Showing papers in "Journal of Accounting, Auditing & Finance in 2012"
TL;DR: In this paper, the authors study whether managerial ownership and analyst coverage relate to audit fees and find that these associations are both statistically and economically significant, on average, a 1% increase in managerial ownership translates into a 0.2% reduction in audit fees.
Abstract: The authors study whether managerial ownership and analyst coverage relate to audit fees. To the extent that these corporate governance factors relate to auditor assessment of the firm’s agency costs and hence various risks the auditor must consider in the development of an audit program, they will affect audit effort and hence audit fees. The authors find that managerial equity holdings and analyst coverage are negatively associated with audit fees and that these associations are both statistically and economically significant. On average, a 1% increase in managerial ownership translates into a 0.2% reduction in audit fees. In the low managerial ownership sample (i.e., less than 5% managerial ownership), a 1% increase in the ownership reduces the fees by 1.4%. Similarly, one more analyst following a company reduces audit fees by 9.3%. These results add to the literature on the effects of corporate governance on audit fees.
50 citations
TL;DR: In this article, the authors examined the discretionary accruals quality of single and multiple-segment firms and found that the discretionary quality is lower for multiple segment firms than single segment firms.
Abstract: This study examines the discretionary accruals quality of single- and multiple-segment firms. The authors hypothesize and find that the discretionary accruals quality is lower for multiple-segment firms than single-segment firms, and for the same level of discretionary accruals quality, the cost of capital is higher for multiple-segment firms than single-segment firms. These findings suggest that more severe agency problems in multiple-segment firms compared with single-segment firms may lead to poor discretionary accruals quality and agency risk is priced-in as a higher cost of capital.
41 citations
TL;DR: In this paper, the authors examined factors affecting the accuracy of cash flow forecasts issued by financial analysts and found that, consistent with previous findings on earnings forecast accuracy, analyst and forecast chara...
Abstract: This article examines factors affecting the accuracy of cash flow forecasts issued by financial analysts. Consistent with previous findings on earnings forecast accuracy, analyst and forecast chara...
40 citations
TL;DR: This article revisited the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions and market value of equity as a proxy for all future cash flow.
Abstract: In this article, the authors revisit the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions and market value of equity as a proxy for all future cash flows. They find that, on average, accruals improve upon current cash flow from operations (CFO) in predicting future cash flows. In the cross-section, accruals’ contribution is positively associated with proxies for quality of accruals and governance. Next, the authors investigate the implications of accruals’ predictive value for accrual-based market anomalies. They find that portfolios formed on stock return predictions using information from current CFO and accruals yield significantly positive returns on average, as opposed to CFO alone. They also find that Sloan’s accrual anomaly is related to our accrual contribution anomaly. Indeed, when accruals’ contribution to future cash flow prediction is the highest, the accrual anomaly vanishes. Collectively, the results suggest that t...
36 citations
TL;DR: In this paper, the authors revisit the client importance and auditor independence debate, and investigate whether investors' perceptions of the auditor's economic dependence have changed since the passage of the Sarbanes-Oxley Act of 2002 (SOX).
Abstract: The authors revisit the client importance and auditor independence debate, and investigate whether investors’ perceptions of the auditor’s economic dependence has changed since the passage of the Sarbanes–Oxley Act of 2002 (SOX). Client importance is measured as the proportion of client nonaudit service fees, audit fees, or total fees to the total audit office revenue. Consistent with their hypothesis, they find a significant decrease in the association between both nonaudit services (NAS) and total fees, and the cost of equity from the pre- to the post-SOX period, indicating that investors’ concerns over auditor independence have changed in the post-SOX period. In addition, the authors find some evidence of a positive and significant association between both audit fees (2003) and total fees (2004), and cost of equity in the post-SOX period. Overall, these results indicate that the independence requirements in SOX and/or the heightened litigation environment post-SOX have, to some extent, mitigated but no...
33 citations
TL;DR: The authors argue that analysts' information acquisition efforts increase firm value by facilitating monitoring of firms' activities and, thereby, reducing agency costs, however, prior research does not support their claim and does not consider the impact of analysts' activities on the overall stock market.
Abstract: Researchers argue that analysts’ information acquisition efforts increase firm value by facilitating monitoring of firms’ activities and, thereby, reducing agency costs. However, prior research pro...
32 citations
TL;DR: In this article, the authors examined the determinants of banks' decision to reclassify financial assets under the amendment of International Accounting Standard (IAS) 39 and the capital market consequences of these reclassifications.
Abstract: This study examines the determinants of banks’ decision to reclassify financial assets under the amendment of International Accounting Standard (IAS) 39 and the capital market consequences of these reclassifications. Based on the prior literature, the authors identify two possible drivers of banks’ reclassification behavior, namely, solvency concerns and exposure to financial markets. The authors expect these reclassifications to adversely affect the market pricing of banks’ accounting numbers. The results of this study show that capital adequacy ratios close to the minimum requirement are indeed associated with banks’ decisions to reclassify financial assets. Furthermore, the authors find evidence that the level of exposure to fair value measurement also increases the probability to reclassify. In the second part of the analyses, they use a difference-in-differences approach to test the market’s pricing of bank’s accounting numbers around the time of reclassification. They observe that for reclassifying ...
30 citations
TL;DR: The framers of the Sarbanes-Oxley Act (SOX) presume that nonaudit services (NASs) lower the quality of financial statements, so they have prohibited auditors from offering most NASs as discussed by the authors.
Abstract: The framers of the Sarbanes–Oxley Act (SOX) presume that nonaudit services (NASs) lower the quality of financial statements, so they have prohibited auditors from offering most NASs. In addition, r...
