Peng-Chia Chiu, Ben Lourie, Alexander Nekrasov, S. Teoh
We study how institutional investor attention to a firm affects the timeliness of analysts’ forecasts for that firm. We measure abnormal institutional attention (AIA) using Bloomberg news search activity for the firm on earnings announcement days. We find that analysts issue more timely forecasts when AIA is high on the earnings announcement day. Analyst responsiveness to AIA is stronger when analysts have more resources and experience and weaker when the AIA of other covered firms is high. Analysts who respond more to AIA are more likely to be named all-star analysts and less likely to be demoted to a smaller brokerage. We address endogeneity concerns using a measure of expected AIA that is unaffected by concurrent information. Our findings suggest that responsiveness to institutional attention influences the production of analyst research and analysts’ career outcomes. This paper was accepted by Brian Bushee, accounting.
{"title":"Cater to Thy Client: Analyst Responsiveness to Institutional Investor Attention","authors":"Peng-Chia Chiu, Ben Lourie, Alexander Nekrasov, S. Teoh","doi":"10.2139/ssrn.3446418","DOIUrl":"https://doi.org/10.2139/ssrn.3446418","url":null,"abstract":"We study how institutional investor attention to a firm affects the timeliness of analysts’ forecasts for that firm. We measure abnormal institutional attention (AIA) using Bloomberg news search activity for the firm on earnings announcement days. We find that analysts issue more timely forecasts when AIA is high on the earnings announcement day. Analyst responsiveness to AIA is stronger when analysts have more resources and experience and weaker when the AIA of other covered firms is high. Analysts who respond more to AIA are more likely to be named all-star analysts and less likely to be demoted to a smaller brokerage. We address endogeneity concerns using a measure of expected AIA that is unaffected by concurrent information. Our findings suggest that responsiveness to institutional attention influences the production of analyst research and analysts’ career outcomes. This paper was accepted by Brian Bushee, accounting.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88854917","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines comment letters on firms’ annual reports in an emerging market. The literature primarily focuses on comment letters issued by the U.S. Securities and Exchange Commission (SEC), although many other market regulators also use SEC-style comment letters. Comment letters can potentially be very impactful in emerging markets due to weak institutions and low disclosure quality in these markets. Using comment letters in China from 2015 to 2019, I find that the market response to the receipt of comment letters is significantly negative and associated with the severity of the comment letters. The receipt (severity) of comment letters is associated with adverse regulatory consequences, CEO turnover, corrective actions to remedy financial reporting, and poor future financial performance in the propensity score matched sample (recipient sample). Overall disclosure quality in the post-review year does not increase, but some comment letter topics prompt topic-specific financial reporting changes.
{"title":"Comment Letters on Annual Reports: Evidence from an Emerging Market","authors":"Shuo Yang","doi":"10.2139/ssrn.3669701","DOIUrl":"https://doi.org/10.2139/ssrn.3669701","url":null,"abstract":"This paper examines comment letters on firms’ annual reports in an emerging market. The literature primarily focuses on comment letters issued by the U.S. Securities and Exchange Commission (SEC), although many other market regulators also use SEC-style comment letters. Comment letters can potentially be very impactful in emerging markets due to weak institutions and low disclosure quality in these markets. Using comment letters in China from 2015 to 2019, I find that the market response to the receipt of comment letters is significantly negative and associated with the severity of the comment letters. The receipt (severity) of comment letters is associated with adverse regulatory consequences, CEO turnover, corrective actions to remedy financial reporting, and poor future financial performance in the propensity score matched sample (recipient sample). Overall disclosure quality in the post-review year does not increase, but some comment letter topics prompt topic-specific financial reporting changes.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"42 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77565568","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a unique data set on audits of Chinese companies, this paper examines the Big N audit quality effect by comparing the audit processes of Big N and non-Big N auditors. We document that Big N audits involve significantly more audit hours with higher per-hour fees but do not result in more audit adjustments. In fact, Big N audits have a significantly higher percentage of cases with no audit adjustments at all. Big N audits also have fewer subsequent restatements. Collectively, this evidence suggests that Big N firms play a significant disciplinary role by performing more time-consuming and costly audits. Anticipating such stringent audits, clients of the Big N increase the quality of their reports ex ante, resulting in fewer audit adjustments and higher-quality financial reports.
