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Journal of Business Finance &amp Accounting

Impact factor: 1.01 5-Year impact factor: 1.061 Print ISSN: 0306-686X Online ISSN: 1468-5957 Publisher: Wiley Blackwell (Blackwell Publishing)

Subject: Business, Finance

Most recent papers:

  • Determinants and consequences of timely asset impairments during the financial crisis.
    Joshua L. Gunn, Inder K. Khurana, Sarah E. Stein.
    Journal of Business Finance &amp Accounting. October 20, 2017
    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. This article is protected by copyright. All rights reserved
    October 20, 2017   doi: 10.1111/jbfa.12287   open full text
  • The Funding of Subsidiaries Equity, Double Leverage, and the Risk of Bank Holding Companies.
    Silvia Bressan.
    Journal of Business Finance &amp Accounting. October 17, 2017
    Banking groups exploit double leverage when “debt is issued by the parent company and the proceeds are invested in subsidiaries as equity” (Board of Governors of the Federal Reserve System (2016)). Financial authorities have frequently raised concerns about the issue of double leverage because this type of intra‐firm financing appears to allow for both the arbitrage of capital and the assumption of risk. This article focuses on the relationship between double leverage and risk‐taking within banking groups. First, we discuss this relationship based on an examination of balance sheet figures. Second, we analyse a large sample of United States Bank Holding Companies (BHCs) from 1990–2014. The results show that BHCs are more prone to risk when they increase their double leverage, namely, when the stake of the parent within subsidiaries is larger than the stand‐alone capital of the parent. This paper's primary implication for policymakers is that the regulators of complex financial entities should more efficiently address the issue of double leverage, thereby limiting the potential negative consequences that arise from corporate instability. This article is protected by copyright. All rights reserved
    October 17, 2017   doi: 10.1111/jbfa.12288   open full text
  • Are analyst stock recommendation revisions more informative in the post‐IFRS period?
    Andreas Charitou, Irene Karamanou, Anastasia Kopita.
    Journal of Business Finance &amp Accounting. October 11, 2017
    This paper investigates whether the mandatory IFRS adoption has affected the informativeness of analyst recommendation revisions in Europe. Although prior studies document that IFRS adoption improved analyst forecast attributes, the impact of IFRS can't be completely assessed without examining how the market reacts to information‐rich events in an environment with enhanced disclosure. To examine this question we utilize a difference‐in‐differences design using as main control sample firms that had voluntarily adopted IFRS before the EU's mandated switch. Overall, our evidence suggests that after the mandatory adoption of IFRS both analyst upgrades and downgrades are more informative. These results hold after controlling for a number of variables that capture analyst, firm and information environment characteristics and are robust to a number of sensitivity analyses including the use of a US control sample. Finally, we examine whether our results are sensitive to the level of accounting enforcement. We find that analyst downgrades are more informative in the post‐IFRS period for firms in both high and low enforcement environments. Analyst upgrades, however, are more informative only if they are issued for firms in high enforcement countries. This article is protected by copyright. All rights reserved
    October 11, 2017   doi: 10.1111/jbfa.12286   open full text
  • CEO inside debt and convertible bonds.
    Wei‐Hsien Li, S. Ghon Rhee, Carl Hsin‐han Shen.
    Journal of Business Finance &amp Accounting. September 28, 2017
    The question of whether convertible bonds are issued to combat the risk‐shifting problem is a subject of debate in the literature, primarily because of the unavailability of clear measures regarding managerial risk‐shifting incentives. Taking advantage of recently developed inside debt‐holding measures for CEOs, we find strong evidence in support of the risk‐shifting hypothesis. When a CEO holds a large amount of inside debt, three distinct patterns emerge: (i) the firm exhibits a lower ratio of outstanding convertibles to total debt; (ii) the firm is less likely to issue convertibles than straight debt; and (iii) the firm devises contract terms to decrease the chance of conversion when it issues convertibles. This article is protected by copyright. All rights reserved
    September 28, 2017   doi: 10.1111/jbfa.12285   open full text
  • The influence of other comprehensive income on discretionary expenditures.
    Roger C. Graham, Kuanchen Lin.
    Journal of Business Finance &amp Accounting. September 27, 2017
    Other Comprehensive Income items (OCI) increase and decrease book value and therefore indicate more or less firm value. It follows that OCI items, albeit transitory, may contribute to a wealth effect that influences expenditure decisions. In support, our regression results indicate an association between current year OCI and future discretionary financing, investing, and operating expenditures. However we also find that OCI influenced expenditures are not associated with future profitability suggesting such expenditures are not value creating. In further tests, we find that future discretionary expenditures are associated with both positive OCI and negative OCI for higher leveraged firms but only associated with positive OCI for lower leveraged firms. These results suggest that, for highly leveraged firms, positive OCI loosens debt constraints on future expenditures while negative OCI tightens debt constraints on future expenditures. For firms without debt constraints the results are suggestive of possible wealth transfers from debtholders to shareholders. This article is protected by copyright. All rights reserved
    September 27, 2017   doi: 10.1111/jbfa.12284   open full text
  • Investor sentiment and management earnings forecast bias.
    Helen Hurwitz.
    Journal of Business Finance &amp Accounting. September 26, 2017
    This study investigates whether investor sentiment is associated with behavioral bias in managers’ annual earnings forecasts that are generally issued early in the year when uncertainty is relatively high. I provide evidence that management earnings forecast optimism increases with investor sentiment. Furthermore, I find that managers’ annual earnings forecasts are more pessimistic during low‐sentiment periods than during normal‐sentiment periods. Since managers lack incentives to further deflate stock prices during a low‐sentiment period, this evidence indicates that sentiment‐related management earnings forecast bias is likely to be unintentional. In addition, I find that the relationship between management earnings forecast bias and investor sentiment is stronger for firms with higher uncertainty, consistent with investor sentiment having a greater influence on management earnings forecasts when uncertainty is higher.
    September 26, 2017   doi: 10.1111/jbfa.12282   open full text
  • Board governance and corporate performance.
    Amama Shaukat, Grzegorz Trojanowski.
    Journal of Business Finance &amp Accounting. September 21, 2017
    We examine the link between the monitoring capacity of the board and corporate performance of UK listed firms. We also investigate how firms use the flexibility offered by the voluntary governance regime to make governance choices. We find a strong positive association between the board governance index we construct and firm operating performance. Our results imply that adherence to the board‐related recommendations of the UK Corporate Governance Code strengthens the board's monitoring capacity, potentially helping mitigate agency problems, but that investors do not value it correspondingly. Moreover, in contrast to prior UK findings suggesting efficient adoption of Code recommendations, we find that firms at times use the Code flexibility opportunistically, aiming to decrease the monitoring capacity of the board, which is followed by subsequent underperformance. This finding questions the effectiveness of the voluntary approach to governance regulation followed in the UK and in many countries around the world.
    September 21, 2017   doi: 10.1111/jbfa.12271   open full text
  • Types of investor uncertainty and the cost of equity capital.
    Chad R. Larson, Robert J. Resutek.
    Journal of Business Finance &amp Accounting. September 14, 2017
    We jointly test the effects of two types of investor uncertainty, one related to future firm performance and unrelated to accruals (cash flow uncertainty) and one directly related to accrual estimation errors (accounting quality uncertainty). Distinct from prior studies, our uncertainty estimates are based on a matched‐firm design that minimizes the mechanical relation between the two uncertainty variables. We find a strong negative relation between cash flow uncertainty and multiple estimates of the cost of equity capital. With respect to accounting quality uncertainty, we find a strong positive association with both expected stock returns and implied costs of equity, but only in settings that control for cash flow uncertainty. Collectively, our results suggest the need to consider different types of investor uncertainty when examining how investor uncertainty affects the cost of equity capital. This article is protected by copyright. All rights reserved
    September 14, 2017   doi: 10.1111/jbfa.12283   open full text
  • How are analysts’ forecasts affected by high uncertainty?
    Dan Amiram, Wayne R. Landsman, Edward L. Owens, Stephen R. Stubben.
    Journal of Business Finance &amp Accounting. September 10, 2017
    This study examines whether key characteristics of analysts’ forecasts—timeliness, accuracy, and informativeness—change when investor demand for information is likely to be especially high, i.e., during periods of high uncertainty. Findings reveal that when uncertainty is high, analysts’ forecasts are more timely but less accurate. However, analysts’ forecasts are also more informative to the market, which is consistent with investors’ demand for timely information, even if it is less accurate. We observe these findings when market prices are increasing and decreasing, consistent with the findings resulting from uncertainty in general rather than just uncertainty associated with market declines. We also examine how timeliness, accuracy, and informativeness change in response to elevated levels of three sources of uncertainty—market, industry, and firm level. We predict and find that analysts are better able to deal with heightened industry uncertainty, as reflected by greater timeliness with no loss in forecast accuracy. In contrast, analysts have greater difficulty dealing with heightened market uncertainty, as both timeliness and forecast accuracy decline.
    September 10, 2017   doi: 10.1111/jbfa.12270   open full text
  • Finding diamonds in the rough: Analysts’ selective following of loss‐reporting firms.
    Donal Byard, Masako Darrough, Jangwon Suh, Yao Tian.
    Journal of Business Finance &amp Accounting. September 07, 2017
    Investors face greater difficulty valuing loss‐reporting than profit‐reporting firms: losses may be due to very different reasons (e.g., poor operating performance or investments in intangibles, and financial accounting information is of more limited use for valuing loss‐making firms than profit‐making firms. Because of increased uncertainty about loss firms’ future financial and business viability, we hypothesize that financial analysts will be more selective when choosing to follow loss firms than profit firms, with the result that “abnormal” analyst following will be more informative to investors regarding the future performance of loss firms than profit firms. Consistent with this prediction, we find that abnormal analyst coverage is useful for predicting firms’ future prospects, and is more strongly associated with future performance (stock returns and ROA) for loss firms than for profit firms. The market, however, does not seem to use this useful information when pricing loss firms: for loss firms a portfolio investment strategy based upon abnormal analyst following can generate positive excess returns over 1‐ to 3‐year holding periods. These results are stronger for persistent‐loss firms than for occasional‐loss firms. We conclude that abnormal analyst following contains useful information about firms’ future prospects, and even more so for loss firms than for profit firms.
    September 07, 2017   doi: 10.1111/jbfa.12269   open full text
  • Corporate social responsibility and the assessment by auditors of the risk of material misstatement.
    Mónica LópezPuertas‐Lamy, Kurt Desender, Mircea Epure.
    Journal of Business Finance &amp Accounting. August 17, 2017
    This paper investigates whether, and how, firms’ corporate social responsibility (CSR) performance influences the auditor's assessment of the risk of material misstatement, whether due to fraud or error, at the financial statement level by analysing their pricing decision (i.e., audit fees). Using a panel data set of 12,330 firms from 28 countries over the period 2003–2012 and different measures of CSR performance, we find a U‐shaped relationship between firms’ CSR performance and audit fees. This result suggests that there is an optimal level of CSR performance that minimizes the auditor's assessment of the risk of material misstatement, which in turn lowers the need for greater auditor effort; that is why auditors charge firms significantly less when their CSR performance is at the optimal level. Finally, we also show that the optimal level of CSR performance varies with the degree of environmental dynamism, ownership concentration and leverage.
    August 17, 2017   doi: 10.1111/jbfa.12268   open full text
  • Managerial ability and bank‐loan pricing.
    Gus Franco, Ole‐Kristian Hope, Haihao Lu.
    Journal of Business Finance &amp Accounting. August 17, 2017
    This paper examines the impact of borrowers’ managerial ability on lenders’ bank‐loan pricing and the channels through which managerial ability affects bank‐loan pricing. Using a large sample of US bank loans, we provide evidence that higher managerial ability is associated with lower bank‐loan prices. This effect is stronger in firms with high information risk, suggesting that an important channel for managerial ability to affect bank‐loan pricing is through improved financial disclosure to mitigate information asymmetry. The relationship is also stronger for firms with weak business fundamentals, implying that another channel is through improved business performance. Of these two mechanisms, path analysis suggests that the business‐fundamentals mechanism is the more important channel through which managerial ability affects bank‐loan pricing.
    August 17, 2017   doi: 10.1111/jbfa.12267   open full text
  • Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis.
    Choong‐Yuel Yoo, Tae Hee Choi, Jinhan Pae.
    Journal of Business Finance &amp Accounting. August 11, 2017
    When the fair value accounting (FVA) option for property, plant, and equipment was introduced in the midst of the global financial crisis, a significant proportion of Korean firms elected FVA. We attribute this unusual boom in asset revaluations to the nation's culture of government intervention and civilian compliance, which was particularly espoused during this period of financial turmoil, and a foreseeable option to switch back to historical cost accounting. We find that among those firms whose debt‐to‐equity ratios are low, public firms opt for the FVA option more often than private firms, suggesting that the need to communicate fair value information with diversified equity holders is more important than the need to do so with creditors. In contrast, among those firms whose debt‐to‐equity ratios are high enough to warrant such unfavorable dispositions as new debt freezes and monitoring by regulators, we find no difference in the FVA choice between private and public firms. These findings imply that during the global financial crisis, private firms that rely heavily on debt financing have a strong incentive to utilize FVA to comply with government guidelines for the debt‐to‐equity ratio and to ease a potential hold‐up problem by influential creditors.
    August 11, 2017   doi: 10.1111/jbfa.12266   open full text
  • Earnings quality and short selling: Evidence from real earnings management in the United States.
    KoEun Park.
    Journal of Business Finance &amp Accounting. August 02, 2017
    Prior research provides evidence consistent with managers using real earnings management (REM) to increase earnings. This study examines whether short sellers exploit the overvaluation of firms employing REM. I find that firms with more REM have higher subsequent short interest. The positive relation between REM and short interest is more pronounced in settings where the costs associated with accrual‐based earnings management are high, such as when a firm has low accounting flexibility or faces greater scrutiny from a high quality auditor. I also find some evidence that short sellers respond to REM more than to other fundamental signals of firm overvaluation. My inferences are robust to the use of propensity score matching. Collectively, my evidence suggests that short sellers not only trade on REM information, but they also trade as if they understand the substitutive nature of alternative earnings management methods. This study provides additional insight into the important role that short sellers play in monitoring managerial operating decisions and overall earnings quality.
    August 02, 2017   doi: 10.1111/jbfa.12264   open full text
  • CEO equity incentives and the remediation of material weaknesses in internal control.
    Xuejiao Liu, Xiaohong Liu.
    Journal of Business Finance &amp Accounting. July 28, 2017
    This study examines how CEO equity incentives affect the remediation of material weaknesses (MWs) in internal control disclosed pursuant to the Sarbanes‐Oxley Act (SOX). We find that the sensitivity of CEO equity portfolios to stock price (CEO price sensitivity, or delta) has a positive impact on firm promptness in remedying MWs, whereas the sensitivity of CEO equity portfolios to stock return volatility (CEO volatility sensitivity, or vega) has a negative impact on firm promptness in remedying MWs. In addition, we provide evidence that effective boards of directors mitigate the undesirable, negative effect of CEO volatility sensitivity on remediation of MWs. Our results shed light on the effects of equity compensation structures on internal control quality in the more transparent, post‐SOX environment.
