Client importance and audit partner independence

We use data from Taiwan where audit partners are required to sign audit reports to examine whether audit partners compromise their independence for economically important clients. Uniquely, we include both listed and unlisted clients in audit partners’ client portfolios and separately study these clients for Big N and non-Big N auditors. We employ multiple proxies for auditor independence, including various abnormal accruals measures, the propensity of audit partners to issue modified audit opinions, and the probability that clients meet or just beat earnings targets. We fail to find evidence that Big N audit partners compromise their independence for economically important clients; however, we find such evidence for non-Big N auditors. Our results are robust to a battery of sensitivity analyses. While our inferences are limited to the Taiwanese capital market, our study may be of interest to market participants and regulators in other well developed capital markets.     

Japanese Corporate Groupings (Keiretsu) and the Informativeness of Earnings

This paper examines the effect of Japanese corporate groupings, keiretsu , on the informativeness of earnings. Keiretsu firms maintain close financial and personal ties through cross-shareholding, credit holding, interlocking corporate directorates, and various business transactions. We propose that the strong interrelations of the keiretsu ownership structure enhance the informativeness of earnings through efficient monitoring of managerial performance. Our empirical results show that keiretsu firms have higher earnings response coefficients than those of non- keiretsu firms, the earnings response coefficient increases as the strength of the keiretsu relationship increases, and discretionary accruals by keiretsu firms are smaller than discretionary accruals of non- keiretsu firms. All of these results suggest that the monitoring ability of the keiretsu improves the informativeness of earnings.     

The Association between Auditor Choice,Ownership Retained,and Earnings Disclosure by Firms Making Initial Public Offerings*

Using a system of three simultaneous equations, we test the predictions of Datar, Feltham, and Hughes 1991 and Hughes 1986 between auditor choice, earnings disclosures, and retained ownership in U.S. firms making initial public offerings of securities. Using a sample of initial public offerings between 1990 and 1997, we find that the demand for high‐quality auditors increases with firm risk. Additionally, we find that auditor choice, earnings disclosure, and risk are determinants of retained ownership, which is consistent with the predictions of Datar et al. and Hughes that auditor choice and direct disclosure are substitute signals for ownership retention. Further, our results suggest that the signals chosen (i.e., retained ownership, auditor choice, and disclosure) are related through their cost structures and are chosen jointly to minimize the overall cost to the entrepreneur.     

Relevance of U.S.-GAAP for Japanese companies

We use differences in U.S.-GAAP and Japanese-GAAP accounting measures to evaluate the value-relevance of U.S.-GAAP reports. We show data provided in U.S.-GAAP financial statements of Japanese firms is value-relevant beyond that contained in domestic-GAAP statements. Our results complement extant research and support the proposition that U.S. reporting methods provide value-relevant data. Understanding the value-relevance of data from Japanese firms is important in its own right because of the major role these firms play in intenational markets. We also provide evidence on significant transnational firms that voluntarily provide U.S.-GAAP statements.     

Differential levels of disclosure and the earnings-return association: evidence from foreign registrants in the United States

Foreign companies listing on U.S. exchanges are required to report financial information under U.S. GAAP on form 20-F using either Item 17 or Item 18 disclosure rules. These two disclosure rules differ in that Item 17 allows many exemptions from U.S. GAAP, while Item 18 requires disclosure of all financial information in accordance with U.S. GAAP. This study examines the differential earnings-return association between Item 17 and Item 18 filers.We find significantly higher earnings-return associations for Item 18 filers than for Item 17 filers. While the earnings-return association of Item 18 foreign firms is not different from that of matched U.S. firms (which fundamentally use Item 18 rules), the earnings-return association of Item 17 foreign firms is significantly lower than that of matched U.S. firms. Overall, the results are consistent with the idea that higher levels of disclosure may be related to lower discount rates and higher earnings response coefficients (ERCs).     

Japanese Corporate Groupings (Keiretsu) and the Characteristics of Analysts' Forecasts

This study examines differences in the characteristics of analysts' forecasts of earnings for keiretsu and non-keiretsu firms in Japan. Japanese industrial organization is characterized by enterprise groupings, keiretsu, composed of firms in different industries, but interrelated through cross-holdings of ownership. The strong interrelations of the Japanese keiretsu have been shown to increase the monitoring of managerial performance. An alternative view of keiretsu stewardship suggests the exclusionary environment within a keiretsu creates an information monopoly, resulting in greater information asymmetry between inside and outside constituents. These two views provide opposing predictions on how keiretsu groupings potentially affect the characteristics of earnings forecasts made by analysts: increased monitoring will improve the forecast characteristics of earnings, while the opposite is true under an information monopoly.Our results suggest that forecast accuracy (dispersion) is higher (lower) for keiretsu firms than non-keiretsu firms, supporting a monitoring role by keiretsu. The results also show that keiretsu firms' forecast characteristics are related to the strength of the keiretsu relationship, providing further evidence that it is indeed the keiretsu relationship that increases the monitoring of management, which ultimately improves the accuracy and dispersion of analysts' forecast.