Philip J. Lee, Donald J. Stokes, Stephen L Taylor, T. Walter
In an environment where expected litigation costs are relatively low (Australia), we provide evidence strongly consistent with signaling considerations influencing the choice of auditor by initial public offering (IPO) firms. When our analysis is confined to smaller IPOs and/or IPOs using less prestigous underwriters (i.e., those IPOs where the use of a high quality auditor is less "routine"), we find that the probability of selecting a high quality auditor is positively related to IPO firms' riskiness, negatively related to the level of retained ownership by the initial owners and positively related to the decision to voluntarily provide information about expected earnings. these results jointly provide support for the signaling models of Datar, Feltham and Hughes (1991) and Hughes (1986), whereby the choice of a high quality auditor represents a trade-off with the level of retained ownership, but is complimentary to the extent of direct disclosure.
{"title":"The Association between Audit Quality, Accounting Disclosures and Firm-Specific Risk: Evidence from the Australian IPO Market","authors":"Philip J. Lee, Donald J. Stokes, Stephen L Taylor, T. Walter","doi":"10.2139/ssrn.210888","DOIUrl":"https://doi.org/10.2139/ssrn.210888","url":null,"abstract":"In an environment where expected litigation costs are relatively low (Australia), we provide evidence strongly consistent with signaling considerations influencing the choice of auditor by initial public offering (IPO) firms. When our analysis is confined to smaller IPOs and/or IPOs using less prestigous underwriters (i.e., those IPOs where the use of a high quality auditor is less \"routine\"), we find that the probability of selecting a high quality auditor is positively related to IPO firms' riskiness, negatively related to the level of retained ownership by the initial owners and positively related to the decision to voluntarily provide information about expected earnings. these results jointly provide support for the signaling models of Datar, Feltham and Hughes (1991) and Hughes (1986), whereby the choice of a high quality auditor represents a trade-off with the level of retained ownership, but is complimentary to the extent of direct disclosure.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115196890","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}
In recent years, outsourcing has become a common practice for firms operating domestically as well as globally. The academic and professional literature discusses numerous factors that influence outsourcing decisions, including the commonly used argument that activities that are not within the core competencies of a firm should be outsourced. In this paper we show that firms may wish to outsource even the manufacture of a product with respect to which they enjoy a competitive advantage. Furthermore, we provide an explanation as to why firms may decide not to outsource non-core products, although their competitors can produce them at a lower cost. Our model provides an explanation for the often coexistence of rivalrous and buyer-supplier relationship between firms in different markets or even the same product market. Specifically, we show that the understanding of outsourcing (or lack of outsourcing) arrangements should be based on analysis of the strategic interaction across markets between the parties in the outsourcing arrangements. Furthermore, in analyzing outsourcing, we should not only analyze the production cost of the product being considered, but also consider the costs and benefits associated with cross-product synergies of the firms. Our analysis demonstrates that outsourcing may enable firms to achieve tacit collusion in the presence of restrictions on explicit cooperation. However, we show that consumers may benefit from outsourcing in spite of its seemingly adverse impact on competition.
{"title":"Consider Outsourcing Even What You Do Best","authors":"Oren Fuerst, Nahum D. Melumad","doi":"10.2139/ssrn.190388","DOIUrl":"https://doi.org/10.2139/ssrn.190388","url":null,"abstract":"In recent years, outsourcing has become a common practice for firms operating domestically as well as globally. The academic and professional literature discusses numerous factors that influence outsourcing decisions, including the commonly used argument that activities that are not within the core competencies of a firm should be outsourced. In this paper we show that firms may wish to outsource even the manufacture of a product with respect to which they enjoy a competitive advantage. Furthermore, we provide an explanation as to why firms may decide not to outsource non-core products, although their competitors can produce them at a lower cost. Our model provides an explanation for the often coexistence of rivalrous and buyer-supplier relationship between firms in different markets or even the same product market. Specifically, we show that the understanding of outsourcing (or lack of outsourcing) arrangements should be based on analysis of the strategic interaction across markets between the parties in the outsourcing arrangements. Furthermore, in analyzing outsourcing, we should not only analyze the production cost of the product being considered, but also consider the costs and benefits associated with cross-product synergies of the firms. Our analysis demonstrates that outsourcing may enable firms to achieve tacit collusion in the presence of restrictions on explicit cooperation. However, we show that consumers may benefit from outsourcing in spite of its seemingly adverse impact on competition.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121951914","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 provides a methodology for estimating the market risk premium based on the underlying process governing the level of market volatility. My model provides a test for a structural shift in the historical risk premium and an unbiased estimate of its value. I provide evidence of a structural shift in the volatility process following the 1930s that implies an upward bias in ex post realized returns during the subsequent period. Controlling for this bias, my estimate of the market risk premium for the period after 1940 is 5.9% over the yield on Treasury bills. My model also provides a lower-bound on forward-looking estimates of the current risk premium of 4.2% over the yield on Treasury bills.
