the corruption index, used as a proxy for the grabbing hand effect, does not mediate the negative effect of institutional development on corporate cash holdings. Furthermore, the impact of institutional development on corporate cash holdings is not significant for large firms and state-owned enterprises. These results are robust to different measures of cash holdings.     

The taxman cometh: Does tax uncertainty affect corporate cash holdings?

We examine whether firms hold more cash in the face of tax uncertainty. Because of gray areas in the tax law and aggressive tax avoidance, the total amount of tax that a firm will pay is uncertain at the time it files its returns. The tax authorities can challenge and disallow the firm’s tax positions, demanding additional cash tax payments. We hypothesize that firms facing greater tax uncertainty hold cash to satisfy these potential future demands. We find that both domestic firms and multinational firms hold larger cash balances when subject to greater tax uncertainty. In terms of economic significance, we find that the effect of tax uncertainty on cash holdings is comparable to that of repatriation taxes. Our evidence adds to knowledge about the real effects of tax avoidance and provides a tax-based precautionary explanation for why there is such wide variation in cash holdings across firms.     

When is cash king? International evidence on the value of cash across the business cycle

Review of Quantitative Finance and Accounting - Precautionary-motive theory implies that corporate cash holdings should be valued at a premium during recessions when uncertainty is high. However,...     

Does disaggregation of fair value information increase the value relevance of the fair value hierarchy?

In response to pressures from Congress, the SEC and investors, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurement. ASU 2010-06 mandates that firms provide disaggregated fair value information by class of financial instruments under each level of the fair value hierarchy. Using financial statements of publicly traded banks for the first quarters of 2009 and 2010, this study examines whether providing class-level information increases the value relevance of the fair value hierarchy. In support of our hypothesis, we find that fair value relevance increases under ASU 2010-06.     

Does stable ownership create value? Evidence from the global financial crisis

We investigate the value of stable ownership for a sample of European firms using the global financial crisis as an exogenous shock and pre-and post-crisis years as benchmark periods. Consistent with the argument that stable ownership allows managers to focus on the creation of long-term value, we find that stable ownership resulted in higher stock returns and a higher market-to-book ratio during the crisis. This positive effect of stable ownership was not reversed after the crisis. Stable institutional blockholdings were more valuable in countries with weaker investor protection. However, the positive effect does not apply to firms in which a family is the largest blockholder. Finally, we also find that ownership stability was associated with a higher level of investments, illustrating that stable ownership affects real corporate decisions.

     

Does financial reporting misconduct pay off even when discovered?

Review of Accounting Studies - Experts and popular belief contend that it pays to engage in financial misconduct. We hand-collect data on three subsamples of severe misconduct cases, between 2003...     

Does economic policy uncertainty raise corporate precautionary cash holdings? Evidence from China

Using China as the research setting, this paper investigates the relationship between economic policy uncertainty and corporate precautionary cash holdings. Empirical results show a U-shaped relation between economic policy uncertainty and corporate precautionary cash holdings. Empirical analysis, in terms of ownership structure, firm size, corporate competitiveness and geographical location, further shows that (i) the effects for economic policy uncertainty in both state-owned and non-state-owned enterprises are significant, but the effect is stronger for state-owned enterprises; (ii) such significant effect is also found more strongly in small and medium-sized enterprises and highly competitive enterprises; and (iii) the effects for eastern, central and western China are all statistically significant, but the effect is strongest for eastern China.     

‘Does accounting regulation matter?’: An experience of international financial reporting standards implementation in an emerging country

The study investigates the balance between accounting regulation and political influences in the implementation of International Financial Reporting Standards (IFRS) in an emerging country. Forty-three interviews were conducted, from 2010 to 2013. Additionally, enforcement documents from 1998 to 2013 in relation to IFRS were evaluated. The study reveals that lack of accounting regulatory framework and political influences are hindering the effective implementation of IFRS. Most importantly, regarding the balance between accounting regulation and political influences, a high level of political influences is adding more apprehension to the implementation of IFRS. The study contributes to the policymaking agenda of the IFRS implementation literature. The findings are relevant to other emerging economies. In particular, local and international policy makers should rethink the path of the global implementation of IFRS.     

Does reporting position affect the pricing of the volatility of comprehensive income?

The FASB changed the reporting policy for comprehensive income (CI) by issuing ASU No. 2011-05, which requires CI be reported in performance statements (i.e., either a single income statement with net income or a separate statement of CI following the income statement) rather than the previously allowed equity statements. We examine whether the change in reporting position of CI led to higher market pricing of CI volatility incremental to NI volatility (“incremental CI volatility”), as measured by the price-earnings relationship. We find that the market pricing of incremental CI volatility increased from the pre- to the post-ASU period for non-financial firms forced to change the reporting position of CI from equity to performance statements. The increase is more prominent for firms that switched to the income statement than for firms that switched to a separate statement of CI. Further, we find that the increased market pricing of incremental CI volatility translates into lower valuation weights on other comprehensive income.     

Does internal control over financial reporting really alleviate agency conflicts?

This study investigates whether internal control over financial reporting (ICFR) alleviates the managerial expropriation of corporate resources. We do this by examining the potential effects of material weaknesses in internal control on the values of corporate cash holdings and capital expenditures. Our findings suggest that ICFR facilitates the scrutiny and discipline of capital markets and thus alleviates the agency problems. Our results support the premise that high financial reporting quality impairs managers’ abilities to use corporate resources in a self‐serving manner.     

Do differences in financial reporting attributes impair the predictive ability of financial ratios for bankruptcy?

This study explores the effect of cross-sectional and time-series differences in financial reporting attributes on the predictive ability of financial ratios for bankruptcy. We identify proxies for discretion over financial reporting, the importance of intangible assets, the comprehensiveness of the accounting model and recognition of losses. Each of our proxies for financial reporting attributes is associated with financial ratios that are less informative in predicting bankruptcy. Furthermore, our time-series tests reveal a decline in the predictive ability of financial ratios for bankruptcy and document that this decline is associated with our measures of financial reporting attributes.     

Does economic policy uncertainty matter for financial reporting quality? Evidence from the United States

Review of Quantitative Finance and Accounting - We examine the effect of economic policy uncertainty (EPU) on the financial reporting quality of US firms over 1999–2015. We use accruals-based...     

Do management reports on internal control over financial reporting improve financial reporting?

Sections 404a and 404b of the Sarbanes–Oxley Act require management and external auditors, respectively, to report on the adequacy of a company’s internal control over financial reporting (ICFR). Larger public firms were first required to file a management report and have an external audit of ICFR in 2004. Smaller public firms were first required to file a management report on ICFR in 2007 but are exempt from the attestation requirement. We investigate the distinct effect of management reports on financial reporting quality. We find that management reports on ICFR improve reporting quality and demonstrate that there are financial reporting benefits from the management report requirement on its own without attestation.     

Does size matter? The influence of large clients on office-level auditor reporting decisions

Large clients create an economic dependence that may cause auditors to compromise their independence and report favorably to retain valuable clients. Economic dependence is measured as a client's size relative to the size of the office that contracts for the audit and issues the audit report. We find no evidence economic dependence causes Big Five auditors to report more favorably for larger clients in their offices. However, larger clients also pose greater litigation risk, and we do find that Big 5 auditors report more conservatively for larger clients, suggesting that reputation protection dominates auditor behavior.