Accounting Commons^™

Intraday Volatility And The Implementation Of A Closing Call Auction At Borsa Istanbul, A. Can Inci, Deniz Ozenbas

Department of Accounting and Finance Faculty Scholarship and Creative Works

The implementation of a closing call auction on market quality and volatility is examined at Borsa Istanbul in Turkey. Using 5- and 15-minute intervals, we document the accentuated volatility after the open and before the close during the morning and afternoon sessions. We show that the implementation of a closing call decreases volatility accentuation just prior to the market close, and increases market quality. We also document the evolution of intraday volatility patterns at Borsa Istanbul using the longest to date high frequency dataset available, and show that volatility has been increasing over time, especially at the close.

Foreign Capital Flows, Uncertainties Of Exchange Rates And Central Bank Independence: Implications For Emerging Economies, Hermann Sintim-Aboagye, Chandana Chakraborty, Serapio Byekwaso

Department of Accounting and Finance Faculty Scholarship and Creative Works

Utilizing time series data for a panel of 22 emerging countries and applying Granger causality tests, this paper extends the relationship between central bank independence (CBI) and uncertainties of inflation by including the phenomena of exchange rates and foreign capital flows. There are two specific objectives of this investigation. The first objective is to see whether uncertainty of inflation induces volatility of exchange rates, and vice versa, under differing degrees of CBI. The second objective is to explore whether the dynamics of the former relationship influence foreign capital flows in turn and, if so, whether the extent of CBI plays …

Voluntary Changes In Accounting Principle: Literature Review, Descriptive Data, And Opportunities For Future Research, Marsha B. Keune, Timothy M. Keune, Linda C. Quick

Accounting Faculty Publications

Voluntary changes in accounting principle represent explicit and fundamental decisions by managers to exercise accounting discretion. This paper develops an organizing framework to review prior literature on voluntary changes, provides descriptive insights on contemporary changes, and identifies opportunities for future research on voluntary changes. The voluntary change literature is robust and has examined many questions using data prior to the Sarbanes-Oxley Act of 2002 (SOX). We find that contemporary voluntary changes often vary across the pre-SOX, post-SOX, and post-SFAS No. 154 periods by the materiality of their income effect, issue type, and justifications provided by managers, suggesting that manager use …

Big Data And Analytics In The Modern Audit Engagement: Research Needs, Deniz Appelbaum, Alexander Kogan, Miklos A. Vasarhelyi

Department of Accounting and Finance Faculty Scholarship and Creative Works

Modern audit engagements often involve examination of clients that are using Big Data and analytics to remain competitive and relevant in today’s business environment. Client systems now are integrated with the cloud, the Internet of Things, and external data sources such as social media. Furthermore, many engagement clients are now integrating this Big Data with new and complex business analytical approaches to generate intelligence for decision making. This scenario provides almost limitless opportunities and the urgency for the external auditor to utilize advanced analytics. This paper first positions the need for the external audit profession to move toward Big Data …

Heineken's Acquisition Of Asia Pacific Breweries: Accounting For Business Combinations And Ownership Interests, Pearl Hock Neo Tan, Chu Yeong Lim

Research Collection School Of Accountancy

On July 20, 2012, Heineken, a Dutch brewery offered S$5.125 billion (Singapore dollars; approximately US$4.1 billion) to buy Asia Pacific Breweries Ltd (APB; formerly, Malayan Breweries Limited) from its Singapore-based joint venture partner, Fraser and Neave, Limited. (F&N). At that point, Heineken and F&N had joint control over APB through the joint venture vehicle Asia Pacific Investments Pte Ltd (APIPL). Brewery business under the joint arrangement had moved on quite predictably from the time APB was formed in 1931. However, the calm changed to high drama when Thai Beverage, owned by one of Thailand's tycoons, made a bid for F&N …

Additional Evidence On The Impact Of The International Financial Reporting Standards On Earnings Quality: Evidence From Latin America, Mauricio Melgarejo

Scholarship and Professional Work - Business

The purpose of this paper is to explore whether the adoption of the International Financial Reporting Standards (IFRS) has an impact on the quality of earnings in Latin America. Studying a sample offirms from Argentina, Brazil, Chile, Mexico, and Peru, I find that management reports a lower level of discretionary accruals after the implementation of the IFRS. In addition, this study provides evidence that earnings are more persistent and stock prices are more associated with earning numbers after the application of IFRS. This paper provides evidence that earnings quality has increased after the adoption of IFRS in Latin America.

