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Showing papers in "Review of Accounting and Finance in 2014"


Journal ArticleDOI
TL;DR: In this paper, the authors investigated the potential impact of the approved Australian carbon emissions reduction plan on the cost of capital and the association between companies' carbon emission intensity and the costs of capital.
Abstract: Purpose – The purpose of this paper is to investigate the potential impact of the approved Australian carbon emissions reduction plan on the cost of capital and the association between companies’ carbon emission intensity and the cost of capital. Design/methodology/approach – A sample of Australian Stock Exchange 200 (ASX 200)-indexed companies from 2006 to 2010 is used. Hypotheses are tested based on Heckman’s two-stage approach. Three regression models are developed to examine the association between carbon emissions and the cost of capital. Findings – Using a sample of ASX 200-indexed listed companies, the paper finds that the cost of capital, including the cost of debt and the cost of equity, will increase for emissions-liable companies. Results also show that the cost of debt is positively correlated with a company’s emission intensity. However, little evidence supports that the emission intensity affects the cost of equity. Originality/value – As it is evident that the emissions reduction plan will ...

51 citations


Journal ArticleDOI
TL;DR: In this article, the role of boards of directors in improving internet financial reporting (IFR) quality has been discussed, and the empirical results show that 28 percent of the sample firms are located on the efficiency frontier for all IFR components, suggesting inefficiencies in the composition, structure, and/or...
Abstract: Purpose – This paper aims to shed some light on the role of boards of directors in improving internet financial reporting (IFR) quality. Design/methodology/approach – The empirical study uses a data envelopment analysis (DEA) approach on a sample of 32 French firms belonging to the CAC40 index as of December 2007. Findings – The empirical results show that 28 percent of the sample firms are located on the efficiency frontier for all IFR components. These firms' boards of directors and their committees seem to act as effective monitors of top executives, which improves the quality of the firm's disclosure policy through, inter alia, an increase in the level of IFR. Under efficient board control, firms develop user-friendly and readily accessible web sites disclosing the information required by various stakeholders. Additional empirical results show that 46.9 percent of the sample firms lie outside the efficiency frontier for all IFR measures, suggesting inefficiencies in the composition, structure, and/or ...

42 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined whether the relatively rules-based US Generally Accepted Accounting Principles (GAAP) and the more principles-based International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) provide different opportunities for earnings management.
Abstract: Purpose – The purpose of this paper is to examine whether the relatively rules-based US Generally Accepted Accounting Principles (GAAP) and the more principles-based International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) provide different opportunities for earnings management (EM). Such an examination is critical as the world moves toward principles-based standards. Design/methodology/approach – Financial information for the fiscal years 1999-2004 from the annual reports of firms listed under the Prime Standard on the Germany Frankfurt Stock Exchange is analyzed. Data from the German Frankfurt Stock Exchange are used to resolve the difficulty in comparing accounting standards across different markets and countries with different institutional factors and corporate governance issues. The unique feature of dual listing in the German Frankfurt Stock Exchange allows firms listing shares under the Prime Standard to report in accordance with either the US GAAP or the IAS/IFRS ...

33 citations


Journal ArticleDOI
TL;DR: In this article, the relation between changes in profit margin (ΔPM) and changes in return on net operating assets (RNOA) by partitioning on the direction of the change in PM was examined.
Abstract: Purpose – The purpose of this study is to re-examine the relation between changes in profit margin (ΔPM) and changes in return on net operating assets (ΔRNOA) by partitioning on the direction of the change in PM. DuPont analysis provides a means of disaggregating a firm’s return on net operating assets (RNOA) into asset turnover (ATO) and profit margin (PM) components to gain insights into the underlying drivers of operating profitability. Prior research finds that changes in ATO are informative about one-year-ahead changes in RNOA, while changes in PM are not. Design/methodology/approach – Consistent with prior research, regression analysis is used to develop a predictive model for one-year-ahead changes in RNOA. Results based on in-sample parameter estimates are used to examine the out-of-sample forecasting accuracy of alternative model specifications. Findings – The results are consistent with significant forecast improvement resulting from considering the impact on future RNOA of the direction of the ...

