Advances in Quantitative Analysis of Finance and Accounting
Center for PBBEFR & Ainosco Press,正常發行
選擇卷期
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Managers of firms with excess cash tend to misuse it. We extend the Radner-Shepp-Shiryaev framework, to create an incentive mechanism (the ＂carrot＂) to motivate managers to pay out the cash instead. The problem cannot be solved in closed-form, and we devise a numerical technique to solve it. We find two main counter intuitive results: First, our mechanism results in higher firm value, and the greatest value goes to firms that are mid-level in their innovation. Second, we find that our mechanism increases risk-taking and interestingly, this is optimal to firm value maximization.
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This paper explores the association between attributes of accounting numbers and properties of analysts' forecasts. The association between properties of analysts' earnings, cash flow and revenues forecasts (accuracy and dispersion) and the attributes of earnings, cash flow and revenues numbers (persistence, predictability and smoothness) provides additional evidence on the value and informativeness of accounting information. I find that predictability is the most important characteristic in all of the cases (earnings, cash flow and revenues).The relation between earnings attributes and the characteristics of analysts' earnings forecasts is stronger for firms with higher levels of accruals. In addition, I find that the probability that analyst starts covering of a firm is increasing in the quality some earnings attributes.
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From the view of agency problem, some monitoring mechanisms are represented as shareholders and the other stakeholders like lenders. The features of monitoring mechanisms are different among different countries. In countries with systems of dispersed ownership structure such as the US, the largest block shareholders would take a monitoring role to prevent opportunistic earnings management. On the other hand, Japan is one of the largest countries which have features of a concentrated and long-term ownership structure that differ from those of Anglo-Saxon countries. There still remains an empirical question about the relation between Japanese corporate governance and to prevent managerial opportunistic behavior. The effectiveness of monitoring roles has been criticized by corporate governance failures. However, few studies investigate whether or not main banks are effective monitors for earnings management. This paper investigates whether or not main bank systems are effective for mitigating client firms' earnings management behavior in Japan. Although Japanese traditional corporate governance mechanisms are known as relational or bank-dominated systems, its foreign ownership has increased since 1990s. In the transition era of corporate governance, there remains a question that who is the effective gatekeeper to decrease earnings management in Japan. We find that earnings management in firms with main bank relationships tend to be mitigated, compared with firms without them. In addition, foreign shareholdings effectively help to mitigate earnings management. This implies that main bank systems function as effective gatekeepers under bank-dominated systems and would be expected for substituting roles of the Anglo-Saxon system.
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Earnings quality measures the informativeness of earnings numbers (a static channel) while stock market competition represents the speed of information (a dynamic channel) being distributed among smart informed traders and noisy uninformed traders. Prior research finds that both earnings quality and stock market competition mitigate information asymmetry between managers and investors (or at least mitigate the adverse effects of information asymmetry). In this paper, we investigate the impact of stock market competition on firm investment efficiency, and find that stock market competition improves investment efficiency. In addition, we also find that earnings quality and stock market competition have a complementary effect on firms' investment efficiency.
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Ownership concentration and debt are important corporate governance mechanisms used by the large firms in Australian market. Their relationships are not correctly modeled in the existing literature and agency theory basis and the implications of these relationships for some financial issues such as capital structure decisions have not yet been analysed satisfactorily in the literature. The current study full-fills this gap by controlling dynamic endogeneity and heterogeneity issues by using the dataset from the period 1997 to 2008 for 220 large Australian firms, and employing two-way fixed effects (FE) and the two-step system generalised method of moments (GMM). This study finds nonlinear and complex nature of the relationships among ownership concentration, debt and firm value and suitability of GMM methods in modeling these relationships. The results prove the detrimental role of majority shareholders and lower level of debt in these firms. Finally, the results also endorse the value enhancing effect of high level of debt supporting pecking order and control preference theory in the Australian market.