    July 28, 2017   doi: 10.1111/jbfa.12265   open full text
  • The impact of bank merger growth on CEO compensation.
    Zhian Chen, Wing‐Yee Hung, Donghui Li, Lu Xing.
    Journal of Business Finance &amp Accounting. July 06, 2017
    We examine the impact of bank mergers on chief executive officer (CEO) compensation during the period 1992–2014, a period characterised by significant banking consolidation. We show that CEO compensation is positively related to both merger growth and non‐merger internal growth, with the former relationship being higher in magnitude. While CEO pay–risk sensitivity is not significantly related to merger growth, CEO pay–performance sensitivity is negatively and significantly related to merger growth. Collectively, our results suggest that, through bank mergers, CEOs can earn higher compensation and decouple personal wealth from bank performance. Furthermore, we document a more severe agency problem in CEO compensation as a consequence of bank mergers relative to mergers in industrial firms. Finally, we find that the post‐financial crisis regulatory reform of executive compensation in banks has limited effectiveness in curbing the merger–pay links.
    July 06, 2017   doi: 10.1111/jbfa.12263   open full text
  • Reputation as a governance mechanism? Evidence from payout policy of insider‐controlled firms in Taiwan.
    Liang‐wei Kuo.
    Journal of Business Finance &amp Accounting. July 05, 2017
    This paper examines the effect of entrenched insiders’ reputational concerns on corporate payout policy in Taiwan, a market in which typical public firms are controlled by a single dominant shareholder who is subject to weak takeover threats and has incentives and abilities to extract private benefits by oppressing minority equity holders. The reputation‐building hypothesis predicts that firms with higher expropriation risk by a controlling shareholder make more payouts to credibly commit not to expropriate minority shareholders, thereby establishing reputation in the capital market for risk diversification and low‐cost external financing. I show that corporate payout intensity is significantly and positively correlated with measures related to the moral hazard of dominant owners. The reputation effect manifests in firms that most value it; the interaction analyses indicate that younger, smaller, or growth firms with higher controlling shareholder expropriation risk pay more cash dividends. Moreover, firms are less likely to omit dividends and more likely to resume dividends when their controlling shareholders are more entrenched. Finally, I show that the value of cash dividends is higher for firms with higher controlling shareholder expropriation risk and that expected dividend increases in these firms are value enhancing.
    July 05, 2017   doi: 10.1111/jbfa.12261   open full text
  • Auditor selection and corporate social responsibility.
    Wen‐Chi Sun, Hua‐Wei Huang, Mai Dao, Chaur‐Shiuh Young.
    Journal of Business Finance &amp Accounting. July 04, 2017
    This study examines the association between the selection of an industry‐specialist auditor and corporate social responsibility (CSR). We find that firms with higher CSR ratings are more likely to hire industry‐specialist auditors (national‐level industry leaders, city‐level industry leaders or joint city‐national industry leaders). Moreover, firms with better CSR performance related to product quality and the environment in controversial industries are found to select non‐specialized auditors. The results suggest that such firms may overinvest in CSR activities associated with the environment and product issues to disguise the sin nature of their manufactured goods, and simultaneously engage low quality auditors perhaps to avoid full disclosure of potential environmental and legal liabilities. Overall, we conclude that CSR is associated with the non‐controversial firms ensuring high quality financial reporting in response to societal expectations, and thus CSR firms in such industries have strong incentives to engage industry‐specialist auditors.
    July 04, 2017   doi: 10.1111/jbfa.12260   open full text
  • Myopic market pricing and managerial myopia.
    Alexandre Garel.
    Journal of Business Finance &amp Accounting. June 30, 2017
    This paper develops a firm‐level measure of myopic market pricing, which captures the extent to which the market overvalues short‐term expected abnormal earnings relative to longer‐term ones. The empirical analysis shows that myopically priced firms manage earnings more actively and invest less in R&D. The impact of myopic market pricing is concentrated in firms where managers cater more to market pricing, that is, in firms with greater short‐term investor ownership, with CEO compensation that is more sensitive to the firm share price, and with higher equity dependence. Additional tests show that these findings are robust to the consideration of market (under)overpricing. The results suggest that when managers cater to market pricing, market myopia encourages managerial myopia.
    June 30, 2017   doi: 10.1111/jbfa.12262   open full text
  • Clawback provision adoption, corporate governance, and investment decisions.
    Yu Chen, Carol E. Vann.
    Journal of Business Finance &amp Accounting. June 01, 2017
    We examine the effect of corporate governance on the likelihood of clawback provision adoption, and its consequences in terms of corporate investment practices and risk‐taking behavior. We find that firms with strong governance (as proxied by board independence, diligence, and size) are positively associated with the firm's adoption of a clawback provision; whereas firms with weak governance (as proxied by management entrenchment, i.e., CEO duality status and tenure) are negatively associated with clawback provision adoption. Using the propensity‐score matching, difference‐in‐differences research design, and inverse Mills ratio to mitigate omitted variables and self‐selection biases, we find that after adopting a clawback provision, firms’ abnormal investment decreases and the firms’ investments are less risky.
    June 01, 2017   doi: 10.1111/jbfa.12259   open full text
  • Balance sheet conservatism and audit reporting conservatism.
    Asad Kausar, Clive Lennox.
    Journal of Business Finance &amp Accounting. May 31, 2017
    Financial reports are prepared on a going‐concern (GC) basis rather than a liquidation basis even when companies are highly distressed. This allows distressed companies to report book values of assets that greatly exceed their liquidation values, implying a lack of conservatism in the balance sheet. We argue that auditors issue going‐concern opinions in order to warn investors about this lack of balance sheet conservatism. This argument leads to two testable hypotheses. First, for companies that are at risk of bankruptcy, auditors are more likely to issue GC opinions when the book values of assets under the GC assumption are high relative to the expected liquidation values of assets (i.e., when the GC assumption causes the balance sheet to lack conservatism). Second, for companies that enter bankruptcy, the issuance of a prior GC opinion has predictive information content with respect to the wedge between the book values of assets and the future liquidation values of those same assets. Our results strongly support both hypotheses. The findings are important because they indicate that conservative audit reporting helps to compensate for a lack of conservatism in the balance sheet, which arises because the GC assumption permits the book values of assets to exceed their liquidation values.
    May 31, 2017   doi: 10.1111/jbfa.12256   open full text
  • Stock‐bond return co‐movement and accounting information.
    Stefano Cascino.
    Journal of Business Finance &amp Accounting. May 31, 2017
    I examine how an important attribute of financial reporting quality, i.e., accounting conservatism, affects the sensitivity of corporate bond returns to changes in the value of equity (i.e., the hedge ratio). The correlation between stock and bond returns (co‐movement) is a fundamental input for asset allocation decisions as it determines the diversification benefits of bonds relative to equities within an investment portfolio. According to structural models of credit risk, co‐movement should be generally positive, but lower when the risk of wealth transfers from bondholders to shareholders is severe. I find that firms that report conservative earnings and use covenants in their bond contracts exhibit on average stronger co‐movement. This result is consistent with conservatism providing bondholders with a credible and contractible signal that improves monitoring, thus preventing wealth transfers.
    May 31, 2017   doi: 10.1111/jbfa.12253   open full text
  • Effect of international working experience of individual auditors on audit quality: Evidence from China.
    Xiaolin Chen, Yunhao Dai, Dongmin Kong, Weiqiang Tan.
    Journal of Business Finance &amp Accounting. May 29, 2017
    This paper investigates the effects of auditors with international working experience on audit quality in emerging markets. Such auditors are associated with better audit quality, a pattern that is further supported by an examination based on a propensity score matching sample that controls for endogeneity. Chief financial officers with international experience are more conservative in the client company of their auditors who have international working experience. Further, reviewer partners with international working experience provide better audit quality in terms of low accruals, less below‐the‐line items, and less audit reporting aggressiveness, while engagement partners with international working experience require high audit fees. Moreover, financial reports signed by auditors with international working experience significantly increase analyst forecast accuracy and decrease analyst forecast dispersion. Our results are robust to different specifications and alternative measures. Overall, this paper highlights the importance of human capital and provides direct evidence on how auditors with international working experience use their knowledge and audit skills in emerging markets.
    May 29, 2017   doi: 10.1111/jbfa.12257   open full text
  • The effect of restatements on analyst behavior.
    Chunlai Ye, Lin‐Hui Yu.
    Journal of Business Finance &amp Accounting. May 29, 2017
    This paper examines how changes in the credibility of financial reporting affect analyst behavior. Using a sample of restatement firms experiencing a substantial change in credibility over 1997–2006, we document that restatements have a long‐lived effect on analyst behavior and that analysts differentiate between restatements caused by irregularities and those caused by errors. We find that while irregularity restatement firms exhibit a reduction in analyst coverage and forecast accuracy and an increase in forecast dispersion in the post‐restatement period, other restatement firms exhibit only an increase in forecast error. Finally, we find evidence to suggest that remedial actions reduce the effect of irregularity restatements on analyst behavior. Overall, these results are consistent with the notion that restatements affect analyst behavior in forming judgements regarding subsequent earnings announcements.
    May 29, 2017   doi: 10.1111/jbfa.12255   open full text
  • Tax avoidance and ex ante cost of capital.
    Kirsten A. Cook, William J. Moser, Thomas C. Omer.
    Journal of Business Finance &amp Accounting. May 28, 2017
    This study examines the association between tax avoidance and ex ante cost of equity capital. Based on prior research, we develop two proxies for investors’ expectations of tax avoidance and explore whether deviations from those expectations result in higher ex ante cost of equity capital. We find that the ex ante cost of equity capital increases with tax avoidance that is either below or above investor expectations and that the increase is larger for tax avoidance that exceeds investors’ expectations. We then examine whether firms that alter their future tax avoidance exhibit a lowering of their ex ante cost of equity capital and find that tax avoidance decreases (increases) from the prior year for firms that were above (below) investors’ expectations in the prior year. These results are consistent with the trade‐off suggested by the Scholes and Wolfson framework and reinforce the notion that balancing tax benefits and non‐tax costs is an important feature of firms’ tax planning.
    May 28, 2017   doi: 10.1111/jbfa.12258   open full text
  • The role of unaffiliated bankers on conditional conservatism: Evidence from IFRS information shock.
    Pietro Bonetti, Elisabetta Ipino, Antonio Parbonetti.
    Journal of Business Finance &amp Accounting. May 25, 2017
    We exploit IFRS mandatory adoption as a source of variation in the demand for conditional conservatism to examine the role of unaffiliated bankers on the level of conditional conservatism. We show that firms with unaffiliated bankers on boards of directors experience a significant increase in the level of conditional conservatism compared with firms without unaffiliated bankers on boards. These findings hold after we account for other country‐level factors that shape the demand for conditional conservatism. Additional analyses show that the role of unaffiliated bankers on conditional conservatism depends also on firm‐specific incentives arising from the contracting environment. Taken together, our findings provide new insights into the role of corporate governance arrangements on financial reporting outcomes.
    May 25, 2017   doi: 10.1111/jbfa.12252   open full text
  • Corporate social responsibility and firm financial risk reduction: On the moderating role of the legal environment.
    Mohammed Benlemlih, Isabelle Girerd‐Potin.
    Journal of Business Finance &amp Accounting. May 17, 2017
    Approaching the institutional environment through its regulative component, we distinguish between shareholder‐oriented and stakeholder‐oriented countries. Identifying first this classification with the distinction between common law versus civil law countries and using a large sample of 5,716 firm‐year observations that represents 1,169 individual firms in 25 countries between 2001 and 2011, we show that Corporate Social Responsibility (CSR) significantly reduces firms’ idiosyncratic risk in civil law countries but not in common law countries. Using then a more direct classification based on shareholder and employee protection scores, our findings suggest that CSR negatively affects firms’ idiosyncratic and systematic risks only in less shareholder‐oriented and more stakeholder‐oriented countries, respectively. These findings are similar in the different components of CSR with two notable exceptions: a high score in corporate governance reduces firm risk only in common law countries, and community involvement increases idiosyncratic risk in more shareholder‐oriented and less stakeholder‐oriented countries, respectively. Taken together, our results strongly support the view that the relationship between CSR and financial risk is moderated by the institutional context of the firm.
    May 17, 2017   doi: 10.1111/jbfa.12251   open full text
  • Do analysts who understand accounting conservatism exhibit better forecasting performance?
    Jay Heon Jung, Sonya S. Lim, Jinhan Pae, Choong‐Yuel Yoo.
    Journal of Business Finance &amp Accounting. May 11, 2017
    This study investigates the performance of analysts when they match the asymmetric timeliness of their earnings forecast revisions (i.e., asymmetric forecast timeliness) with the asymmetric timeliness of firms’ reported earnings (i.e., asymmetric earnings timeliness). We find that better timeliness‐matching analysts produce more accurate earnings forecasts and elicit stronger market reactions to their forecast revisions. Further, better timeliness‐matching analysts issue less biased earnings forecasts, more profitable stock recommendations and have more favorable career outcomes. Overall, our results indicate that analysts’ ability to incorporate conditional conservatism into their earnings forecasts is an important reflection of analyst expertise and professional success.
    May 11, 2017   doi: 10.1111/jbfa.12254   open full text
  • The CDS market reaction to restatement announcements.
    Lijing Du.
    Journal of Business Finance &amp Accounting. May 10, 2017
    I investigate the credit market's reaction to restatement announcements through changes in credit default swap (CDS) spreads. I document an overall positive association between CDS returns and restatement announcements. Specifically, I find that more positive CDS returns are associated with restatements (1) involving fraud and (2) affecting more accounts. Moreover, these reactions are sensitive to the underlying entities’ credit ratings and the market‐wide investor sentiment. Next, I compare CDS and stock market reactions and find that more negative stock returns are associated with restatements (1) involving fraud and (2) decreasing reported income.
    May 10, 2017   doi: 10.1111/jbfa.12250   open full text
  • Option Implied Dividends Predict Dividend Cuts: Evidence from the Financial Crisis.
    Andy Fodor, David L. Stowe, John D. Stowe.
    Journal of Business Finance &amp Accounting. May 03, 2017
    We employ the forward‐looking implied dividend information contained in option prices to predict dividend cuts and omissions during the recent financial crisis. The large number of dividend cuts and omissions during the 2008–09 financial crisis period provides the opportunity to study the predictability of dividend cuts in a controlled environment. Implied dividends and implied volatility, based on put–call parity and computed from put and call option prices, prove to be effective in predicting those cuts, especially compared to only using the equity market and accounting variables conventionally used for this purpose. Options‐derived variables (implied dividends and implied volatility) enhance the ability to identify firms more likely to reduce or omit dividend payments.