{"title":"Estimating the Market Risk Premium","authors":"S. Mayfield","doi":"10.2139/ssrn.195569","DOIUrl":"https://doi.org/10.2139/ssrn.195569","url":null,"abstract":"This paper provides a methodology for estimating the market risk premium based on the underlying process governing the level of market volatility. My model provides a test for a structural shift in the historical risk premium and an unbiased estimate of its value. I provide evidence of a structural shift in the volatility process following the 1930s that implies an upward bias in ex post realized returns during the subsequent period. Controlling for this bias, my estimate of the market risk premium for the period after 1940 is 5.9% over the yield on Treasury bills. My model also provides a lower-bound on forward-looking estimates of the current risk premium of 4.2% over the yield on Treasury bills.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134524065","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 study synthesizes and extends the prior literature examining economic motives for manager's accounting method choices. First, we present a framework for organizing the economic factors that potentially influence managers' accounting decisions. We apply our framework to examine inventory and depreciation method choices because they are directly observable and have large sustained effects on earnings. Second, we present descriptive statistics on the distribution of these and combined-method choices for the years 1984, 1990, and 1996. Both firm and industry level data show a preponderance of income-increasing methods in each year as well as a trend toward more income-increasing methods over time. Third, we identify 19 independent variables (largely drawn from the past 20 years of research) to explain the inventory, depreciation, and combined-method choices of over 2,000 firms for the years 1984, 1990 and 1996. Taken together, these variables explain a high percentage of the cross-sectional variation in method choices (e.g., adjusted R2 of 23%-27% for combined-method choices). Finally, we add variables that proxy for industry determinants of accounting method choice, which increases total explanatory power to 28%-37% for combined-method choices. Both sets of variables, economic and industry, have incremental explanatory power over the other. Given earlier studies often explained less than 5%, our results suggest that, cumulatively, the accounting literature has made considerable progress in identifying economic factors associated with managers' accounting method choices.
{"title":"Economic and Industry Determinants of Accounting Method Choice","authors":"R. M. Bowen, L. DuCharme, D. Shores","doi":"10.2139/ssrn.182888","DOIUrl":"https://doi.org/10.2139/ssrn.182888","url":null,"abstract":"This study synthesizes and extends the prior literature examining economic motives for manager's accounting method choices. First, we present a framework for organizing the economic factors that potentially influence managers' accounting decisions. We apply our framework to examine inventory and depreciation method choices because they are directly observable and have large sustained effects on earnings. Second, we present descriptive statistics on the distribution of these and combined-method choices for the years 1984, 1990, and 1996. Both firm and industry level data show a preponderance of income-increasing methods in each year as well as a trend toward more income-increasing methods over time. Third, we identify 19 independent variables (largely drawn from the past 20 years of research) to explain the inventory, depreciation, and combined-method choices of over 2,000 firms for the years 1984, 1990 and 1996. Taken together, these variables explain a high percentage of the cross-sectional variation in method choices (e.g., adjusted R2 of 23%-27% for combined-method choices). Finally, we add variables that proxy for industry determinants of accounting method choice, which increases total explanatory power to 28%-37% for combined-method choices. Both sets of variables, economic and industry, have incremental explanatory power over the other. Given earlier studies often explained less than 5%, our results suggest that, cumulatively, the accounting literature has made considerable progress in identifying economic factors associated with managers' accounting method choices.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133484952","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}
Kenneth A. Borokhovich, Robert Bricker, B. Simkins
At its inception, Financial Management (FM) had the difficult mission of serving the needs of all members of the Financial Management Association (FMA), both academic and practitioner. That mission has now changed. FM's revised mission is to focus solely on the publication of original scholarly research of the highest quality. This paper employs citation analysis to evaluate FM's relative performance among academic research journals in finance. The evidence from the analysis is consistent across all measures. FM ranks among the top five finance journals. Additionally, the trend is toward increasing influence.