28 citations


Journal ArticleDOI
TL;DR: In this article, the authors examined whether the design of chief executive officer (CEO) compensation generates incentives to engage in managerial behavior that enhances customer satisfaction and whether these incentives, in turn, lead to higher firm value.
Abstract: Purpose – The purpose of this article is to examine whether the design of chief executive officer (CEO) compensation generates incentives to engage in managerial behavior that enhances customer satisfaction and whether these incentives, in turn, lead to higher firm value. Design/methodology/approach – A unique dataset combining customer satisfaction and executive compensation data was used, and the relationship between option sensitivity, customer satisfaction and performance was modeled using simultaneous equations modeling with industry and year fixed effects. Findings – Findings suggest that CEO compensation plays an important role in explaining the variation in customer satisfaction and firm value. Specifically, CEO short-term compensation (salary or bonus) has no affect on customer satisfaction or firm value; the sensitivity of CEO wealth from long-term incentive compensation to stock price changes is positively related and also exhibits an inverted U-shaped relationship with customer satisfaction; t...

23 citations


Journal ArticleDOI
TL;DR: In this article, the main thrust of the present study is to look into the trading patterns of behavior and investment performance exhibited by individual and institutional investor categories in the Qatar Exchange (QE).
Abstract: Purpose – The main thrust of the present study is to look into the trading patterns of behavior and investment performance exhibited by individual and institutional investor categories in the Qatar Exchange (QE). The paper aims to discuss these issues. Design/methodology/approach – The present study uses daily aggregated investment flows made separately by each investor group, as well as daily closing price observations of the QE stock composite index. The trading patterns of investor categories are examined by estimating a bivariate vector autoregressive process of order p, VAR (p). To determine whether each category performs well or poorly over the entire sample period, each investor category's cumulative returns are estimated and analyzed. Findings – The empirical results reveal that institutional investors pursue positive feedback trading strategies, whereas individual investors tend to be negative feedback traders. Both investor categories appear to be engaged in herding behavior. Additionally, insti...

19 citations


Journal ArticleDOI
TL;DR: Li et al. as mentioned in this paper investigated whether the dual audit requirement induces more auditor conservatism, measured by the level of discretionary accruals, and empirically tested whether dual audit requirements induce more conservative audits.
Abstract: Purpose – This study aims to examine whether China's unique dual audit policy affects one specific aspect of audit quality: auditor conservatism. In China, listed companies issuing B/H-shares in addition to A-shares must release two financial reports – one based on Chinese accounting standards and the other based on international accounting standards (ISA). The China Securities Regulatory Commission (CSRC) further requires that the financial reports following Chinese accounting standards should be audited by a domestic CPA firm, and the financial reports following ISA should be audited by an approved overseas CPA firm. This study investigates whether the dual audit requirement induces more auditor conservatism. Design/methodology/approach – Based on a sample of 7,046 firm-year observations that issue A-shares from 2001 to 2006, the authors empirically test whether the dual audit requirement induces more auditor conservatism, measured by the level of discretionary accruals. Findings – The authors find the ...

12 citations


Journal ArticleDOI
TL;DR: In this article, the authors proposed several factors which can explain the negative relationship between financial constraints and investment-cash flow sensitivity and found that substitutability between cash holdings and free cash flow can partially explain why financially constrained firms do not depend on cash flow as heavily as we expect.
Abstract: Purpose – This paper aims to propose several factors which can explain the negative relationship between financial constraints and investment-cash flow sensitivity. Design/methodology/approach – The author uses traditional fixed effects model and minimum distance panel estimation by Erickson and Whited (2000) to estimate investment-cash flow sensitivity in the cash flow-augmented investment equation. In addition, principal component analysis is used to construct a financial constraints measure. Findings – First, it was found that substitutability between cash holdings and free cash flow can partially explain why financially constrained firms do not depend on cash flow as heavily as we expect. Second, it was confirmed that the level of net external financing can also partially explain the investment-cash flow sensitivity puzzle. Furthermore, it was argued that the influence of cash holdings and external financing on investment-cash flow sensitivity is caused by the low level of internal cash flow for finan...

