Determinants and consequences of timely asset impairments during the financial crisis

U.S. firms recorded an unprecedented number of asset impairments during the recent financial crisis. We investigate the timing of these losses in the context of two competing views on how firms use discretion over asset impairments. The first view posits that firms record impairments to convey private information as part of their commitment to a conditionally conservative reporting strategy. The second view argues that firms use their discretion to report opportunistically by delaying the recording of bad news. Consistent with the first view, we find that firms recorded timelier asset impairments during the financial crisis if they reported more conservatively in the five years preceding the crisis. Further tests show this relation is greater for firms with strong corporate governance, industry‐specialist auditors, and high leverage, indicating the importance of monitoring mechanisms in determining how firms handle the discretion involved in impairment decisions. We also test for the consequences of timely asset impairments during the financial crisis and find that firms reporting conservatively both before and during the crisis were able to acquire more debt financing, and their publicly traded bonds suffered smaller increases in illiquidity. Collectively, our study highlights the role of asset impairments in firms’ accounting choices over time.     

Fee competition among Big 4 auditors and audit quality

Review of Quantitative Finance and Accounting - Both the GAO (Public accounting firms: mandated study on consolidation and competition. GAO, Washington, 2003; Audits of public companies: continued...     

Weakened outside shareholder rights in dual-class firms and timely loss reporting

In this paper, we examine timely loss reporting for U.S. firms with a dual-class share structure, i.e., firms characterized by a divergence (wedge) between insiders’ voting rights and cash flow rights. In our primary analysis, we find compelling evidence that the wedge (quantified by excess voting rights) is associated with less timely loss reporting for these firms. In our secondary analysis, in which we match our sample of dual-class share observations with a sample of single-class share observations, we find similar results. Our paper informs public policy by showing that weakened outside shareholder rights matter, even in the U.S., where, despite a strong investor protection environment, dual-class firms are less timely in recognizing bad news in reported earnings.     

Economic potential for improving the nutritional characteristics of feed grains

A comprehensive set of potential new feed grains for Australia was evaluated to help establish the options with the highest priorities for research. The cost–reducing impacts of the different options were analysed using a linear–programming model that determined the least–cost feed rations for the different livestock industries. Economic welfare analysis was then used to estimate the size and distribution of the benefits of research from the feed grains quality–improving research. The analysis revealed that there are only limited opportunities to improve the productivity and competitiveness of Australia's livestock industries by improving the nutritional characteristics of feed grains.     

PCAOB Inspections and the Differential Audit Quality Effect for Big 4 and Non–Big 4 US Auditors*

In this study, we investigate whether the increase in regulatory scrutiny epitomized by the initial PCAOB inspection impacted audit quality differentially for Big 4 and non–Big 4 auditors to better understand the consequences of PCAOB inspections for different audit firm types. Because of competing views on the effect of PCAOB inspections, the relation between PCAOB inspections and the audit quality differential between Big 4 and other auditors is an empirical issue. Empirically, we take the endogenous choice of auditor as a given and utilize a difference‐in‐differences specification that takes into account the staggered timing of the initial PCAOB inspection for different‐sized auditors in the United States. Our results suggest that the initial PCAOB inspection improved audit quality more for Big 4 auditors than for other annually inspected or triennially inspected non–Big 4 auditors. We also examine annually and triennially inspected non–Big 4 auditors separately, and find that the pre‐post Big 4/non–Big 4 differential audit quality effect is more pronounced for the triennially inspected non–Big 4 firms. In the larger context of the highly concentrated US audit market, our findings that PCAOB inspections accentuate the Big 4/non–Big 4 audit quality differential are of potential interest to public company audit clients contemplating an auditor change, investors interested in learning about the consequences of PCAOB inspections, regulators concerned about the Big 4 dominance of the US audit market, and academics investigating audit quality differences.     

Business,government, and the science of human settlements

In this time of decaying cities and mounting pressures in technological societies, more alternatives and innovative solutions are needed for men to be able to respond to their rapidly changing world. Piecemeal programs (such as public housing) have failed dismally. A new discipline, ekistics, has developed a framework for dealing with problems in human settlements. It takes into account five basic elements of communities: nature, man, society, structures, and networks. Since business and government are such pervasive forces, the author suggests that they cooperate to improve the functioning of our society. To do this, planners can adapt the ekistic framework to society's needs, as well as the universal view of the discipline itself.     