28 citations
TL;DR: This article examined the consequences of the series of reforms targeting investment banking-related conflicts of interest and compared optimism biases in analysts' stock recomme-mentioning biases in stock prices.
Abstract: This study examines the consequences of the series of reforms targeting investment banking–related conflicts of interest. The authors compare and contrast optimism biases in analysts’ stock recomme...
28 citations
TL;DR: A persistent (but overlooked) feature of the cross-sectional distribution of quarterly earnings announcement returns is that the measured earnings surprise and share price response to that surprise is a predictor of the stock price response as discussed by the authors.
Abstract: A persistent (but overlooked) feature of the cross-sectional distribution of quarterly earnings announcement returns is that the measured earnings surprise and share price response to that surprise...
25 citations
TL;DR: In this paper, the cross-sectional approach that is typically used to estimate accrual models implicitly assumes that firms within the same industry have a homogeneous accruality generating process (AGP).
Abstract: The cross-sectional approach that is typically used to estimate accrual models implicitly assumes that firms within the same industry have a homogeneous accrual-generating process (AGP). In this ar...
TL;DR: In this article, the authors introduce some new econometric tests and techniques for identifying and overcoming the problem of weak instruments in the context of joint provision of audit and nonaudit fees.
Abstract: The authors introduce some new econometric tests and techniques for identifying and overcoming the problem of weak instruments in the context of joint provision of audit and nonaudit fees. The auth...
TL;DR: In this paper, the authors provide some preliminary evidence of possible implementation outcome of the use of fair value option for non-financial assets in the U.S. The characteristics of foreign-liste...
Abstract: This paper attempts to provide some preliminary evidence of possible implementation outcome of the use of fair value option for non-financial assets in the U.S. The characteristics of foreign-liste...
TL;DR: In this paper, the authors investigate earnings revisions that occur between preliminary earnings announcements and the immediate subsequent Securities and Exchange Commission (SEC) filings and find that on average, the abs...
Abstract: This article investigates earnings revisions that occur between preliminary earnings announcements and the immediate subsequent Securities and Exchange Commission (SEC) filings. On average, the abs...
TL;DR: In this paper, the authors examined how information provided by the other primary financial statement (the balance sheet) is incrementally useful for determining returns, and they showed theoretically that returns should be related to three balance sheet-related variables (the previous period's (equity) capital investment, contemporaneous capital investment and the profitability change).
Abstract: Until recently, studies in accounting research have predominantly focused on using earnings information to explain stock returns. This article examines how information provided by the other primary financial statement—the balance sheet—is incrementally useful for determining returns. Based on existing models of equity value, the author shows theoretically that returns should be related to three balance sheet–related variables—the previous period’s (equity) capital investment, contemporaneous capital investment, and the profitability change—in addition to the earnings variables used in previous studies. Our empirical analysis yields the following results. First, the three balance sheet–related variables each have a statistically and economically significant effect that is incremental to those of the earnings variables on equity returns, and together they improve the explanatory power of an earnings-only-based model from 11.5% to 13.9% in annual cross-sectional samples. Second, over time, the incremental ex...
TL;DR: In this article, the authors analyze whether the adoption of the IAS regime implies an improvement of the firms' earnings quality, referring to a sample of German listed companies reporting under IAS and German...
Abstract: The paper analyses whether the adoption of the IAS regime implies an improvement of the firms' earnings quality. Referring to a sample of German listed companies reporting under the IAS and German ...
TL;DR: In this exceeding competitive business environment, capital structure decisions (CSDs) have become complicated as discussed by the authors, and theories and models of 1950s are unable to incorporate the demands faced by the decisi...
Abstract: Capital structure decisions (CSDs) have become complicated in this exceeding competitive business environment. Theories and models of 1950s are unable to incorporate the demands faced by the decisi...
TL;DR: In this article, the authors show that managerial entrenchment deteriorates the credibility of earnings, hence reducing the value relevance of earnings; however, prior literature documents that the likelihood of...
Abstract: Prior studies show that managerial entrenchment deteriorates the credibility of earnings, hence reducing the value relevance of earnings. However, prior literature documents that the likelihood of ...
TL;DR: The authors showed that the chosen level of equity incentives, when publicly disclosed, will also convey information about future earnings, causing two-way linkages between incentive compensation, and financial reporting.
Abstract: The primary role of equity compensation is to provide incentives to an effort-averse agent. Here, the author shows that the chosen level of equity incentives, when publicly disclosed, will also convey information about future earnings, causing two-way linkages between incentive compensation, and financial reporting. If (a) market prices respond more (less) to information, (b) the manager is more (less) risk averse, or (c) earnings are more (less) noisy, then the firm’s owners choose more pronounced (muted) incentives, in turn leading to greater (lower) future earnings. The model explains observed spurious correlations between firm performance and executive compensation, and it provides several new predictions linking managerial, earnings, and market determinants to optimal equity holdings.
TL;DR: In this article, the authors examined the association between the existence of ex ante severance agreements and the timeliness of bad news disclosures and found that an ex ante single-trigger severance agreement may play a role in forming timely disclosures and that paring it with a high-variable pay structure enhances the chance of its success.
Abstract: This study explores the puzzle of CEO severance agreements by examining the association between the existence of ex ante severance agreements and the timeliness of bad news disclosures. Classifying severance agreements by type and the way boards grant them, this article documents a positive association between the timeliness of bad news disclosures and the existence of an ex ante single-trigger severance agreement, especially when it is granted alone. This association remains positive in the CEO’s last year of tenure where performance is poor. Further analyses show that this association is stronger among CEOs with a high-variable pay structure than among CEOs with a low-variable pay structure. These results suggest that an ex ante single-trigger severance agreement may play a role in forming timely disclosures of bad news and that paring it with a high-variable pay structure enhances the chance of its success.