    May 03, 2017   doi: 10.1111/jbfa.12249   open full text
  • Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality*.
    Artem Durnev, Tiemei Li, Michel Magnan.
    Journal of Business Finance &amp Accounting. May 03, 2017
    We explore how firms’ operations in Offshore Financial Centers (OFCs) through subsidiaries or affiliates affect the quality of financial reporting. Using a unique and large sample of firms that have headquarters in the 15 countries with the strictest legal regimes and have subsidiaries or affiliates in OFCs, we find that such firms exhibit lower financial reporting quality than comparable firms without OFC operations. We also find that as OFC characteristics become more prevalent, firms are more likely to engage in both accrual‐based and real earnings management. More importantly, after disentangling OFC characteristics into the opportunity for tax avoidance, regulation arbitrage and secrecy policies, we find that beyond tax avoidance, regulation arbitrage and the secrecy policies of OFCs significantly affect financial reporting quality. The causal effect of OFC operations is supported by the analysis of financial reporting quality when firms set up OFC operations. Our findings are robust to various additional tests addressing potential endogeneity issues. We conclude that the assessment of a firm's institutional environment must encompass the registration status of its subsidiaries or affiliates as well as its own.
    May 03, 2017   doi: 10.1111/jbfa.12240   open full text
  • Related Party Transactions, Corporate Governance and CEO Compensation.
    Steven Balsam, Richard H. Gifford, John Puthenpurackal.
    Journal of Business Finance &amp Accounting. May 03, 2017
    Examining the years 2001–2012, we document a decrease in reported CEO related party transactions (RPTs) and an increase in reported outside director RPTs, with the largest change occurring around the 2006 Securities and Exchange Commission (SEC) RPT disclosure changes. Our analysis of the determinants of RPTs and their association with CEO compensation also shows an impact of the SEC disclosure change, as we find support for the weak governance hypothesis in the pre‐2006 period and some support for the efficient contracting hypothesis post‐2005. While our results vary by model, pre‐2006, consistent with weak governance we find that outside director RPTs are positively associated with CEO compensation, with our estimates of the impact ranging from 8 to 18% depending on the model. In the post‐2005 period, this result dissipates, and we find some evidence consistent with the efficient contracting hypothesis. Overall we find that the SEC RPT disclosure change appears to have had a significant impact on reported RPTs, the determinants of those RPTs, and the impact of those RPTs on CEO compensation.
    May 03, 2017   doi: 10.1111/jbfa.12245   open full text
  • Corporate Lobbying, Visibility and Accounting Conservatism.
    Xiangting Kong, Suresh Radhakrishnan, Albert Tsang.
    Journal of Business Finance &amp Accounting. May 03, 2017
    In this study, we examine the relationship between a firm's lobbying activities and financial reporting quality using a US setting where public scrutiny of corporate political activities is high. More importantly, we examine whether and how a firm's visibility shapes the relationship between its corporate lobbying activities and accounting conservatism. Adopting annual lobbying expenditure data to measure firms’ lobbying activities, and using a propensity‐score‐matching methodology to control for differences in firm characteristics between lobbying and non‐lobbying firms, we find a positive relationship between a firm's lobbying intensity and the degree of accounting conservatism in its financial reporting. We further find this positive relationship to be more pronounced in lobbying firms with a higher level of visibility. These results are robust after controlling for a firm's political connections, across various conditional conservatism measures, and across a number of visibility measures including firm size, the number of analysts following the firm, the age of the firm, the number of foreign stock exchanges that the firm is cross‐listed in, and the level of the firm's media coverage. Together, our findings add to the literature on how firms’ political activities shape their accounting practices in general, and accounting conservatism in particular. More importantly, our findings suggest that the heightened public attention paid to political activities in the US yields incentives for firms to be more conservative in their accounting practices.
    May 03, 2017   doi: 10.1111/jbfa.12246   open full text
  • The BP Oil Spill: Shareholder Wealth Effects and Environmental Disclosures.
    Frank Heflin, Dana Wallace.
    Journal of Business Finance &amp Accounting. April 24, 2017
    We use the BP oil spill to provide new evidence regarding the consequences of, and motivations for, environmental disclosures. We find that among oil and gas firms drilling in US waters, those with greater environmental disclosure suffered smaller negative shareholder wealth effects following the spill. This suggests that shareholders believed firms with more environmental disclosures were better prepared to address future environmental regulations and less likely to experience similar environmental incidents. We also document an increase in environmental disclosure, specifically disclosures of disaster readiness plans, in the year following the spill. Firms with poorer past environmental performance were more likely to increase disaster readiness plan disclosures. The increased disclosure by the poor pre‐spill environmental performers is not entirely window dressing, as their post‐spill environmental performance improved. The totality of our evidence is most consistent with the voluntary disclosure theory of environmental disclosure.
    April 24, 2017   doi: 10.1111/jbfa.12244   open full text
  • Controlling Shareholders’ Incentive and Corporate Tax Avoidance: A Natural Experiment in China.
    Oliver Zhen Li, Hang Liu, Chenkai Ni.
    Journal of Business Finance &amp Accounting. April 06, 2017
    The split share structure reform removes a significant market friction in China's capital market by allowing previously non‐tradable shares to be freely tradable at market prices. Such a reform reduces the agency conflict between controlling shareholders and minority shareholders as the former now care more about stock prices. We find that state‐owned firms, but not non‐state‐owned firms, significantly increased their tax avoidance activities after the reform. We attribute this differential effect to the dual role of the government as state‐owned firms’ controlling shareholder as well as the tax claimant. Further, this effect is more pronounced for state‐owned firms that are more likely to be influenced by the government prior to the reform. Finally, the reform reinforces a positive association between tax avoidance and firm value. Overall, our study suggests that when controlling shareholders are more concerned about stock prices, state‐owned firms engage more in tax avoidance activities to enhance firm value.
    April 06, 2017   doi: 10.1111/jbfa.12243   open full text
  • Are Entrenched Managers’ Accounting Choices More Predictive of Future Cash Flows?
    Bradley E. Lail, Gregory W. Martin.
    Journal of Business Finance &amp Accounting. April 05, 2017
    We examine the role manager entrenchment has on firms’ financial reporting quality. More specifically, we test whether entrenched managers’ reported accruals deviate from industry norms and whether entrenched managers’ abnormal accruals are more (or less) predictive of future cash flows. Consistent with implications from prior research, we find that firms with entrenched managers generally report lower levels of abnormal accruals (in an absolute sense), but the abnormal accruals utilized by entrenched managers are more predictive of future cash flows. Contrary to a more traditional view of manager entrenchment, our evidence suggests that entrenched managers report higher quality abnormal accruals. While prior research provides evidence that manager entrenchment is associated with negative economic outcomes, we argue that attempts to limit entrenchment are unlikely to improve financial reporting quality and may actually lower quality. Future corporate governance research should consider not only the level but also the quality of the association between accounting choices and manager entrenchment.
    April 05, 2017   doi: 10.1111/jbfa.12247   open full text
  • Corporate Innovation Strategy, Analyst Forecasting Activities and the Economic Consequences.
    Ning Jia.
    Journal of Business Finance &amp Accounting. March 28, 2017
    We examine the impact of corporate innovation strategy on analyst following and forecasting performance, as well as the associated economic consequences. Using a sample of US firms from 1992−2012, we find that firms pursuing an exploration‐oriented innovation strategy (as opposed to an exploitation‐oriented innovation strategy) are associated with lower analyst coverage, higher forecast error and dispersion. The effect is less pronounced for firms with greater disclosure of innovation activities, and for firms followed by analysts with more firm‐specific experience. We also examine how innovation strategy affects the perceived credibility of analyst forecasts and find that investors appear to be less responsive to forecast revisions issued for exploratory firms. Such firms also incur a higher level of cash holdings, greater internal financing, and lower dividend ratio. The findings of this paper advance our understanding of how a public company's choice of innovation strategy affects its performance in the capital markets as well as the associated economic consequences.
    March 28, 2017   doi: 10.1111/jbfa.12242   open full text
  • The Role of Foreign Shareholders in Disciplining Financial Reporting.
    Christof Beuselinck, Belen Blanco, Juan Manuel García Lara.
    Journal of Business Finance &amp Accounting. March 24, 2017
    We investigate the role of foreign shareholders in improving the quality of accounting information provided by firms domiciled in countries with low de facto institutional quality. Using a sample of firms from four South European countries (Greece, Italy, Portugal and Spain) for which we observe detailed ownership evolutions over the period 2002–2007, we find that increases in foreign ownership lead to increases in financial reporting quality but only if the foreign shareholders are domiciled in countries with strong investor protection mechanisms. Further, we find that the improvement in financial reporting quality is more pronounced in the case of foreign institutional investors. Finally, our results hold before and after the introduction of the International Financial Reporting Standards (IFRS) in 2005.
    March 24, 2017   doi: 10.1111/jbfa.12239   open full text
  • Managerial Discretion in Accruals and Informational Efficiency.
    Pietro Perotti, David Windisch.
    Journal of Business Finance &amp Accounting. March 21, 2017
    In this paper, we examine the relation between managerial discretion in accruals and informational efficiency. We measure managerial discretion in accruals by the absolute value of abnormal accruals. Assuming that efficient prices follow a random walk, we measure informational efficiency by using stock return variance ratios. We find that the absolute value of abnormal accruals is negatively associated with the price deviation from a random walk pattern, estimated in the 12‐month period subsequent to the accrual reporting; hence, future informational efficiency increases with the extent to which managers exercise discretion over accruals. The results are consistent with the view that discretionary accruals, on average, convey useful information to investors and facilitate the price convergence to its fundamental value. Our findings are robust to a battery of tests, including tests to validate both our measures of informational efficiency and our measure of managerial discretion in accruals.
    March 21, 2017   doi: 10.1111/jbfa.12241   open full text
  • Impression Management and Non‐GAAP Disclosure in Earnings Announcements.
    Encarna Guillamon‐Saorin, Helena Isidro, Ana Marques.
    Journal of Business Finance &amp Accounting. March 15, 2017
    We study the market's reaction to the disclosure of non‐GAAP earnings measures that are combined with high impression management. We construct an impression management score that captures several communication techniques that managers often use to positively bias investors’ perceptions of firm performance. We hand‐collect and code both quantitative and qualitative information from earnings announcement press releases of large European firms. Our results indicate that non‐GAAP measures are informative to capital markets. However, non‐GAAP adjustments are more persistent when accompanied by higher levels of impression management. This evidence is consistent with managers attempting to distort users’ perceptions when non‐GAAP adjustments are of lower quality. Market reaction tests suggest that investors are able to see through managers’ intentions and discount non‐GAAP information that is accompanied by high impression management. Moreover, investors in more sophisticated markets penalize non‐GAAP measures communicated with high impression management. Our results are robust to a battery of sensitivity tests, including the use of a machine‐coded tone measure.
    March 15, 2017   doi: 10.1111/jbfa.12238   open full text
  • Overconfidence, CEO Awards, and Corporate Tax Aggressiveness.
    Thomas R. Kubick, G. Brandon Lockhart.
    Journal of Business Finance &amp Accounting. February 24, 2017
    Theory and prior research suggest that overconfidence leads managers to overestimate their own ability to generate returns, leading to riskier corporate policies. We use a novel dataset of media awards as an exogenous shock to overconfidence to test whether award‐winning CEOs adopt more aggressive corporate tax policies. Using propensity score matching and a difference‐in‐difference design, we find strong evidence that firms with an award‐winning CEO exhibit significantly greater tax aggressiveness following the award. Overall, our results suggest that CEO overconfidence has a meaningful impact on corporate tax policy.
    February 24, 2017   doi: 10.1111/jbfa.12237   open full text
  • Does Stock Liquidity Affect Accrual‐based Earnings Management?
    Kelly Huang, Brent Lao, Gregory McPhee.
    Journal of Business Finance &amp Accounting. February 21, 2017
    This study investigates the effects of stock liquidity on earnings management. While prior research finds that liquidity has mixed effects on corporate governance, our baseline regression results show that an increase in stock liquidity is associated with an increase in discretionary accruals and revenues. To establish causality, we use two quasi‐natural experiments that exploit exogenous increases in stock liquidity resulting from regulatory changes to the minimum tick size. The results of our difference‐in‐differences approach indicate that stock liquidity increases accrual‐based earnings management. Additional analysis suggests that liquidity affects earnings management by magnifying the effects of takeover pressure and equity compensation.
    February 21, 2017   doi: 10.1111/jbfa.12236   open full text
  • National Culture and the Valuation of Cash Holdings.
    Svetlana Orlova, Ramesh Rao, Tony Kang.
    Journal of Business Finance &amp Accounting. February 20, 2017
    Prior studies document that national culture traits are systematically related to cash holdings and attribute this to managerial cultural predispositions. However, it is possible that these preferences reflect investors’ cultural preferences and that managers are simply catering to investors’ preferences. It is also not clear whether the cash holding effects previously documented are value maximizing. By examining the impact of national culture traits on cash valuation, we are able to provide insight into these questions. Specifically, we examine the effect of three national culture traits – individualism, uncertainty avoidance and long‐term orientation – on firm cash valuation. Our results suggest that the previously observed effects of cultural traits on cash holdings and attributed to managerial cultural biases do not reflect investors’ preferences and are not value maximizing.
    February 20, 2017   doi: 10.1111/jbfa.12233   open full text
  • Is Japan Really a “Buy”? The Corporate Governance, Cash Holdings and Economic Performance of Japanese Companies.
    Kazuo Kato, Meng Li, Douglas J. Skinner.
    Journal of Business Finance &amp Accounting. February 15, 2017
    We investigate whether Japan's much‐touted governance reforms improve its firms’ management of cash, economic performance and valuation. Consistent with an improvement in governance since 2000, Japanese firms hold less cash and increase payouts to shareholders. Improvements in performance are associated with reductions in (excess) cash, reductions in the influence of the banks that traditionally sit at the center of horizontal keiretsu, and increases in the holdings of management and foreign investors. The market valuation of Japanese firms’ cash holdings was lower than for US firms during the 1990s but increased to levels closer to those of US firms in the 2000s. Collectively, the evidence suggests that performance improves in those Japanese companies that reform their governance practices. These findings have implications for other Asian economies, such as China, India and Korea, where there are ongoing discussions of whether improved governance can increase firm performance and valuation.
    February 15, 2017   doi: 10.1111/jbfa.12235   open full text
  • Does It Pay to Communicate with Firms? Evidence from Firm Site Visits of Mutual Funds.
    Shasha Liu, Yunhao Dai, Dongmin Kong.
