The Usefulness of Direct and Indirect Cash Flow Disclosures

We investigate the ability of disclosed operating cash flow and indirect accruals components to explain annual returns for a sample of Australian firms. Consistent with claims made by accounting standard setters, we find evidence of significant explanatory power for disclosed operating cash flow components beyond aggregate operating cash flows when they also have significant incremental predictive power for future (one year ahead) operating cash flows. Accrual components also have incremental explanatory power for returns. In addition, we find evidence of significant explanatory power for operating cash flow components beyond estimates of the components (based on other financial statement disclosures) for firms with large differences between disclosed and estimated components.     

Exchange‐Sponsored Analyst Coverage

Several major stock exchanges, including the NASDAQ and NYSE Euronext, have recently embarked on schemes to sponsor and promote analyst coverage for firms listed on their exchanges. We evaluate the efficacy of one such scheme pioneered by the Singapore Exchange (SGX). We find that sponsored analysts produce forecasts with similar bias, but lower accuracy than those issued by analysts voluntarily following a firm. In analyses that control for self‐selection into the SGX Scheme, we find that sponsored firms enjoy at best minor improvements in their information environments and stock liquidity. Any benefits accruing from the scheme are insufficient to make sponsored firms fully comparable to those of firms with voluntary analyst following on the measured attributes.     

Merging time‐series Australian data across databases: challenges and solutions

This study discusses the differences in company identification across sources of Australian data and raises important issues which should be considered prior to merging across databases. In particular, we show that the practice among accounting databases of overwriting prior identifiers used by a given company, with its most recent, results in failure to match data which actually exists. We suggest a method for reconciling these differences and show that our method results in a match rate of 97 percent with the Aspect company identification file, and 94 percent after missing accounting data is considered. This contrasts with a match rate of only 71 percent when performing a direct merge.     

The 'New' Deferred Tax: a Comment on AARF Discussion Paper No. 22 'Accounting for Income Tax'

Discussion Paper No. 22 Accounting for Income Tax (DP 22), issued by the Australian Accounting Research Foundation, represents significant change through its advocacy of a "balance sheet" rather than the currently prescribed "income statement" approach for the recognition of deferred tax assets and liabilities. This paper clarifies the differences between the two methods and illustrates their effects on financial statements. It evaluates DP 22's arguments in favour of the balance-sheet approach and provides some guidance on the "usefulness" of deferred tax numbers. The paper concludes that the logical inconsistencies in DP 22, coupled with the available evidence on income-tax allocation, suggest that we should be cautious in making changes to current reporting requirements.     

The Usefulness of Long-Term Accruals

Though empirical evidence strongly supports the role of short-term operating accruals in improving operating cash flows as a measure of performance, there is little support or consensus with respect to the effect of long-term accruals. We provide evidence that long-term accruals do reduce timing and matching problems in cash flows. In return-earnings regressions, long-term accruals are found to improve earnings as a measure of firm performance, although not to the same extent as short-term accruals. Further, our analysis highlights differences in economic and statistical properties between short-term and long-term accruals and demonstrates how these differences impede the ability of long-term accruals to improve earnings as a performance measure in a return-earnings context. The incremental explanatory power of long-term accruals is shown to be hampered by the lack of present-value considerations in the existing accounting model, timeliness problems, and measurement error in the indirect method of computing cash flows and accruals.     

Exploring Exploration Orientation and its Determinants: Some Empirical Evidence*

abstract Adopting an information‐process perspective, this article conceptualizes exploration orientation in terms of scope of information acquisition. In line with this conceptualization, a multidimensional operational measure of exploration orientation is developed and its internal consistency established. The measure appears to have nomological validity in that it behaves as predicted with measures of variables hypothesized to be related to exploration orientation. Consistent with the emerging co‐evolution framework, environmental pressures as well as managerial intentions are found to influence an organization's exploration behaviour. Specifically, empirical results indicate that more environmental dynamism, a stronger organization mission, a prospector orientation and larger slack resources are associated with a greater exploration orientation. Implications, shortcomings and future research directions are discussed.     

Economic value and cost-effectiveness of biventricular versus right ventricular pacing: results from the BLOCK-HF study

Abstract

Aims: The Biventricular vs Right Ventricular Pacing in Heart Failure Patients with Atrioventricular Block (BLOCK-HF) demonstrated that biventricular (BiV) pacing resulted in better clinical and structural outcomes compared to right ventricular (RV) pacing in patients with atrioventricular (AV) block and reduced left ventricular ejection fraction (LVEF; ≤50%). This study investigated the cost-effectiveness of BiV vs RV pacing in the patient population enrolled in the BLOCK-HF trial.

