Business Commons^™

The Assurance Market Of Sustainability Reports: What Do Accounting Firms Do?, Belen Fernandez-Feijoo, Silvia Romero, Silvia Ruiz

Department of Accounting and Finance Faculty Scholarship and Creative Works

The assurance of sustainability reports is a relatively new service offered by different providers such as accounting firms and consultants. The percentage of sustainability reports assured and the weight of the four largest accounting firms (Deloitte, EY, KPMG and PWC) in this new market are evolving in time. The purpose of this paper is to contribute to a better understanding of the role each one of the four major accounting firms (Big4) play in this assurance market. Using a generalized linear mixed model in an international sample, our results confirm that each Big4 accounting firm leverages its network of financial …

Trade Networks And Cross-Border Acquisitions: Evidence From United States Acquiring Firms, Seung Hun Han, Eun Jin Jo, Dong-Kyoon Kim, Duk Hee Lee

Department of Accounting and Finance Faculty Scholarship and Creative Works

This study examines the impact of the trade networks of target firms' nation on the announcement returns of the cross-border acquisitions of United States acquirers. By using a sample of 818 cross-border acquisitions during 2000–2007, we find that the centrality measure of trade networks has a positive impact on announcement returns, after controlling for Hofstede's cultural distance measure between the acquiring and target nations and various firm- and deal-specific factors. In sum, trade network analysis, based on strength centrality, better explains the performance of acquiring firms than does the bilateral trade openness measurement used in previous studies.

The Benefits Of Specific Risk-Factor Disclosures, Ole-Kristian Hope, Danqi Hu, Hai Lu

Research Collection School Of Accountancy

Practitioners have long criticized risk-factor disclosures in the 10-K as generic and boilerplate. In response, regulators emphasize the importance of being specific. By using a computing algorithm, this paper establishes a new measure (Specificity) to quantify the level of specificity of firms’ qualitative risk-factor disclosures. We first examine determinants of variations in Specificity, and document that firms with high proprietary costs provide less specific risk-factor disclosures. More importantly, we find that, controlling for numerous determinants, the market reaction to the 10-K filing is positively and significantly associated with Specificity. In addition, our results suggest that analysts are better able to …

Ceo Overconfidence And Stock Price Crash Risk, Jeong-Bon Kim, Zhang Wen, Liandong Zhang

Research Collection School Of Accountancy

This study examines the association between chief executive officer (CEO) overconfidence and future stock price crash risk. Overconfident managers overestimate the returns to their investment projects and misperceive negative net present value (NPV) projects as value creating. They also tend to ignore or explain away privately observed negative feedback. As a result, negative NPV projects are kept for too long and their bad performance accumulates, which can lead to stock price crashes. Using a large sample of firms for the period 1993–2010, we find that firms with overconfident CEOs have higher stock price crash risk than firms with nonoverconfident CEOs. …

Accounting Flexibility And Managers' Forecast Behavior Prior To Seasoned Equity Offerings, Jae Bum Kim

Research Collection School Of Accountancy

This study examines the effect of accounting flexibility on managers’ forecasting behavior prior to seasoned equity offerings (SEOs). Although SEO firms have a strong incentive to convey optimistic information to boost the pre-SEO stock price, they also face enhanced litigation risk arising from SEO-related regulations. Thus, I hypothesize that managers will release positive news through their forecasts (relative to the prevailing analyst consensus) prior to an SEO only if they have the accounting flexibility to manage subsequent reported earnings to meet or exceed their forecasts. I find that managers with greater accounting flexibility are more likely to issue a forecast …

Socially Responsible Firms, Allen Ferrell, Hao Liang, Luc Renneboog

Research Collection Lee Kong Chian School Of Business

In the corporate finance tradition, starting with Berle and Means (1932), corporations should generally be run to maximize shareholder value. The agency view of corporate social responsibility (CSR) considers CSR an agency problem and a waste of corporate resources. Given our identification strategy by means of an instrumental variable approach, we find that well-governed firms that suffer less from agency concerns (less cash abundance, positive pay-for-performance, small control wedge, strong minority protection) engage more in CSR. We also find that a positive relation exists between CSR and value and that CSR attenuates the negative relation between managerial entrenchment and value.