    Journal of Business Finance &amp Accounting. February 03, 2017
    By using a unique dataset on mutual fund visits to listed firms in China, we investigate whether mutual funds are able to obtain private information or benefit from their communication with firms. Our findings are as follows: 1) such communication significantly increases the subsequent trading magnitude of mutual funds; 2) mutual fund trades that rely on communication significantly predict the unexpected earnings of visited firms, which is further supported by IV‐regressions that use the number of direct flights between two cities as the instrument of communication; and 3) comprehensiveness of communication topics and firms’ information environment significantly affect the benefits that mutual funds obtain from communication. Our results are robust to alternative measures and specifications, and provide insights for regulators who are concerned with fair disclosure.
    February 03, 2017   doi: 10.1111/jbfa.12232   open full text
  • The Effects of Disclosure and Analyst Regulations on the Relevance of Analyst Characteristics for Explaining Analyst Forecast Accuracy.
    Sami Keskek, Linda A. Myers, Thomas C. Omer, Marjorie K. Shelley.
    Journal of Business Finance &amp Accounting. February 02, 2017
    We posit and find an effect of disclosure and analyst reporting regulations implemented from 2000 through 2003 (including Regulation Fair Disclosure, the Sarbanes‐Oxley Act and the Global Settlement Act) on the importance of analyst and forecast characteristics for analyst forecast accuracy. Following the enactment of these regulations, more experienced analysts and All‐Star analysts do not maintain their superior forecast accuracy, and analysts employed by large brokerage houses perform worse than other analysts. In addition, we find a decrease in the importance of analyst effort, the number of industries and firms followed, days elapsed since the last forecast, and forecast horizon. While the importance of bold upward forecast revisions does not change, bold downward revisions lose their relevance for forecast accuracy after 2003. Finally, we find an increase in the importance of prior forecast accuracy. We find that the importance of these characteristics varies with the precision of publicly available information. Specifically, the decrease in the importance of most analyst and forecast characteristics and the increase in the importance of prior forecast accuracy are greater when the precision of publicly available information is low. Overall, our results suggest that the positive effects of experience, effort, brokerage house size and All‐Star status on forecast accuracy in the pre‐regulation period were because of the information advantages that these analysts enjoyed (rather than their ability to generate private information). In contrast, our results suggest that prior forecast accuracy is related to analysts’ ability to generate private information.
    February 02, 2017   doi: 10.1111/jbfa.12234   open full text
  • Analyst Tipping: Additional Evidence.
    Stanimir Markov, Volkan Muslu, Musa Subasi.
    Journal of Business Finance &amp Accounting. January 19, 2017
    We examine whether analysts tip investors during investor conferences. We find that conference‐day abnormal returns of a presenting company are about 0.6% higher when the conference is hosted by an analyst who will initiate coverage with a Buy recommendation than when the conference is hosted by non‐initiating analysts. Furthermore, conference‐day abnormal returns of the presenting company amount to half of the price run‐up during the 20 trading days prior to the Buy initiation. Finally, there is a statistically and economically significant price run‐up prior to a Sell initiation (by about –0.7%) when the analyst who will initiate coverage with a Sell recommendation hosts a conference but does not invite the company to present. Our findings collectively suggest that analysts, rather than companies, tip select investors about upcoming initiations during conferences.
    January 19, 2017   doi: 10.1111/jbfa.12231   open full text
  • The Unintended Consequences of the Frequency of PCAOB Inspection.
    Paul Tanyi, Barri Litt.
    Journal of Business Finance &amp Accounting. December 13, 2016
    After more than 50 years of self‐regulation of the US auditing profession, the Sarbanes‐Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) as a quasi‐governmental entity with statutory authority to inspect accounting firms that audit public clients. The frequency of this inspection is annual or triennial, based upon the number of public clients the firm audits. We examine the effects of these two levels of inspection frequency on financial reporting quality and audit fees for clients of small and midsize public accounting firms. Our findings provide evidence of significantly higher audit quality and audit fees for clients of annually inspected firms relative to clients of triennially inspected firms. These findings are robust to auditor‐client alignment analyses, propensity score matching, time‐series analyses, examination of firms that have changed from triennial to annual inspection, and particular examination of firms with inspection deficiencies. Overall, our study suggests that the two‐tier frequency system of PCAOB inspection may have also resulted in two‐tier audit quality and audit fee systems for small and midsize public accounting firms, with more frequent inspection leading to more rigorous and informed auditor decisions. We discuss the implications of our results for the Board and the profession at large.
    December 13, 2016   doi: 10.1111/jbfa.12230   open full text
  • Credit Ratings and Earnings Management around IPOs.
    Dimitrios Gounopoulos, Hang Pham.
    Journal of Business Finance &amp Accounting. December 08, 2016
    This study examines the impact of having a credit rating on earnings management (EM) through accruals and real activities manipulation by initial public offering (IPO) firms. We find that firms going public with a credit rating are less likely to engage in income‐enhancing accrual‐based and real EM in the offering year. The monitoring by a credit rating agency (CRA) and the reduced information asymmetry due to the provision of a credit rating disincentivise rated issuers from managing earnings. We also suggest that the participation of a reputable auditing firm is crucial for CRAs to effectively restrain EM. Moreover, we document that for unrated issuers, at‐issue income‐increasing EM is not linked to future earnings and is negatively related to post‐issue long‐run stock performance. However, for rated issuers, at‐issue income‐increasing EM is positively associated with subsequent accounting performance and is unrelated to long‐run stock performance following the offering. The evidence indicates that managers in unrated firms generally manipulate earnings to mislead investors, while managers in rated firms tend to exercise their accounting and operating discretion for informative purposes.
    December 08, 2016   doi: 10.1111/jbfa.12228   open full text
  • What Drives the Consequences of Intentional Misstatements? Evidence from Rating Analysts’ Reactions.
    Martin Bierey, Martin Schmidt.
    Journal of Business Finance &amp Accounting. December 02, 2016
    This paper aims to identify the mechanisms through which intentional misstatements adversely affect firms by analyzing rating analysts’ reaction to misstatements. In order to identify the mechanisms through which the misstatement affects firms’ credit ratings, we analyze the content of rating reports. Rating analysts are concerned about seven different mechanisms. They are most concerned about misstatement‐related violations of debt covenants that increase a firm's liquidity risk. We find that, subsequent to an intentional misstatement becoming publicly known, credit ratings of misreporting firms are adversely affected for up to seven years. The adverse impact of an intentional misstatement on a firm's credit rating is most pronounced in cases in which rating analysts mention concerns about misstatement‐related violations of covenants. Our results suggest that these covenant violations are the most severe mechanism through which misstatements adversely affect firms’ creditworthiness.
    December 02, 2016   doi: 10.1111/jbfa.12229   open full text
  • How does the Funding Status of Defined Benefit Pension Plans Affect Investment Decisions of Firms in the United States?
    Neeru Chaudhry, Hue Hwa Au Yong, Chris Veld.
    Journal of Business Finance &amp Accounting. November 24, 2016
    We investigate whether the flexibility in making contributions towards defined benefit pension plans sponsored by firms in the United States allows managers to save cash and increase investments. Firms invest more at higher levels of pension deficit, defined as pension benefit obligations less pension assets, and scaled by total assets. At the median level (90th percentile) of pension deficit, investments increase by 6.7 cents (9.4 cents) for every dollar increase in cash. As the pension deficit increases, firms deviate more from the predicted level of investment. These findings suggest that the incremental investments are more likely to represent overinvestment by managers. Our results are robust to alternative model specifications and endogeneity concerns that may arise if investments are jointly determined with the funding policy of pension plans and the firm's target cash level. We repeat our main analysis for the United Kingdom and also find for that country that, at a fixed cash level, total investment increases as pension deficit increases.
    November 24, 2016   doi: 10.1111/jbfa.12219   open full text
  • Does Branch Religiosity Influence Bank Risk‐Taking?
    Justin Chircop, Michele Fabrizi, Elisabetta Ipino, Antonio Parbonetti.
    Journal of Business Finance &amp Accounting. November 16, 2016
    Using branch‐level data on public and private US banking institutions, we investigate the importance of branch religiosity in shaping bank risk‐taking behavior. Our results show robust evidence that branch religiosity is negatively related to bank risk‐taking. This effect persists after controlling for several bank‐level and county‐level variables that might correlate with religiosity. Moreover, this result is robust to controlling for headquarter religiosity, suggesting that the effect of branch religiosity is additive and not washed out by headquarter religiosity. Overall, our findings document that headquarter religiosity does not capture the full effect of religiosity on bank behavior, as claimed by previous research, but that the religiosity of the geographic area in which the bank operates significantly influences bank behavior.
    November 16, 2016   doi: 10.1111/jbfa.12227   open full text
  • Detecting Target‐Driven Earnings Management Based on the Distribution of Digits.
    Robert Ullmann, Christoph Watrin.
    Journal of Business Finance &amp Accounting. November 10, 2016
    We present a novel research design to detect target‐driven earnings management in accounting data. As a particular concern in this line of research, information about the exact earnings target value of a given firm is often not available. We therefore develop an empirical strategy that does not require such information. To this end, we rely on the concept of the distribution of digits rather than the distribution of the earnings metric itself. We then theoretically derive that the mean of the distribution of digits, in particular, exhibits a specific pattern around the earnings target that can be exploited to investigate target‐driven earnings management. This pattern arises regardless of the distribution of digits that obtains in unmanaged data. We extensively test our theoretical predictions using both simulated and archival data.
    November 10, 2016   doi: 10.1111/jbfa.12223   open full text
  • Underwritten Dividend Reinvestment Plans and Conflicts of Interest.
    Nicholas Pricha, Sean Foley, Graham Partington, Jiri Svec.
    Journal of Business Finance &amp Accounting. November 09, 2016
    We examine conflicts of interests arising from the pricing of seasoned equity offerings (SEOs) in underwritten dividend reinvestment plans (DRIPs). A DRIP is a type of SEO that enables shareholders automatically to reinvest their dividend entitlements in the issuing company's shares. The underwriters have an incentive to sell stock during the DRIP pricing period in order to hedge price risk and/or to reduce the price at which shares are issued. Using individual brokers’ transactions, we show that underwriting brokers engage in an abnormally high level of selling during the issue pricing period. Comparison of pricing period returns between stocks with underwritten DRIPs and a matched sample of non‐underwritten DRIPs shows that significantly more negative returns accrue to firms that have their issues underwritten.
    November 09, 2016   doi: 10.1111/jbfa.12226   open full text
  • The Effects of the Specialization of Private Equity Firms on their Exit Strategy.
    Damiana Rigamonti, Elena Cefis, Michele Meoli, Silvio Vismara.
    Journal of Business Finance &amp Accounting. November 09, 2016
    We investigate how industry and stage specialization of Private Equity (PE) firms affect the likelihood to exit investments by means of trade sales, Initial Public Offerings (IPOs), or Secondary Buyouts (SBOs). Our empirical analysis relies on competing risks models. Using a sample of 818 Leveraged Buyouts (LBOs) by US and European PE firms over the period 2000–2015, we find that both industry and stage specializations of PEs increase the likelihood of exiting via IPO, whereas only industry specialization positively affects the likelihood of divesting through a trade sale. Finally, SBOs are more likely for non‐specialized investors.
    November 09, 2016   doi: 10.1111/jbfa.12221   open full text
  • The Influence of Country‐ and Firm‐level Governance on Financial Reporting Quality: Revisiting the Evidence.
    Pietro Bonetti, Michel L. Magnan, Antonio Parbonetti.
    Journal of Business Finance &amp Accounting. November 09, 2016
    This paper examines how firm‐level governance and country‐level governance interplay in shaping financial reporting quality. Using IFRS adoption as a source of variation in firms’ reporting discretion, and a large sample of European firms that mandatorily switch to the new set of standards, we find that in countries with low enforcement and weak oversight over financial reporting, only firms with strong board‐level corporate governance mechanisms experience an increase in financial reporting quality, consistent with firm‐ and country‐level governance mechanisms being substitutes. However, in countries with high enforcement and strict oversight over financial reporting, firms with either strong or weak board‐level governance mechanisms experience an increase in financial reporting quality, even if the increase is larger for the former group. Overall, our findings indicate that in the debate about the effects of governance on the quality of financial reporting, it is important to consider both country‐ and firm‐level corporate governance mechanisms.
    November 09, 2016   doi: 10.1111/jbfa.12220   open full text
  • Climate Change and Asset Prices: Are Corporate Carbon Disclosure and Performance Priced Appropriately?
    Andrea Liesen, Frank Figge, Andreas Hoepner, Dennis M. Patten.
    Journal of Business Finance &amp Accounting. November 03, 2016
    This paper empirically assesses the relevance of information on corporate climate change disclosure and performance to asset prices, and discusses whether this information is priced appropriately. Findings indicate that corporate disclosures of quantitative greenhouse gas (GHG) emissions and, to a lesser extent, carbon performance are value relevant. We use hand‐collected information on quantitative GHG emissions for 433 European companies and build portfolios based on GHG disclosure and performance. We regress portfolios on a standard four factor model extended for industry effects over the years 2005 to 2009. Results show that investors achieved abnormal risk‐adjusted returns of up to 13.05% annually by exploiting inefficiently priced positive effects of (complete) GHG emissions disclosure and good corporate climate change performance in terms of GHG efficiency. Results imply that, firstly, information costs involved in carbon disclosure and management do not present a burden on corporate financial resources. Secondly, investors should not neglect carbon disclosure and performance when making investment decisions. Thirdly, during the period analysed, financial markets were inefficient in pricing publicly available information on carbon disclosure and performance. Mandatory and standardised information on carbon performance would consequently not only increase market efficiency but result in better allocation of capital within the real economy.
    November 03, 2016   doi: 10.1111/jbfa.12217   open full text
  • The Informational Role of Short Sellers: The Evidence from Short Sellers’ Reports on US‐Listed Chinese Firms.
    Lei Chen.
    Journal of Business Finance &amp Accounting. October 27, 2016
    Using US‐listed Chinese firms as the setting, this paper studies a novel channel through which investors can acquire information about firms’ financial reporting quality, that is, the reports published voluntarily by short sellers. I find that short sellers tend to target firms that have financial reporting red flags and that exhibit ‘good’ operating performance and stock valuations. Targeted firms experience an average three‐day cumulative abnormal return (CAR) of −6.4%, and −13.6% for initial coverage of the firm, and the CARs are more negative when the reports allege more severe misconduct of the firms. Non‐targeted firms also experience losses in value following short seller reports, especially when they hire the same non‐Big 4 auditors as targeted firms and when their earnings quality is poor. In comparison, analysts fail to perform proper due diligence and are much less effective than short sellers in exposing misreporting risk in Chinese firms.
    October 27, 2016   doi: 10.1111/jbfa.12225   open full text
  • Predicting Corporate Bankruptcy: An Evaluation of Alternative Statistical Frameworks.
    Stewart Jones, David Johnstone, Roy Wilson.
