Accounting‐Based Probabilistic Prediction of ROE,the Residual Income Valuation Model and the Assessment of Mispricing in the Swedish Stock Market

Using Swedish stock market data, this study investigates whether an investment strategy based on publicly available accounting information can generate abnormal investment returns. The strategy involves two steps. First, an accounting‐based probabilistic prediction model of changes in the medium‐term book return on owners' equity (ROE) is estimated. Second, market expectations of changes in medium‐term ROE are assessed through observed stock prices and the residual income valuation model. Stock market positions over 36‐month holding periods are taken when the accounting‐based predictions of ROE and the market expectations differ. Over the period 1983–2003, the investment strategy generated values of Jensen's alpha corresponding to an average monthly excess return for a hedge position of up to 0.8% for a sample of manufacturing companies. In the main this hedge return was caused by strong positive returns to the long positions, and additional analyses show that the returns appear to have been affected by a positive market sentiment bias (i.e., positive ROE surprises being associated with stronger price reactions than negative ROE surprises) making out‐of‐sample inferences somewhat dubious. Furthermore, most of the investment returns accrued over holding periods up to around 1995, with no indications of market mispricing over the last third (1995–2003) of the investment period. The empirical results are consistent with market investors having become more sophisticated in their use of publicly available accounting information over time.     

Disciplining building societies by accounting-based regulation,circa 1960

Taking as its point of departure the rules regulating accounting practice, this article focuses on the use of accounting numbers and ratios to regulate the specific behaviour of reporting entities. In particular, the corporatist analysis provides a framework for exploring the use of accounting-based regulation to discipline those depository financial institutions that depart from industry norms. Empirical support built upon the legislation enacted in 1959 and 1960 which set performance parameters for building societies and gave the Chief Registrar of Friendly Societies new powers of intervention. These powers and parameters were used together with accounting ratios (which were generally recognised as financially sound within the industry) to discipline building societies. Although only a tiny fraction of the societies were ultimately sanctioned, they all acknowledged important deviations from specified accounting-based criteria. In some cases accounting-based criteria were effective in driving societies to dissolution, while others, which avoided immediate dissolution were forced to improve their governance and systems of internal control. Intervention was further activated under the interdependent relationship formed between the Registrar of Friendly Societies and the Building Societies Association. Together they successfully lobbied state authorities to discipline societies outside the industry association. As a result, the evidence documented in this paper sheds light on the dynamics upon which accounting-based regulation came to be constructed and implemented.     

Predicting unlisted SMEs' default: Incorporating market information on accounting-based models for improved accuracy

The risk associated with lending to small businesses has become more important since regulations started obliging banks to use separate procedures in assessing SMEs' credit worthiness. However, current accounting-based models for SMEs do not account for the impact of market information on default prediction. We fill this gap in the literature by introducing a hybrid default prediction model for unlisted SMEs that uses market information of listed SMEs (comparable approach) alongside existing accounting information of unlisted SMEs. Our results suggest that the accuracy of this default prediction modelling approach in the hold-out sample, during the period of the financial crisis 2007-09 and for the entire sample-period, improves considerably. We conclude that the proposed hybrid model is a good replacement for existing standard accounting-based methods on SMEs' default prediction.     

Accounting flexibility and managers’ forecast behavior prior to seasoned equity offerings

This study examines the effect of accounting flexibility on managers’ forecasting behavior prior to seasoned equity offerings (SEOs). Although SEO firms have a strong incentive to convey optimistic information to boost the pre-SEO stock price, they also face enhanced litigation risk arising from SEO-related regulations. Thus, I hypothesize that managers will release positive news through their forecasts (relative to the prevailing analyst consensus) prior to an SEO only if they have the accounting flexibility to manage subsequent reported earnings to meet or exceed their forecasts. I find that managers with greater accounting flexibility are more likely to issue a forecast prior to the SEO and that their forecasts are more likely to convey positive news and are more specific. Furthermore, I find no effect of accounting flexibility for non-SEO control firms or for non-SEO periods. My results suggest that when managers experience a tension between the incentive for voluntary disclosure and high litigation risk, accounting flexibility is an important factor that determines their forecasting behavior.     