Targets Tax Shelter Participation And Takeover Premiums, Travis Chow, Kenneth J. Klassen, Yanju Liu

Research Collection School Of Accountancy

This paper examines the effect of targets' participation in tax shelters on takeover premiums in mergers and acquisitions. Using a novel data set in which targets disclose that they have not participated in tax shelters, we find that targets that make this statement in their merger filings are associated with 4.6 percent higher takeover premiums, on average. These findings suggest that acquirers are concerned about the potential future liabilities when targets have engaged in tax sheltering. Consistent with this interpretation, the results also indicate that the positive association between targets' nonsheltering disclosure and acquisition premiums is stronger for less tax-aggressive …

Theory And Practice Of The Proposed Conceptual Framework: Evidence From The Field, Kevin Ow Yong, Chu Yeong Lim, Pearl Hock-Neo Tan

Research Collection School Of Accountancy

We provide survey evidence of chartered accountants' perspectives on the proposed conceptual framework of the International Accounting Standards Board. Our survey obtains their views on the changes in the definitions of assets and liabilities, recognition criterion, and additional guidance in these areas, as well as issues relating to other comprehensive income, business model-based accounting, and choice of measurement basis. Our field evidence suggests broad consensus with respect to most of these changes. The areas that generate the most disagreement among our respondents relate to the removal of economic benefits in the proposed asset definition, the proposal to remove the minimum …

2016 Q4 Private Capital Access Index Report, Craig R. Everett

Pepperdine Private Capital Access Report

The Pepperdine Private Capital Access Index (PCA) is a quarterly indicator produced by the Graziadio School of Business and Management at Pepperdine University, and with the support of Dun & Bradstreet. The index is designed to measure the demand for, activity, and health of the private capital markets. The purpose of the PCA Index is to gauge the demand of small and medium sized businesses for financing needs, the level of accessibility of private capital, and the transparency and efficiency of private financing markets.

Valuation Uncertainty, Market Sentiment And The Informativeness Of Institutional Trades, Lisa Yang, Jeremy Goh, Chiraphol N. Chiyachantana

Research Collection Lee Kong Chian School Of Business

Prior studies indicate that institutional investors are informed, in the sense that their trades predict price changes. In this study we show that return predictive ability of institutions arises (after controlling for size, book-to-market, and momentum) mainly from institutional sales of hard-to-value stocks during periods of positive market sentiment. These results support the notion that these stocks tend to be overvalued during periods of bullish market sentiment, and institutions contribute to market efficiency by identifying and trading on these overpriced stocks.

Audit Committees And Financial Reporting Quality In Singapore, Yuanto Kusnadi, Kwong Sin Leong, Themin Suwardy, Jiwei Wang

Research Collection School Of Accountancy

We examine three characteristics (independence, expertise, and overlapping membership) of audit committees and their impact on the financial reporting quality for Singapore-listed companies. The main finding is that financial reporting quality will be higher if audit committees have mixed expertise in accounting, finance, and/or supervisory. In addition, we do not find evidence that incremental independence of audit committees enhances financial reporting quality because audit committees already consist of a majority of independent directors. Finally, we fail to find any impact of overlapping membership on audit and remuneration committees on financial reporting quality. Overall, the results have policy implications on improving …

The Effect Of Corporate Tax Avoidance On The Cost Of Equity, Beng Wee Goh, Jimmy Lee, Chee Yeow Lim, Terry J. Shevlin

Research Collection School Of Accountancy

Based on Lambert, Leuz, and Verrecchia (2007)'s derivation of the cost of equity capital in terms of expected cash flows, we generate a testable hypothesis that relates tax avoidance to a firm's cost of equity capital. Using three broad measures of tax avoidance-book-tax differences, permanent book-tax differences, and long-run cash effective tax rates-to test our hypothesis, we find that the cost of equity is lower for tax-avoiding firms. This effect is stronger for firms with better outside monitoring, firms that likely realize higher marginal benefits from tax savings, and firms with higher information quality. Overall, our results suggest that equity …