{"title":"Big N Audit Quality Effect: New Evidence on Audit Hours and Audit Adjustments","authors":"Jasmine Zhang, Xiao-Jun Zhang, W. Zhou","doi":"10.2139/ssrn.3673591","DOIUrl":"https://doi.org/10.2139/ssrn.3673591","url":null,"abstract":"Using a unique data set on audits of Chinese companies, this paper examines the Big N audit quality effect by comparing the audit processes of Big N and non-Big N auditors. We document that Big N audits involve significantly more audit hours with higher per-hour fees but do not result in more audit adjustments. In fact, Big N audits have a significantly higher percentage of cases with no audit adjustments at all. Big N audits also have fewer subsequent restatements. Collectively, this evidence suggests that Big N firms play a significant disciplinary role by performing more time-consuming and costly audits. Anticipating such stringent audits, clients of the Big N increase the quality of their reports ex ante, resulting in fewer audit adjustments and higher-quality financial reports.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"101 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85821104","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Extractive firms form a major part of the stock markets of many countries which use IFRS for financial reporting, yet the key accounting issues are hardly regulated at all under a long-running ‘temporary’ standard. The resulting variety in practice has not been studied by any large-scale international survey. We hand-collect data on accounting policies from the annual reports of firms from 10 countries, focusing on the key issues of the scope of costs capitalized and the size of impairment pool. Many of our IFRS firms report the use of one of the two methods allowed in US GAAP: successful efforts and full cost. However, these are not defined in IFRS, and most of those firms do not use policies that are consistent with the US definitions of the methods. Instead, we identify nine distinct methods, which we classify by degree of conservatism. We find that there are highly significant differences in policies by country and by sub-industry (oil/gas versus mining).
{"title":"Varied Practice in Accounting for Extractive Activities under IFRS","authors":"C. Stadler, C. Nobes","doi":"10.2139/ssrn.3627080","DOIUrl":"https://doi.org/10.2139/ssrn.3627080","url":null,"abstract":"Extractive firms form a major part of the stock markets of many countries which use IFRS for financial reporting, yet the key accounting issues are hardly regulated at all under a long-running ‘temporary’ standard. The resulting variety in practice has not been studied by any large-scale international survey. We hand-collect data on accounting policies from the annual reports of firms from 10 countries, focusing on the key issues of the scope of costs capitalized and the size of impairment pool. Many of our IFRS firms report the use of one of the two methods allowed in US GAAP: successful efforts and full cost. However, these are not defined in IFRS, and most of those firms do not use policies that are consistent with the US definitions of the methods. Instead, we identify nine distinct methods, which we classify by degree of conservatism. We find that there are highly significant differences in policies by country and by sub-industry (oil/gas versus mining).","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"115 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82244119","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The production, dissemination and market consequences of firm-specific information are shaped by the incentives of market players operating within the constraints imposed by securities regulation. In this paper we focus on constraints to short selling activity and address two questions: Do short sale constraints influence (1) the extent to which the business press reports negative news stories?; and (2) the speed and intensity with which market participants respond to the publication of negative news reports? Following exogenous relief of short sale constraints, we find that treated firms’ press coverage tilts significantly more negative relative to untreated firms still facing higher constraints. This result is stronger for media-initiated articles than for firm-initiated press releases. With respect to market consequences we find that for treated firms, stock returns and open short interest become significantly more sensitive to negative news reports, and news sentiment-based trading strategies earn lower abnormal returns.
{"title":"The Influence of Short Selling on the Production and Market Consequences of Negative Press Coverage","authors":"Robert Bushman, Jedson Pinto","doi":"10.2139/ssrn.3663301","DOIUrl":"https://doi.org/10.2139/ssrn.3663301","url":null,"abstract":"The production, dissemination and market consequences of firm-specific information are shaped by the incentives of market players operating within the constraints imposed by securities regulation. In this paper we focus on constraints to short selling activity and address two questions: Do short sale constraints influence (1) the extent to which the business press reports negative news stories?; and (2) the speed and intensity with which market participants respond to the publication of negative news reports? Following exogenous relief of short sale constraints, we find that treated firms’ press coverage tilts significantly more negative relative to untreated firms still facing higher constraints. This result is stronger for media-initiated articles than for firm-initiated press releases. With respect to market consequences we find that for treated firms, stock returns and open short interest become significantly more sensitive to negative news reports, and news sentiment-based trading strategies earn lower abnormal returns.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82127824","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Although corporate social responsibility (CSR) has significant benefits for firms, firms also regularly make decisions about scaling back or discontinuing CSR initiatives. We conduct a series of experiments to examine whether investors react differently to stopping socially responsible initiatives compared to stopping other business activities. In our first experiment, we find investors react more negatively to stopping a CSR initiative than to stopping a general business initiative, even though reactions to starting the initiatives do not differ. In our second experiment, we find investors react more negatively to stopping a CSR initiative with a higher degree of ethicality than to stopping a CSR initiative with a lower degree of ethicality, supporting our theory that investors’ more negative reactions result from the ethical nature of CSR. Additional experiments provide further evidence of theory and rule out alternative explanations. Although prior research suggests benefits of engaging in CSR, our results suggest such benefits may be undone when initiatives end.
