Business Commons^™

Index Fund Ownership And Stock Price Efficiency: Evidence From Quarterly Earnings Seasons, Joe López Vilaró

Graduate Theses and Dissertations

While prior research argues that individual investors benefit from a switch to passive investment in index funds (French 2008, Bond and García 2022), higher levels of index fund ownership of firm shares lead to competing factors that influence a firm’s price efficiency (i.e., the speed and accuracy with which a firm’s stock price reflects investor consensus on the information provided about a firm). If relative investor sophistication increases as index fund ownership increases, there is a benefit to the firm’s price efficiency. Yet, more shares held passively limit the shares available for investors to actively incorporate firm news, adversely impacting …

Full Disclosure: Model Uncertainty In Adjusting For Confounders, Dieudonne Dusenge

Graduate Theses and Dissertations

This study examines the role of knowledge about underlying causal relationships in classifying controls in order to mitigate omitted- and included-variable biases. Using simulations and accounting examples, the study shows that the researcher may not distinguish good and bad controls because the underlying causal relationships are unobservable, and remedying strategies (such as the relative timing of measurement) may not remove the uncertainty in the classification. Because of the uncertainty about which controls to use, two or more models will be credible as will the distinct estimates derived from them. Next, the study shows that the current standard practice of singling …

Audit Firms’ Response To Audit Failures: Evidence From Partner Resource Reallocation, Elizabeth Cowle

Graduate Theses and Dissertations

I investigate whether audit firms reallocate partner resources following restatement announcements and, consequently, whether a supply-side response is beneficial in mitigating the previously documented implications of realized audit failures. I find a positive association between prior period restatement announcements and the year-over-year percentage change in the number of engagement partners allocated to a local audit office. Further analysis suggests that a supply-side response is beneficial in mitigating the persistence of low-quality audits and lost market share. However, I also find some evidence suggesting that the reallocation of partner resources can be detrimental to audit quality at offices from which partners …

The Value Of Assurance Over Internal Controls: Evidence From Mergers And Acquisitions, Ryan Courtlin Cating

Graduate Theses and Dissertations

In this study, I examine the value of assurance over internal controls in the mergers and acquisitions setting. Specifically, I examine the how the existence of an internal control audit mandated under Section 404(b) of SOX affects information asymmetry as proxied for by the likelihood of a company becoming the target of an acquisition. I find that companies with internal control audits are significantly more likely to receive bids than their counterparts that do not have an internal control audit. Upon further investigation, I find that the mechanism by which companies are more likely to become the target of an …

The First Sign: Detecting Future Financial Fraud From The Ipo Prospectus, Lisa Spadaccini Anderson

Graduate Theses and Dissertations

In this study, I examine whether it is possible to predict future financial statement fraud using disclosure content prior to the fraud. Specifically, I employ a machine learning algorithm to construct a unique measure based on the lexical cues embedded within a firm’s first public disclosure, the Management’s Discussion and Analysis section of the S-1 filing, during the Initial Public Offering process. I use this measure to predict whether a firm that is not already committing fraud will commit fraud within five years of the Initial Public Offering (IPO) that results in an Accounting or Enforcement Release (AAER). I find …

Insider Trading Enforcement And The Private Information Environment: Evidence From The Newman Ruling, Andrew T. Pierce

Graduate Theses and Dissertations

I exploit a shock to U.S. insider trading law to investigate whether a reduction in the enforceability of tipper-tippee insider trading restrictions leads to changes in information parity among investors and the efficiency of price discovery. The December 2014 Federal Second Circuit Court of Appeals ruling in US v. Newman constrained enforcement by restricting the types of exchanges between managers and investors that trigger tipper-tippee insider trading liability. Following Newman, I find that Second Circuit hedge funds experienced a significant increase in their stock picking ability of Second Circuit stocks in terms of preempting future earnings announcement returns and future …

Auditor Information Spillovers And Company Operating Performance: Evidence From Targeted Auditor Switches, Tyler Kleppe

Graduate Theses and Dissertations

In this study, I examine whether companies realize operational benefits from making “targeted auditor switches” (i.e., engaging a new auditor recently dismissed by a competitor company). While prior work provides evidence consistent with companies perceiving that auditor information spillovers are costly, there is sparse extant evidence as to whether auditors actually do transfer operational information across companies. I find that companies that switch to a competitor’s former auditor realize significant subsequent improvements in operating performance, and I provide evidence that the association between targeted auditor switches and improvements in operating performance varies predictably with several across- and within-market factors. In …