{"title":"Financial Management's Success as an Academic Journal","authors":"Kenneth A. Borokhovich, Robert Bricker, B. Simkins","doi":"10.2139/ssrn.172568","DOIUrl":"https://doi.org/10.2139/ssrn.172568","url":null,"abstract":"At its inception, Financial Management (FM) had the difficult mission of serving the needs of all members of the Financial Management Association (FMA), both academic and practitioner. That mission has now changed. FM's revised mission is to focus solely on the publication of original scholarly research of the highest quality. This paper employs citation analysis to evaluate FM's relative performance among academic research journals in finance. The evidence from the analysis is consistent across all measures. FM ranks among the top five finance journals. Additionally, the trend is toward increasing influence.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114590932","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 financial accounting data from manufacturing firms in 16 countries for 1986-1995, we demonstrate that the value relevance of financial reports is lower for countries where the financial systems are bank-oriented rather than market-oriented; where private sector bodies are not involved in standard setting process; where accounting practices follow the Continental model as opposed to the British-American model; where tax rules have a greater influence on financial accounting measurements; and where spending on auditing services is relatively low. Results are robust to alternative measures of value relevance of financial accounting data, including measures based on earnings (using a regression and a hedge-portfolio approach), accruals, and earnings and book value of equity combined. We show that the extent to which earnings information is reflected in leading-period returns as compared to contemporaneous returns is greater for bank-oriented than for market-oriented countries. This feature potentially induces spurious associations between value relevance measures and financial system characteristics. Our results are robust to using value relevance measures adjusted for this confounding effect.
{"title":"Country-Specific Factors Related to Financial Reporting and the Value Relevance of Accounting Data","authors":"Ashiq Ali, Lee-Seok Hwang","doi":"10.2139/ssrn.181279","DOIUrl":"https://doi.org/10.2139/ssrn.181279","url":null,"abstract":"Using financial accounting data from manufacturing firms in 16 countries for 1986-1995, we demonstrate that the value relevance of financial reports is lower for countries where the financial systems are bank-oriented rather than market-oriented; where private sector bodies are not involved in standard setting process; where accounting practices follow the Continental model as opposed to the British-American model; where tax rules have a greater influence on financial accounting measurements; and where spending on auditing services is relatively low. Results are robust to alternative measures of value relevance of financial accounting data, including measures based on earnings (using a regression and a hedge-portfolio approach), accruals, and earnings and book value of equity combined. We show that the extent to which earnings information is reflected in leading-period returns as compared to contemporaneous returns is greater for bank-oriented than for market-oriented countries. This feature potentially induces spurious associations between value relevance measures and financial system characteristics. Our results are robust to using value relevance measures adjusted for this confounding effect.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116521146","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}
Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (IAS or US GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely the bid-ask spread and trading volume, behave in the predicted direction compared to firms employing the German reporting regime.
{"title":"The Economic Consequences of Increased Disclosure","authors":"C. Leuz, Robert E. Verrecchia","doi":"10.2139/ssrn.171975","DOIUrl":"https://doi.org/10.2139/ssrn.171975","url":null,"abstract":"Economic theory suggests that a commitment by a firm to increased levels of disclosure should lower the information asymmetry component of the firm's cost of capital. But while the theory is compelling, so far empirical results relating increased levels of disclosure to measurable economic benefits have been mixed. One explanation for the mixed results among studies using data from firms publicly registered in the US is that, under current US reporting standards, the disclosure environment is already rich. In this paper, we study German firms that have switched from the German to an international reporting regime (IAS or US GAAP), thereby committing themselves to increased levels of disclosure. We show that proxies for the information asymmetry component of the cost of capital for the switching firms, namely the bid-ask spread and trading volume, behave in the predicted direction compared to firms employing the German reporting regime.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125527855","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 AICPA/CICA has established WebTrust to respond to consumer concerns about the risks of making purchases over the Internet. While WebTrust provides assurances related to Internet vendors'; business and security practices, it does not provide assurances with respect to product or service quality. This paper examines perceptions of the assurances provided by WebTrust and the effect of WebTrust on the willingness to make Internet purchases by asking 106 accounting majors to complete a case concerning a company engaging in electronic commerce. Results suggest that, while WebTrust provided no additional assurances with respect to business and security practices, it resulted in higher perceived product quality. We also find that product quality is the most important determinant of subjects'; willingness to purchase from a Web site displaying the WebTrust seal. The results suggest an expectation gap and suggest that the AICPA/CICA should examine closely the value added by WebTrust and better communicate its purpose.
