Do more able managers provide better non-GAAP earnings?

This paper investigates whether managerial ability is associated with non-GAAP earnings quality. I find that the quality of non-GAAP earnings is greater for high-ability managers than low-ability managers. I also find that investors consider non-GAAP earnings released by high-ability management to be informative. Additional tests show that the positive association between managerial ability and the quality of non-GAAP earnings is stronger when return volatility or managerial stock ownership is greater. The results are robust to alternative measures of managerial ability and non-GAAP earnings quality and to controlling for endogeneity bias. Overall, this paper provides evidence that managers of high ability use non-GAAP reporting as a signalling tool to reduce information asymmetry.     

Sneaking in the back door? An evaluation of reverse mergers and IPOs

I examine whether the financial reporting quality of firms that access capital markets through reverse mergers differs from that of firms that rely on the traditional and more onerous IPO process. Using a broad sample of reverse merger firms and a propensity-score matched sample of IPOs, I find that reverse merger firms exhibit lower earnings quality as measured by several earnings attributes established in prior literature: accrual quality, earnings persistence, earnings predictability, cash persistence, cash predictability, earnings smoothness, timeliness, and value relevance. I document similar results for firms with low levels of institutional ownership. Differences in earnings quality, however, are attenuated for reverse merger firms with higher levels of institutional ownership. Given recent U.S. Securities and Exchange Commission enforcement actions against Chinese reverse merger firms, I also use a difference-in-differences technique and find that the lower financial reporting of reverse merger firms is actually driven by the non-Chinese reverse merger firms.     

Exploring the Causes of Accounting Restatements by Family Firms

Prior research shows that family firms have better earnings quality than non‐family firms in common‐law countries and highly developed markets. In contrast, we do not find a significant difference in the financial reporting quality between family and non‐family firms in the context of a civil‐law system and less developed market. We show that the financial reporting quality of family firms is conditioned on: (1) the divergence between the controlling shareholders’ voting rights and their cash flow rights, and (2) the firm's reputation for integrity, while these two conditions do not explain the restatement likelihood for non‐family firms. Moreover, when accounting irregularities are detected in the case of family firms, they are associated with more serious accounting restatements. Together, these results imply that the severity of the conflict between ultimate and minority shareholders, and a lack of integrity, explain the propensity for making financial restatements among family firms in a regime characterized as having weak investor protection and concentrated ownership structures.     

Financial institutional blockholders and earnings quality: Do blockholders contestability and countries' institutions matter?

We examine the relationship between financial earnings quality and block ownership by institutional investors. This relation is vital given the tremendous growth of institutional ownership and the significant influence of large institutional blockholders on financial earnings quality. Our findings indicate that the presence of institutional blockholders drives higher financial earnings quality. Results from an instrumental variable (IV) approach suggest our documented effects are directional. Next, cross-sectional tests prove that the relationship is more pronounced among firms adopting IFRS and those in countries with minority shareholder protection. Moreover, our results reveal that property rights and the lack of contestability partially mitigate the positive association between institutional ownership and earnings quality. Our findings inform the ongoing debate on the influence of institutional ownership on earnings, which institutional and regulatory dimensions affect earnings, and through what channels these effects run. Overall, our results suggest that beyond corporate governance practices that enhance financial earnings quality, different countries' institutions and regulations settings influence the relation of institutional ownership to earnings quality.     

Institutional incentives and earnings quality: The influence of government ownership in China

We examine the effect of government ownership and its associated institutional incentives on firms’ earnings quality using a sample of Chinese firms during the transitional economy between 1998 and 2005 when state-owned and non-state-owned firms were traded in the stock exchanges. We find that, in China, state-owned firms exhibit a lower earnings quality property than non-state-owned firms. Particularly, state-owned firms have more earnings smoothing, more frequently managed earnings toward target, less frequent timely recognition of losses, and less value relevance, relative to non-state-owned firms. We also find that state-owned firms have significantly higher discretionary current accruals than non-state-owned firms. We conclude that the Chinese government, through its controlling ownership of state-owned firms, creates incentives and regulatory backing for self-serving purposes that negatively influence these listed firms’ financial reporting.     

Managerial Ownership and Accounting Conservatism

In this paper we examine the effect of managerial ownership on financial reporting conservatism. Separation of ownership and control gives rise to agency problems between managers and shareholders. Financial reporting conservatism is one potential mechanism to address these agency problems. We hypothesize that, as managerial ownership declines, the severity of agency problem increases, increasing the demand for conservatism. Consistent with our hypothesis, we find that conservatism as measured by the asymmetric timeliness of earnings declines with managerial ownership. The negative association between managerial ownership and asymmetric timeliness of earnings is robust to various controls, in particular, for the investment opportunity set. We thus provide evidence of a demand for conservatism from the firm's shareholders.     

Do Family Firms Provide More or Less Voluntary Disclosure?