    Journal of Business Finance &amp Accounting. October 27, 2016
    Corporate bankruptcy prediction has attracted significant research attention from business academics, regulators and financial economists over the past five decades. However, much of this literature has relied on quite simplistic classifiers such as logistic regression and linear discriminant analysis (LDA). Based on a large sample of US corporate bankruptcies, we examine the predictive performance of 16 classifiers, ranging from the most restrictive classifiers (such as logit, probit and linear discriminant analysis) to more advanced techniques such as neural networks, support vector machines (SVMs) and “new age” statistical learning models including generalised boosting, AdaBoost and random forests. Consistent with the findings of Jones et al. (), we show that quite simple classifiers such as logit and LDA perform reasonably well in bankruptcy prediction. However, we recommend the use of “new age” classifiers in corporate bankruptcy modelling because: (1) they predict significantly better than all other classifiers on both the cross‐sectional and longitudinal test samples; (2) the models may have considerable practical appeal because they are relatively easy to estimate and implement (for instance, they require minimal researcher intervention for data preparation, variable selection and model architecture specification); and (3) while the underlying model structures can be very complex, we demonstrate that “new age” classifiers have a reasonably good level of interpretability through such metrics as relative variable importances (RVIs).
    October 27, 2016   doi: 10.1111/jbfa.12218   open full text
  • Information‐Hedging Disclosures and Insider Trading.
    Stephen L. Lenkey.
    Journal of Business Finance &amp Accounting. October 26, 2016
    I model the effect of disclosure on the tradeoff between information risk, liquidity risk, and price risk for a well‐informed, risk‐averse insider. Revealing some information before trading decreases the variability of the insider's information advantage and thus reduces his information risk. Disclosure also lowers adverse selection costs for market makers, which reduces the insider's liquidity risk by increasing his trading flexibility. However, disclosure increases price risk for the insider because the price fully reflects the revealed information. The reduction in information and liquidity risks outweigh the rise in price risk when the insider is less risk averse because a less risk‐averse insider's information‐based motive for trading is stronger than his hedging motive. The opposite relation holds when the insider is more risk averse. Therefore, a less (more) risk‐averse insider experiences an increase (decrease) in welfare when he discloses some information before trading. Cost of capital and policy implications are identified.
    October 26, 2016   doi: 10.1111/jbfa.12224   open full text
  • Is Family Control Relevant for Corporate Cash Holding Policy?
    Rodrigo F. Durán, M. Belén Lozano, Serhat Yaman.
    Journal of Business Finance &amp Accounting. October 20, 2016
    This empirical research examines the effect of family control on firms’ cash holding policy. Using a sample of Western European firms, we confirm the precautionary motive for holding cash as family‐controlled firms’ desire to perpetuate the family legacy for future generations motivates them to accumulate more cash than their non‐family counterparts. We also show that, given family‐controlled firms’ long‐term perspective, they focus on cash flow volatility rather than cash flow level. Finally, the relation between financing constraints and cash holdings is not homogeneous: financially constrained family‐controlled firms hold higher levels of cash than financially constrained non‐family firms. Overall, these results suggest that family firms’ cash holding policy is the result not of a specific financial outcome but rather on the strategic objectives of the firm.
    October 20, 2016   doi: 10.1111/jbfa.12222   open full text
  • Labor Unemployment Concern and Corporate Discretionary Disclosure.
    Yuan Ji, Liang Tan.
    Journal of Business Finance &amp Accounting. October 18, 2016
    We investigate how firms strategically vary their disclosure policies in response to labor unemployment concern. Using changes in state unemployment insurance laws as exogenous variations of labor unemployment concern, we show that firms provide more bad news forecasts when unemployment concern is low. This relation is stronger when firms are financially constrained, when CEOs and CFOs have higher equity incentives, and when workers are likely to be affected more by unemployment. Our findings are not driven by earnings management reversal or underlying performance changes, and are robust to a battery of identification tests. Finally, we find a similar effect of unemployment concern on disclosure using the tone of 10‐K and 10‐Q filings as an alternative proxy for corporate disclosure. Overall, our findings suggest that labor unemployment concern is an important consideration for corporate discretionary disclosure.
    October 18, 2016   doi: 10.1111/jbfa.12212   open full text
  • Accruals Management to Avoid Losses.
    Weihong Xu.
    Journal of Business Finance &amp Accounting. October 13, 2016
    This study examines whether firms engage in accruals management to beat the zero earnings benchmark from the perspective of earnings per share (EPS). Based on net income scaled by lagged market value of equity (E/MV) to define just‐miss and just‐beat test bins, previous studies provide no or inconclusive evidence of accruals management to beat the zero earnings benchmark. I conjecture that because managers focus on shares scaled earnings performance rather than market value scaled earnings performance, forming test bins based on EPS instead of E/MV is a better approach to detect accruals management. As expected, I find evidence of accruals management to beat the zero EPS benchmark. I also find that firms are more likely to manipulate accruals when managers have stronger incentives to beat the zero EPS benchmark. In addition, accruals of firms just beating the zero EPS benchmark are more likely to reverse the next year, resulting in relatively lower future earnings for firms just beating the benchmark compared with firms just missing the benchmark.
    October 13, 2016   doi: 10.1111/jbfa.12215   open full text
  • The Risk Effects of Acquiring Distressed Firms.
    Evy Bruyland, Wouter de Maeseneire.
    Journal of Business Finance &amp Accounting. October 03, 2016
    Existing research shows that bidder default risk increases following acquisitions due to a rise in post‐acquisition leverage and managerial risk‐taking actions offsetting the potential for asset diversification. This study examines whether the risk effects of acquiring distressed targets are fundamentally different and investigates possible explanations for any dissimilarities. Bidders often acquire relatively smaller distressed targets in domestic and related industries and have a higher initial target stake and more financial flexibility, thereby minimizing risk exposure. Controlling for several characteristics of bidder investment behaviour in both types of deals, however, we find that the increase in bidder default risk is substantially larger when acquiring distressed firms.
    October 03, 2016   doi: 10.1111/jbfa.12210   open full text
  • The Young and the Restless: A Study of Age and Acquisition Propensity of CEOs of UK Firms.
    Teng Zhang, Sanjiv Sabherwal, Narayanan Jayaraman, Stephen P. Ferris.
    Journal of Business Finance &amp Accounting. October 02, 2016
    Using a large sample of CEOs of UK firms, we show that CEO age is a key determinant of acquisition activity. We find that younger CEOs are more likely to acquire another firm and spend more on large capital expenditures. We argue that while younger CEOs of both UK and US firms undertake more acquisitions than their older peers, their motivations for acquisitions might differ. We find that the stock market perceives acquisitions by younger CEOs to be of a higher quality. Following previous studies, we use CEO tenure as a proxy for reputation, and find that large acquisitions enhance CEO reputation, especially for younger CEOs. In contrast to the previous findings for CEOs of US firms, we determine that the compensation of CEOs in the UK does not increase after acquisitions. This absence of a compensation incentive for CEOs of UK firms is consistent with the idea that the UK compensation structure is more restrictive and has a smaller equity‐based component. Our evidence is also inconsistent with an overconfidence effect. Overall, our results provide consistent evidence of executive signaling by younger CEOs of UK firms eager to distinguish themselves.
    October 02, 2016   doi: 10.1111/jbfa.12216   open full text
  • The Ex‐Ante Monitoring Role of Accounting Covenants in Public Debt.
    Zahn Bozanic.
    Journal of Business Finance &amp Accounting. September 28, 2016
    In contrast to what is known about accounting covenants in private debt, little empirical evidence on the role of accounting covenants in public debt exists. Diffuse ownership, arm's length monitoring, and collective action problems are unique to the public debt setting and raise the question of whether these covenants serve their intended role. As such, this study investigates whether including covenants reliant upon accounting inputs influences borrowers’ actions to prevent adverse credit events. Accounting covenants in the public debt setting provide firms with a disciplining mechanism to renegotiate ahead of costly technical default – a stark contrast to the ex‐post renegotiation ‘trip wire’ role covenants play in private debt. In particular, the results show that including accounting covenants in public debt is associated with an increased probability of ex‐ante renegotiation, that is, negotiation through consent solicitations ahead of covenant violation. This ex‐ante renegotiation, in turn, is associated with decreased adverse credit events. Cross‐sectional results support these findings as the ex‐ante renegotiation role of accounting covenants varies with bondholders’ and trustees’ monitoring ability.
    September 28, 2016   doi: 10.1111/jbfa.12208   open full text
  • The Impact of NASD Rule 2711 and NYSE Rule 472 on Analyst Behavior: The Strategic Timing of Recommendations Issued on Weekends.
    Yi Dong, Nan Hu.
    Journal of Business Finance &amp Accounting. September 28, 2016
    Amendments to NASD Rule 2711 and NYSE Rule 472, enacted in May 2002, mandate that sell‐side analysts disclose the distribution of their security recommendations by buy, hold and sell category. This regulation enhances the transparency of analysts’ information and mitigates the long‐recognized optimistic bias in their recommendations. However, we find that analysts are more likely to issue sell recommendations or downgrade revisions on weekends when investors have limited attention after these rule changes. This pattern is more pronounced for prestigious analysts, who are more likely to influence stock prices. Market reaction tests reveal an incomplete immediate response and a greater drift to unfavorable recommendations issued on weekends. Finally, analysts who are more likely to release unfavorable recommendations on weekends exhibit higher future forecast accuracy. Our findings suggest that, while these regulatory changes effectively reduce analysts’ optimistic bias, they are also associated with an increased prevalence of a different form of distortion in the capital market.
    September 28, 2016   doi: 10.1111/jbfa.12211   open full text
  • Investment Horizons and Information.
    Kershen Huang, Alex Petkevich.
    Journal of Business Finance &amp Accounting. September 28, 2016
    We examine the relation between institutions' investment horizons on firms' financing and investment decisions. Firms with larger short‐term institutional ownership use less debt financing and invest more in corporate liquidity. In contrast, firms with larger long‐term institutional ownership use more internal funds, less external equity financing, and preserve investments in long‐term assets. These results are primarily driven by the variation in informational preferences of different institutions. We argue that short‐term (long‐term) institutions collect and use value‐neutral (value‐enhancing) information.
    September 28, 2016   doi: 10.1111/jbfa.12205   open full text
  • Target Information Asymmetry and Acquisition Price.
    Peter Cheng, Lin Li, Wilson H.S. Tong.
    Journal of Business Finance &amp Accounting. September 28, 2016
    This study investigates the effects of target information asymmetry in a takeover transaction. We find that a target with more information asymmetry receives a larger bid premium from the acquirer. We examine the response of the acquirer's investors to the bid to clarify whether the larger bid premium is an overpayment by the acquirer. We observe that the acquirer's investors respond more positively to the acquisition of an opaque target, indicating that the market recognizes the acquirer's valuation of the opaque target and agrees with the offer price. Our results indicate that corporate takeovers help to resolve asymmetric information in the capital market.
    September 28, 2016   doi: 10.1111/jbfa.12202   open full text
  • The Information Content of Corporate Pension Funding Status in Japan.
    Shingo Goto, Noriyoshi Yanase.
    Journal of Business Finance &amp Accounting. September 28, 2016
    This paper tests if a firm's pension funding ratio (pension assets/PBO) reveals the management's private information about the firm's operation when the firm can exercise discretion in pension funding. The lax enforcement of pension funding rules and the prevalence of management forecasts make Japanese firms an ideal testing ground. We show that, among firms with large business uncertainty, large accruals, or high effective tax rates, the pension funding ratio predicts the firm's management forecast errors significantly beyond conventional control variable and the effects of pension accounting management. However, the stock market does not appear to incorporate this information immediately.
    September 28, 2016   doi: 10.1111/jbfa.12197   open full text
  • Individual Large Shareholders, Earnings Management, and Capital‐Market Consequences.
    Yiwei Dou, Ole‐Kristian Hope, Wayne B. Thomas, Youli Zou.
    Journal of Business Finance &amp Accounting. September 28, 2016
    Using a large hand‐collected sample of all blockholders (ownership ≥ 5%) of S&P 1500 firms for the years 2002–2009, we first document significant individual blockholder effects on earnings management (accrual‐based earnings management, real earnings management, and restatements). This association is driven primarily by these large shareholders influencing rather than selecting firms’ financial reporting practices. Second, the market's reaction to earnings announcements suggests that investors recognize the heterogeneity in blockholders’ influence on earnings management. The results highlight the highly individualized effects of blockholders and a mechanism through which shareholders impact reported earnings.
    September 28, 2016   doi: 10.1111/jbfa.12204   open full text
  • A Comparative Analysis of Real and Accrual Earnings Management around Initial Public Offerings under Different Regulatory Environments.
    M. Alhadab, I. Clacher, K. Keasey.
    Journal of Business Finance &amp Accounting. September 28, 2016
    While earnings management around IPOs has been researched in a number of settings, there has been a relative absence of work that analyses the impact of the regulatory environment on such activities. We find that the regulatory environment does impact the real and accrual earnings management activities of IPO firms. Our results show that IPO firms listing on the lightly regulated UK Alternative Investment Market (AIM) have higher (lower) levels of accrual‐based and sales‐based (discretionary expenses‐based) earnings management around the IPO than firms listing on the more heavily regulated Main market in the UK.
    September 28, 2016   doi: 10.1111/jbfa.12201   open full text
  • Too Good to be True? An Analysis of the Options Market's Reactions to Earnings Releases.
    Yan Lu, Sugata Ray.
    Journal of Business Finance &amp Accounting. September 28, 2016
    Using option implied risk neutral return distributions before and after earnings announcements, we study the option market's reaction to extreme events over earnings announcements. While earnings announcements generally reduce short‐term uncertainty about the stock price, very good news does not reduce uncertainty and slightly bad news actually increases uncertainty. We also find that left tail probabilities decrease over earnings releases while right tail probabilities increase. We interpret these findings as evidence of maintained investor expectations that very good news is generally not released during earnings announcements, combined with skepticism in the form of lingering uncertainty at the release of such very good news.
    September 28, 2016   doi: 10.1111/jbfa.12214   open full text
  • Stock Liquidity Risk and the Cross‐sectional Earnings‐Returns Relationship.
    Zangina Isshaq, Robert Faff.
    Journal of Business Finance &amp Accounting. September 22, 2016
    We argue that a higher sensitivity to aggregate market‐wide liquidity shocks (i.e., a higher liquidity risk) implies a tendency for a stock's price to converge to fundamentals. We test this intuition within the framework of the earnings‐returns relationship. We find a positive liquidity risk effect on the relationship between return and expected change in earnings. This effect on the earnings‐returns relationship is distinct from the negative effect observed for stock illiquidity level. Notably, the liquidity risk effect is evident (absent) during periods of neutral/low (high) aggregate market liquidity. We also show that the liquidity risk effect is dominant in firms that: (a) are of intermediate size; (b) are of intermediate book‐to‐market; and (c) are profit making.
