• Canada
• 050201 accounting close

Recent work in management accounting offers several novel insights into firms’ cost behavior. This study explores whether financial analysts appropriately incorporate information on two types of cost behavior in predicting earnings - cost variability and cost stickiness. Since analysts’ utilization of information is not directly observable, we model the process of earnings prediction to generate empirically testable hypotheses. The results indicate that analysts “converge to the average” in recognizing both cost variability and cost stickiness, resulting in substantial and systematic earnings forecast errors. Particularly, we find a clear pattern - inappropriate incorporation of available information on cost behavior in earnings forecasts leads to larger errors in unfavorable scenarios than in favorable ones. Overall, enhancing analysts’ awareness of the expense side is likely to improve their earnings forecasts, mainly when sales turn to the worse.

This paper examines the economic consequences of changes in the financial reporting requirements for contingent convertible securities (COCOs). Using a sample of 199 COCO issuers from 2000 to 2004, we find that issuers are more likely to restructure or redeem existing COCOs to obtain more favorable accounting treatment when the financial reporting impact on diluted earnings per share (EPS) is greater and when EPS is used as a performance metric in CEO bonus contracts. These results provide new evidence that managers are willing to incur costs to retain perceived financial reporting and compensation benefits. We also present evidence of significantly negative stock returns around event dates associated with the financial reporting changes, consistent with investor anticipation of the agency costs associated with the rule change.

PurposeThe purpose of this paper is to analyze the consequences of using international accounting standards (IAS/IFRS) for the development of capital markets located in developing countries (emerging capital markets).Design/methodology/approachThe authors conduct an empirical study using a sample of 38 developing countries with capital markets, starting by comparing the means of the different measures studied before and after the use of IAS/IFRS. A multivariate statistical analysis is conducted based on the estimation of a model of panel data with fixed effects.FindingsThe results show that the development of the emerging capital markets is positively and significantly associated with the use of international accounting standards.Practical implicationsThe paper's findings are of interest to several different parties, primarily the national accounting standardization body, the IASB, many international organizations and international investors.Originality/valueThe paper describes an empirical study, conducted on a group of developing countries, which provides a better understanding of the potential consequences of the use of IASB standards. The paper is also a meaningful contribution to the international accounting literature, as it examines an interesting subject that has not yet been investigated.

This paper analyzes audit firm supervision since the Public Company Accounting Oversight Board (PCAOB) began conducting inspections. First, we find that audit clients do not perceive that the PCAOB's inspection reports are valuable for signaling audit quality. Second, we document that the information content of peer review reports fell after they became narrower in scope with the initiation of PCAOB inspections. Third, we isolate that the signaling role of peer review reports mainly stems from information that PCAOB inspectors do not publicly disclose. Collectively, our evidence implies that less is known about audit firm quality under the new regulatory regime.

Abstract In this paper, we conceptualize shareholder activism demanding CSR transparency as an outcome of the marketization of a social movement. We argue that the infusion of profit-oriented motivations into the social justice ideals on which the original shareholder activism movement was founded has contributed to create a conceptualization of CSR as a risk to be managed. As marketized solutions to risk management privilege the provision of information, they contribute to explaining the emphasis placed by shareholders on transparency in their proposals. Drawing on a sample of U.S. firms over 2006–2012, our evidence suggests a marked increase in CSR disclosure for the sample firms targeted by transparency proposals. However, our analysis reveals that concerns over the CSR practices of the same firms worsen, suggesting that shareholder activism demanding CSR transparency does not inspire change in corporate activities beyond disclosure, at least in the short term. Our contribution to the accounting literature lies in conceptualizing how the emphasis placed on CSR disclosure contributes to ensconcing the social movement into a corporation-centric, market-driven approach, moving away from the initial ideals of social justice aiming to push corporations to act on societal concerns. Altogether, we expose how the accounting practice of CSR disclosure is complicit in the attrition of the initial ideals of shareholder activism on CSR.

This paper examines the relationship between the institutional environment and sustained corporate illegality. We find that cognitive assumptions generate expectations that can, under specific circumstances, induce organizations to amplify illegal actions and that serve to lessen regulatory scrutiny. We also find that, once initiated, illegal actions can become hidden because of institutionalized practices that enable their concealment and that weaken the prospect of detection. These processes and effects are particularly noticeable in networks of professional regulators who become mutually over-confident and over-influenced by each other to the extent that their independent critical assessments and judgements are compromised. Mechanisms of mimetic herding and social humiliation compromise independence of judgement. Networks of interacting professionals are thus vulnerable to a collectively induced lowering of regulatory vigilance.

In this paper, I provide an empirical work in order to test the tax‐adjusted market valuation (residual income) model. Feltham‐Ohlson's (1995) residual income model can be extended by adding corporate tax: firm market value is a function of the bottom line after‐tax accounting data, e.g., book value and after‐tax earnings. Under this tax‐adjusted framework, certain issues are examined: the information from the firm's operating activities is not enough to measure the firm's market value; financial activities also affect firm market value. In particular, abnormal financial earnings are not equal to zero, due to the tax deduction on interest expenses. An empirical analysis, using the financial reporting data of Canadian firms for the years 1994–1999, demonstrates that the current book value of financial assets and operating assets, abnormal operating earnings, and abnormal financial earnings are all relevant to firm market value. The sensitivity tests, which define the corporate tax rates in different ways, do not change the results. The sensitivity test, which uses the financial analysts' forecasts, does not change the results, either. Furthermore, the empirical analysis shows that abnormal financial earnings enhance firm share price more when the firm has lower non‐tax costs, i.e., firm business risk (financial distress) and bankruptcy costs. It supports the previous research on capital structure to the extent that debt financing benefits a firm more when non‐tax costs are lower.

In competitive markets, prices offered by investors play a dual role: they must induce the firm to make truthful disclosures about its expected cash flows and they must also be efficient, i.e., equal the expected future cash flows to the buyer conditional on the disclosed information. We show that these requirements may exert opposing influences resulting in equilibrium disclosures being partial; that is, they might cause firms to reveal some, but not all, of the valuation relevant information possessed by the firm. We then characterize the maximal level of information that can be elicited through efficient prices. We apply our analysis to the study of voluntary disclosures in the context of equity offerings, leases and sale of tax-loss carry-forwards and compare these to the level of currently mandated disclosures under GAAP.

We examine whether short sellers are interested in, and capable of, identifying firms with corporate governance deficiencies. Using a novel setting – short selling prior to the revelation of Internal Control Weaknesses (ICW), we show that short sellers accumulate positions in firms that are about to disclose ICW under Section 404 of the Sarbanes-Oxley Act for the first time when ICW problems are severe. We find that the short interest build-up is more likely due to the use of private rather than of public information, which suggests that their trades contain incremental prediction power of upcoming corporate governance failure. Furthermore, the ability of short sellers to predict ICW is more pronounced in firms with poor information environments. Overall, we present evidence of short sellers’ ability to predict and trade on corporate governance deficiencies, and establish a path through which ICW impacts equity investors.