The Strategic Disclosure Of Currency Headwinds And Tailwinds, Kevin Butler

Graduate Theses and Dissertations

In this study, I examine whether companies are more likely to disclose revenue growth adjusted to remove the effects of foreign currency fluctuations (constant-currency revenue growth rates) when currency fluctuations decrease revenue growth (i.e., there is a currency headwind) than when currency fluctuations increase revenue growth. Public companies increasingly cite non-GAAP performance metrics when announcing earnings. While regulators see value in non-GAAP reporting, they continue to express concern that it is carried out inconsistently and in a misleading manner. Because the disclosure of constant-currency revenue growth is discretionary, companies have an incentive to strategically disclose it only when it benefits …

Tax Indemnification And The Association Between Unrecognized Tax Benefit Reserves And Future Tax Cash Outflows, Patrick Lee Hopkins

Graduate Theses and Dissertations

Tax indemnification transfers from a firm to an outside party the risk of potential cash settlements associated with uncertain tax positions taken in prior years. The current accounting treatment of tax indemnification under Accounting Standards Codification (ASC) 805 and the required disclosures for uncertain tax positions under ASC 740 provide little or no information regarding this risk transfer in the financial statements or notes. I examine merger and acquisition (M&A) contracts from 2008 through 2013 and find that tax indemnification is commonly present in M&A transactions. I then provide evidence that the association between current uncertain tax benefit reserves and …

Collaborative Speculation And Overvaluation: Evidence From Social Media, Adam Barrett Booker

Graduate Theses and Dissertations

I use data from StockTwits and Twitter to provide evidence that investor attention on social media in the period before earnings is related to short-term overvaluation, consistent with bullish investors herding around common information. In the 2 to 60 days after earnings, returns for companies in the highest quintile of pre-earnings announcement investor attention are 4.2 percent lower than those of companies in the lowest quintile. I find evidence that the negative post-earnings drift result found in this study is related to investors waiting until after earnings are announced to enact costly arbitrage strategies. I further examine intra- and inter-network …

Essays On Networks And Corporate Finance, Tatiana Salikhova

Graduate Theses and Dissertations

In my dissertation I explore how personal networks affect firms’ financial decisions. In the first essay, I study how social connections among divisional managers affect the capital allocation to divisions in diversified conglomerates. In contrast to the previous studies, I focus on the horizontal connections or connections formed among managers of the same level of corporate hierarchy. I show that connections among divisional managers lead to higher sensitivity of segment capital spending to segment’s growth opportunities, higher firm-level allocation efficiency and higher firm value. Additionally, firms tend to strategically assign better-connected managers to these segments, and connections help to reduce …

Predicting Changes In Earnings: A Walk Through A Random Forest, Joshua Hunt

Graduate Theses and Dissertations

This paper investigates whether the accuracy of models used in accounting research to predict categorical dependent variables (classification) can be improved by using a data analytics approach. This topic is important because accounting research makes extensive use of classification in many different research streams that are likely to benefit from improved accuracy. Specifically, this paper investigates whether the out-of-sample accuracy of models used to predict future changes in earnings can be improved by considering whether the assumptions of the models are likely to be violated and whether alternative techniques have strengths that are likely to make them a better choice …

The Effect Of Tax System Characteristics On Cross-Border Mergers And Acquisitions, Jodi Michelle Henley

Graduate Theses and Dissertations

Although determinants of cross-border merger and acquisitions (M&As) have been given substantial attention in the literature, research examining the effect of tax system characteristics on cross-border M&As is more limited. Cross-border M&As have substantial tax implications for both the acquiring firm and the target firm. Because firms evaluate investments based on expected after-tax returns, I expect that managers consider potential tax savings or costs in making investment decisions across tax jurisdictions. In this study, I use hand-collected country-year-level tax system characteristics to examine tax determinants of the volume and direction of cross-border M&As. I find that tax system characteristics such …

The Influence Of Nonpublic Audit Concentration On Public Client Audit Outcomes, Emily Hunt

Graduate Theses and Dissertations

Nonpublic clients make up a substantial portion of audit firm client portfolios and the demands they place on the audit firm differ from those of public clients. As such, I investigate the influence of nonpublic audit concentration (NPAC) on the quality, timeliness, and cost effectiveness of public client audits. I find that NPAC is unrelated to audit quality and negatively related to the likelihood of late filing financial statements and audit fees for public clients. My study contributes to audit literature that investigates the effect of audit firm portfolio characteristics on audit outcomes by 1) providing a new measure that …

Implications Of Audit Office Resource Allocation Shocks: Evidence From Late 10-K Filings, Stuart Dearden

Graduate Theses and Dissertations

Prior literature examines consequences (e.g., negative market reactions, higher subsequent audit fees, and debt covenant violations) audit clients face arising from missed regulatory due dates. These clients likely pressure the auditor to provide additional resources to perform the audit. This paper examines whether an audit office resource allocation shock stemming from late-filing clients is associated with the audit quality of the other timely-filing clients in that audit office. I find that timely-filing clients are more likely to subsequently restate their financial statements when there are late-filing clients in the same audit office. Using audit fees as a proxy for auditor …