Family firms, debtholder�Cshareholder agency costs and the use of covenants in private debt

We ask whether the private debt contracts of family firms contain more restrictive covenants tied to accounting numbers than those of non-family firms. Our examination of Dealscan data indicates that credit agreements of Standard and Poor (S&P) 500 family firms are more likely to include accounting-based covenants that limit the lender(s)’ risk that managers will divert cash or assets to shareholders than those of S&P 500 non-family firms. The likelihood is further increased by presence of a dual class stock system that includes supervoting shares. Our results suggest that lenders are more willing to rely on accounting-based covenants to solve the shareholder–private lender agency problem in family firms given that the reporting quality is higher due to better alignment of owner and manager interests in such firms.     

Do mutual funds have information advantage? Evidence from seasoned equity offerings in China

By integrating the literature on institutional investors with that on seasoned equity offerings (SEOs), this paper investigates the role played by mutual funds around SEO announcements in China. To the extent that shareholdings already held by mutual funds in a firm prior to the firm's SEO issuance represent funds' information advantage, our first finding suggests a positive association between such information advantage and funds' decision to participate in certain SEOs. Second, we find that certain SEO firms that have attracted fund participation at issuance outperform peer firms without fund involvement when performance is proxied for by accounting-based measures. Collectively, our findings are consistent with the notion that mutual funds have an information advantage over other types of investors, and such an advantage would allow them to be able to invest in the “right” SEOs.     

Information spillovers around seasoned equity offerings

We examine information spillovers in the context of seasoned equity offerings (SEOs). Rival firms react significantly positively (0.26%) to primary SEO announcements, indicative of a competitive effect, but negatively (− 0.35%) to secondary share announcements, which is evidence of a contagion effect. Consistent with the view that primary equity offerings signal favorable industry prospects because firms presumably issue new shares to invest in profitable projects, we find that the rival response is positively related to analysts' EPS growth forecasts. However, when insiders are selling their shares through a secondary offer, this may suggest overvaluation and thus negatively impacts rival firms. Consistent with this view, we find when VCs sell through a secondary offerings, rivals experience a more significant negative reaction. We find rival firms are more likely to follow their peers and conduct a primary SEO if the market reacts favorably to their peer's SEO announcement. Finally, rival firms outperform secondary share issuers of equity, but not primary share issuers. Collectively, the findings support the view that insiders take advantage of windows of opportunity when they sell their own shares, but not when they raise capital for investing purposes.     

Government Regulation,Enforcement, and Economic Consequences in a Transition Economy: Empirical Evidence from Chinese Listed Companies Implementing the Split Share Structure Reform

In a changing transition economy, Chinese government regulations that adopt the relatively simple bright line rule formula are enforceable in practice. Taking the early reform-oriented policies of the China Securities Regulatory Commission (CSRC) as an example, we find that the CSRC did not consider local enthusiasm for reform when allocating IPO resources because of the high enforcement costs involved. We also find that CSRC listed company regulations were enforced due to the lower costs involved in verifying regulatory violations, and that listed companies that completed the reform process were given priority in public refinancing. We present empirical evidence supporting the theoretical basis for the hypotheses outlined above. We also conclude that companies that completed the reform process in 2005 were of significantly higher quality and that the SEO regulation did not affect stock market efficiency. These findings enhance our understanding of the efficiency of government regulation in a transition economy.     

Institutional shareholder services' proxy voting guidelines and ROE management

We examine the impact of the Institutional Shareholder Services (ISS) proxy voting guidelines on managers' opportunistic reporting behaviours. In February 2015, the ISS introduced a new advisory policy based on firms' return on equity (ROE) and started to issue negative recommendations for top executive election in firms whose past average and most recent ROE are lower than 5%. We find that managers are more likely to achieve the 5% ROE after implementing the policy, and they do so by discretionary activities. Our findings imply that accounting-based guidelines issued by a proxy voting advisor can generate managers' incentives for opportunistic reporting.     

Institutional shareholders and SEO market timing

Pecking order and market timing theories assume that corporate financing decisions are made in the interests of existing shareholders. We find that existing institutional investors, on average, significantly increase their share ownership at the time of the SEO, including SEOs that would be classified as overpriced based on ex-ante measures of mispricing, such as pre-issue returns and market-to-book ratios. We further find that higher pre-existing institutional shareholdings lead to less SEO timing. Overall, the results question whether firms engage in equity timing to benefit existing shareholders at the expense of investors buying shares in the SEOs.     

