Corporate Finance Commons^™

Public Communication Of Audit Risks And Related-Party Transactions: Evidence From China, Ole-Kristian Hope, Heng Yue, Qinlin Zhong

Research Collection School Of Accountancy

This paper examines whether and how firms' engagement in related-party transactions (RPTs) is shaped by public communication of audit risks as required by the expanded audit report. Using the phased regulatory changes in China and a difference-in-differences design with firm fixed effects and matching, we find that firms significantly reduce their RPTs after the adoption of expanded audit reports (EARs). To investigate potential mechanisms, we find that (1) investor scrutiny increases after the adoption of EARs, (2) the reduction of RPTs is more pronounced when EARs are more likely to attract investor attention, and (3) the reduction of RPTs is …

Conflict Or Alignment? The Role Of Return-Oriented Foreign Shareholders And Domestic Relational Shareholders In Mitigating Earnings Management, Toru Yoshikawa, Ignacio P. Requejo, Asli Colpan, Daisuke Uchida

Research Collection Lee Kong Chian School Of Business

This study investigates the effects of foreign return-oriented shareholders and domestic relational shareholders of Japanese companies on the earnings management behavior of their invested firms when stock option pay is adopted. We theorize that foreign shareholders seek short-term returns and do not engage in close monitoring due to an information disadvantage while domestic shareholders prevent managerial behavior that distorts information disclosure. Our findings show that managers of firms that use stock option pay engage in earnings management to increase their private financial benefits and meet capital markets’ expectations, which allows them to enhance their own reputation. However, this managerial behavior …

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

Research Collection School Of Accountancy

Chief Executive Officer (CEO) contractual protection, in the forms of CEO employment agreements and CEO severance pay agreements, is prevalent among S&P 1500 firms. While prior research has examined the impact of these agreements on corporate decisions from shareholders’ perspective, there is little research on the impact from debt holders’ perspective. We find that, compared with other loans, loans issued by firms with CEO contractual protection on average contain more performance covenants and performance-pricing provisions. This effect increases with CEOs’ risk-taking incentives and opportunities, but it decreases with CEOs’ preference for and opportunity of enjoying a quiet life. Furthermore, for …

Esg News, Future Cash Flows, And Firm Value, Francois Derrin, Philipp Krueger, Augustin Landier, Tianhao Yao

Research Collection Lee Kong Chian School Of Business

We investigate the expected consequences of negative ESG news on firms’ future profits. After learning about negative ESG news, analysts significantly downgrade their forecasts at short and longer horizons. Negative ESG news affect forecasts more strongly at longer horizons than other types of negative corporate news. The negative revisions of earnings forecasts following negative ESG news reflect expectations of lower future sales (rather than higher future costs). Quantitatively, forecast revisions can explain most of the negative impacts of ESG news on firm value. Analysts are correct to revise forecasts downward following negative ESG news and ESG sensitive analysts tend to …

Auditor Materiality Threshold And Audit Quality: Evidence From The Revised Isa 700 In The United Kingdom, Beng Wee Goh, Kiat Bee Jimmy Lee, Dan Li, Na Li, Muzhi Wang

Research Collection School Of Accountancy

Using a broad sample of U.K. firms that are required to disclose auditor materiality thresholds under the International Standards on Auditing (U.K. and Ireland) 700, we examine whether the auditor materiality threshold is associated with audit quality. We document that a lower materiality threshold is associated with higher audit quality, as measured by lower absolute discretionary accruals, higher accruals quality, and a lower propensity to just meet or beat analysts’ earnings expectations. We also find some evidence that the negative association between the materiality threshold and audit quality is attenuated when the audit committee is more effective and when the …

Flu Fallout: Information Production Constraints And Corporate Disclosure, Chen Chen, Leonard Leye Li, Louise Yi Lu, Rencheng Wang

Research Collection School Of Accountancy

Using influenza epidemic data, we examine how constraints on corporate information production affect disclosure policies. We find that firms in areas with higher flu activity are less likely to issue short-run earnings forecasts and more likely to issue long-run earnings forecasts. These results are more pronounced when the information production process is more complex, when managers face a greater reputational loss for issuing low-quality short-run forecasts, and when firms’ costs of switching the forecast horizon are lower. Further analysis implies that the effect of flu activity on these forecast issuance decisions is not driven by firm performance or information uncertainty. …