Materiality Defined: Differing Concepts Of Materiality Can Cause Confusion Among Stakeholders, Michael P. Fabrizius, Sridhar Ramamoorti

Accounting Faculty Publications

Because the term materiality arose within the context of financial reporting and statement assurance, internal auditors have been challenged in adapting or creating a definition that is relevant for themselves and their stakeholders. In the context of financial reporting, materiality is relevant to three stakeholder groups: 1) preparers of financial statements, 2) auditors, and 3) users of financial statements. Although materiality decisions are made by only two of these three groups--preparers and auditors--most internal auditors' conception of materiality likely has a user orientation. The auditor might ask, "How would a reasonably prudent investor react to the magnitude of misstatement (under- …

Additional Evidence On The Impact Of The International Financial Reporting Standards On Earnings Quality: Evidence From Latin America, Mauricio A. Melgarejo

Mauricio Melgarejo

Gender And Connections Among Wall Street Analysts, Lily Hua Fang, Sterling Huang

Research Collection School Of Accountancy

We examine how alumni ties with corporate boards differentially affect male and female analysts’ job performance and career outcomes. Connection improves men’s job performance — forecasting accuracy and recommendation impact — significantly more than women’s. Controlling for performance, connection further contributes to men’s, but not women’s, likelihood of being voted by institutional investors as “star” analysts, a marker of career success. These asymmetric effects are stronger in more opaque firms and among younger analysts, but is absent from a placebo test. Our evidence indicates that men reap higher benefits from social networks than women in both job performance and subjective …

The Effects Of Risk Management On Management Forecast Behavior, John L. Campbell, Sean Cao, Hye Sun Chang, Raluca Chiorean

Research Collection School Of Accountancy

Prior research examines several reasons why managers voluntarily disclose information, but provides relatively little evidence as to whether day-to-day operational decisions influence a manager’s disclosure choice. In this study, we examine whether a particular operational activity – risk management through the use of derivatives – affects whether a manager decides to issue earnings forecasts. Using a large hand-collected sample of derivatives users and non-users, we find that derivatives users are more likely to issue earnings forecasts relative to non-users. We then find that this result is stronger when the use of derivatives makes it less costly for managers to issue …

Using Formal Concept Analysis To Examine Water Disclosure In Corporate Social Responsibility Reports, Gary Kleinman, Chu Hua Kuei, Picheng Lee

Department of Accounting and Finance Faculty Scholarship and Creative Works

Corporate social responsibility (CSR) water disclosures vary in content, leading to concern about the quality and extent of such disclosures. This paper employs formal concept analysis (FCA) to examine water reporting of selected companies in the US food and beverage industry that have followed the water guidelines set forth by the Global Reporting Initiative (GRI) and in the disclosure guidelines of the CEO Water Mandate. Assessments of water consumption and water withdrawal were cited more often in our sample firms' CSR reports. FCA results also identify the major focus of our sample firms as setting sustainable water management goals and …

Do High Ceo Pay Ratios Destroy Firm Value?, Qiang Cheng, Tharindra Ranasinghe, Sha Zhao

Research Collection School Of Accountancy

There is growing public concern over the rapid growth in CEO pay relative to average worker pay (CEO pay ratio). Critics contend that high CEO pay ratios could destroy firm value by damaging employee morale and/or signal CEO rent extraction. In this paper, we use a proprietary dataset to examine the relationship between CEO pay ratio and firm value/performance. Contrary to critics’ arguments, we find that industry-adjusted CEO pay ratios are positively associated with both firm value and performance. We also find that high CEO pay ratios are associated with higher quality acquisitions and stronger CEO turnover-performance sensitivity. Our results …

