Business Commons^™

The Pricing Of Assurance Services In Secondary Equity Offerings, Neil L. Fargher, Brian W. Mayhew, Michael S. Wilkins

School of Business Faculty Research

This paper examines the pricing of assurance services in secondary equity offerings (SEOs). Our empirical model extends initial public offering (IPO) fee specifications to include variables that are unique to, or more relevant for, secondary offerings. We document an inverse relationship between SEO fees and a client's ability to delay its secondary offering, suggesting that auditors do not charge as much for SEOs made by relatively mature firms. The relationship reverses, however, when the client is required to use more comprehensive types of filings (i.e., when assurance effort is higher). We also show that fees are higher when the SEO …

An Investigation Of The Pricing Of Audit Services For Financial Institutions, L. Paige Fields, Donald R. Fraser, Michael S. Wilkins

School of Business Faculty Research

In this paper we investigate audit pricing for financial institutions. We modify the standard audit fee model for industrial companies by incorporating measures of risk and complexity that are either unique to or more relevant for banks, and that are used by bank regulatory agencies. For a sample of 277 financial institutions in fiscal 2000, we find that audit fees are higher for banks having more transactions accounts, fewer securities as a percentage of total assets, lower levels of efficiency, and higher degrees of credit risk. Higher fees also obtain for savings institutions, for banks that are more involved in …

Audit Firm Industry Specialization As A Differentiation Strategy: Evidence From Fees Charged To Firms Going Public, Brian W. Mayhew, Michael S. Wilkins

School of Business Faculty Research

This paper examines IPO assurance fees to assess the use of industry specialization as a differentiation strategy by audit firms. Theory suggests that as an audit firm’s share of a client industry increases their costs will decrease and their service quality to that industry will increase. In this setting, the impact of industry specialization on fees is indeterminate. We extend existing theory by considering both the supply and the demand for industry specialization. We conclude that the market for audit services is generally price-competitive, suggesting that auditors will be forced to share cost savings with clients. However, when an audit …

Initial Technical Violations Of Debt Covenants And Changes In Firm Risk, Neil L. Fargher, Michael S. Wilkins, Lori M. Holder-Webb

School of Business Faculty Research

The purpose of this paper is to investigate whether initial technical debt covenant violations are associated with significant increases in the equity risk of violating firms. Our results indicate that first-time violations are associated with significant increases in both systematic and unsystematic risk. The increase in systematic risk is attributable primarily to rising levels of financial leverage as opposed to changes in the underlying asset beta. We also find that the change in unsystematic risk experienced by first-time debt covenant violators is a significant predictor of future exchange delisting, even after controlling for other factors typically associated with increasing financial …

Tests Of A Deferred Tax Explanation Of The Negative Association Between The Lifo Reserve And Firm Value, Dan Dhaliwal, Robert Trezevant, Michael S. Wilkins

School of Business Faculty Research

Guenther and Trombley (1994) and Jennings, Simko, and Thompson (1996) document a negative association between a firm's last-in, first-out (LIFO) reserve and the market value of its equity. In this paper, we test a deferred tax explanation of this negative association. Specifically, we argue that investors, conditional on adjusting inventory to as-if first-in, first-out (FIFO), estimate a firm's future LIFO liquidation tax burden as its LIFO reserve multiplied by the appropriate corporate tax rate and include this tax-adjusted LIFO reserve in the valuation of a LIFO firm's net assets. On the basis of this argument, the tax-adjusted LIFO reserve is …

The Incremental Information Content Of Sas No. 59 Going-Concern Opinions, Lori M. Holder-Webb, Michael S. Wilkins

School of Business Faculty Research

The purpose of this paper is to evaluate whether the expanded requirements of SAS No. 59 (A/CPA [1988]), which requires auditors to actively evaluate and report on a client's going-concern status for the coming year, have allowed investors to make more accurate ex ante assessments of firms that eventually file for bankruptcy. We extend Chen and Church [1996] (hereafter CC), who conclude that SAS No. 34 (AICPA [1981]) "subject to" going-concern opinions have information value because they reduce the surprise associated with bankruptcy announcements. We hypothesize that if SAS No. 59 has achieved what was intended, going-concern opinions issued under …

Articulation In Cash Flow Statements: A Resource For Financial Accounting Courses, Michael S. Wilkins, Martha L. Loudder

School of Business Faculty Research

Recent accounting research (Bahnson, P., Miller, P., & Budge, B. (1996). Nonarticulation in cash flow statements and implications for education, research and practice. Accounting Horizons, 10, 1–15 has shown that firms implementing the indirect method for reporting cash flows under SFAS 95 rarely produce financial statements that articulate cleanly. The purposes of this paper are (1) to provide financial accounting educators with a list of companies for which articulation does exist, (2) to describe the process by which educators can update the list in the future, or modify it to suit their own preferences, and (3) to present an …