Relation Between Auditor Quality And Corporate Tax Aggressiveness: Implications Of Cross-Country Institutional Differences, Kiridaran Kanagaretnam, Jimmy Lee, Chee Yeow Lim, Gerald J. Lobo

Research Collection School Of Accountancy

Using an international sample of firms from 31 countries, we study the relation between auditor quality and corporate tax aggressiveness. Employing an indicator variable for tax aggressiveness when the firm's corporate tax avoidance measure is within the top quintile of each country-industry combination, we find strong evidence that auditor quality is negatively associated with the likelihood of tax aggressiveness, even after controlling for other institutional determinants such as home-country tax system characteristics. We also find that the negative relation between auditor quality and the likelihood of tax aggressiveness is more pronounced in countries where investor protection is stronger, auditor litigation …

Decimalization, Ipo Aftermath, And Liquidity, Charlie Charoenwong, David K. Ding, Tiong Yang Thong

Research Collection Lee Kong Chian School Of Business

We investigate the effect of decimalization on the aftermarket trading of NYSE-listed IPOs. We find that the relation between bid–ask spread and underpricing becomes negative post-decimalization, suggesting that benefits from the increased price competition accrue more to hot IPOs. The quoted depth is generally smaller post-decimalization due to a higher probability of front running, which aggravates the cost of adverse selection and limit order submission. We show that underwriters continue to provide price support but are only willing to cover the initial short position, if profitable to do so. Decimal pricing does not affect the flipping strategy of institutions for …

Acquisitions And Regulatory Arbitrage By Captive Finance Companies, Deborah Smith, Mina Glambosky, Kimberly Gleason, K. Bryan Menk

Business Faculty Publications

Captive finance firms play an important role as financial intermediaries. Yet, they receive little attention in financial research. Recently, finance companies have grown by engaging in acquisition activities. Given their unique characteristics, finance companies may be more capable of extracting gains from acquisitions than other firms. We explain their advantages, and assess the market response and long-term valuation of finance companies that engage in acquisitions. Our results indicate that acquisitions by captive finance firms are wealth enhancing in the short term and the long term. However, the market reacts negatively when flexible captive financing firms acquire highly regulated depository institutions.

Sociability, Golf Courses, And The Performance Of Institutional Investors, Chi Shen Wei, Lei Zhang

Research Collection Lee Kong Chian School Of Business

We hypothesize that prestigious golf courses attract golfers and visitors from across the country, providing greater opportunities for nearby investors to build social connections. Our evidence suggests that institutional investors located near prestigious golf courses earn significantly better benchmark- and risk-adjusted returns. This reflects the benefits of sociability as our findings are stronger for golf courses with reciprocal guest policies that allow wider participation and increase when major golf championships rotate to the state. Their portfolios reveal hallmarks of active trading – higher concentration, greater selectivity, more frequent turnover – and include more distant stocks. To establish a causal link, …

Does It Pay To Be Different? Relative Csr And Its Impact On Firm Value, David K. Ding, Christo Ferreira, Udomsak Wongchoti

Research Collection Lee Kong Chian School Of Business

Conventional aggregation of Corporate Social Responsibility (CSR) raw scores and its interpreted impact on firm value have provided mixed evidence in the literature. We show that the value impact of CSR activities relies heavily on the industry-specific relative position of the firm. Only firms that distinguish themselves over their peers are associated with increased firm value. This finding is robust and holds for both responsible and irresponsible behaviors. Information concerns and portfolio construction can allude to a possible CSR clientele, suggesting the existence of an optimal CSR level. Our peer-effect results are robust to unobserved heterogeneity along the lines of …

The Price Contagion Effects Of Financial Reporting Fraud And Reputational Losses: Evidence From The Individual Audit Partner Level, Ferdinand A. Gul, Chee Yeow Lim, Kun Wang, Yanping Xu

Research Collection School Of Accountancy

This study investigates the existence of price contagion effects for the low-quality audits of individual audit partners and the associated reputational losses in China. Low-quality partners are identified as those whose clients have been sanctioned by regulators for financial reporting fraud. Our evidence shows that sanctions induce a significant stock price decline among the contagion firms that share common low-quality partners and common low-quality audit firms; however, the decline is greater for the former. We also find that the price contagion effects of low-quality partners are more pronounced for firms located in regions with weak institutional development and less pronounced …