Esg Reporting Divergence, Qiang Cheng, Yun Lou, Mengjie Yang

Research Collection School Of Accountancy

In this paper, we provide the first large-sample empirical analysis of the consequences of ESG reporting divergence among U.S. firms. We construct and validate an ESG reporting divergence measure based on the dissimilarities in ESG reporting across firms. Validation tests confirm that it is lower for firm-pairs using the same ESG reporting framework, with similar size, and with similar ESG performance than for other firm-pairs. We find that ESG reporting divergence is positively associated with ESG rating disagreement and weakens the positive association between ESG ratings and ESG fund allocation. These results indicate that ESG reporting divergence reduces the usefulness …

Is Carbon Risk Priced In The Cross-Section Of Corporate Bond Returns?, Tinghua Duan, Frank Weikai Li, Quan Wen

Research Collection Lee Kong Chian School Of Business

This paper examines the pricing of a firm's carbon risk, measured by its carbon emissions intensity, in the cross-section of corporate bond returns. Contrary to the "carbon risk premium" hypothesis, we find bonds of firms with higher carbon emissions intensity earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon premium, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to carbon risk, …

Shrinking Factor Dimension: A Reduced-Rank Approach, Ai He, Dashan Huang, Jiaen Li, Guofu Zhou

Research Collection Lee Kong Chian School Of Business

We propose a reduced-rank approach (RRA) to reduce a large number of factors to a few parsimonious ones. In contrast to PCA and PLS, the RRA factors are designed to explain the cross section of stock returns, not to maximize factor variations or factor covariances with returns. Out of 70 factor proxies, we find that five RRA factors outperform the Fama-French (2015) five factors for pricing target portfolios, but performs similarly for pricing individual stocks. Our results suggest that existing factor proxies do not provide enough new information at the stock level beyond the Fama-French (2015) five factors.

The Information In Asset Fire Sales, Sheng Huang, Matthew C. Ringgenberg, Zhe Zhang

Research Collection Lee Kong Chian School Of Business

Asset prices remain depressed for years following mutual fund fire sales, but little is known about the causes of these price drops. We show that asymmetric information generates price pressure during fire sales. We separate trades into expected trades, which assume fund managers scale down their portfolio, and discretionary trades. We find that discretionary trades contain fundamental information, whereas expected trades do not. Moreover, other traders cannot distinguish between discretionary and expected trades. Our findings help explain the magnitude and persistence of fire sale discounts: fund managers choose which assets to sell, and information asymmetries make it difficult for arbitrageurs …

Insider Trading And Corporate Spinoffs, Charlie Charoenwong, Kuan Yong David Ding, Jing Pan

Research Collection Lee Kong Chian School Of Business

This paper studies insider trading to examine undervaluation as a motive behind corporate spinoffs. We show an unmistakable increase (decrease) in the number of insider purchases (sales) and net purchases (sales) in the four quarters prior to a spinoff announcement. In addition, relative to a benchmark period, insider selling is significantly lower, and their net purchases significantly higher, in the three quarters prior to a spinoff announcement compared to other periods. We find that announcement period excess returns for abnormal net insider purchases are significantly higher than excess returns for abnormal net insider sales. Moreover, only firms with abnormal net …

Esg Ratings Rewriting Or Recalibration?, Chengshuang Zhang

Dissertations and Theses Collection (Open Access)

ESG ratings are the nexus of sustainable development. Are ongoing retroactive adjustments of ESG scores rewriting or recalibration? Using datasets from 20 random weeks of downloads of Refinitiv ESG universe between 7 October 2021 to 14 December 2022, we find that the positive link between ESG scores or E&S scores to firms’ stock returns existed between 2011 to 2017, disappeared between 2002 to 2011 and attenuated between 2017 to 2021. Using the formation of the International Sustainability Standard Board on 3^rd November 2021 as the external shock event, we further find that the retroactive ESG score adjustments are not …