12 citations


Journal ArticleDOI
TL;DR: In this article, the authors assess the performance of a contrarian investment strategy focusing on frequently traded large-cap US stocks and find that the winners outperform losers at all times, and with a differential of up to 29.2 per cent after portfolio formation.
Abstract: Purpose – The purpose of this paper is to assess the performance of a contrarian investment strategy focusing on frequently traded large-cap US stocks. Previous criticisms that losers’ gains are not due to overreaction but due to their tendency to be thinly traded and smaller-sized firms than winners are addressed. Design/methodology/approach – Portfolios based on past performance are constructed and it is examined whether contrarian returns exist. The Capital Asset Pricing Model (CAPM), Fama and French three-factor model and the Carhart’s (1997) momentum portfolio are used to test whether excess returns are feasible in a contrarian strategy. Findings – The results show an asymmetric performance following portfolio formation. Although both, winners and losers portfolios, have gains during holding periods, losers outperform winners at all times, and with a differential of up to 29.2 per cent 36 months after portfolio formation. Furthermore, the loser and the winner portfolios’ alphas are significant, sugge...

10 citations


Journal ArticleDOI
TL;DR: In this article, the authors examined the determinants of involuntary delisting rate for the Egyptian initial public offerings (IPOs) issued over the period 1992-2009 using binary logit regression analysis.
Abstract: Purpose – The purpose of this paper is to examine the determinants of involuntary delisting rate for the Egyptian initial public offerings (IPOs) issued over the period 1992-2009 Design/methodology/approach – A definition of survival time that considers the date when the new Egyptian listing rules were enforced to track delisting status for each IPO firm for five survival years is relied on Binary logit regression analysis is used to identify these determinants Total sample is divided into two subsamples: the first subsample covers the period from 1992 to 2004 It is used to estimate the logit equations and to predict delisting status of firms included in the second subsample, which covers the period from 2005 to 2009 Findings – The probability of involuntary delisting decreases significantly with the increase in firm size, institutional ownership, assets growth rate, operating efficiency, offering size, initial returns and insider ownership However, it increases significantly in IPO firms with high

9 citations


Journal ArticleDOI
TL;DR: In this paper, the authors examined the association between audit committee characteristics and a firm's ability to guide analysts' forecasts downward to meet or beat earnings benchmarks and found that a more effective audit committee would be able to reduce managers' propensity to use downward forecast guidance to avoid negative earnings surprises.
Abstract: Purpose – The purpose of this paper is to examine the association between audit committee characteristics and a firm’s ability to guide analysts’ forecasts downward to meet or beat earnings benchmarks. Design/methodology/approach – The authors expect that a more effective audit committee would be able to reduce managers’ propensity to use downward forecast guidance to avoid negative earnings surprises. Four committee characteristics are used to measure its effectiveness: independence, diligence, expertise and size. Findings – For the pre-SOX (Sarbanes-Oxley Act) period (1996-2002), none of the four audit committee characteristics are significantly associated with managers’ propensity to use downward forecast guidance to avoid negative earnings surprises. For the post-SOX era (2003-2004), however, the likelihood of engaging in downward forecast guidance is significantly lower for firms with larger and more independent audit committees. In addition, the likelihood is significantly lower for audit committees...

Journal ArticleDOI
TL;DR: In this paper, the authors investigated the association between auditor industry specialization and audit fees surrounding Section 404 implementation and found no significant cost savings associated with audit industry specialization in the second year of SOX compliance (2004-2005).
Abstract: Purpose – The purpose of this paper is to investigate the association between auditor industry specialization and audit fees surrounding Section 404 implementation. Design/methodology/approach – With a sample of 1,006 industrial firms over the 2003-2005 reporting periods, an ordinary least square regression model was used to regress change in audit fees on auditor specialization measure and other control variables. Findings – It was found that auditor industry specialization is negatively related to the change in audit fees during the first year of Sarbanes–Oxley Act (SOX) compliance (2003-2004). It was also found that there were no significant cost savings associated with auditor industry specialization in the second year of SOX compliance (2004-2005). Practical implications – These results suggest that industry-specific expertise may enable auditors to adapt more efficiently to new significant audit standards and regulations, but that such efficiencies are likely to be most pronounced during the initial...

Journal ArticleDOI
TL;DR: In this article, the authors examined the level of capital market integration between the Montenegrin stock market and a number of European Union (EU) countries and the USA, and provided evidence for the existence of a long-run equilibrium between Montenegro and the developed countries of Western Europe and USA.
Abstract: Purpose – The purpose of this paper is to examine the level of capital market integration between the Montenegrin stock market and a number of European Union (EU) countries and the USA. Design/methodology/approach – The authors use an equity data set at the daily frequency from 12 countries and 4 broad regions, spanning the period from March 2003 to September 2008. They investigate long-run and short-run dynamics using cointegration techniques, Granger causality tests and vector error correction models. Findings – The authors provide evidence for the existence of a long-run equilibrium between Montenegro and the developed countries of Western Europe and the USA. The investigation of short-run dynamics reveals that Montenegro follows an autonomous path, influenced mainly by domestic developments. Originality/value – This is the first study on the Montenegrin stock market which has been neglected by the academic community. Montenegro’s accession in the EU is imminent; thus the study of the level of its integration with the rest of EU countries, before its actual accession, is useful for regulators and policymakers. Various lessons of a more general nature can also be drawn from the analysis of this paper.