    September 22, 2016   doi: 10.1111/jbfa.12209   open full text
  • Earnings Warnings and CEO Welfare.
    Ping Wang, Masako Darrough, Linna Shi.
    Journal of Business Finance &amp Accounting. September 07, 2016
    Some CEOs decide voluntarily to issue a warning when they expect a negative earnings surprise. Prior research suggests that warnings contain incremental information beyond actual earnings; warning firms tend to experience permanent earnings decreases. This paper investigates whether compensation committees take warnings into account in setting CEO compensation. We find that warnings are significantly negatively (positively) associated with CEO bonus (option grants), suggesting that compensation committees adjust CEO compensation towards a more high‐powered structure after warnings. However, the sensitivity of bonus or option grants to earnings and stock returns is not affected except for bonus sensitivity to stock returns. We also find weak evidence of an increase in forced CEO turnover after warnings, accompanied by a significant increase in its sensitivity to stock returns. This benefits CEOs with higher ability but imposes more risk on other CEOs. These findings provide a partial explanation of why not every CEO facing a negative surprise decides to issue a warning. Our results are robust to various specifications. In particular, the impact of warnings on compensation appears invariant to the timing or the number of warnings. Overall, these findings suggest that the signal from warnings is used in determining CEO compensation and retention.
    September 07, 2016   doi: 10.1111/jbfa.12213   open full text
  • The Effect of Regulations on Pension Risk Shifting: Evidence from the US and Europe.
    Yanling Guan, Daphne Lui.
    Journal of Business Finance &amp Accounting. July 27, 2016
    This paper provides evidence that pension regulations can incentivize or curb risk shifting in the investment of defined benefit plan assets. We document that in the US, where the pension insurance premium charged by the Pension Benefit Guaranty Corporation is largely flat, financially distressed firms with severely underfunded plans shift pension investment risk. We further find that risk shifting is mitigated in the UK after the implementation of risk‐adjusted pension insurance premiums, and in the Netherlands where full pension funding is mandatory. Overall the results in this paper lend support to the view that structural flaws in the US statutory pension insurance scheme incentivize high‐risk sponsors to gamble their pension assets when distress terminations of their plans become foreseeable.
    July 27, 2016   doi: 10.1111/jbfa.12199   open full text
  • The Choice of Debt Source by UK Firms.
    Andrew Marshall, Laura Mccann, Patrick Mccolgan.
    Journal of Business Finance &amp Accounting. July 27, 2016
    We examine the choice of borrowing source among public debt, syndicated bank loans, bilateral bank loans and non‐bank private debt. Using a sample of 400 non‐financial firms over the period 2000–2012, we find strong support for the reputational theory of borrowing source. Larger firms are more likely to borrow in public debt markets. Bank dependent firms are less likely to borrow in public debt markets and choose between bank and non‐bank private debt based on maturity, collateral available to lenders and other firm characteristics. These results are consistent with the role of borrower reputation being the primary determinant of borrowing source for UK listed firms.
    July 27, 2016   doi: 10.1111/jbfa.12194   open full text
  • Does the Riskiness of R&D Outweigh Its Benefits? The Perspective of US Private Lenders.
    Mustafa Ciftci, Masako Darrough.
    Journal of Business Finance &amp Accounting. July 27, 2016
    We investigate the relationship between R&D investments and loan spread. Prior research documents that R&D is associated with greater future benefits and risks, suggesting that the valuation of R&D depends on a tradeoff between the two. Some research finds that bondholders consider that the benefits of R&D outweigh its risks: R&D is negatively associated with bond yields. This is surprising given that debt holders are more concerned about downside risk due to asymmetric payoffs. Using data on private debt from the US, we find an overall positive association between loan spread and R&D intensity, suggesting that the riskiness of R&D appears to outweigh its benefits for private lenders. Furthermore, an asymmetric payoff structure implies that the risks of R&D for lenders increase with default risk. Consistent with this argument, we find a positive association between R&D and loan spread for firms that are smaller, with high default‐risk ratings, unrated (no public debt), or in industries with weaker legal protection. Unrated firms are in the most R&D‐intensive group and make up nearly 60% of the firms with private debt. Consequently, studies that exclude unrated firms are likely to present an incomplete picture of the perspective of debt holders on R&D.
    July 27, 2016   doi: 10.1111/jbfa.12196   open full text
  • Market Reaction to Seasoned Offerings in China.
    Jia Liu, Saeed Akbar, Syed Zulfiqar Ali Shah, Dayong Zhang, Dong Pang.
    Journal of Business Finance &amp Accounting. July 27, 2016
    This study examines stock market reaction to the announcement of various forms of seasoned issues in China. Our empirical evidence demonstrates that market reactions differ in ways that suggest a difference between management's internal assessment and the market's assessment of the stock price. The market responds unfavourably to the announcement, notably in the case of rights issues and also with regard to open offers. Private placements experience an unfavourable pre‐announcement reaction, which contrasts with the favourable reaction after the event. Convertible bond issues generate positive excess returns consistent with the market's confidence that they can help to align management and shareholders’ interests. Further investigation shows that market reaction is related to factors specific to the issuer and issue by reference to the period immediately surrounding the issue. Specifically, ownership concentration, agency matters connected with equity offerings, investor protection connected with fund allocation and security pricing, and the influence of powerful moneyed interests together provide an instructive insight into market reaction. Institutional inefficiency pertaining to underwriting, auditing, analysts’ forecasts and credit ratings are found to have a weak association with market price, consistent with due public scepticism concerning management and their gatekeepers.
    July 27, 2016   doi: 10.1111/jbfa.12198   open full text
  • S&P 500 Membership and Managers’ Supply of Conservative Financial Reports.
    Gregory W. Martin, Wayne B. Thomas, Matthew M. Wieland.
    Journal of Business Finance &amp Accounting. July 27, 2016
    Our study is motivated by economic theory and the debate among practitioners, standard setters, and academics on the role of conditional conservatism in financial reporting. We find that managers provide less conditionally conservative financial reports after their firms are added to the Standard and Poor's (S&P) 500 index. S&P 500 membership is expected to reduce information asymmetry between managers and outside stakeholders due to an increased flow of public and private information. As a result, the contracting benefits of conservative accounting choices are reduced, and managers are less willing to provide conditionally conservative reports. In contrast, we find that managers provide more conditionally conservative financial reports after their firms are deleted from the index. Firms being deleted from the S&P 500 index probably incur an increase in information asymmetry. Overall, our results provide evidence consistent with conditional conservatism being a response by managers to the information needs of financial statements users.
    July 27, 2016   doi: 10.1111/jbfa.12200   open full text
  • The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis.
    Karthik Balakrishnan, Ross Watts, Luo Zuo.
    Journal of Business Finance &amp Accounting. July 27, 2016
    This paper examines the effect of accounting conservatism on firm‐level investment during the 2007–2008 global financial crisis. Using a differences‐in‐differences design, we find that firms with less conservative financial reporting experienced a sharper decline in investment activity following the onset of the crisis compared to firms with more conservative financial reporting. This relationship was stronger for firms that were financially constrained, faced greater external financing needs, or had higher information asymmetry. We also find that more conservative firms experienced lower declines in both debt‐raising activity and stock performance. The evidence suggests that accounting conservatism reduces underinvestment in the presence of information frictions.
    July 27, 2016   doi: 10.1111/jbfa.12206   open full text
  • The Role of Collateral in the Credit Acquisition Process: Evidence from SME Lending.
    Fábio Duarte, Ana Paula Matias Gama, José Paulo Esperança.
    Journal of Business Finance &amp Accounting. July 27, 2016
    This study tests the simultaneous impact of observed characteristics and private information on debt term contracts in a multi‐period setting, using a dataset of 12,666 credit approvals by one major Portuguese commercial bank during 2007–2010. The main results show that borrowers with good credit scores that know they have a high probability of success and are unlikely to default are more willing to pledge collateral in return for a lower interest rate premium (IRP). Furthermore, lenders tailor the specific terms of the contract, increasing both collateral requirements and the IRP from observed risk, for borrowers operating in riskier industries and with less credit availability. The results are robust to controls for joint debt terms negotiation and the degree of collateralization offered by the borrower.
    July 27, 2016   doi: 10.1111/jbfa.12207   open full text
  • Changes in Non‐current Assets and in Property, Plant and Equipment and Future Stock Returns: The UK Evidence.
    Nikola Petrovic, Stuart Manson, Jerry Coakley.
    Journal of Business Finance &amp Accounting. June 19, 2016
    We examine the effect of changes in non‐current operating assets (NCOA) and of changes in property, plant and equipment (PPE) on future abnormal stock returns using a sample of 21,549 UK non‐financial firm observations over the 1990–2012 event period. The results from a matching portfolio procedure and 4‐factor regressions indicate that abnormal returns from investing in a portfolio of low‐minus‐high quintile NCOA and PPE change firms are between 5.5% and 6.1%. This negative association is confirmed by cross‐sectional regressions. The economic significance of mispricing seems weaker than in the US and weaker than the mispricing of working capital accruals adjusted for depreciation in the UK. Changes in PPE drive the predictability of share returns with respect to changes in NCOA. There is no significant evidence that return predictability is stronger in less liquid firms. We find two strands of evidence that lend some support to behavioural explanations of predictability through overreaction to investment. On one hand, fundamental information about investment explains one‐third of the predictability of returns while, on the other, predictability is generally not significantly stronger in firms with high operating leverage as a proxy for risk.
    June 19, 2016   doi: 10.1111/jbfa.12203   open full text
  • Stock Recommendations for Politically Connected Firms.
    Elio Alfonso.
    Journal of Business Finance &amp Accounting. April 27, 2016
    Social network connections of corporations can significantly affect operating performance and firm valuation. Political connections are one form of social networking which often manifests into improved firm profitability as a result of political favors granted by politicians. However, analysts often have greater difficulty forecasting the earnings of politically connected firms than those of non‐connected firms. This is because politicians often grant political favors to firms in an unpredictable manner making it difficult for market participants to time precisely when political benefits will translate into higher firm profitability. I examine how political connections affect analysts’ stock recommendations using a unique dataset of political contributions in the US over the period 1993–2012. I show that analysts’ recommendations are less profitable for firms with high connectedness than for firms with low (or no) connectedness. I also find that analysts are less effective in translating earnings forecasts into profitable recommendations for highly connected firms. Overall, the findings suggest that analysts do not impound all of the information concerning corporate political connections efficiently into their primary research outputs.
    April 27, 2016   doi: 10.1111/jbfa.12178   open full text
  • The Impact of Dividend Covenants on Investment and Operating Performance.
    Boochun Jung, Woo‐Jong Lee, Yanhua Sunny Yang.
    Journal of Business Finance &amp Accounting. April 27, 2016
    This paper examines the influence of dividend covenants in corporate bonds on investment and operating performance. Prior literature analytically demonstrates that by limiting dividend distribution to shareholders, dividend restrictions effectively place a minimum on investment expenditures. This suggests a positive relation between dividend covenants and investment. The literature also conjectures that the influence of dividend covenants on investment (1) mitigates the under‐investment problem associated with debt financing; or (2) exacerbates over‐investment. We empirically document that the presence of dividend covenants is associated with a higher level of investment and poorer future performance. Further analyses confirm that the higher level of investment is consistent with dividend covenants exacerbating over‐investment, not mitigating under‐investment. Our results shed light on the cost aspect of dividend covenants proposed in prior literature.
    April 27, 2016   doi: 10.1111/jbfa.12172   open full text
  • Do Women and Ethnic Minority Directors Influence Firm Value? Evidence from Post‐Apartheid South Africa.
    Ernest Gyapong, Reza M. Monem, Fang Hu.
    Journal of Business Finance &amp Accounting. April 27, 2016
    Previous studies on the value relevance of board gender and ethnic diversity have produced mixed results. This paper re‐examines this relationship using hand‐collected data of 245 South African listed firms over the period 2008–2013. We document a positive and significant effect of both board gender and ethnic diversity on firm value. We also find that the increase in firm value is greater when boards have three or more women directors. In contrast, ethnic minority directors contribute less to firm value when there are three or more on the board. Furthermore, we document that ethnicity has a concave relationship with firm value, but gender does not. We demonstrate that in better‐governed firms, ethnic diversity is more value relevant than gender diversity. Our results also suggest that financial crisis is associated with the propensity to restructure boards along gender and ethnicity. This paper sheds new light on the effect of board diversity in South African firms as the government increasingly pursues policies aimed at eradicating the effects of apartheid. Our results are robust after controlling for self‐selection and various forms of endogeneity.
    April 27, 2016   doi: 10.1111/jbfa.12175   open full text
  • Non‐compliance in Executive Compensation Disclosure: the Brazilian Experience.
    Cristiano Machado Costa, Fernando Caio Galdi, Fabio Y. S. Motoki, Juan Manuel Sanchez.
    Journal of Business Finance &amp Accounting. April 27, 2016
    We examine the determinants and consequences of firms’ choice not to comply with a new executive compensation disclosure regulation. We exploit a unique feature of Brazilian markets, where a change in the regulation of executive compensation disclosure could arguably lead to personal security‐related costs for executives. This major reform in executive compensation disclosure in Brazil became effective in December 2009. While some firms complied with the change in regulation, other firms explicitly refused to comply fully with the regulation by using a court injunction. After controlling for firm‐specific characteristics and both social and economic inequality measures, we find that the degree of criminality in the state in which the firm is headquartered (a proxy for security‐related costs) and the level of CEO compensation are important determinants of a firm's decision not to fully disclose executive compensation information. We also show that firms which do not fully comply with the regulation face costs in the form of higher bid‐ask spreads, suggesting investors are leery of the decision not to comply with the regulation. We discuss the potential implications of our results in the context of executive compensation disclosure reform.
    April 27, 2016   doi: 10.1111/jbfa.12177   open full text
  • Multidimensional Competition and Corporate Disclosure.
    Flora Muiño, Manuel Núñez‐Nickel.
    Journal of Business Finance &amp Accounting. April 27, 2016
    In this paper, we argue that the influence product market competition exerts on disclosure is defined by the combined effect of the incentives and disincentives to disclose raised by the multiple competition dimensions. We distinguish between firm‐ and industry‐level competition measures, and we hypothesize that the former raises agency and proprietary costs, whereas the latter creates incentives to disclose either to fulfil the owners’ need for information to monitor managers or to deter the entrance of new competitors in the industry. Our research design allows for non‐monotonic relationships between competition and disclosure as well as for interactions between competition dimensions. Using a sample of US manufacturing companies, we gather evidence that is consistent with our hypotheses. First, we find an inverted U‐shape relationship between corporate disclosure and a firm's abnormal profitability, which is suggestive of firms being reluctant to disclose when they are underperforming (outperforming) their rivals because of the fear of unveiling agency conflicts (raising proprietary costs). Second, we observe a U‐shape relationship between corporate disclosure and industry profitability, although this U design evolves to approximate a rising function as the protection provided by entry barriers increases.
