Journal of Business Finance & Accounting

doi: 10.1111/jbfa.12547pmid: N/A

L. Caylor, Marcus; J. Chambers, Dennis; Mutlu, Sunay

doi: 10.1111/jbfa.12608pmid: N/A

We explore the relation between financial reporting uniformity and comparability. We also examine the effect of uniformity on analyst coverage, analyst forecast accuracy and analyst forecast dispersion. We develop a Compustat‐based financial statement account uniformity measure based on the presentation of common financial statement line items. We define uniformity using a Jaccard similarity index where a firm's non‐missing Compustat data items are compared to a prototypical firm for that industry year. We emphasize the conceptual difference between uniformity and comparability, and our tests do not show a significant association between uniformity and output‐based accounting comparability. However, we find that the association between account uniformity and comparability becomes positive in high research and development firms, while it becomes negative in firms with higher managerial discretion. We explore the association between uniformity and information processing efficiencies, and we show that our uniformity measure is positively associated with analyst coverage. Furthermore, we partition our uniformity measure into separate income statement and balance sheet components. We find that income statement uniformity is associated with higher forecast accuracy and lower forecast dispersion, while balance sheet uniformity is associated with greater analyst coverage. Finally, we provide further support for these findings using an XBRL‐based uniformity measure.

Ahn, Jae Hwan

doi: 10.1111/jbfa.12611pmid: N/A

Despite the controversial debate over the role of public enforcement and private litigation in detecting and deterring financial misreporting, we have only scant literature comparing their enforcement outcomes: The Securities and Exchange Commission (SEC)‐sanctioned cases (Accounting and Auditing Enforcement Releases [AAERs]) and settled class actions against which the SEC did not file cases (securities class‐action lawsuits [SCALs]). This paper documents systematic differences between the two. Specifically, AAERs exhibit a larger magnitude of accruals prior to misreporting, as well as greater financing needs and insider trading during manipulation periods. After controlling for case backlogs in the SEC and the courts, the misreporting amount and period of AAERs are also greater and longer than those of SCALs, although SCALs represent greater settlement amounts. Further analysis indicates that resource constraints do not critically undermine the SEC investigations to detect more material misreporting cases. However, plaintiff investors appear to go forum shopping to earn greater settlement proceeds from SCALs. Finally, relative to SCALs, AAERs experienced significant drops in firm performance, analyst following and CEO tenure around SEC sanctions. Overall, this study provides consistent evidence supporting the SEC's optimization of detection rates under resource constraints and the strategic interaction between SEC enforcement and private litigation.

McCarten, Matthew; Diaz‐Rainey, Ivan; Roberts, Helen; Tan, Eric K. M.

doi: 10.1111/jbfa.12603pmid: N/A

This paper examines the impact of political connections (i.e., lobbying and political contributions) on the time it takes to detect corporate misconduct and the size of penalties following securities class actions (SCAs), restatements and Accounting and Auditing Enforcement Releases (AAERs). We find firms with political connections exhibit longer misconduct periods for SCAs, and such ability to conceal misconduct for longer translates into a larger settlement size. In addition, we find politically connected firms are associated with greater shareholder losses and are less likely to be involved in Securities Exchange Commission enforcement actions on restatements. Finally, while we do not find any relation between political connections and the likelihood of AAERs being settled, we find political connections are associated with lower AAER settlement size.

Xu, Xiaolu; Yang, Leo L.; Zhang, Joseph H.

doi: 10.1111/jbfa.12599pmid: N/A

We examine whether auditors consider financially distressed clients’ technological peer pressure (TPP) in their going‐concern assessments. While auditing standards highlight the importance of understanding the competitive environment in risk assessments and going‐concern assessments, it is not clear whether and to what extent auditors assess different dimensions of industry competition in evaluating firms’ ability to continue as a going concern. We show that a client firm's TPP in the prior year increases the likelihood that it is issued a going‐concern opinion in the current year. This dimension of industry competition is more relevant in auditor evaluations than product market threats and supply chain competition. Further, we find that the positive association is more pronounced when a client firm's auditor audits more industry peers and when a client's peer firms have greater innovative originality. Finally, we find evidence that greater TPP results in more conservative going‐concern reporting.