Growing Up Under Mao And Deng: On The Ideological Determinants Of Corporate Policies, Hao Liang, Rong Wang, Haikun Zhu

Research Collection Lee Kong Chian School Of Business

Historically, economic activities have been organized around certain ideologies. We investigate the impact of politicians’ ideology on corporate policies by exploring a unique setting of ideological change—China from Mao to Deng around the 1978 economic reform—in a regression discontinuity framework. We find that the age discontinuity of politicians around 18 years old in 1978, who had already joined the Chinese Communist Party (CCP) or joined soon thereafter and later became municipal paramount leaders, has had a lasting effect on contemporary firm- and city-level policies. In particular, firms in cities with mayors that joined the CCP under the ideological regime of …

How Does Credit Risk Affect Cost Management Strategies? Evidence On The Initiation Of Credit Default Swap And Sticky Cost Behavior, Jing Dai, Nan Hu, Rong Huang, Yan Yan

Research Collection School Of Computing and Information Systems

In this paper, we examine the effect of credit defaults swaps (CDS) initiation on reference firms' cost management strategies. CDS contracts provide insurance protection for creditors, inducing a shift in bargaining power from borrowers to creditors and an excessive incidence of bankruptcy. Anticipating more intransigent creditors in debt renegotiations and higher bankruptcy risk, CDS firms are incentivized to mitigate risk through decreasing cost stickiness after CDS initiation, as cost stickiness lowers liquidity and triggers early covenant violations. We find that, on average, CDS initiation is associated with a decline in reference firms' cost stickiness. This association is more pronounced for …

Does Disclosure Of Advertising Spending Help Investors And Analysts?, Sungkyun Moon, Kapil R. Tuli, Anirban Mukherjee

Research Collection Lee Kong Chian School Of Business

Publicly listed firms have the discretion to disclose (or not) advertising spending in their annual (10-K) reports. The disclosure of advertising spending can provide valuable information because advertising is a leading indicator of future performance. However, estimates of advertising spending are available from data providers, arguably mitigating the need for its formal disclosure. This study argues that firms’ disclosure of advertising spending provides more complete and public information and therefore lowers investor uncertainty about future firm performance (idiosyncratic risk). Empirical analyses show this effect is largely driven by the negative effect of disclosure of advertising spending on analyst uncertainty. Consistent …

Price Comovement And Market Segmentation Of Chinese A- And H-Shares: Evidence From A Panel Latent-Factor Model, Yingjie Dong, Wenxin Huang, Yiu Kuen Tse

Research Collection School Of Economics

This paper examines the price comovement of cross-listed Chinese A- and H-shares using a panel model with latent factors and a heterogeneous long-run structure. Our model is more flexible than the cointegration system and is estimated using the data-driven Cup–Lasso method. The long-run H-share price discounts are heterogeneous across different groups of stocks. We have identified both stationary and nonstationary latent factors in the price differentials, which are driven by different economic variables. By analyzing the factor loadings of the nonstationary latent factor, we identify some trading-friction and information-friction variables that have effects on the price convergence between the A- …

Exogenous Loss Of Analyst Coverage And Choice Of Audit Quality, Simon Yu Kit Fung, Zheng Wang, Liandong Zhang, Xindong Zhu

Research Collection School Of Accountancy

We show that a firm’s likelihood of appointing auditors with industry expertise or with a larger office increases after the firm is affected by an exogenous reduction in analyst coverage, relative to its matched control firms. This effect is stronger for affected firms with greater reductions in analyst monitoring, for smaller or younger firms, for firms with lower institutional or CEO ownership, and when the lost analysts are more effective monitors. We further show that affected firms that switch to high-quality auditors receive more positive market reaction, experience a smaller decrease in stock liquidity and a smaller increase in cost …

Loan Spreads And Credit Cycles: The Role Of Lenders' Personal Economic Experiences, Daniel Carvalho, Janet Gao, Pengfei Ma

Research Collection Lee Kong Chian School Of Business

We provide evidence that changes in lender optimism can lead to excessive fluctuations in credit spreads across the credit cycle. Using data on the real estate properties of loan officers originating large corporate loans, we find that credit spreads overreact to sophisticated lenders' recent local economic experiences, captured by local housing price growth. These effects are only present when borrowers own real estate assets and during times of greater uncertainty about real estate values, i.e., boom-and-bust cycles in housing prices. Our analysis suggests that recent personal experiences shape sophisticated lenders' beliefs about real estate values, which affect their pricing decisions.