Political Turnovers, Ownership, And Corporate Investment In China, Jerry X. Cao, Julio Brandon, Tiecheng Leng, Sili Zhou

Research Collection Lee Kong Chian School Of Business

We examine the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are promoted in China. The tournament-style promotion system creates incentives for new governors to exert influence over investment in the early years of their term. We find a divergence in investment rates between state owned enterprises (SOEs) and private firms following political turnover. SOEs increase investment by 6.0% following the turnover while investment rates for private firms decline, suggesting that the political influence exerted over SOEs may crowd out private investment.

Did The Sarbanes-Oxley Act Impede Corporate Innovation? An Analysis Of The Unintended Consequences Of Regulation, Cao, Jerry X., Aurobindo Ghosh, Choo Yong, Jeremy Goh, Feichin Ted Tschang (Or F. Ted Tschang)

Research Collection Lee Kong Chian School Of Business

We investigate whether innovation by publicly listed U.S. companies deteriorated significantly after the adoption of the Sarbanes-Oxley Act of 2002. Using data on patent filings as proxies for firms‟ innovative activities, we find firms‟ innovation as measured by patents and innovation efficiency dampened significantly after the enactment of the Act. The degree of impact is related to firm-specific characteristics such as the firm‟s value (Tobin‟s Q) and its measure of corporate governance (G-Index), as well as the firm‟s operating conditions (i.e., the firm being in an high-tech industry, and being delisted or not). We find evidence that the SOX‟s impact …

Ceo Power, Corporate Social Responsibility, And Firm Value: A Test Of Agency Theory, Zhichuan Li

Business Publications

Purpose

The purpose of this paper is to explore whether firms with powerful chief executive officers (CEOs) tend to invest (more) in corporate social responsibility (CSR) activities as the over-investment hypothesis based on classical agency theory predicts.

Design/methodology/approach

This paper tests an alternative hypothesis that if CSR investment is indeed an agency cost like the over-investment hypothesis suggests, then those activities may destroy firm value.

Findings

Using CEO pay slice (Bebchuk et al., 2011), CEO tenure, and CEO duality to measure CEO power, the authors show that CEO power is negatively correlated with firm’s choice to engage in CSR …

Does The Relation Between Information Quality And Capital Structure Vary With Cross-Country Institutional Differences?, Jeff Zeyun Chen, Chee Yeow Lim, Gerald J. Lobo

Research Collection School Of Accountancy

Prior research based on U.S. data finds that firms with better information quality raise more equity whereas firms with poorer information quality prefer to issue debt when they seek external financing. Little is known about whether the same conclusion holds outside the U.S. and how the country-level institutional environment influences the relation between information quality and capital structure choices. We examine the relation between accounting information quality (measured by earnings precision, accruals quality, and analyst consensus) and financial leverage across 24 countries and whether that relation varies systematically with country-level investor protection and financial orientation. We document a lower financial …

Financial Reporting Quality Of Chinese Reverse Merger Firms: The Reverse Merger Effect Or The China Effect?, Kun-Chih Chen, Qiang Cheng, Ying Chou Lin, Yu-Chen Lin, Xing Xiao

Research Collection School Of Accountancy

In this paper, we examine why Chinese reverse merger (RM) firms have lower financial reporting quality than U.S. IPO firms. We find that the financial reporting quality of U.S. RM firms is similar to that of matched U.S. IPO firms, but Chinese RM firms exhibit lower financial reporting quality than Chinese ADR firms. We also find that Chinese RM firms exhibit lower financial reporting quality than U.S. RM firms. These results indicate that the use of the RM process is associated with poor financial reporting quality only in firms from China, where legal enforcement and investor protection are weak. In …

Can Information Be Locked Up? Informed Trading Ahead Of Macro-News Announcements, Gennaro Bernile, Jianfeng Hu, Yuehua Tang