Does Industry-Level Information Affect Auditors’ Assessment Of Client-Level Risk?, David Rosser

Graduate Theses and Dissertations

This study investigates auditors’ consideration of industry-level information in their assessment of client-level risk. Auditing standards suggest that industry-level information is likely to be important in the assessment of client-level risk, but the standards provide few specifics about how auditors should use industry-level information in the risk assessment process. I argue that industry norms serve as a benchmark for evaluating the risk of the client and that deviations from industry norms could indicate increased audit risk. I create measures that capture the extent to which clients deviate from industry norms using proxies for client-level risk factors. In my primary tests, …

The Impact Of Unions On Information Asymmetry, Caroline Burke

Graduate Theses and Dissertations

Prior literature documents a positive association between union power, calculated using industry-level union data, and information asymmetry. Prior literature also finds a mitigating effect from employee ownership on the negative association between union power and voluntary disclosure. Using a sample of company observations for fiscal years 2008 through 2010, I examine the effect of company-specific measures of employee unionization on market-based measures of information asymmetry (proxied for by insider trading activity, analyst following, and analyst dispersion). I also examine whether employee ownership impacts the effect of company-specific measures of employee unionization on my market-based measures of information asymmetry. I find …

Audit-Related Services And Audit Quality: Evidence From Benefit Plan Audits, Jaclyn Prentice

Graduate Theses and Dissertations

The following study examines a material but less understood component of the public audit marketplace, namely the provision of “audit-related” services to financial statement audit clients. I use the benefit plan audit service setting to examine the company and benefit plan characteristics associated with auditor selection and the impact of audit-related services on financial statement audit quality. I provide market evidence of distinct shifts in the use of the same audit firm for the financial statement audit and other audit-related services over time as well as characteristics of the choice of auditors. I then test whether having the same audit …

Does Assurance Matter? Evidence From U.S. Financial Institutions, Ashley Warwick Douglass

Graduate Theses and Dissertations

In this paper, I explore the determinants and consequences of the level of assurance that a bank selects. Using a sample of small, privately held U.S. (United States) financial institutions (banks), I find that two differing types of banks are more likely to purchase more assurance. First, larger banks that are experiencing growth purchase relatively more assurance than other banks. Second, more complex banks with lower returns on assets, losses, and higher leverage are more likely to purchase an audit than a lower level of assurance. This may indicate the influence of regulators on banks’ assurance purchasing decisions. I also …

Do Analysts Understand Momentum? Evidence From Target Prices, Benjamin Carl Anderson

Graduate Theses and Dissertations

Target prices are analysts’ forecasts of a firm’s stock price. Although target prices can be used to help market participants make investment decisions, much is still unknown about how analysts make these forecasts. Because prior literature documents momentum in stock returns, in this paper, I examine whether target prices reflect the information in returns over the six months prior to the target price announcement date. I find that target prices systematically underestimate the persistence of these six month returns. I further find that the forecasted return in target price revisions is more pessimistic following periods of very good stock performance …

The Determinants And Consequences Of Disclosure Committee Adoption, Lyle Roy Schmardebeck

Graduate Theses and Dissertations

After the passage of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission recommended that companies voluntarily adopt disclosure committees to aid in preparing company disclosures. In this paper, I investigate the determinants and consequences of disclosure committee adoption. I find that companies with material weaknesses in internal controls over financial reporting and less readable 10-K filings are more likely to adopt disclosure committees. In consequences analyses, using a propensity score matched control sample and a difference-in-differences research design, I find that 10-K filings are longer and less readable after disclosure committee adoption. However, consistent with institutional theory, I …

The Effect Of Ceo It Expertise On The Information Environment: Evidence From Management Earnings Forecasts, Jacob Zachary Haislip

Graduate Theses and Dissertations

Firms depend on information technology to provide high quality internal information, but prior research suggests that IT is underutilized (Venkatesh and Bala 2008). Therefore, using a sample of firms with equivalent levels of technology in their information systems, I investigate whether firms that employ CEOs with IT expertise make forecasts that are more accurate. I argue that CEOs with IT expertise are more likely to encourage the utilization of IT in making earnings forecasts, thus increasing the accuracy of the forecasts. This argument is supported by prior research that suggests that people are more likely to utilize technology if they …

The Effective Use Of The Audit Risk Model At The Account Level, Timothy Andrew Seidel

Graduate Theses and Dissertations

I examine whether auditors effectively respond to an assessment of high control risk at the account level. The audit risk model assumes that auditors alter their audit procedures to compensate for a greater risk of material misstatement to maintain a low risk of audit failure (i.e., low audit risk). I use internal control weakness disclosures in interim and annual filings to identify assessments of high control risk within specific accounts, and restatements of these specific accounts to identify account–level audit failures. I find an increased incidence of account–level misstatements when control risk within that particular account is high, suggesting that, …