Strategic Financial Management Part Iii: Debt Maturity And Priority And Corporate Liquidity, Fangjian Fu, Clifford W. Smith

Research Collection Lee Kong Chian School Of Business

This is the third in our series ofJACFarticles that explores thecorporate motives for and consequences of seasoned equity offer-ings (SEOs) by U.S. public companies over the past 50 years. Likeits two predecessors, this article begins by examining each of thethree standard theories (or “models”) of corporate capital structureand financing policy that continue to receive serious considerationin academic discussions: (1) the Tradeoff Model;(2)thePeckingOrder Model, and (3) theMarket Timing Model.Aswealsobeganby noting in our two previous articles, each of these three modelshas implications that do not fit comfortably with the findings ofour analysis of over 8500 SEOs by U.S. companies between 1970and 2019.

Impact Of Geographical Diversification And Limited Attention On Private Equity Fund Returns, Victor Ong

Research Collection Lee Kong Chian School Of Business

This article analyzes the effect of geographical diversification on global private equity (PE) fund returns. We find that there is a negative correlation between geographical diversification and PE fund returns. To establish the causality between geographical diversification and PE fund returns, we employ an instrumental variable analysis where the instrument used is the stock market capitalization of the host country where the PE fund is based. Our results apply to Net IRR, TVPI and DPI as dependent variables used to proxy for PE fund returns in the main regression model. A one standard deviation increase in geographical diversification results in …

Can Honesty Reminders Reduce Dishonesty In Budgetary Slack?, Wilfred W. H. Cheng, Chee Yeow Lim, Chi Kwan Yuen

Research Collection School Of Accountancy

This study investigates the effect of honesty reminders on budgetary slack. Based on self-concept maintenance theory, the authors posit that honesty reminders can reduce budgetary slack by making people more aware of their own standards of honesty, resulting in more honest behavior. Using an experimental research design, the authors find evidence that honesty reminders reduce budgetary slack. The authors also find that although penalties can similarly reduce budgetary slack, they tend to cause distrust and resentment from subordinates. Therefore, honesty reminders may be a less costly method than penalties for reducing budgetary slack.

Redefining The Boundaries Of Firms: Insights From The Corporate Social Responsibility Of The Digital Platform-Based Firms And Stock Returns, Moo Kung Kim

Dissertations and Theses Collection (Open Access)

By using a novel dataset, platform firms (those that operate on apps and the internet as their main vector of operations), this study explores the boundaries of the firm through the lens of corporate social responsibility. By examining the CSR scandals of platform-based firms, the paper aims to answer: ‘How do digital platform firms affect the society and capital market and understand the welfare of stakeholders?’. To disentangle the debates in the literature, the study articulates the new framework of the boundaries and scope of firms by proposing broader stakeholders of firms.

This research attempts to elucidate the boundaries of …

Postmaterialism And Corporate Tax Avoidance, Yujia Cui, Jiwei Wang, Kangtao Ye

Research Collection School Of Accountancy

Using a proprietary dataset of China tax audits, we found that firms owned by investors from countries with higher postmaterialism values were less likely to engage in tax-avoidance behavior in China. In addition, we found some evidence that the negative association between postmaterialism and tax avoidance is more pronounced when tax enforcement is stronger, indicating that national culture and formal institutions act as complements. To check the external validity of our main results, we further used a cross-country sample from 21 countries over 22 years. The evidence from the cross-country sample was consistent with the findings obtained from the China …

Information Sharing Between Mutual Funds And Auditors, Ole‐Kristian Hope, Pingui Rao, Yanping Xu, Heng Yue

Research Collection School Of Accountancy

This paper examines whether there is information sharing between mutual funds and their auditors about the auditors’ other listed firm clients. Using data from the Chinese market, we find that mutual funds earn higher profits from trading in firms that share the same auditors. The effects are more pronounced when firms have a more opaque information environment and when the audit partners for the fund and the partners for the listed firm share school ties. The evidence is consistent with information flowing from auditors to mutual funds, providing mutual funds with an information advantage in firms that share the same …