The Impact On Ipo Assurance Fees Of Commercial Bank Entry Into The Equity Underwriting Market, Neil L. Fargher, L. Paige Fields, Michael S. Wilkins

School of Business Faculty Research

Changes in the provisions of the United States Banking Act of 1933 have allowed the entry of commercial banks into the initial public offering (IPO) underwriting market. In this paper, we examine the effect of commercial bank equity underwriting on the fees paid to auditors. We predict that IPO assurance fees will be higher for equity offerings underwritten by commercial banks than for offerings handled by traditional underwriters because (1) commercial banks are relatively inexperienced in bringing firms public, requiring additional assistance from accounting firms in the IPO process; (2) new entrants into the underwriting market may manage lower quality …

The Importance Of Call Delays And Cash Flow Positions In Evaluating The Information Content Of Convertible Preferred Stock Calls, L. Paige Fields, Michael S. Wilkins, Eric L. Mais

School of Business Faculty Research

We examine a sample of in-the-money convertible preferred stock calls and find that they are delayed. We find that the length of the call delay does not depend on the relation between the preferred stock dividends and the pro rata common dividends to be paid on conversion. Thus, our evidence suggests that preferred stock calls may be used for signaling purposes. In support of this, we find that only delayed calls (i.e., those with potential signaling elements) are viewed negatively by equity investors. We also show that, in responding to delayed call announcements, investors appear to react to two distinct …

Evidence On Risk Changes Around Audit Qualification And Qualification Withdrawal Announcements, Neil L. Fargher, Michael S. Wilkins

School of Business Faculty Research

Qualifications to an audit report may provide the basis for an auditor's claim that the user was warned about an unusual risk. If audit qualifications highlight changes in firm risk that are material, then the announcement of a qualification should be associated with an increase in the risk of the affected firm. In this paper, we test this proposition. Our initial tests do not detect a shift in systematic risk around qualification announcements; however, subsequent analysis shows that firms announcing recurring material uncertainties have higher levels of systematic risk than firms announcing initial qualifications. Furthermore, we document a significant decrease …

Timely Industry Information As An Assurance Service: Evidence On The Information Content Of The Book-To-Bill Ratio, Neil L. Fargher, Larry R. Gorman, Michael S. Wilkins

School of Business Faculty Research

Assurance services include independent professional services that improve the quality of information. Once such service is the collection of confidential information from participating firms on behalf of an industry association and the release of summarized information to investors. An example of this type of service is the collection of industry-wide information for the Semiconductor Industry Association. The primary output from this process is the monthly release of a ratio of new orders received to chips shipped, known as the book-to-bill ratio.

We evaluate the association between book-to-bill disclosures and common stock prices. Statements in the financial press suggest that the …

Technical Default, Auditors' Decisions And Future Financial Distress, Michael S. Wilkins

School of Business Faculty Research

A study was conducted to examine auditors' responses to first-time debt covenant violations and to assess whether these responses can be employed to forecast financial distress. Data were drawn from a sample of 159 companies traded on the NYSE/AMEX or NASDAQ that had initial default dates ranging from 1978 to 1988. The findings reveal that auditors are more likely to need debt reclassification when the violations are not waived by lenders. However, the waiver decision does not seem to significantly affect the auditor's qualification decision. For companies experiencing technical default, the audit option is an important determinant of future financial …

An Empirical Investigation Of Stock Dividends-In-Kind, L. Paige Fields, Michael S. Wilkins

School of Business Faculty Research

We investigate share price reactions to announcements of dividends payable in the common stock of corporations different from the issuing firm. We find that firms that declare these dividends (typically investment companies) experience positive abnormal returns upon announcement. We also find that such dividends are more likely to be declared when the shares to be distributed have peaked in value. Consistent with this finding, we document negative announcement-period abnormal returns for firms having their shares distributed. Additional tests reveal that prices respond more negatively when the information signal is strongest, when outside ownership is more dispersed, and when management is …

The Information Content Of Withdrawn Audit Qualifications: New Evidence On The Value Of "Subject-To" Opinions, L. Paige Fields, Michael S. Wilkins

School of Business Faculty Research

Statement on Auditing Standards No. 58 (AICPA 1988) effectively eliminated the "subject-to" audit opinion which auditors used to highlight financial statement uncertainties. Elimination of the "subject-to" report implied the Auditing Standards Board's belief that the opinion conveyed no material information to users. Several market-based studies of the value of "subject-to" opinions have yielded mixed results. A major limitation in most of these studies was a lack of precision in identifying the exact date upon which information, if any, was revealed to the market.

This study extends the previous work by examining the common share price reactions to public announcements of …