Internal Audit And Financial Reporting Quality In The Public Sector, Steven M. Desimone

Economics Department Working Papers

Using a unique set of hand-collected data, this study investigates the association of (1) the presence of an Internal Audit Function (IAF) and (2) the use of quality assurance programs for the IAF with financial reporting quality in public sector organizations. Specifically, I examine if the presence of IAFs and the use of quality assessments therein is associated with the presence of financial statement audit reportable conditions and restatements in municipalities in the U.S. Results indicate that both the presence of an IAF and use of external quality programs therein are positively associated with financial statement audit reportable conditions related …

Fair Value Accounting: Affect On The Auditing Profession, Danny A. Pannese, Alan Delfavero

Danny Pannese

During this period of global markets, multinational corporations are demanding financial accounting standards with enhanced uniformity. In an effort to achieve this objective, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together on the Convergence Project, aiming to develop accounting standards that closely correlate with international financial reporting standards. In September 2006 and February 2007, the FASB issued two key fair value accounting (FVA) standards which focused on providing guidelines for fair value measurement (through a classification hierarchy), expanding disclosure requirements, and also allowing business entities to increase FVA's application. However, the …

Refocusing Through Discontinued Operations In Response To Acquisitions And Diversification, Richard Lord, Yoshie Saito

Department of Accounting and Finance Faculty Scholarship and Creative Works

We examine how prior acquisitions and the extent of corporate diversification affect decisions to discontinue operations. These choices comprise a very important class of publicly announced disposal decisions, and analyzing them allows us to utilize a much larger sample than most prior studies of divestitures. We employ a multinomial logistic regression setting to test our three hypotheses; this framework allows us to assess the difference in choices regarding positive- and negative-valued announcements of discontinued operations. We find that firms are less liable to report negative-valued divestitures in the year of an acquisition, and are more likely to discontinue operations, especially …

Ceo Contractual Protection And Debt Contracting, Qiang Cheng, Xia Chen, Alvis K. Lo, Xin Wang

Research Collection School Of Accountancy

CEO employment agreements and severance pay agreements are prevalent among S&P1500 firms. While prior research has examined their impact on corporate decision from shareholders’ perspective, there is little research on their impact from debtholders’ perspective. We examine the effect on debt contracting of CEO contractual protection, in the form of employment agreements and severance pay agreements. We find that compared with other loans, loans issued by firms with CEO contractual protection contain more financial covenants, particularly performance covenants, are more likely to have performance pricing provisions, and have higher loan spreads. We further find that this effect increases with the …

Sharing Risk With The Government: How Taxes Affect Corporate Risk Taking, Alexander Ljungqvist, Liandong Zhang, Luo Zuo

Research Collection School Of Accountancy

Using 113 staggered changes in corporate income tax rates across U.S. states, we provide evidence on how taxes affect corporate risk-taking decisions. Higher taxes reduce expected profits more for risky projects than for safe ones, as the government shares in a firm's upside but not in its downside. Consistent with this prediction, we find that risk taking is sensitive to taxes, albeit asymmetrically: the average firm reduces risk in response to a tax increase (primarily by changing its operating cycle and reducing R&D risk) but does not respond to a tax cut. We trace the asymmetry back to constraints on …

Impact Of Business Analytics And Enterprise Systems On Managerial Accounting, Deniz Appelbaum, Alexander Kogan, Miklos Vasarhelyi, Zhaokai Yan

Department of Accounting and Finance Faculty Scholarship and Creative Works

The nature of management accountants' responsibility is evolving from merely reporting aggregated historical value to also including organizational performance measurement and providing management with decision related information. Corporate information systems such as enterprise resource planning (ERP) systems have provided management accountants with both expanded data storage power and enhanced computational power. With big data extracted from both internal and external data sources, management accountants now could utilize data analytics techniques to answer the questions including: what has happened (descriptive analytics), what will happen (predictive analytics), and what is the optimized solution (prescriptive analytics). However, research shows that the nature and …

Corporate In-House Human Capital Tax Investments, Xia Chen, Qiang Cheng, Travis Chow, Yanju Liu