{"title":"How do investors react when corporate social responsibility initiatives end?","authors":"S. Garavaglia, Brian J. White, J. Irwin","doi":"10.2139/ssrn.3035515","DOIUrl":"https://doi.org/10.2139/ssrn.3035515","url":null,"abstract":"Although corporate social responsibility (CSR) has significant benefits for firms, firms also regularly make decisions about scaling back or discontinuing CSR initiatives. We conduct a series of experiments to examine whether investors react differently to stopping socially responsible initiatives compared to stopping other business activities. In our first experiment, we find investors react more negatively to stopping a CSR initiative than to stopping a general business initiative, even though reactions to starting the initiatives do not differ. In our second experiment, we find investors react more negatively to stopping a CSR initiative with a higher degree of ethicality than to stopping a CSR initiative with a lower degree of ethicality, supporting our theory that investors’ more negative reactions result from the ethical nature of CSR. Additional experiments provide further evidence of theory and rule out alternative explanations. Although prior research suggests benefits of engaging in CSR, our results suggest such benefits may be undone when initiatives end.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"56 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86474316","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We study the extent to which market participants are informed about firms’ political connections when the connections are not publicly disclosed and how it affects pricing efficiency. Using a sample of public announcements of government officials’ corruption investigations, we find that, on average, investors do not realize that officials under investigation are connected to firms in which they have invested and that the value of those connections has been lost. This finding suggests that the connections generally are of low visibility to investors. However, institutional investors know about at least some of the connections and abnormally sell their shares in the firms when investigations are announced. The loss of value of the connections is not fully incorporated into stock prices until the connections are subsequently disclosed, and price incorporation is slower for the connections that have been less visible to institutional investors. Our results suggest that lack of visibility significantly harms pricing efficiency of political connections.
{"title":"The (In)Visibility of Political Connections","authors":"Ole‐Kristian Hope, Yi Li, Qiliang Liu, Han Wu","doi":"10.2139/ssrn.3363698","DOIUrl":"https://doi.org/10.2139/ssrn.3363698","url":null,"abstract":"We study the extent to which market participants are informed about firms’ political connections when the connections are not publicly disclosed and how it affects pricing efficiency. Using a sample of public announcements of government officials’ corruption investigations, we find that, on average, investors do not realize that officials under investigation are connected to firms in which they have invested and that the value of those connections has been lost. This finding suggests that the connections generally are of low visibility to investors. However, institutional investors know about at least some of the connections and abnormally sell their shares in the firms when investigations are announced. The loss of value of the connections is not fully incorporated into stock prices until the connections are subsequently disclosed, and price incorporation is slower for the connections that have been less visible to institutional investors. Our results suggest that lack of visibility significantly harms pricing efficiency of political connections.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"12 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90717071","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Accounting for extractive costs is the last major issue to remain largely unregulated by IFRS. This is despite the fact that extractive firms are an important part of several big stock markets. Under a temporary permissive standard (IFRS 6), which has been in place since 2004, firms use a wide range of accounting policies for extractive costs, thus undermining comparability. We review the IFRS annual reports of a large number of firms, looking for different policies. We identify many distinguishable methods of accounting. Along with this, we discover that disclosures are often confusing, partly because of the lack of definitions in IFRS 6. To aid insight into this complexity, we prepare a classification of these methods and give real examples of each. We then assess the methods in the context of IFRS 6 and other relevant parts of IFRS. We find that nearly all the methods comply with IFRS. This leads us to a proposal for narrowing the variety of practice by withdrawing IFRS 6, and putting extractive costs within the scope of IAS 38 (Intangible Assets). As part of this, IAS 38 would be further revised to extend the scope of capitalization of other development costs, thereby addressing one of the criticisms of current reporting practice and bringing IAS 38 more into line with the latest version of the Conceptual Framework.