Donor And Grantor Reactions To Ceo Compensation In Nonprofit Organizations, Stacey Renee Kaden

Graduate Theses and Dissertations

Nonprofit organizations often rely on donations and grants to accomplish their mission. This study examines whether nonprofit organizations with high CEO compensation receive less in donor and grantor support compared to nonprofit organizations with lower CEO compensation. I find strong evidence that both donors and grantors give less to organizations that spend a larger percentage of total expenses on total CEO compensation. I also find that the reactions of donors and grantors differ based on the type of CEO compensation. While donors and grantors react to CEO base compensation, grantors also react to other CEO compensation and nontaxable benefits.

In …

Does Analyst Experience Affect Their Understanding Of Non-Financial Information? An Analysis Of The Relation Between Patent Information And Analyst Forecast Errors, Taiwhun Taylor Joo

Graduate Theses and Dissertations

This study examines whether analyst experience affects the relation between patent information and analyst forecast errors. U.S. Generally Accepted Accounting Principles require that firms expense all in-house research and development (R&D) costs. This means that even when R&D activities produce intangible assets with future economic benefits, firms cannot capitalize R&D costs as assets. Consequently, financial statements are largely deficient in the information they provide regarding the output of R&D activities. However, patent information is one type of non-financial information about R&D output that is publicly available.

Using updated patent data, I confirm the results of prior studies that find a …

The Determinants And Consequences Of Ceo Cheap Stock In Ipos, Michael Dennis Stuart

Graduate Theses and Dissertations

The term "cheap stock" describes undervalued stock options granted to CEOs and other key employees prior to initial public offerings (IPOs). Pre-IPO firms have incentives to issue cheap stock as compensation because it results in lower compensation expense on the income statement and in large cash windfalls to CEOs subsequent to the IPO. Because cheap stock results in an overstatement of earnings, the Securities and Exchange Commission frequently challenges the valuations of these grants, which makes cheap stock a key accounting issue in many IPOs. Using a sample of firms that completed IPOs between 2004 and 2007, I investigate the …

Do Changes In The Sg&A Ratio Provide Information About Changes In Future Earnings, Analyst Forecast Revisions, And Stock Returns?, Eugene Scott Johnson

Graduate Theses and Dissertations

In fundamental analysis, increases in the ratio of selling, general and administrative (SG&A) costs to sales (SG&A ratio) are viewed as negative signals about future firm performance. However, this interpretation focuses on the overall change in the SG&A ratio and ignores the underlying changes in the components of the ratio. For example, prior literature finds that the interpretation offered by fundamental analysis does not hold during periods of decreasing sales. I contend that a further partitioning of the full sample into subsamples representing all possible combinations of changes in the components of the SG&A ratio, and the ratio itself, will …

Determinants And Consequences Of Risk Management Committee Formation, Chris Hines

Graduate Theses and Dissertations

This paper examines the determinants and consequences of financial institutions voluntarily forming risk management committees (RMCs). Specifically, I determine whether RMCs are related to a change in risk outcomes, an increase in profitability, a change in hedging and trading derivative structures, and greater financial reporting quality during the post-committee formation period compared to a control group. I use a sample of financial institutions that form a RMC in any year from 1994 through 2008 and a control sample of financial institutions that do not form a RMC during the sample period. The results provide evidence to suggest that financial institutions …

Two Essays On The Accounting Treatment For Information Technology Expenditures, Kimberly Swanson Church

Graduate Theses and Dissertations

The current accounting measurement and reporting system is ill-equipped to provide intangible investment information that is decision useful for stakeholders in the information economy. Potentially relevant intangible items are not reported on the balance sheet, since current standards mandate the immediate expensing of these intangible items. Presumably FASB's uncertainty with the fundamental issues of extent and timing of future benefits to the firm has led to concerns with relevance, reliability, and objectivity of capitalizing some intangibles, which results in potential long term value generating expenditures being immediately expensed on the income statement. Prior research has demonstrated extent and timing of …

New Business Initiatives And Financial Performance, Douglass Cagwin

Graduate Theses and Dissertations

This dissertation examines the relationship o f improvement in financial performance with use o f new business initiatives such as JIT, TQM, and ABC. The investigation is organized into three areas o f inquiry that telescope from the general to the specific to reach a conclusion regarding the efficacy of initiatives. The first two studies contain regression analyses o f the association between the use of the initiatives and change in industry mean-adjusted ROI. The third study develops and test a comprehensive structural model that incorporates factors postulated by previous researchers to affect the efficacy of ABC. Data are obtained …