    April 27, 2016   doi: 10.1111/jbfa.12195   open full text
  • The Volatility of Return Revisions and Financial Statement Literacy in Emerging Markets: The Case of Cross‐listed Chinese Firms.
    Jeffrey L. Callen, Karen M.Y. Lai, Steven X. Wei.
    Journal of Business Finance &amp Accounting. March 06, 2016
    Are foreign investors in emerging markets more financial statement literate than domestic investors? If so, this conjecture implies that foreign (domestic) investors are more likely to revise their return expectations to cash flow (discount rate) news. It also implies that cash flow news and discount rate news are likely to be uncorrelated when evaluating return revisions by domestic investors, whereas cash flow news and discount rate news are likely to be negatively correlated when evaluating return revisions by foreign investors. The Chinese equity markets yield robust empirical results that are consistent with both hypotheses.
    March 06, 2016   doi: 10.1111/jbfa.12180   open full text
  • What Drives Target Price Forecasts and Their Investment Value?
    Zhi Da, Keejae P. Hong, Sangwoo Lee.
    Journal of Business Finance &amp Accounting. March 06, 2016
    This paper examines the informativeness of analysts’ target price forecasts by relating the investment value of target prices to their primary drivers. Decomposing target price forecasts into near‐term earnings forecasts and price‐to‐earnings ratio forecasts, we show that target price revisions reflect information from both components. In addition, we also find that the relative importance of each component in target price revisions is related to firm characteristics. A portfolio based on target price implied expected returns delivers significant abnormal returns. More importantly, we find that the abnormal returns are associated with both earnings and price‐to‐earnings forecasts, which suggests that the informativeness of target price forecasts comes not only from analysts’ ability to forecast short‐term earnings but also from their ability to assess risk and long‐term growth prospect implied in price‐to‐earnings forecasts.
    March 06, 2016   doi: 10.1111/jbfa.12176   open full text
  • Corporate Governance, Companies’ Disclosure Practices and Market Transparency: A Cross Country Study.
    Wendy Beekes, Philip Brown, Wenwen Zhan, Qiyu Zhang.
    Journal of Business Finance &amp Accounting. March 06, 2016
    We examine the link between corporate governance, companies’ disclosure practices and their equity market transparency in a study of more than 5,000 listed companies in 23 countries covering the period 1 January 2003 to 31 December 2008. Our results confirm the belief that better‐governed firms make more frequent disclosures to the market. We also find greater disclosure in common law relative to code law countries. However firms with better governance in both code and common law countries make more frequent disclosures. We measure market transparency by the timeliness of prices. In contrast to single country studies, results show, for the 23 countries collectively, better corporate governance is associated with less timely share prices. This would suggest that a firm substitutes better corporate governance for transparency. We are thus led to the conclusion that even if information is disclosed more frequently by better‐governed firms, it does not necessarily follow that information is reflected in share prices on a timelier basis.
    March 06, 2016   doi: 10.1111/jbfa.12174   open full text
  • Are the Discounts in Seasoned Equity Offers Due to Inelastic Demand?
    Seth Armitage, Dionysia Dionysiou, Angelica Gonzalez.
    Journal of Business Finance &amp Accounting. May 15, 2014
    This paper investigates the large and diverse discounts in UK open offers and placings. Large discounts are a substantial cost to shareholders who do not buy new shares. The existing literature mainly examines US firm‐commitment offers and private placements. The institutional setting differs in the UK, in ways that make the theory of inelastic demand for shares more important as an explanation for discounts than in the US. The paper finds that inelastic demand, or illiquidity of the issuer's shares, and financial distress, are key determinants of the discount. We expect these results to apply to other stock markets.
    May 15, 2014   doi: 10.1111/jbfa.12074   open full text
  • Earnings Management Constraints and Classification Shifting.
    John L. Abernathy, Brooke Beyer, Eric T. Rapley.
    Journal of Business Finance &amp Accounting. May 08, 2014
    Prior literature has investigated three forms of earnings management: real earnings management (REM), accruals earnings management (AEM) and classification shifting. Managers make trade‐off decisions among these methods based on the costs, constraints and timing of each strategy. This study investigates whether managers use classification shifting when their ability to use other forms of earnings management is constrained. We find that when REM is constrained by poor financial condition, high levels of institutional ownership and low industry market share, managers are more likely to use classification shifting. Further, we find that when AEM is constrained by low accounting system flexibility and the provision of a cash flow forecast, managers are more likely to use classification shifting. In addition, when we limit our sample to firms that are most likely to have manipulated earnings, we continue to find support for constraints of both REM and AEM leading to higher levels of classification shifting. We also find support for the hypothesis that the timing of each earnings management strategy influences managers’ trade‐off decision. Our results indicate that managers use classification shifting as substitute form of earnings management for both AEM and REM.
    May 08, 2014   doi: 10.1111/jbfa.12076   open full text
  • The Market's Valuation of Fraudulently Reported Earnings.
    Kai Wai Hui, Clive Lennox, Guochang Zhang.
    Journal of Business Finance &amp Accounting. May 08, 2014
    This study examines the market valuation of accounting earnings during the period before it is publicly revealed that the earnings are fraudulent. Using both cross‐sectional and time‐series valuation models, we first find that the market accords less weight to earnings when the accounting numbers are fraudulent. We also show that the market better anticipates the presence of fraud when there is information in the public domain indicating a high ex‐ante risk of fraud. Our findings suggest that investors are able to accurately assess the probability of fraud and that such assessments affect the market's valuation of earnings even before it is publicly announced that fraud has occurred.
    May 08, 2014   doi: 10.1111/jbfa.12072   open full text
  • Lockup Agreements and Survival of UK IPOs.
    Wasim Ahmad, Ranko Jelic.
    Journal of Business Finance &amp Accounting. April 24, 2014
    This paper examines the role of lockup agreements on the survival of 580 UK Initial Public Offerings (IPOs) during the period of 1990–2011. Our accelerated failure time (AFT) survival model shows a statistically and economically significant effect of lockup length on the post‐IPO survival. A 12 month increase in median lockup period increases the (median) survival time by 27%. Furthermore, the failure rates for IPOs with longer lockups are consistently lower than the failure rates for IPOs with shorter lockups regardless of delisting reasons. The results are robust to choice of different survival estimation models, heterogeneity, clustering, and alternative specification of variables. Our results highlight the importance of lockup characteristics on the subsequent survival of newly listed firms and inform recent debate regarding alleged short‐termism in the UK equity market.
    April 24, 2014   doi: 10.1111/jbfa.12068   open full text
  • What Drives Executive Stock Option Backdating?
    Chris Veld, Betty H.T. Wu.
    Journal of Business Finance &amp Accounting. April 24, 2014
    We study motives for executive stock option backdating, the practice of changing the grant dates of current options to dates in the past using hindsight. We find that smaller, younger and less profitable firms tend to be more heavily involved in backdating. These results are consistent with the retention hypothesis. In line with the incentive hypothesis, we find that backdating occurs more for options that are out‐of‐the‐money. We derive some evidence for the agency hypothesis, in the sense that backdating companies have a larger percentage of inside directors. However, contrary to this hypothesis, we conclude that backdating firms have better protection for minority shareholders compared to firms that do not backdate.
    April 24, 2014   doi: 10.1111/jbfa.12077   open full text
  • Rights Offerings and Expropriation by Controlling Shareholders.
    Wai‐Ming Fong, Kevin C.K. Lam.
    Journal of Business Finance &amp Accounting. April 18, 2014
    We investigate rights issues and open offers in Hong Kong. We observe that the greater the severity of firms’ management‐agency problems, the more unfavourably shareholders tend to react, leading to more negative cumulative abnormal returns or rights forfeiture. Controlling shareholders do not forfeit rights, and may increase their percentage ownership at deep price discounts by underwriting rights offerings. Our results suggest that, although certain rights offerings can be described as value‐enhancing, many other rights offerings closely resemble the expropriation activities of controlling shareholders.
    April 18, 2014   doi: 10.1111/jbfa.12069   open full text
  • Earnings Quality Measures and Excess Returns.
    Pietro Perotti, Alfred Wagenhofer.
    Journal of Business Finance &amp Accounting. April 18, 2014
    This paper examines how commonly used earnings quality measures fulfill a key objective of financial reporting, i.e., improving decision usefulness for investors. We propose a stock‐price‐based measure for assessing the quality of earnings quality measures. We predict that firms with higher earnings quality will be less mispriced than other firms. Mispricing is measured by the difference of the mean absolute excess returns of portfolios formed on high and low values of a measure. We examine persistence, predictability, two measures of smoothness, abnormal accruals, accruals quality, earnings response coefficient and value relevance. For a large sample of US non‐financial firms over the period 1988–2007, we show that all measures except for smoothness are negatively associated with absolute excess returns, suggesting that smoothness is generally a favorable attribute of earnings. Accruals measures generate the largest spread in absolute excess returns, followed by smoothness and market‐based measures. These results lend support to the widespread use of accruals measures as overall measures of earnings quality in the literature.
    April 18, 2014   doi: 10.1111/jbfa.12071   open full text
  • Fair Value‐related Information in Analysts’ Decision Processes: Evidence from the Financial Crisis.
    Jannis Bischof, Holger Daske, Christoph Sextroh.
    Journal of Business Finance &amp Accounting. April 10, 2014
    We use a sample of conference calls and analyst research reports from international banks to examine how financial analysts request and communicate fair value‐related information in their valuation process. We find that analysts devote considerable attention to fair value‐related topics. Most of the conference call questions and references in research reports pertain to fair value reclassifications and fair value changes of liabilities resulting from banks’ own credit risk. The accounting impact of these one‐time effects during the financial crisis and a lack of corresponding firm disclosures help to explain the prevalence of these two topics. The content of the questions and references suggests that analysts have different motives for their interest in fair value‐related information. While some analysts adjust reported earnings for unrecognised fair value changes of reclassified assets, most of the observed analysts exclude banks’ own credit risk effects from reported earnings. Thus, the use of fair value‐related information varies substantially across analysts and across instruments.
    April 10, 2014   doi: 10.1111/jbfa.12063   open full text
  • Managerial Ownership and Financial Analysts’ Information Environment.
    Sam Han, Justin Yiqiang Jin, Tony Kang, Gerald Lobo.
    Journal of Business Finance &amp Accounting. April 10, 2014
    Despite the importance of sell‐side financial analysts as information intermediaries in the capital market, little is known about how managerial equity ownership is associated with their information environment. Using Barron, Kim, Lim and Stevens’ (1998) framework for measuring the precision of financial analysts’ information, we observe that managerial ownership is positively associated with the precision of financial analysts’ public (common) and private (idiosyncratic) information, largely consistent with the alignment view of managerial equity ownership. These results are robust to controlling for various economic and statistical factors that might affect the inference.
    April 10, 2014   doi: 10.1111/jbfa.12070   open full text
  • Relevance of Differences between Net Income based on IFRS and Domestic Standards for European Firms.
    Mary E. Barth, Wayne R. Landsman, Danqing Young, Zili Zhuang.
    Journal of Business Finance &amp Accounting. April 10, 2014
    Net income adjustments resulting from mandatory 2005 IFRS adoption in Europe are value relevant for financial and non‐financial firms. Differences in relevance of the aggregate adjustment and adjustments related to several IFRS standards, for financial and non‐financial firms and across country groups, suggest differences in domestic standards and institutions affect investors’ assessment of the relevance of IFRS accounting amounts. Despite these differences, except for French/German non‐financial firms, investors view net income measured using IAS 39 Financial Instruments: Recognition and Measurement as more relevant than that measured using domestic standards, which is notable because IAS 39 was highly controversial in Europe.
    April 10, 2014   doi: 10.1111/jbfa.12067   open full text
  • Product Market Competition, Information and Earnings Management.
    Garen Markarian, Juan Santalo´.
    Journal of Business Finance &amp Accounting. March 31, 2014
    We study theoretically the effect of product market competition on the incentives to engage in earnings manipulation, and we show how manipulating earnings is particularly rewarding in more competitive markets since the boost in market value of reporting good earnings is especially important. Using a panel dataset of about 70,000 observations spanning the period 1989–2011, we document that the competitive environment is an important determinant of Jones type discretionary accruals and it also affects real earnings management. In additional analysis, we find that the effect of competition on earnings manipulation is particularly important for companies that seem to be underperforming their competitors and that the competition‐earnings management linkage is moderated by the degree of information visibility at the industry level.
    March 31, 2014   doi: 10.1111/jbfa.12064   open full text
  • Long‐Run Stock Performance and Its Determinants for Asset Buyers.
    Sheng‐Syan Chen, Yong‐Chin Liu, I‐Ju Chen.
    Journal of Business Finance &amp Accounting. March 28, 2014
    This paper examines the long‐term stock performance of asset purchasers and the determinants of cross‐sectional differences in performance. Our findings show that buyers’ stocks, on average, underperform following purchases. Buy‐and‐hold abnormal returns of buyers acquiring related assets are significantly higher than those acquiring unrelated assets, consistent with the focus hypothesis. Asset buyers with superior prior stock performance experience poorer long‐run performance than buyers with inferior prior stock performance, consistent with the prior performance hypothesis. Asset buyers that manage earnings upward, experience poorer long‐term abnormal stock performance than acquirers with downward earnings management, consistent with the earnings management hypothesis. The long‐term return evidence is to some degree consistent with the governance hypothesis but we find little support for the free cash flow hypothesis.
    March 28, 2014   doi: 10.1111/jbfa.12065   open full text
  • Naked M&A Transactions: How the Lack of Local Expertise in Cross‐Border Deals Can Negatively Affect Acquirer Performance – and How Informed Institutional Investors can Mitigate This Effect.
    Anna Faelten, Miles Gietzmann, Valeriya Vitkova.
    Journal of Business Finance &amp Accounting. December 13, 2013
    This paper tests how informed investors with local expertise can affect cross‐border deal success using a comprehensive dataset of corporate acquirers’ share registers. We posit that deals in which long‐term investors have a high level of expertise in the target firm's region are more likely to perform better than if the deal is ‘naked’, i.e., when such regional expertise amongst the investors is low. We show that the strength of this effect depends upon an index of country‐level M&A maturity which measures the relative divergence between acquirer and target countries. Specifically, we investigate whether acquirers investing in countries with low M&A maturity gain greater benefit from investors with regional expertise. We present evidence which confirms the hypothesis that acquirers in cross‐border corporate transactions are more likely to be successful if the acquirer's investors have a higher level of expertise in the target region, and that this effect is strongest when the maturity for corporate transactions of the target country is low. This provides a specific setting which is consistent with earlier theoretical work that argues in general that information flows should not just be from firms to capital markets but also in the opposite direction, and that this flow of information is particularly important whenever information is dispersed.