Research Collection School Of Accountancy

In-house human capital investment in the tax function is a significant input to a firm’s tax planning. Yet, due to lack of data, there is little empirical evidence on whether corporate in-house tax departments are associated with effective tax planning. We examine this issue using hand-collected data on corporate tax employees in S&P1500 firms. We find that firms with larger in-house tax departments are more effective in tax planning: they have lower tax rates, report lower uncertain tax benefits, and exhibit less volatile tax rates. The results are stronger for firms with in-house tax departments that have a higher proportion …

Valuation Implications Of Fas 159 Reported Gains And Losses From Fair Value Accounting For Liabilities, Sung Gon Chung, Gerald J. Lobo, Keng Kevin Ow Yong

Research Collection School Of Accountancy

This study examines the economic implications of fair value liability gains and losses arising from the adoption of Statement of Financial Accounting Standards No. 159 (hereafter, FAS 159). Consistent with the notion that gains and losses contain value-relevant information, we find a positive correspondence between a firm’s FAS 159 fair value liability gains and losses and current period stock returns. However, further analysis indicates that fair value gains and losses from liabilities have a negative association with future returns, suggesting that investors misprice this earnings component. This negative association is stronger for firms with low levels of institutional ownership. While …

Why Do Publicly Listed Firms Evade Taxes: Evidence From China, Travis Chow, Bin Ke, Hongqi Yuan, Yao Zhang

Research Collection School Of Accountancy

Taking advantage of the mandatory disclosure of detected corporate tax evasions in China, we examine why publicly listed firms evade taxes. Different from most prior studies that focus on corporate income tax avoidance, we consider tax evasions related to both income taxes and non-income taxes. We also use a bivariate probit model to account for the partial observability of corporate tax evasion. Many of our regression results using the bivariate probit model are different from the results using the reduced form probit model that ignores the partial observability of tax evasion. Many of our results are also different from those …

A Strategy For Teaching Critical Thinking: The Sellmore Case, Joseph F. Castellano, Susan Lightle, Bud Baker

Accounting Faculty Publications

The importance of teaching and applying critical thinking skills is apparently matched by its difficulty in doing so. Sara Rimer, writing for the January 18, 2011, edition of The Hechinger Report, discussed a study by Richard Arum that followed several thousand undergraduates from when they entered college in fall 2005 to when they graduated in spring 2009. Arum’s research, published in his book Academically Adrift: Limited Learning on College Campuses, found that large numbers of students did not learn critical thinking, complex reasoning, and written communication skills. Arum used testing data and student surveys from 24 colleges and universities ranging …

Do Politically Connected Directors Affect Accounting Quality? Evidence From China's Anti-Corruption Campaign (Rule 18), Ole-Kristian Hope, Heng Yue, Qinlin Zhong

Research Collection School Of Accountancy

We examine the impact of politically connected directors on accounting quality using a quasi experiment in China. In October 2013, “Rule 18” was issued to prohibit government and party officials, who were concurrently holding public offices or had recently retired from such positions within the last three years, from serving as directors for publicly listed firms. The regulation is part of China’s anti-corruption campaign, and it has led to a large number of politically connected directors resigning from their roles as directors involuntarily. As such, Rule 18 has effectively weakened, if not fully discontinued, the political connections of the firms …

Insider Versus Outsider Ceos, Executive Compensation, And Accounting Manipulation, Prasart Jongjaroenkamol, Volker Laux

Research Collection School Of Accountancy

This paper examines the role of the financial reporting environment in selecting a new CEO from within versus outside the organization. Weak reporting controls allow the CEO to misreport performance information, which reduces the board's ability to detect and replace poorly-performing CEOs as well as aggravates incentive contracting. We show that these adverse effects are stronger when the CEO is an outsider rather than an insider. Our model predicts that boards are more likely to recruit a CEO from the outside when the performance measures with which the new hire is assessed are harder to manipulate.