{"title":"Towards a solution to the variety in accounting practices of extractive firms under IFRS","authors":"C. Nobes, C. Stadler","doi":"10.2139/ssrn.3624733","DOIUrl":"https://doi.org/10.2139/ssrn.3624733","url":null,"abstract":"Accounting for extractive costs is the last major issue to remain largely unregulated by IFRS. This is despite the fact that extractive firms are an important part of several big stock markets. Under a temporary permissive standard (IFRS 6), which has been in place since 2004, firms use a wide range of accounting policies for extractive costs, thus undermining comparability. We review the IFRS annual reports of a large number of firms, looking for different policies. We identify many distinguishable methods of accounting. Along with this, we discover that disclosures are often confusing, partly because of the lack of definitions in IFRS 6. To aid insight into this complexity, we prepare a classification of these methods and give real examples of each. We then assess the methods in the context of IFRS 6 and other relevant parts of IFRS. We find that nearly all the methods comply with IFRS. This leads us to a proposal for narrowing the variety of practice by withdrawing IFRS 6, and putting extractive costs within the scope of IAS 38 (Intangible Assets). As part of this, IAS 38 would be further revised to extend the scope of capitalization of other development costs, thereby addressing one of the criticisms of current reporting practice and bringing IAS 38 more into line with the latest version of the Conceptual Framework.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84391161","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Because conservative accounting practices induce firms to report bad news earlier and defer good news disclosure, accounting conservatism in target firm accounting can hinder acquirers from identifying a potentially profitable target while it can help acquiring firms mitigate the downside risk stemming from future asset write-downs and investment inefficiency. After accounting for other accounting attributes and governance mechanisms, our analysis reveals that a firm is more likely to receive an acquisition offer when its financial reporting is more conservative. More importantly, while the acquirer pays a larger takeover premium to a more conservative target firm, the acquirer’s acquisition performance turns out to be greater when the target firm’s accounting is more conservative. Overall, our findings suggest that unlike other target firm accounting quality proxies that transfer wealth from the target to the acquirer shareholders, target firm accounting conservatism benefits both the acquirer and target shareholders.
{"title":"Target Firm Accounting Conservatism and Corporate Acquisitions: Transferring Wealth or Benefiting Both?","authors":"Taewoo Kim, William Kross, Inho Suk","doi":"10.2139/ssrn.3672892","DOIUrl":"https://doi.org/10.2139/ssrn.3672892","url":null,"abstract":"Because conservative accounting practices induce firms to report bad news earlier and defer good news disclosure, accounting conservatism in target firm accounting can hinder acquirers from identifying a potentially profitable target while it can help acquiring firms mitigate the downside risk stemming from future asset write-downs and investment inefficiency. After accounting for other accounting attributes and governance mechanisms, our analysis reveals that a firm is more likely to receive an acquisition offer when its financial reporting is more conservative. More importantly, while the acquirer pays a larger takeover premium to a more conservative target firm, the acquirer’s acquisition performance turns out to be greater when the target firm’s accounting is more conservative. Overall, our findings suggest that unlike other target firm accounting quality proxies that transfer wealth from the target to the acquirer shareholders, target firm accounting conservatism benefits both the acquirer and target shareholders.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80536522","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
How do firms modify CEO risk-incentive compensation in response to increased foreign competition? Theoretically we show the answer is ambiguous: increased competition can result in firms either increasing or decreasing the CEO’s risk-taking incentives. Empirically using a quasi-natural experiment, tariff cuts resulting from important trade deals, we find evidence that in response to increases in foreign competition firms adjust CEO risk-incentive compensation downwards – a result that is more pronounced for firms with less risk-averse CEOs. These findings suggest that more intense foreign competition results in managers voluntarily taking on more risk, and firms therefore reduce the convexity in managers’ compensation.
{"title":"Foreign Competition and CEO Risk-Incentive Compensation","authors":"Tor-Erik Bakke, F. Z. Feng, Hamed Mahmudi, C. Zhu","doi":"10.2139/ssrn.3129112","DOIUrl":"https://doi.org/10.2139/ssrn.3129112","url":null,"abstract":"How do firms modify CEO risk-incentive compensation in response to increased foreign competition? Theoretically we show the answer is ambiguous: increased competition can result in firms either increasing or decreasing the CEO’s risk-taking incentives. Empirically using a quasi-natural experiment, tariff cuts resulting from important trade deals, we find evidence that in response to increases in foreign competition firms adjust CEO risk-incentive compensation downwards – a result that is more pronounced for firms with less risk-averse CEOs. These findings suggest that more intense foreign competition results in managers voluntarily taking on more risk, and firms therefore reduce the convexity in managers’ compensation.","PeriodicalId":12319,"journal":{"name":"Financial Accounting eJournal","volume":"37 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2020-06-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76094577","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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