We examine the voluntary disclosure practices of family firms. We find that, compared to nonfamily firms, family firms provide fewer earnings forecasts and conference calls, but more earnings warnings. Whereas the former is consistent with family owners having a longer investment horizon, better monitoring of management, and lower information asymmetry between owners and managers, the higher likelihood of earnings warnings is consistent with family owners having greater litigation and reputation cost concerns. We also document that family ownership dominates nonfamily insider ownership and concentrated institutional ownership in explaining the likelihood of voluntary disclosure. Using alternative proxies for the founding family's presence in the firm leads to similar results.     

Innovation,financial reporting quality,and audit quality

We examine the relation between innovation and financial reporting quality (FRQ) and the implications of audit quality for this relation. We first document a negative relation between innovation and FRQ. This result is consistent with greater earnings management at higher innovation firms, likely because of the more opaque information environment that gives managers the opportunity to act opportunistically. We then examine whether audit quality moderates the observed negative relation between innovation and FRQ because audit quality constrains managers’ opportunities to manage earnings. We find results consistent with the predicted moderating effect. Lastly, we verify that these findings hold in a difference-in-differences test designed around an exogenous event, state R&D tax credits.     

Disclosure timing: Determinants of quarterly earnings release dates

Existing research on discretionary disclosures provides valuable insights on the potentials causes and consequences of alternative forms of disclosure. However, relatively little is known about how managers choose to time the release of financial information. This paper focuses on the quarterly earnings release dates and investigates why some choose to release earnings information relatively early, compared to others. The results indicate that the reporting lag (days between fiscal period end and quarterly earnings release date) is shorter for firms facing greater demand for information from investors and greater litigation costs. The reporting lag, however, is longer for firms with greater block ownership and those whose operations are somewhat more complex.     

EARNINGS MANAGEMENT AND CORPORATE OWNERSHIP STRUCTURE: AN EXAMINATION OF EXTRAORDINARY ITEM REPORTING

This study examines the empirical relation between a three-way classification of corporate ownership structure and earnings management through the use of extraordinary item (EI) reporting. The EI reporting decisions examined are those made during 1960-1966, a time period when US reporting standards allowed considerable management discretion with respect to both the classification of EIs and their placement in the financial statements (i.e., income. versus retained earnings statement). Overall, the results provide strong support for income-increasing behavior by non-owner managers. Importantly, the results also suggest that the three-way ownership classification scheme used in this study is superior to the dichotomous owner-controlled/managercontrolled classification typically used in accounting studies.     

Multiple blockholders and earnings management

This paper examines the impact of multiple blockholders on earnings management when the main conflict of interest is between controlling shareholder and other shareholders. Using a sample of Chinese listed firms from 2000 to 2017 and controlling for potential sample selection and endogeneity, we find that firms with multiple blockholders tend to have higher earnings management than firms with a single controlling shareholder. The positive impact of multiple blockholders on earnings management is more pronounced when those blockholders are the same type – state or private. Earnings management is also enhanced with more large shareholders and higher relative ownership of other large shareholders to the controlling shareholder. The results are consistent with the cost-sharing hypothesis, where the other large shareholders shoulder the costs of earnings management with the controlling shareholder proportionally, but not the private benefits of control. Further tests show that the positive relation between multiple large shareholders and earnings management is less pronounced in firms with stronger internal or external governance. Overall, our paper demonstrates a potential dark side of multiple blockholders from the angle of financial reporting quality.     

Institutional ownership and conservatism

Recent research suggesting that shareholders demand conservative financial reporting raises the question: Which shareholders demand conservatism? We find that higher ownership by institutions that are likely to monitor managers is associated with more conservative financial reporting. This positive association is more pronounced among firms with more growth options and higher information asymmetry, where direct monitoring is more difficult and the potential governance benefits of conservatism are greater. Further, lead-lag tests of the direction of causality suggest that ownership by monitoring institutions leads to more conservative reporting, rather than the reverse. Collectively, these results are consistent with monitoring institutions demanding conservatism.     

Private company finance and financial reporting

This article provides a comprehensive assessment of private firms’ financing sources and their relation with financial reporting practices. We consider debt financing (bank financing, leasing, and government guarantees), equity financing (family ownership, government ownership, employee ownership, and private-equity financing), and trade credit (supplier credit and factoring). Our primary conclusions are that there is significant heterogeneity in the way in which private companies are financed that is influenced by their specific business contexts, and that this heterogeneity in financing is associated with differential demand for and supply of financial reporting.     

Shareholder Rights,Insider Ownership and Earnings Management

This paper examines whether shareholder rights, which enable shareholders to replace managers, can constrain earnings management, and whether this effect is conditional on the level of insider ownership. Using the comprehensive shareholder rights measure constructed by Gompers et al. ( 2003 ), we find that firms with stronger shareholder rights are associated with fewer income‐increasing discretionary accruals, suggesting that stronger shareholder rights deter managers from reporting aggressive earnings. Moreover, if insider ownership introduces managerial entrenchment, managers with higher ownership would be insulated from shareholder discipline. Consistent with this entrenchment theory, we find that the association between shareholder rights and earnings management becomes insignificant in the presence of higher levels of insider ownership. Shareholder rights are negatively associated with earnings management only when insider ownership is low. Our results indicate that the disciplinary effect of shareholder rights can be attenuated by high levels of insider ownership.     