Auditor monitoring and verification in financial contracts: evidence from earnouts and SFAS 141(R)

We study how monitoring and verification of accounting-based performance benchmarks influences the design and efficiency of earnout contracts. Earnouts are commonly used to resolve agency conflicts arising in mergers and acquisitions, but these contracts create measurement and other agency problems when contingent payments are tied to future accounting-based performance. Exploiting changes in auditor monitoring of earnouts that arose as\ a consequence of SFAS 141(R), we find that acquisition contracts are more likely to incorporate accounting-based earnouts and that contingent payments tied to accounting-based performance benchmarks make up a larger portion of the consideration when acquiring firms have high-quality auditors. We also find that market reactions to announcements of earnout deals are more positive after SFAS 141(R) for acquisitions most susceptible to disputes over accounting-based performance metrics and these results are more pronounced for acquiring firms with high-quality auditors. By exploiting the features of this unique setting, we illuminate the role of monitoring and verification of accounting information in financial contracts.     

Mandatory IFRS adoption and executive compensation:Evidence from China

This study investigates how the mandatory adoption of International Financial Reporting Standards(IFRS) affects the contractual benefits of using accounting information to determine executive compensation in China. After controlling for firm and corporate governance characteristics, we find strong evidence supporting the positive role of mandatory IFRS adoption on the accounting-based performance sensitivity of executive compensation. Subsample analysis suggests that improvements in accounting-based performance sensitivity after IFRS adoption differ across regions with various levels of institutional quality and across firms that are affected to a different extent by the adoption. Additional analysis supports the argument that the positive effects of IFRS adoption on the use of accounting performance in executive compensation are driven by the reduction in accounting conservatism associated with IFRS adoption.     

Government assisted earnings management in China

As the socialist system in China embraces the market economy, it has created many conflicts of interests and collusion between firms and different layers of governments. The central government in China sets regulations to ensure the quality of firms listed in the capital market, while local governments engage in inter-jurisdictional competition for more capital, and their interests are aligned with listed firms through the stringent IPO quota system. This paper examines how local governments in China help listed firms in earnings management to circumvent the central government’s regulation. We find that local governments provide subsidies to help firms boost their earnings above the regulatory threshold of rights offering and delisting. Moreover, this collusion between government and listed firms in earnings management exists mainly in firms controlled by local governments.     

高层管理当局薪酬与上市公司业绩的相关性实证研究

本文在对国内外文献进行综评的基础上,立足于中国资本市场的特殊制度背景,分别选择会计绩效指标(ROA、ROE)、市场指标(Tobinq)以及股东财富指标(OF)构建模型,对我国上市公司高层管理当局的薪酬激励、特别是现金薪酬与上市公司业绩之间的相关性进行了经验研究,并减弱了相关的多重共线性现象。我们发现,高层管理当局薪酬与公司以及股东财富前后两期的变化,均成正相关关系;而与本期Tobinq的变化成负相关关系,与上期Tobinq的变化成正相关关系。公司的董事会或薪酬委员会在决定高层管理当局薪酬时青睐于会计盈余指标的变化更甚于信任股东财富指标。     

Improved corporate governance and Chinese seasoned equity offering announcement effects

Corporate governance and thus overall investor protection in China improved after the Split Share Structure Reform and the release of the new company law in 2005. This study examines the impact of improved corporate governance and investor protection on the market's reaction to seasoned equity offering (SEO) announcements in China. The market reacts to post‐2005 SEOs positively, while it reacts to pre‐2005 SEOs negatively. The different market reactions are attributed to the market's different perceptions of firms' intentions behind SEO decisions – that is, investors are more optimistic and have more trust in SEO issuers when they believe they are better protected.     

The Incidence of Accounting-based Covenants in UK Public Debt Contracts: An Empirical Analysis

Accounting-based covenants are of particular interest to accounting researchers in view of their potential to influence management's accounting policy choices and their attitudes to new accounting standards. This exploratory paper provides evidence on the incidence of accounting-based covenants in 108 UK public debt contracts for the period 1987-1990. Thirty percent of the agreements contain such covenants, the majority of which are affirmative gearing covenants. Focusing on the institutional differences between the UK and the US, the paper examines relationships between the presence of accounting-based covenants and (a) characteristics of the issuing firm, and (b) other control mechanisms included in the debt agreement. UK firms raising public debt are of good credit quality and UK insolvency procedures afford unambiguous protection to secured creditors. As a result, accounting-based covenants are associated with long-term unsecured debt and with firms having high values for assets-in-place but, in contrast with US findings, are unrelated to gearing. Convertibility appears to reduce the need for accounting-based covenants, especially when the debt is also subordinated. The relationship between accounting- based covenants and security depends on the nature of the security (fixed or floating). Longer term non-convertible debt agreements are, therefore, particularly likely to contain covenants that could influence management's accounting behaviour. This paper provides a starting point for further research into these issues.     