Regulatory Pressure And Income Smoothing By Banks In Response To Anticipated Changes To The Basel Ii Accord, Chu Yeong Lim, Kevin Ow Yong

Research Collection School of Accountancy

We examine the effects of the revised Basel II rules on bank managers’ discretionary behavior, specifically income smoothing and loan loss provisioning. As the revised rules exert greater regulatory pressure on corporate than retail banking, we predict corporate bank managers to reduce risk-taking activities or increase income smoothing. Analysis of segmental reports reveals greater (less) income smoothing in the corporate banking segments of low-capital (high-capital) banks during the Basel II period, with their managers recognizing loan loss provisions in a less timely fashion. We find no such effects for retail banking. Although we document an initially negative market reaction to …

Using Drones In Internal And External Audits: An Exploratory Framework, Deniz Appelbaum, Robert A. Nehmer

Department of Accounting and Finance Faculty Scholarship and Creative Works

Recently the FAA relaxed restrictions on the use of drones or Unmanned Aircraft Systems (UASs) for commercial purposes. Markets for commercial drone use are in the technology trigger phase of the Gartner Group’s Hyper Cycle, with developments occurring rapidly in real estate, agriculture (farming), the film industry, insurance, and other areas. Examination and inspection applications of drones have been proposed in heavy industry and cell tower inspection. Previous research suggests an incremental structure for implementing technological innovations such as continuous auditing (CA). In this paper these proposals are expanded to include the additional requirements to add drone technologies. This structure …

Voluntary Fair Value Disclosures Beyond Sfas 157’S Three-Level Estimates, Sung Gon Chung, Beng Wee Goh, Jeffrey Ng, Kevin Ow Yong

Research Collection School Of Accountancy

Some firms voluntarily make disclosures about the controls and processes in place to ensure the reliability of fair value estimates. Consistent with these disclosures being driven by management’s concerns about the reliability of their SFAS 157 estimates, we find that firms with more opaque estimates are more likely to provide such disclosures. We then examine whether these disclosures increase the reliability of fair value estimates. We find that they are associated with higher market pricing and lower information risk for Level 3 estimates. Further analyses of the contents of the reliability disclosures reveal that the following are particularly important to …

Conditional Conservatism And Debt Versus Equity Financing, Beng Wee Goh, Chee Yeow Lim, Gerald J. Lobo, Yen H. Tong

Research Collection School Of Accountancy

Extant research suggests that conditional conservatism reduces information asymmetry between a firm and its shareholders as well as its debtholders. However, there is little evidence on whether conditional conservatism reduces information asymmetry differentially for shareholders and debtholders. We use the setting of a firm's choice between equity versus debt when it seeks a significant amount of external financing to examine this research question. We find that when firms raise a significant amount of external financing, the use of equity (versus debt) increases with the level of conservatism. We also find that the reduction in cost of equity associated with conservatism …

Continuous Auditing: A New Instrument In The Cfo’S Toolbox, Clarence Goh

Research Collection School Of Accountancy

In the past decade, rapid technological developments have led to the widespread adoption of enterprise resource planning systems. These ERP platforms not only allow different functional areas of a business to share data, but also enable businesses to generate financial information in real time.Such developments have fundamentally altered how businesses operate, and present both challenges and opportunities for CFOs and auditors.That’s because traditional audit methods have, to a significant extent, not kept up with these developments. Many audit procedures that are used today remain manual in nature, and are often costly in terms of both time and money. To a …

Audit Regulation In An International Setting: Testing The Impact Of Religion, Culture, Market Factors, And Legal Code On National Regulatory Efforts, Gary Kleinman, Beixin Lin

Department of Accounting and Finance Faculty Scholarship and Creative Works

Assuring the quality of international auditing is important in the current, globalized business/economic environment. High-quality international auditing efforts promote greater confidence in financial statements, and therefore promote greater movement of capital. Ensuring high-quality auditing efforts is the task of auditing regulation efforts, among others. Several potential determinants of the strength of these efforts were postulated in Kleinman et al (2014). The postulated determinants of interest include national culture, religion, legal code origin, and financial market liquidity. The authors, however, did not test the relationship of the postulated determinants to auditing enforcement efforts. This study undertakes the task of investigating such …