Journal ArticleDOI
TL;DR: In this paper, the authors investigated the rounding-up in reported income numbers of Indian companies by examining the evidence of unusual occurrence of zero and nine in the reported income number such as profit after tax and earnings per share.
Abstract: Purpose – This paper aims to investigate the rounding-up in reported income numbers of Indian companies by examining the evidence of unusual occurrence of zero and nine in reported income numbers such as profit after tax and earnings per share (EPS). It also examines such rounding-up patterns under different scenarios such as companies varying across different time periods, income size, market capitalization, industries, initial public offering and earnings news. Design/methodology/approach – All 1,707 companies listed on National Stock Exchange of India were considered for analysis. This study covered a period of 21 years from 1991-1992 to 2011-2012. Data were collected from PROWESS database. Findings – In Indian companies, the rounding-up pattern in reported income numbers is in conformity with existing studies (Carslaw, 1988; Thomas, 1989). In case of income numbers, the observed proportionate occurrence of zero and nine is significantly different from the expected proportionate occurrence. The study f...

Journal ArticleDOI
TL;DR: In this article, the authors examined the determinants of acquisitions for 47 acquired banks and 33 acquiring banks in ASEAN from 2003 to 2011 by applying matching strategy and found that asset quality and liquidity played important roles in determining the likelihood of being acquired in the period after the onset of the 200...
Abstract: Purpose – ASEAN region has emerged as a major hotspot for banking mergers and acquisitions (M&A) in Asia. This paper aims to examine the determinants of acquisitions for 47 acquired banks and 33 acquiring banks in ASEAN from 2003 to 2011 by applying matching strategy. Design/methodology/approach – Three binary logistic regressions are estimated in the study to identify the determinants of acquisitions in the ASEAN banking industry. Furthermore, the paper examines the ex ante bank-specific and country-specific characteristics of acquiring and acquired banks which motivate bank acquisitions. Findings – The division of the sample into sub-samples reflects significant changes in the determinants of the likelihood of being acquired over different time periods. In the normal period prior to the financial crises, acquired banks are also found to have greater loan activities. Asset quality and liquidity played important roles in determining the likelihood of being acquired in the period after the onset of the 200...

Journal ArticleDOI
TL;DR: In this article, the authors examine whether firms manage the total value of stock option grants downward after the implementation of Statement of Financial Accounting Standards (SFAS) 123R to reduce their reported option expenses.
Abstract: Purpose – The purpose of this paper is to examine whether firms manage the total value of stock option grants downward after the implementation of Statement of Financial Accounting Standards (SFAS) 123R to reduce their reported option expenses. Design/methodology/approach – All Standard & Poor’s (S&P) 1500 firms with available stock option data in 2004 and 2006 are included in the analysis. The authors analyze if the total value of options granted, the per share fair value of options granted, the number of options granted as well as each individual input assumption have changed from the pre-SFAS 123R (i.e. 2004) to the post-SFAS 123R (i.e. 2006) period. We compare post-SFAS123R option pricing assumptions and per share fair value of options granted with their respective expected values to verify the results. We also analyze whether SFAS 123R has differential effects on firms which chose to disclose option expense only in footnotes (“disclosing firms”) versus firms which voluntarily recognized option expense (“recognizing firms”) prior to SFAS 123R. Findings – The results show that after SFAS 123R, the total fair value of stock options granted for disclosing firms declined significantly. The decrease appears to result from managerial discretion over volatility and dividend yield assumptions as well as the reduction in the number of options granted. The evidence suggests that firms engage in not only assumption-based manipulations but also real activities to lower reported stock option expenses. It was also found that disclosing firms lower the total fair value of stock options granted to a greater extent than recognizing firms. Originality/value – This study adds to prior literature that examines the opportunistic incentives for managers to use discretion in reporting stock option expenses. This study contributes to the earnings management literature by providing another example of manipulating earnings through real activities. Finally, our study should be of interest to regulators and investors.