International Diversification,SFAS 131 and Post‐Earnings‐Announcement Drift

Using 1990 through 2013 data of U.S. firms with foreign operations, we show that (i) the serial correlation of analyst forecast errors increases in the extent of international diversification, (ii) post‐earnings‐announcement drift (PEAD) based on analyst forecast errors increases in the extent of international diversification, and (iii) the impact of international diversification on the serial correlation of analyst forecast errors and its associated drift is significantly reduced after the implementation of SFAS 131 on segment disclosures. When we replicate our tests using seasonally differenced earnings, we fail to observe similar patterns. Overall, our results suggest that investors’ underreaction to announced earnings is a likely explanation for PEAD. Our findings also indicate that disclosures required under SFAS 131 are useful to analysts in forming efficient earnings expectations, thereby helping capital market participants in the pricing of internationally diversified firms’ earnings.     

Managerial compensation and the debt placement decision

Extant research argues that borrowing from financial intermediaries subjects managers to external monitoring. However, given managers' flexibility in choosing the type of debt financing, why would managers submit themselves to external monitoring? Recent theory points to the role of managerial incentive compensation. Specifically, it is argued that managers will borrow from financial intermediaries if their compensation is tied to firm performance. Additionally, it is noted that a more optimal compensation scheme will induce managers to undertake intermediated loans only when the firm is sufficiently profitable. Such a compensation scheme is likely to exist in opaque firm settings where borrowing from financial intermediaries can serve to signal firm profitability. Our study provides corroborative evidence. We find that the choice of syndicated bank loans is positively associated with CEO equity incentives. Second, this syndicated debt-incentive compensation link is influenced by firm profitability, particularly among information problematic firms. Overall, our study points to the role of incentive compensation in the debt placement decision.     

Do the Big 4 and the Second-tier firms provide audits of similar quality?

In this paper, we examine audit quality for Big 4 and Second-tier auditors during 2003–2006. We utilize the auditor’s propensity to issue a going concern audit report for distressed clients as a measure of audit quality. In addition, since the purpose of an audit is to improve financial reporting quality, we utilize abnormal accruals as an observable proxy for audit quality. Further, we utilize the client- and year-specific ex ante equity risk premium as a proxy for audit quality as perceived by investors. We control for auditor self-selection bias using the matched-pairs sample approach discussed by Francis and Lennox (2008). We find weak evidence that the Big 4 have a higher propensity to issue going concern audit opinions for distressed companies. However, the level of performance-adjusted abnormal accruals for Big 4 and Second-tier audit firm clients appears to be similar. With respect to investor perceptions, we find the client-specific ex ante equity risk premium to be lower for Big 4 clients than for Second-tier audit firm clients. Overall, our findings suggest little difference in actual audit quality but a more pronounced difference in perceived audit quality. Collectively, the evidence we provide informs the current discourse on audit quality, auditor choice, and the viability of Second-tier auditors as an alternative to the Big 4.     

Debt Maturity Structure and Accounting Conservatism

This study examines the association between debt maturity structure and accounting conservatism. Short‐maturity debt can mitigate agency costs of debt arising from information asymmetry and suboptimal investment problems inherent in debt financing. As such, debt‐contracting demand for accounting conservatism is expected to be lower in the presence of more short‐maturity debt. We find that short‐maturity debt is negatively associated with accounting conservatism. As firms could commit to more accounting conservatism to gain access to long‐maturity debt, we conduct lead‐lag tests of the direction of causality, and the results suggest that more short‐maturity debt leads to less conservative reporting, rather than the reverse. We also find the negative relation between short‐maturity debt and accounting conservatism is more pronounced among financially distressed firms, where ex ante severity of agency costs of debt are higher. Collectively, our results contribute to our understanding of the role of accounting conservatism in debt contracting and show how debt maturity, a key and pervasive feature of creditor protection in debt contracting, affects accounting conservatism.