Auditor Conservatism,Asymmetric Monitoring,and Earnings Management*

In this paper, we investigate whether, and how, audit effectiveness differentiation between Big 6 and non‐Big 6 auditors is influenced by a conflict or convergence of reporting incentives faced by corporate managers and external auditors. In so doing, we incorporate into our analysis the possibility that managers self‐select both external auditors and discretionary accruals, using the two stage “treatment effects” model. Our results show that only when managers have incentives to prefer income‐increasing accrual choices are Big 6 auditors more effective than non‐Big 6 auditors in deterring/monitoring opportunistic earnings management. Contrary to conventional wisdom, we find Big 6 auditors are less effective than non‐Big 6 auditors when both managers and auditors have incentives to prefer income‐decreasing accrual choices and thus no conflict of reporting incentives exists between the two parties. The above findings are robust to different proxies for opportunistic earnings management and different proxies for the direction of earnings management incentives.     

A new methodology linking concentration dynamics to current and steady-state profits:Examining Korean industrial policy during take-off

We model the dynamics of industrial structure and market power using Korean manufacturing data during the take-off period (1978–82). Structure–Conduct–Performance [SCP] methodologies have been criticized for using accounting data and because a few superior firms may have greater shares and greater profits. Both are argued to present possible spurious correlations between concentration and profits. This paper follows earlier work which shows that market structure responds to observed accounting profits as if these were accurate indices of real profits, and not as if leading firms are perceived to have unmatchable advantages. The methodological contribution of this model is a new latent variable for steady-state profits derived from the speed of structural adjustment. Long run profits are identified by the hypothesis that structural adjustment will be more rapid when industries are farther from steady-state levels. We analyze the long run profits latent variable, finding strong support for this hypothesis. The speed of adjustment is greater for positive and negative deviations from steady-state structure. We show that the profits and structural adjustment relationship is non-monotone. The SCP criticisms above are based on spurious correlations which are monotone in profits and structure. Positing spurious correlations which are at the same time monotone in structure and non-monotone in structural adjustment seems less plausible than accepting the SCP results which are consistent with both. Our analysis also is new in that it is the first direct econometric analysis of Korean industrial policy during its take-off years. We note that in Korea, unlike elsewhere, Industrial Policy was hypothesized to lead to concentration and market power in the popular press and by professional economists. Ours is the first direct econometric analysis of this hypothesis, and we find it supported.     

Factors of determining long-term orientation in interfirm relationships

Marketers have witnessed a paradigm shift in which establishing, maintaining, and forging long-term buyer–seller relationships are considered the core of marketing activities. Accordingly, investigating a long-term orientation (LTO) has become a steady research stream in the marketing literature. Building on this on-going research stream, this study confirms that an essential precursor of a manufacturer's LTO is trust that, in turn, is formed by relational norms and satisfaction with supplier performance. Interestingly, however, the seemingly strong trust–LTO path is moderated by both power asymmetry and environmental uncertainty in buyer–seller relationships. The empirical findings suggest that regardless of emerging relationship marketing where buyer and seller are portrayed as parts of a team, power is still in use to control suppliers. In addition, a manufacturer facing uncertainty is less likely to form LTO toward its supplier for fear of losing flexibility in the time- and quality-based competition.     

Testing for the Ratchet Effect in the R&D Tax Credit

Many countries have implemented the R&D tax credit to encourage firms’ R&D spending. The design of the tax credit is important for its effectiveness. Some countries such as Korea, Taiwan, Japan, France and the US have employed an incremental R&D tax credit system. The US case that made a major change in its design from the moving average base to the fixed base in calculating the credit provides us with a natural experiment to measure the effectiveness of the tax credit from the perspective of the ratchet effect. By applying an endogenous switching regression model to US manufacturing firm data, we attempt to measure the ratchet effect of R&D credit on firms’ R&D investment. According to the empirical results, the R&D tax credit policy has been effective with the price elasticity, –1.818, for the qualified firms, and the re-design of R&D credit improved the positive impact of R&D credit. This provides some policy implication for those countries that adopted an incremental credit system. In addition, our result suggests the existence of selectivity bias in the previous literature.     

Cyclicality of markups and real wages in Korea

This paper examines the cyclical patterns of markups, real wages, and labor share for Korean industries. Markup ratio is greater than 1 in most industries. Markups are countercyclical, and real wages and labor share are procyclical. Income distribution effect has more impact on determining markups than price and technology effect.     

Hotel service providers’ emotional labor: The antecedents and effects on burnout

The purpose of this study is to examine the antecedents and consequences of two emotional labor strategies (surface and deep acting) in the lodging industry. Variety, duration, and positive display rules are significant predictors of hotel service providers’ deep acting and negative display rules are related to service providers’ surface acting. Employees ohigh in neuroticism are more likely to fake their emotional expressions (surface acting) when dealing with guests and those high in extraversion are more likely to try hard to invoke the appropriate emotions (deep acting). Results further indicate that surface actors are more exhausted and cynical than deep actors and the mediating role of emotional labor between burnout and job and personality characteristics is found to be rather weak. Managerial implications for hotel operators are discussed.     

Exploring the impact of advertising and R&;D expenditures on corporate brand value and firm-level financial performance

A parsimonious framework linking advertising expenditures and research and development expenditures to brand value, and brand value in turn to firm-level financial performance, was proposed and empirically investigated under four data conditions: data form, brand type, financial performance metric, and lag structure. Using pooled data from 125 firms (848 firm-year observations) over the period 1991–2007, 108 path analyses were conducted to compute five path model output metrics. Data on these metrics were then compared for each of the data conditions by means of analysis of variance. Although significant relationships were generally observed among framework variables, study results differed considerably across three of the four data conditions. The principal take-away from the study is that the impact of marketing activities on firm-level financial performance is likely to be in large part a function of the specific research purpose and methodology employed. As such, the take-away has implications when interpreting value-relevance findings, when constructing theories involving market-based assets, and when designing studies to investigate relationships between marketing and financial performance.     

Exploring potential R&D collaboration partners through patent analysis based on bibliographic coupling and latent semantic analysis

The aim of the present research is to provide a new systematic methodology to explore potential Research and Development (R&D) collaboration partners using patent information. The potential R&D collaboration partners are visualised as a patent assignee level map based on technological similarity between patents by using the network analysis. The proposed framework utilises two analytic methods to measure technological similarity. The first method, bibliographic coupling analysis, measures technological similarity based on the citation relationship using patent bibliographic information. Second, latent semantic analysis is utilised based on semantic similarity using patent textual information. The fuel cell membrane electrode assembly technology field is selected and applied to illustrate the proposed methodology. The proposed approach allows firms, universities, research institutes and governments to identify potential R&D collaborators as a systematic decision-making support tool.     

Who bribes? Evidence from the United Nations' oil-for-food program

How do managers react in an environment where bribery is likely to bring high rewards, but also presents high risks? We examine the supply side (firms' illicit payments) of bribery in a global setting, using the United Nations' (UN) Oil-for-Food Program, part of UN sanctions on Iraq. Some companies helped Iraq circumvent UN sanctions through bribe payments in the form of illicit surcharges. Our transaction-level analysis of factors affecting bribe payments draws on the economic theory of crime, agency theory, and home country institutions. Results suggest that firms pay larger bribes when there are stronger financial and managerial incentives, but pay less when their home countries have implemented the OECD Anti-Bribery Convention. We find little relationship between a widely used country-level corruption perception index and firms' actual bribery. Copyright © 2012 John Wiley & Sons, Ltd.