Trust And Contracting: Evidence From Church Sex Scandals, Gilles Hilary, Sterling Huang

Research Collection School Of Accountancy

Firms located in communities in which people are, on average, more trusting enjoy some benefits in terms of the power of CEO contracts. We present two pieces of empirical evidence to support this claim: (1) higher average trust in a county is associated with “flatter” executive contracts and (2) when an exogenous shock occurs (such as a scandal involving an important social institution), both trust and contracting move in similar directions. We obtain the first result in a panel specification and the second in a “difference-in-difference” specification that uses the revelation of sex scandals involving the Catholic Church across different …

The Effects Of Prior Trading Performance Have On Risk-Taking Of Subsequent Trading – The House Money Effect, Lenz Tan Koon Bin

Dissertations and Theses Collection (Open Access)

This study tests for house money effect on 2,030 non-professional FX investors trading through an Australian Financial Service provider. The results indicate that, in general, investors display a positive relationship between prior gains and the change in subsequent weekly risk-taking - the house money effect. The results also suggest that astute investors display a stronger house money effect than mediocre investors following prior gains. In comparison, mediocre investors display a stronger disposition effect following prior losses than astute investors. The study further reveals that investors who initially demonstrated the house money effect became more prone to the disposition effect during …

Impact Of Geographical Diversification And Limited Attention On Private Equity Fund Returns, Victor Hock Keong Ong

Dissertations and Theses Collection (Open Access)

This study analyzes the effect of geographical diversification on global private equity (PE) fund returns. I find that there is a negative correlation between geographical diversification and PE fund returns. To establish the causality between geographical diversification and PE fund returns, I employ an instrument variable analysis where the instrument used is the stock market capitalization value of the host country where the PE fund is based. My results apply to Net IRR, multiple and DPI as dependent variables used to proxy for PE fund returns in the main regression model. A one standard deviation increase in geographical diversification results …

Cfo Gaps: Determinants And Impact On The Corporate Information Environment, Xia Chen, Na Li, An-Ping Lin

Research Collection School Of Accountancy

A CFO gap arises when the CFO position is left vacant for a period between the departure of the old CFO and the appointment of a new CFO. We find that CFO gaps are fairly common; over the sample period 2004–2016, approximately one-third of CFO turnovers are associated with a CFO gap, lasting on average two quarters and two months. CFO gaps are more likely for firms that face more labor market search frictions and with financial reporting and performance issues, and are less likely for firms with succession plans and with greater growth opportunities. While CFO gaps are not …

Trusting The Stock Market: Further Evidence From Ipos Around The World, Kiridaran Kanagaretnam, Kiat Bee Jimmy Lee, Chee Yeow Lim, Gerald J. Lobo

Research Collection School Of Accountancy

Using an international sample of IPO firms from 36 countries and a country-level index for societal trust, we find strong evidence that societal trust is negatively associated with the degree of IPO underpricing. In cross-sectional analyses, we find that the effect of societal trust in reducing IPO underpricing is more pronounced when the information environment is less transparent, when the stock market environment is less robust, and when legal institutions are weaker, settings where the effect of trust is likely to be more salient. Our study contributes to and extends the literature by providing strong evidence that an informal institution …

Subsidiary Governance And Corporate Tax Planning: The Effect Of Parent-Subsidiary Common Directors And Offficers, Xin Wang, Yongxin Xu, Liandong Zhang, Gaoping Zheng

Research Collection School Of Accountancy

Top executives of the parent company often take positions as the directors and officers (D&Os) of subsidiaries. These parent-subsidiary common D&Os have better access to subsidiary information and can exert more influence over subsidiary operations. Therefore they can better identify tax-planning opportunities and coordinate tax arrangements. Using the mandatory disclosure of top executives' subsidiary positions for Chinese listed firms, we find that effective income tax rate is lower for firms with common D&Os. The tax-saving effect is stronger for firms with more intangible assets and with related-party transactions involving subsidiaries. The effect is also stronger when common D&Os have positions …