Financial controller turnover: An early warning sign of deteriorating financial reporting quality

This study examines the relation between financial controller turnover and public firms’ financial reporting quality. Exploiting a special institutional setting in China, where financial controllers along with CEOs and CFOs are required to attest to the accuracy and completeness of firms’ annual reports, we find that: (a) financial controller turnover is negatively associated with financial reporting quality, (b) the negative relation between financial controller turnover and financial reporting quality is more pronounced in non-state-owned enterprises, in firms with weaker corporate governance, and in areas with higher regulatory enforcement intensity, and (c) financial controller turnover is not related to real earnings management. Further analyses show that financial controller turnover is associated with the incidence of subsequent financial report restatements and enforcement actions by the China Securities Regulatory Commission (CSRC). Financial controller turnover also precedes top executive turnover and can be viewed as an early warning sign of deteriorating financial reporting quality. Such information content is incremental to that of top executive turnover. Our analyses also show that firms with financial controller turnover have higher initial stock returns but underperform their counterparts in the long run.     

Effects of international institutional factors on earnings quality of banks

We examine the relation between legal, extra-legal and political institutional factors and earnings quality of banks across countries. We predict that earnings quality is higher in countries with legal, extra-legal and political systems that reduce the consumption of private control benefits by insiders and afford outside investors greater protection. Using a sample of banks from 35 countries during the pre-crisis period from 1993 to 2006, we find that all five measures of earnings quality studied are higher in countries with stronger legal, extra-legal and political institutional structures. We also find that banks in countries with stronger institutions are less likely to report losses, have lower loan loss provisions, and higher balance sheet strength during the 2007–2009 crisis period. Our findings highlight the implications of country level institutional factors for financial reporting quality and are relevant to bank regulators who are considering additional regulations on bank financial reporting.     

The effect of CEO ownership on the information content of reported earnings

This paper examines the relation between capital market perceptions of earnings quality and CEO equity ownership. Using the earnings response coefficients (ERCs) from annual returns–earnings regressions as a proxy for investor perceptions of earnings quality, we find that ERCs first increase and then decline across higher levels of CEO ownership with an inflection point around 25% ownership. Using analyst behavior as another proxy for the perceptions of financial analysts, we find that earnings forecasts are more accurate as ownership increases, but once ownership levels reach about 25%, accuracy declines with further increases in ownership. Forecast dispersion, forecast revision volatility, and analyst following decline and then increase across increasing levels of CEO ownership. Our results suggest that, for low levels of CEO ownership, earnings are perceived as being more informative about future firm performance as ownership increases. However, once ownership levels are high, earnings are perceived as being less informative with further increases in ownership.     

The Timeliness of Restatement Disclosures and Financial Reporting Credibility

This study investigates whether prompt discovery and disclosure of earnings restatements is associated with greater post‐restatement financial reporting credibility. We measure the timeliness of restatement detection by the length of time between the end of the misstated period and the subsequent restatement announcement. We document that shorter detection periods are significantly associated with high‐quality corporate governance characteristics and executive and/or auditor turnover, but not with characteristics of restatements. We also find that firms with shorter detection periods exhibit a more moderate decline in the information content of earnings following restatement announcements relative to firms with longer detection periods, and that detection period length has an incremental effect on the information content of earnings relative to executive and/or auditor turnover alone. In addition, we find that restatement disclosures are more timely following the implementation of the SOX‐era reforms, and that only firms with shorter detection periods experience more moderate post‐restatement declines in the information content of earnings following the implementation of the SOX‐era reforms. The results from this study suggest that the timeliness of restatement detection and disclosure is associated with greater financial reporting credibility following restatements.     

Are incentives for earnings management reflected in the ERC: Large sample evidence

In this study, I examine the effect of exposure to earnings management (EM) incentives on the earnings response coefficient (ERC). Drawing from several anecdotes and normative arguments about the implications of managers' incentives for investor perception, I predict and test that exposure to EM incentives is negatively associated with the ERC. I find that ERC is reliably lower for firms with elevated exposure to EM incentives, holding constant the effects of actual EM and other factors that affect the returns–earnings relation. Furthermore, the effect of the incentive exposure on cash flows as well as on total accruals is reliably negative. These results are robust across alternative price– and returns–earnings specifications, and are insensitive to the inclusion of other measures of earnings quality. Additional analysis shows that the effect of such incentives on the ERC is more pronounced at higher levels of institutional stock ownership. However, a certain class of institutional owners – transient institutions – are less sensitive to the implications of such incentives for earnings quality.     

The influence of director stock ownership and board discussion transparency on financial reporting quality

Seventy-two active corporate directors participate in an experiment where management insists on aggressive recognition of revenue, but the chief audit executive proposes a more conservative approach. Results indicate interactive effects of director stock ownership and the transparency of director decisions. Stock-owning directors are more likely to oppose management’s attempts to manage earnings when transparency increases. For non-stock owning directors, however, increasing transparency does not affect the likelihood that directors oppose management’s attempts to manage earnings. The current study challenges suppositions that equate director stock ownership with improved financial reporting and higher corporate governance quality, and it provides evidence that increased transparency is beneficial when director compensation plans threaten director independence.