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This paper reports two empirical regularities regarding trading volume prior to earnings announcements. The literature suggests that discretionary liquidity traders postpone their equity trading until firms publicly announce earnings due to high information asymmetry before anticipated information events. Our first finding is that pre-announcement trading volume increases for firms with high analyst coverage. Our second finding is that trading volume prior to bad news is lower than good news earnings announcements for firms with low analyst coverage. Our findings suggest that the intensity of analyst activity and the nature of mandatory earnings news jointly determine the direction and magnitude of pre-announcement trading volume. We contribute to the literature by showing that analysts' information discovery (temporarily pushed back trading demand) prior to earnings announcements may understate (overstate) the magnitude of a short-window trading volume reaction to earnings announcements as measures of information content for firms with high (low) analyst coverage.
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Empirical research since the enactment of SFAS 142, ＂Goodwill and Other Intangible Assets,＂ (now, Accounting Standards Codification [ASC] section 350-20) provides evidence that managers use the discretion afforded under the new rule to manage earnings through discretionary goodwill impairments. In this paper, we examine a group of firms with discretionary goodwill impairments to understand in more detail the goodwill impairment choices that managers make under current accounting rules. First, we explore whether there exist contextual factors that inhibit managers' use of discretion. While we find that there are significant associations between these factors and managers' reporting choices, we also find evidence that firms with discretionary goodwill impairments experience poor stock return performance both in the short and long term compared to firms with nondiscretionary impairments. In light of the Financial Accounting Standard Board's (FASB) recent discussions on amortization versus impairment of goodwill, these findings are important for our understanding of managers' impairment reporting choices and the subsequent market's reaction to these choices.
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The model established by Dittmann and Maug (2007) uses a calibrated principal-agent framework with constant relative risk aversion to determine the optimal structure of executive pay. This model however omits the impact of pensions, which may be a significant component in executive compensation. We recalibrate the model with a pension factor to determine the new optimal structure of executive pay. Using a hand-collected dataset of 828 executives from 141 firms, we follow the theoretical model used by Carpenter (1998), Bettis, Bizjak, and Lemmon (2005), and Dittmann, Maug, and Spalt (2010) to calculate the optimal piecewise linear contract. This study provides a significantly refined answer to the original paper, and furthermore, finds little justification for high levels of pension compensation. Finally, we find that the pensions drive a substantial amount of contract mispricing among CEOs, but not for non-CEO executives.
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In this study, we examine a sample of U.S. firms with defined benefit pensions plans and investigate how investors view under-funded plans. On average, investors reward firms with fully or over-funded pension plans and view deficits derived from under-funded plans as liabilities, while encouraging firms with under-funded plans to become funded. Investors also encourage conservative pension asset allocation to mitigate firm risk, and smaller firms are perceived as more able to manage the risk associated with underfunded plans. During the financial crisis of 2008, underfunded status had a positive association with market value, and firms that were underfunded during the financial crisis were discouraged from increasing funded status. Significant differences also exist pre- and post- Statement of Financial Accounting Standards No. 158 (SFAS 158). These results are robust to various scenarios of the timing of the financial crisis and an alternative measure of funding.
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This paper examines how tax aggressiveness affects the relationship between corporate social responsibility (CSR) and firm value. We posit that when other corporate behaviors are not congruent with social responsibility, investors may be skeptical of a firm's CSR efforts, attributing these efforts to corporate hypocrisy or managerial opportunism. We identify tax aggressiveness as a behavior that is socially irresponsible and inconsistent with CSR, and examine whether the market values the CSR activities of tax aggressive firms less favorably than those of non-tax aggressive firms. We find that while CSR is valued positively, CSR valuation is discounted when firms are tax-aggressive. Further analysis shows that strong corporate governance mitigates the value discount on CSR efforts of tax-aggressive firms, suggesting that the discount is partly attributable to agency costs. We also find that our results are especially pronounced in financially unconstrained firms and firms with high media coverage, suggesting that the discount is high in firms in which tax aggressiveness is likely opportunistic and whose communications strategies are indicative of corporate hypocrisy. Our study highlights the importance of aligning corporate activities with societal norms, and demonstrates the economic and social outcomes of aggressive tax strategies.