Methods: All-cause mortality, New York Heart Association (NYHA) Class distribution over time, and NYHA-specific heart failure (HF)-related healthcare utilization rates were predicted using statistical models based on BLOCK-HF patient data. A proportion-in-state model calculated cost-effectiveness from the Medicare payer perspective.

Results: The predicted patient survival was 6.78?years with RV and 7.52?years with BiV pacing, a 10.9% increase over lifetime. BiV pacing resulted in 0.41 more quality-adjusted life years (QALYs) compared to RV pacing, at an additional cost of $12,537. The “base-case” incremental cost-effectiveness ratio (ICER) was $30,860/QALY gained. Within the clinical sub-groups, the highest observed ICER was $43,687 (NYHA Class I). Patients receiving combined BiV pacing and defibrillation (BiV-D) devices were projected to benefit more (0.84?years gained) than BiV pacemaker (BiV-P) recipients (0.49?years gained), compared to dual-chamber pacemakers.

Conclusions: BiV pacing in AV block patients improves survival and attenuates HF progression compared to RV pacing. ICERs were consistently below the US acceptability threshold ($50,000/QALY). From a US Medicare perspective, the additional up-front cost associated with offering BiV pacing to the BLOCK-HF patient population appears justified.     

Professionalism vs Commercialism: The Association Between Non-Audit Services (NAS) and Audit Independence

This paper examines the relative information content of earnings and cash flows for security returns using a methodology incorporating contextual factors which may affect earnings and cash flow response coefficients. For our UK dataset, we provide evidence that the earnings coefficient is related to earnings permanence, growth and firm size and that the cash flow coefficient may be related to growth. Although our results emphasise the value relevance of earnings, they also suggest that both contemporaneous and prior period cash flow are positively related to security returns and that market-to-book and market value of equity have predictive power for returns.     

Independently Certified Industry-specific Disclosures to the Capital Market: The JORC Code in the Australian Mining Industry

We investigate compliance with the Australian JORC Code for reporting mineral resources and ore reserves, the quality of the disclosure, and its impact on the capital market. The compliance and quality assessment is conducted by two experienced geologists who find that while the overall reporting quality improved after the 2012 revisions to the Code, they disagree on the extent of improvement. This reflects the uncertainties involved and the difficulty in interpreting the reports. Both geologists agree that the greatest improvement is seen in early-stage projects, consistent with the expectation that there are more uncertainties surrounding these, and the additional information disclosed under the 2012 JORC Code appears to assist in reducing the uncertainties to some extent. The capital markets study shows that JORC announcements have a significant impact on investors’ assessments of firm value, and that the announcement impact is higher after the 2012 revisions designed to strengthen the disclosure requirements. This is consistent with post-2012 JORC reports conveying higher information content. There continues to be information leakage prior to announcement date. Further tests show a widening of bid–ask spreads in the post-2012 period, suggestive of higher information asymmetry. While the probability of informed trading declines for large firms, it remains statistically unchanged for the rest of the sample. The findings reiterate the need for regulators and standard setters to be cognisant of unintended consequences of their decisions. The substantiation process under JORC involves a delay in the release of ‘news’, a ‘chilling’ effect with larger announcement effects.     

Accounting for Intangibles: Can Capitalization of R&D Improve Investment Efficiency?

This paper investigates the potential for accounting rules to mitigate under-investment induced by myopic managerial incentives. It exploits the difference within US GAAP requiring the capitalization of some research and development (R&D) costs in software development but proscribing the capitalization of R&D in other industries. We first investigate whether other hi-technology firms with no capitalization of R&D costs suffer higher levels of under-investment in myopic settings relative to software development firms. Second, we investigate whether the capitalization rule assists in mitigating under-investment within the software development industry, and whether this comes at the cost of over-investment in the presence of financial flexibility. Our findings are consistent with the mitigation of under-investment in the software development setting but we find no evidence of over-investment in the presence of high financial flexibility. Other hi-tech firms that cannot capitalize R&D costs suffer higher levels of under-investment relative to software development firms. Finally, we find that the ability to capitalize for the sample of software firms does reduce the probability of cutting R&D investment when managers are under earnings pressure. The findings in this paper are relevant to standard setters seeking to understand the costs imposed by (understandably) conservative accounting rules, and how verification of points of feasibility alongside less conservative accounting can prevent dysfunctional investment outcomes. This is the first study to consider whether the ability to (justifiably) capitalize the costs of internally generated intangibles can improve investment efficiency (the allocation of resources).