Earnings management of seasoned equity offering firms in Korea

We investigated 249 Korean seasoned equity offering (SEO) firms during the period 1995-1997 to determine if the SEO firms manage earnings in the year before a planned issue of seasoned equity stocks. Using three test methods (accrual difference, correlation, and sign-change), we found that the Korean firms contemplating SEOs in the following year do manage earnings particularly when their relative performances have been poor. The results are robust irrespective of control samples. Analysis of operating performances around SEOs shows that SEO firms tend to increase reported earnings in the year immediately preceding and the year of SEOs, but no differences were found in operating cash flows between the SEO firms and the control firms. By using a regression analysis for discretionary accruals, we found that SEO firms are more likely to manage earnings if the operating performances are poor and if the offer sizes are relatively large. Association tests between stock returns and discretionary accruals indicate that the market reacts positively to net income but negatively to discretionary accruals. The results indicate that the market correctly analyzes the cash flow implications of the SEO firms' opportunistic use of discretionary accruals.     

Costs of Accounting to Lenders: Canadian Evidence

Do new accounting pronouncements impose costs on firms with accounting-based restrictions in their public lending agreements? Previous studies have not found significant, adverse share price reactions to such pronouncements. This paper posits that management is concerned with the total costs of the monitoring policies used for reporting to lenders, and that share price reactions are likely to comprise only a small portion of those costs. The episode of mandatory lease capitalisation in Canada is used to test some predictions that are consistent with this expanded view of the costs of accounting to lenders. Lessees ‘public lending agreements were examined to see if they stipulated restrictions based on accounting numbers; and, if they did, whether the constraints were based on GAAP (generally accepted accounting principles) or TAP (tailored accounting principles). The evidence strongly supports the hypothesis that there are costs of accounting to lenders; but these costs are unlikely to be observed by researchers who look only for adverse share price reactions to mandated accounting changes. It also indicates that Canadian standards setters were sensitive to lessees’ accounting costs.     

事前披露能够降低董监高减持的获利能力吗?——基于中国“减持新规”的实证检验

"事前披露"能否降低董监高交易的信息优势?中国证监会于2017年5月修订并实施的"减持新规"首次为上述命题的检验提供了独特的研究场景。通过"事件研究法",本文对"减持新规"颁布前后的董监高减持行为进行研究,考察事前披露减持计划是否会削弱董监高减持时的信息优势。实证结果表明,"减持新规"实施后董监高减持的短期超常回报显著低于"减持新规"实施前,这说明事前披露会抑制董监高交易的择时能力。进一步研究发现,当公司信息质量较差、所处地区的市场化程度较低、成长性较高、减持规模较大时,事前披露对董监高减持获利能力的削弱作用更强;"减持新规"实施对董监高减持超常回报的削弱主要体现在交易日与减持计划披露日间隔短的减持样本中。本文不仅在实证层面上验证了"事前披露"可以降低董监高交易的信息优势,丰富了内部人交易研究文献,也为我国"减持新规"的实施效果提供了证据和建议。     

Gender-diverse board and the relevance of voluntary CSR reporting

In this paper, we focus on voluntary corporate social responsibility (CSR) disclosure, and we test the extent to which the value relevance of CSR reporting is affected by the appointment of female directors. Using a sample of French listed companies belonging to the SBF 120 index from 2001 to 2011, we control for differences in firm characteristics between firms with and without female board membership by using propensity score matching. Our results show that high CSR reporting is more relevant in terms of market value for firms with gender-diverse boards than for firms with completely male directors. This finding holds when we use the accounting-based performance measures, namely, return on assets (ROA) and return on equity (ROE). We also highlight that engaging an external assurance provider for CSR reporting is value relevant for firms without female directors but not value relevant for firms with female directors, suggesting a substitute relationship between gender-diverse boards and CSR assurance. Our results are stable when we consider the presence of at least two and three female directors.