Journal ArticleDOI
TL;DR: In this article, a series of tests explores changes in correlations between asset allocations and expected rates of return and changes in the implied risk premiums following adoption of Statements No. 132(R) and No. 158.
Abstract: Purpose – The purpose of this paper is to address two questions: did adoption of Statements of Financial Accounting Standards No. 132(R) and No. 158 affect neutrality of the financial reporting with regard to the disclosed expected rate of return (ERR) on pension assets assumptions, and did pension asset allocations change in response to the new recognition and disclosure requirements? Design/methodology/approach – The author uses several measures of association between reported expected return and pension assets allocations to assess neutrality of the reported ERR. The series of tests explores changes in correlations between asset allocations and expected rates of return and changes in the implied risk premiums following adoption of Statements No. 132(R) and No. 158. Granger causality analysis is used to explore the second research question: did pension asset allocations change in response to the new recognition and disclosure requirements? Findings – The empirical results are consistent with improved ne...

Journal ArticleDOI
TL;DR: In this article, the authors examined the impact of management's choice of forecast precision on the subsequent dispersion and accuracy of analysts' earnings forecasts and found that the dispersion in analysts' forecasts is negatively related to the management forecast precision.
Abstract: Purpose – The purpose of this paper is to examine the impact of management’s choice of forecast precision on the subsequent dispersion and accuracy of analysts’ earnings forecasts. Design/methodology/approach – Using a sample of 3,584 yearly management earnings per share (EPS) forecasts and 10,287 quarterly management EPS forecasts made during the period of 2002-2007 and collected from the First Call database, the authors controlled for factors previously found to impact analysts’ forecast accuracy and dispersion and investigate the link between management forecast precision and attributes of the analysts’ forecasts. Findings – Results provide empirical evidence that managements’ disclosure precision has a statistically significant impact on both the dispersion and the accuracy of subsequent analysts’ forecasts. It was found that the dispersion in analysts’ forecasts is negatively related to the management forecast precision. In other words, a precise management forecast is associated with a smaller dispe...

Journal ArticleDOI
TL;DR: In this paper, the effects of different compensation policies have on managerial discretion with regard to stock options have been investigated, showing that firms with higher cash compensation tend to undervalue the unobservable market price of pre-IPO shares, leading to lower option values and a lower likelihood of reporting in-the-money options.
Abstract: – This paper aims to test the effects that different compensation policies have on managerial discretion with regard to stock options. , – Hand-collected data from Securities and Exchange Commission registration statements are used to analyze the effects of chief executive officer (CEO) compensation policies on managerial discretion used in valuing stock options. , – This paper provides evidence that during the height of the initial public offering (IPO) bubble, CEO pay was associated with the undervaluation of stock options by IPO firms. The discretion varies with the relative mix of cash vs stock-based compensation. Firms with higher cash compensation tend to undervalue the unobservable market price of pre-IPO shares, leading to lower option values and a lower likelihood of reporting in-the-money options. Firms with greater stock-based compensation understate stock volatility, resulting in lower measures of the time-value component of options. , – The results provide evidence that firms attempted to disguise the true value of CEO pay when making IPOs. By disguising the value of options granted to the CEO, outsiders were not aware of the actual cost incurred and the true value of the company. , – This paper is the first to document that IPO firms understate the non-observable market price of pre-IPO shares to manipulate the value of stock options. It also documents the effect of discretion in estimates of volatility on stock options and the link between this discretion and CEO compensation.

Journal ArticleDOI
TL;DR: In this article, the authors examined the market reaction to several key contract events which were not disclosed at the time they occurred, in compliance with the contractually required non-disclosure clause.
Abstract: Purpose – This study aims to examine a large, non-disclosed production contract awarded to Lockheed Corp. in the context of a trade-off between a contractually required non-disclosure clause and the need (as a publicly traded firm) to disclose material information to its shareholders. This production contract generated significant cash flows to the firm as evidenced by growth in its earnings. However, the existence of the production contract and its contribution to Lockheed’s earnings, was not disclosed by the firm to shareholders and potential investors while the production contract was being executed. Design/methodology/approach – The authors examine the market reaction to several key contract events which were not disclosed at the time they occurred, in compliance with the contractually required non-disclosure clause. Findings – A statistically significant stock price reaction around the time of the award of this non-public contract, indicative of trading by some capital market participants using non-p...