Research Collection Lee Kong Chian School Of Business

Government agencies routinely allow pre-release access to information to accredited news agencies under embargo agreements. Using high-frequency data, we find evidence consistent with informed trading during embargoes of Federal Open Market Committee (FOMC) scheduled announcements. The E-mini Standard & Poor’s 500 futures’ abnormal order imbalances are in the direction of subsequent policy surprises and contain information that predicts the market reaction to the policy announcements. The estimated informed trades’ profits are arguably large. Notably, we find no evidence of informed trading prior to the start of FOMC news embargoes or during lockups ahead of nonfarm payroll, US Producer Price Index, …

Hedge Fund Activism, Poison Pills, And The Jurisprudence Of Threat, William W. Bratton

All Faculty Scholarship

This chapter reviews the single high profile case in which twentieth century antitakeover law has come to bear on management defense against a twenty-first century activist challenge—the Delaware Court of Chancery’s decision to sustain a low-threshold poison pill deployed against an activist in Third Point LLC v. Ruprecht. The decision implicated an important policy question: whether a twentieth century doctrine keyed to hostile takeovers and control transfers appropriately can be brought to bear in a twenty-first century governance context in which the challenger eschews control transfer and instead makes aggressive use of the shareholder franchise. Resolution of the question …

2016 Q3 Private Capital Access Index Report, Craig R. Everett

Pepperdine Private Capital Access Report

The Pepperdine Private Capital Access Index (PCA) is a quarterly indicator produced by the Graziadio School of Business and Management at Pepperdine University, and with the support of Dun & Bradstreet. The index is designed to measure the demand for, activity, and health of the private capital markets. The purpose of the PCA Index is to gauge the demand of small and medium sized businesses for financing needs, the level of accessibility of private capital, and the transparency and efficiency of private financing markets.

Social Media Information And Analyst Forecasts, Mahfuja Malik, Rajib Hasan, Abu S. Amin

WCBT Faculty Publications

In the past decade, social networking has changed the landscape of information dissemination. The rapid diffusion of social media services such as Facebook and Twitter is unprecedented and offers immense possibilities for corporations to communicate with, and engage core stakeholders in, various business decisions. In this study, we investigate whether social media play any role as a source of information for financial analysts. We specifically focus on information revealed on the official Facebook pages of S&P 500 firms. We define information content on a Facebook page as the total number of posts by the corporations and the comments, likes and …

Governance And Post-Repurchase Performance, Gary Caton, Jeremy Goh, Yen Teik Lee, Scott Linn

Research Collection Lee Kong Chian School Of Business

Payout policies based on share repurchase programs provide greater flexibility than do those based on cash dividends. We develop and test an empirical model in which strongly governed companies outperform weakly governed companies after announcing share repurchase programs. Our findings include positive associations between strong governance and both post-announcement adjusted operating performance and abnormal stock returns. The results are robust to sample selection bias, different sample criteria, governance measurement, and various control variables. In addition, governance strength is associated with larger post-announcement changes in CEO incentive compensation and merger and acquisition activity, both of which we argue are consistent with …

"Other Information" In An Audit (Part 2), Foo S.L.

Research Collection School Of Accountancy

In light of the new reporting requirements, SSA 720 (Revised) articulates a systematic approach on Other Information (OI) work. It comprises five key elements. These are Obtaining, Reading and Considering, Responding, Reporting and Documentation of OI (Figure 1). Invariably, these enhancements provide useful guidance to the auditors. With additional prescribed work efforts, it also calls for a greater integration of OI work scope with the overall audit planning.

Aggregate Earnings Surprises, Monetary Policy, And Stock Returns, Lindsey A. Gallao, Rebecca N. Hann, Congcong Li

Research Collection School Of Accountancy

This paper examines whether the negative association between aggregate earnings and returns is explained by the monetary policy news in aggregate earnings. Using Federal funds futures data to construct a measure of policy news, we find that aggregate earnings convey information about the Fed׳s policy actions. Additionally, the negative aggregate earnings-returns association is muted when we control for policy surprises. This result is more pronounced in periods with negative policy surprises, which tend to trigger a more significant market reaction. Taken together, these results suggest that aggregate earnings convey policy news and the market reacts negatively to policy surprises, which …