Kuo, Nan‐Ting; Li, Shu; Zhai, Shiyun

doi: 10.1111/jbfa.12602pmid: N/A

Our study explores the association between audit fees and clients’ excess cash to clarify how institutional features shape auditor assessment on agency problems. Prior studies suggest that this association is positive because agency problems from excess cash amplify auditor business risk, which induces auditors to charge higher fees as compensation. However, we find that this association is negative for Chinese listed companies. We further find that this negative association is attributable to the institutional features of China, where auditor liabilities do not extend beyond financial statement assurance. While prior literature argues that auditors incorporate clients’ agency problems into risk assessment, our results suggest that this incorporation does not naturally extend to cover agency problems from managerial misuses that are per se not audit failures. Whether auditors view agency problems from excess cash as a risk factor depends on the institutional features about the scope of their liabilities. Our study highlights the importance of institutional features in shaping auditor decisions.

Li, Qingyuan; Maydew, Edward L.; Willis, Richard H.; Xu, Li

doi: 10.1111/jbfa.12605pmid: N/A

We construct a sample of firms in 36 countries with 158 elections to examine corporate tax behavior in the face of political uncertainty. We define political uncertainty as unmeasurable unpredictability regarding governmental policies or regulatory shifts, such as tax rates, tax enforcement and general economic conditions, emanating from a possible change in political leadership. If insufficient information exists to develop plausible expectations about future tax‐related outcomes, ambiguity‐averse managers will attend to relatively more pessimistic priors and assume the worst‐case scenario. We expect firms to increase tax avoidance in election years given uncertainty regarding the post‐election tax and macroeconomic environment. Our results are consistent with this argument. Firms increase their corporate tax avoidance in election years, consistent with managers exercising current tax planning strategies while it is still most optimal to do so given post‐election uncertainty. The effect is increasing in the political uncertainty associated with the election. Specifically, for elections that are closely contested, representing uncertainty regarding the victor, or held in countries with fewer electoral checks and balances, representing uncertainty regarding the ease of effectuating potential post‐election changes. We document increased reshuffling of tax burdens across firms after elections, further supporting that elections reflect periods of heightened tax uncertainty.

Ali, Searat; Liu, Benjamin; Su, Jen Je

doi: 10.1111/jbfa.12606pmid: N/A

We investigate whether corporate governance has differential effects on downside and upside risk. Intuitively, strong corporate governance should decrease the downside risk but increase the upside risk. However, using a large panel of 1164 non‐financial Australian firms from 2001 to 2013, we find that strong corporate governance relates negatively not only to downside risk but also to upside risk. These findings are robust to alternative risk‐taking and corporate governance proxies and alternative sample specifications. We also show that our main results are unaffected due to endogeneity bias by using firm and industry‐year fixed effects, lagged independent variables, generalized method of moments and entropy balancing estimation techniques. In additional analyses, we document that our main results are homogeneous across different industries and for firms with varying levels of boardroom gender diversity. However, we find that our main results are driven by firms with lower ownership concentration as well as by older and more mature firms. Finally, we document that while reducing risk‐taking (downside and upside risk), corporate governance reduces firm value. From a regulatory perspective, these findings raise questions on the design of monitoring‐focused corporate governance recommendations and have implications for risk management.

Ferris, Stephen P.; Jayaraman, Narayanan; Zhang, Tim

doi: 10.1111/jbfa.12612pmid: N/A

We find that the cultural distance between the CEO and a firm's directors increases the sensitivity of CEO turnover and compensation to performance while enhancing shareholder value. This effect is concentrated in the cultural distance between the CEO and independent directors. More culturally distant CEOs adopt less risky financial and operating policies. To establish causality, we use the sudden exit of directors as a source of exogenous change in cultural distance. Overall, our results suggest that cultural distance increases information collection costs. This causes the board to monitor with increased rigor and to rely on “hard” information to assess CEO performance.

Li, Lin; Tong, Wilson H. S.

doi: 10.1111/jbfa.12607pmid: N/A

By categorizing managerial confidence attributes into overconfidence, rationality and diffidence with the methodology used in the finance literature, we investigate how company boards strategically select chief executive officer (CEO) replacements from the senior management pool with different confidence attributes. In normal retirements, company boards tend to select succeeding managers with the same confidence attribute as retiring CEOs. If boards fire company CEOs, they tend to select rational successors irrespective of the confidence attributes of the ousted CEOs. Such board inclination of picking rational successors also occurs when corporate operation is at the recession stage or corporate strategy is changed surrounding succession. The evidence indicates that the managerial confidence attribute is an important consideration of the board in the CEO selection process and that the board deliberately selects the CEO with a certain attribute to move the firm in a planned direction.