    December 13, 2013   doi: 10.1111/jbfa.12049   open full text
  • Asset Liquidity and Stock Liquidity: International Evidence.
    Charlie Charoenwong, Beng Soon Chong, Yung Chiang Yang.
    Journal of Business Finance &amp Accounting. December 13, 2013
    This study examines the relationship between asset liquidity and stock liquidity across 47 countries. In support of the valuation uncertainty hypothesis, we find that firms with greater asset liquidity on average have higher stock liquidity. More importantly, our study shows that asset liquidity plays a more significant role in resolving valuation uncertainty in countries with poor information environment. For example, we find that the asset–stock liquidity relationship is stronger in countries with poor accounting standards. We further find evidence that after the adoption of IFRS, the improved accounting information environment results in a weaker asset–stock liquidity relation, but only in countries with a strong legal regime. Finally, our study shows that the positive asset–stock liquidity relationship may be attributed to transparency and/or liquidity reasons.
    December 13, 2013   doi: 10.1111/jbfa.12052   open full text
  • Do Analysts Disclose Cash Flow Forecasts with Earnings Estimates when Earnings Quality is Low?
    Pawel Bilinski.
    Journal of Business Finance &amp Accounting. December 13, 2013
    Cash flows are incrementally useful to earnings in security valuation mainly when earnings quality is low. This suggests that when earnings quality decreases, analysts will be more likely to supplement their earnings forecasts with cash flow estimates. Contrary to this prediction, we find that analysts do not disclose cash flow forecasts when the quality of earnings is low. This is because cash flow forecast accuracy depends on the accuracy of the accrual estimates and the precision of accrual forecasts decreases for firms with low quality earnings. Consequently, as earnings quality decreases, cash flow forecasts become increasingly inaccurate compared to earnings estimates. Cash flow estimates that lack reliability are not useful to investors and, consequently, unlikely to be reported by analysts. This result provides an explanation for why analysts are less likely to report cash flow estimates when earnings quality is low.
    December 13, 2013   doi: 10.1111/jbfa.12056   open full text
  • Earnings Announcements, Differences of Opinion and Management Guidance.
    Sami Keskek, Lynn Rees, Wayne B. Thomas.
    Journal of Business Finance &amp Accounting. August 02, 2013
    Berkman, Dimitrov, Jain, Koch, and Tice (2009) document a negative relationship between differences of opinion and earnings announcement returns, and this relationship is more pronounced when short‐sale constraints are likely to be high. These findings are interpreted as support for the theory in Miller (1977) that binding short sale constraints cause pessimists to be underrepresented in price formation. We conjecture that accounting information (i.e., earnings news) is likely to play a role in this returns pattern. After controlling for the level of earnings news, we find that the relationship between differences of opinion and stock returns is either eliminated or opposite from what is predicted by Miller's theory. Further, we present evidence that suggests the confounding effect of earnings news can be explained by (pessimistic) management earnings guidance. Our findings offer an alternative explanation for why low differences of opinion stocks earn greater abnormal returns around earnings announcements.
    August 02, 2013   doi: 10.1111/jbfa.12037   open full text
  • Has the IASB Been Successful in Making Accounting Earnings More Useful for Prediction and Valuation? UK Evidence.
    Young‐Soo Choi, Ken Peasnell, Joao Toniato.
    Journal of Business Finance &amp Accounting. August 02, 2013
    When producing International Financial Reporting Standards (IFRS), one of the main goals of the International Accounting Standards Board (IASB) was to create a set of standards which were more useful to investors as a predictive tool. We assess the success of the IASB in achieving this goal by investigating the effects of the introduction of IFRS on the relative information content of reported earnings and forecasted earnings under UK generally accepted accounting practices (GAAP) and IFRS. Results indicate that the value relevance of forecasted earnings is significantly lower under IFRS while the value relevance of reported earnings is significantly larger. These findings suggest that IFRS substitutes price‐relevant information previously provided to the market in the form of analyst forecasts with information encoded by companies in their reported earnings. This implies that the IASB was indeed successful in its stated goal and points towards IFRS forecasts being more accurate and less dispersed than UK GAAP forecasts. This, in turn, implies that analysts are able to provide more informative forecasts under IFRS than under pre‐IFRS regimes and that the aforementioned substitution effect is not a consequence of any decrease in the quality of forecasts under the new regime.
    August 02, 2013   doi: 10.1111/jbfa.12025   open full text
  • Corporate Governance and the Cost of Borrowing.
    Pascal Frantz, Norvald Instefjord.
    Journal of Business Finance &amp Accounting. July 23, 2013
    This paper analyzes the theoretical link between governance (defined loosely as the degree of protection offered to outside shareholders), and the cost of borrowing. We find, consistent with empirical evidence, that improvements in governance reduce the likelihood of default. Also, we find that improvements in governance will monotonically increase or reduce the cost of debt, where the sign of the relationship depends on the firm's restructuring cost in default. Finally, we find that the strength of the governance mechanism can influence the incentives to carry out risk shifting.
    July 23, 2013   doi: 10.1111/jbfa.12034   open full text
  • Institutional Investor Participation and Stock Market Anomalies.
    Tao Shu.
    Journal of Business Finance &amp Accounting. July 22, 2013
    This paper investigates the impact of institutional trading volume on stock market anomalies. The paper proposes a measure that evaluates the percentage of total trading volume of a stock accounted for by institutional trades. The empirical analyses using a large sample of firms from 1980–2005 provide strong evidence that the strength of stock market anomalies such as price momentum, post‐earnings announcement drift, the value premium, and the investment anomaly is decreasing in institutional trading volume. Additionally, the effects of institutional trading volume are stronger than those of institutional ownership, the major measure of institutional investor participation in the finance literature. These findings suggest that institutional trading significantly improves stock price efficiency.
    July 22, 2013   doi: 10.1111/jbfa.12035   open full text
  • Dividend Irrelevance and Accounting Models of Value.
    William Rees, Aljosa Valentincic.
    Journal of Business Finance &amp Accounting. July 22, 2013
    In accounting models of value, dividends typically appear to have a strong positive relationship with value despite theoretical reasons to expect dividend displacement. We show that this result is driven by the relationship between dividends and both core earnings and other information derived from the valuation error in the prior year. Where core earnings can be effectively modelled in a specification including other information, dividend displacement is no longer rejected. Under these circumstances dividends exhibit weak incremental predictive power for earnings and earnings expectations and hence have little impact on value. We show that valuation models are sensitive to model specification and should be used with caution when testing the value impact of firm characteristics or accounting numbers.
    July 22, 2013   doi: 10.1111/jbfa.12032   open full text
  • The Information Content of Dividend Surprises: Evidence from Germany.
    Christian Andres, Andre′ Betzer, Inga Bongard, Christian Haesner, Erik Theissen.
    Journal of Business Finance &amp Accounting. July 22, 2013
    This paper reconsiders the issue of share price reactions to dividend announcements. We use the difference between the actual dividend and the analyst consensus forecast as obtained from I/B/E/S as a proxy for the surprise in the dividend announcement. Using data from Germany, we find significant share price reactions after dividend announcements. We use panel methods to analyze the determinants of the share price reactions and find evidence in favour of the cash flow signaling hypothesis and dividend clientele effects. We further find that the price reaction to dividend surprises is related to the ownership structure of the firm. The results do not support the free cash flow hypothesis. An additional result of our analysis is that dividend changes are not an appropriate measure to capture the information content of dividend announcements.
    July 22, 2013   doi: 10.1111/jbfa.12036   open full text
  • Trust, Owner Rights, Employee Rights and Firm Performance.
    Marc Goergen, Salim Chahine, Chris Brewster, Geoffrey Wood.
    Journal of Business Finance &amp Accounting. July 22, 2013
    This is a study of variations in trust relationships according to institutional setting. A wide body of comparative institutional literature within economics and finance engages with trust. However, as most of this literature uses macro‐level data and/or stylistic ideal types, it normally neglects intra‐firm trust. This paper redresses this lacuna by using both macro‐level data and comparative firm‐level evidence. We found that both country trust and firm trust increase firm performance, but that there is a trade‐off between the two as high levels of both reduce performance. Finally, both employee rights and investor rights are negatively correlated with country trust.
    July 22, 2013   doi: 10.1111/jbfa.12033   open full text
  • Institutional Investors’ Reaction to SEC Concerns about IFRS and US GAAP Reporting.
    Miles B. Gietzmann, Helena Isidro.
    Journal of Business Finance &amp Accounting. July 15, 2013
    For the period of 2006 to 2008, we collect Comment Letters issued by the SEC that question the application of US GAAP by US firms or the application of IFRS by European firms registered with the SEC. We investigate whether institutional investors react to the letters by changing their holdings and whether their responses vary for US registrants and European registrants. We do this via a treatment‐effects model in which we test the hypothesis that institutional investors rebalance their portfolio holdings because they view Comment Letters as informative public signals. We find that institutional investors reduce their equity holdings when firms receive SEC Comment Letters, and their negative reactions are most marked for low turnover institutional investors, who we use to represent those informed investors most prepared to incur costs to closely monitor firms. Next, while noting that the number of Letters questioning application of IFRS are smaller in number relative to those questioning application of US GAAP, we investigate whether there are different reactions to Comment Letters questioning different standards. We show that there is a higher probability of the SEC questioning the application of IFRS as compared to US GAAP. After controlling for firm‐specific conditions that impact the issuance of a Comment Letter, we show that this higher probability has economic significance because institutional investors’ react more negatively to Comment Letters that question the application of IFRS as compared to US GAAP. A content analysis confirms the economic importance of the Comment Letters. We find that in almost half of all IFRS cases the Comment Letters request amendments to financial statements.
    July 15, 2013   doi: 10.1111/jbfa.12027   open full text
  • Analyst Pessimism and Forecast Timing.
    Orie E. Barron, Donal Byard, Lihong Liang.
    Journal of Business Finance &amp Accounting. June 18, 2013
    In this study, we show that on average relatively pessimistic analysts tend to reveal their earnings forecasts later than other analysts. Further, we find this forecast timing effect explains a substantial proportion of the well‐known decrease in consensus analyst forecast optimism over the forecast period prior to earnings announcements, which helps explain why analysts’ longer term earnings forecasts are more optimistically biased than their shorter term forecasts. We extend the theory of analyst self‐selection regarding their coverage decisions to argue that analysts with a relatively pessimistic view–compared to other analysts–are more reluctant to issue their earnings forecasts, with the result that they tend to defer revealing their earnings forecasts until later in the forecasting period than other analysts.
    June 18, 2013   doi: 10.1111/jbfa.12031   open full text
  • Underwriting Fees and Shareholder Rights.
    Ji‐Chai Lin, Bahar Ulupinar.
    Journal of Business Finance &amp Accounting. June 18, 2013
    Do firms’ governance provisions affect their terms of obtaining external financing? We hypothesize that it is more difficult for firms with more restrictions on shareholder rights to raise external equity, and that since analyst coverage is an important part of underwriting services, underwriters would use analyst recommendations to promote issuing firms with weaker shareholder rights more strongly and charge them higher underwriting fees. Consistent with our hypothesis, we find that analyst recommendations on issuing firms with weak shareholder rights increase more than those with strong shareholder rights prior to SEOs, and that underwriting spreads are positively related to issuing firms’ shareholder rights as proxied by the G‐index. Furthermore, the effect of shareholder rights on underwriting fees is largely contained in the six provisions in the E‐index.
    June 18, 2013   doi: 10.1111/jbfa.12026   open full text
  • On Monetary Policy and Stock Market Anomalies.
    Alexandros Kontonikas, Alexandros Kostakis.
    Journal of Business Finance &amp Accounting. June 18, 2013
    This study utilizes a macro‐based VAR framework to investigate whether stock portfolios formed on the basis of their value, size and past performance characteristics are affected in a different manner by unexpected US monetary policy actions during the period 1967–2007. Full sample results show that value, small capitalization and past loser stocks are more exposed to monetary policy shocks compared with growth, big capitalization and past winner stocks. Sub‐sample analysis, motivated by variation in the realized premia and parameter instability, reveals that the impact of monetary policy shocks on these portfolios is significant and pronounced only during the pre‐1983 period.
    June 18, 2013   doi: 10.1111/jbfa.12028   open full text
  • Debt Financing and Earnings Management: An Internal Capital Market Perspective.
    Hong‐Da Wang, Chan‐Jane Lin.
    Journal of Business Finance &amp Accounting. June 18, 2013
    This paper investigates the role internal capital markets play in mitigating earnings management of group firms. We predict that the funding advantages of internal capital markets from business affiliates obscure solvency problems resulting from higher leverage for individual firms within a group, which in turn mitigates their incentives for earnings management. Using Taiwanese firms as a sample, we provide evidence that is consistent with such a prediction. In particular, we show that higher group profitability reduces its member firms’ sensitivity of earnings management to debt levels. Among business groups, earnings management in pyramidal groups is less sensitive to debt levels. We also find that the debt‐abnormal accrual curve becomes smoother as group profitability increases when considering the non‐monotonic relationship between firm leverage and earnings management.
    June 18, 2013   doi: 10.1111/jbfa.12030   open full text
  • Book‐to‐Market Equity, Asset Correlations and the Basel Capital Requirement.
    Shih‐Cheng Lee, Chien‐Ting Lin, Min‐Teh Yu.
    Journal of Business Finance &amp Accounting. June 05, 2013
    This paper examines the effect of book‐to‐market equity (BE/ME) on asset correlations under the Basel capital requirement. We find that BE/ME captures variations in asset correlations after controlling for firm size, default probability and industry effects from 1987 to 2011. Obligors with higher BE/ME exhibit lower asset correlations compared to those with lower BE/ME. Decomposing BE/ME into assets‐in‐place and growth options based on the asset pricing literature shows that obligors with more assets‐in‐place or more fixed assets have higher BE/ME and lower asset correlations than those with more growth options. Overall, our findings suggest that BE/ME is an additional important factor that may improve the estimates of asset correlations and thereby banks’ capital adequacy.
    June 05, 2013   doi: 10.1111/jbfa.12029   open full text
  • Dividend Policy Irrelevancy and the Construct of Earnings.
    Zhan Gao, James A. Ohlson, Adam J. Ostaszewski.
    Journal of Business Finance &amp Accounting. May 14, 2013
    This paper analyzes the characteristics of earnings in valuation settings where the dividend policy is irrelevant to equity value. The paper first demonstrates an equivalent characterization of dividend policy irrelevancy (DPI) in a general linear dynamic. It then proceeds to show how DPI leads to ideal and practical constructs of earnings and examines their analytical properties. We further demonstrate that earnings properties can be used to deduce the core approach in practical equity valuation – namely, measures of growth in expected earnings explain the price to forward earnings ratio. However, unlike dividends, free cash flow cannot generally be claimed to be irrelevant to value.
    May 14, 2013   doi: 10.1111/jbfa.12019   open full text