{"title":"Consumer Perceptions of Cpa Webtrust Assurances: Evidence of an Expectations Gap","authors":"R. Houston, Gary K. Taylor","doi":"10.2139/ssrn.149087","DOIUrl":"https://doi.org/10.2139/ssrn.149087","url":null,"abstract":"The AICPA/CICA has established WebTrust to respond to consumer concerns about the risks of making purchases over the Internet. While WebTrust provides assurances related to Internet vendors'; business and security practices, it does not provide assurances with respect to product or service quality. This paper examines perceptions of the assurances provided by WebTrust and the effect of WebTrust on the willingness to make Internet purchases by asking 106 accounting majors to complete a case concerning a company engaging in electronic commerce. Results suggest that, while WebTrust provided no additional assurances with respect to business and security practices, it resulted in higher perceived product quality. We also find that product quality is the most important determinant of subjects'; willingness to purchase from a Web site displaying the WebTrust seal. The results suggest an expectation gap and suggest that the AICPA/CICA should examine closely the value added by WebTrust and better communicate its purpose.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123990176","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}
In the last few years the financial accounting model has been attacked on a number of fronts. Some argue that the model reports irrelevant information in today's knowledge‐based economy, while others argue that the model's reporting discretion makes the results unreliable. Accruals allow the model to report wealth creation or depletion in a more timely manner, yet they also allow abuse when the underlying estimates are intentionally distorted. But surprisingly, the accuracy of the estimates underlying the accruals is never examined; rather current accruals are mixed together with the reversals of prior accruals. I propose that the financial reporting model be amended to report on the ex post accuracy of a firm's prior estimates. Doing so will identify firms that have abused their reporting discretion in the past and provide valuable information about the expected credibility of the firm's disclosures in the present. Firms will also have a greater incentive to make accurate estimates and accruals if they k...
{"title":"Reporting on the Past: A New Approach to Improving Accounting Today","authors":"Russell J. Lundholm","doi":"10.2139/ssrn.188308","DOIUrl":"https://doi.org/10.2139/ssrn.188308","url":null,"abstract":"In the last few years the financial accounting model has been attacked on a number of fronts. Some argue that the model reports irrelevant information in today's knowledge‐based economy, while others argue that the model's reporting discretion makes the results unreliable. Accruals allow the model to report wealth creation or depletion in a more timely manner, yet they also allow abuse when the underlying estimates are intentionally distorted. But surprisingly, the accuracy of the estimates underlying the accruals is never examined; rather current accruals are mixed together with the reversals of prior accruals. I propose that the financial reporting model be amended to report on the ex post accuracy of a firm's prior estimates. Doing so will identify firms that have abused their reporting discretion in the past and provide valuable information about the expected credibility of the firm's disclosures in the present. Firms will also have a greater incentive to make accurate estimates and accruals if they k...","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-06-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123680351","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 investigates whether the accrual pricing anomaly documented by Sloan (1996) for annual data holds for quarterly data and whether this form of market mispricing is distinct from the post-earnings announcement drift anomaly. We find that the market appears to overestimate (underestimate) the persistence of the accrual (cash flow) component of quarterly earnings and, therefore, tends to overprice (underprice) accruals (cash flows). Moreover, the accrual (cash flow) mispricing appears to be distinct from post-earnings announcement drift. A hedge portfolio trading strategy that exploits both forms of market mispricing generates abnormal returns in excess of those based on unexpected earnings, accruals, or cash flow information alone.
{"title":"Earnings-Based and Accrual-Based Market Anomalies: One Effect or Two?","authors":"D. Collins, P. Hribar","doi":"10.2139/ssrn.166455","DOIUrl":"https://doi.org/10.2139/ssrn.166455","url":null,"abstract":"This paper investigates whether the accrual pricing anomaly documented by Sloan (1996) for annual data holds for quarterly data and whether this form of market mispricing is distinct from the post-earnings announcement drift anomaly. We find that the market appears to overestimate (underestimate) the persistence of the accrual (cash flow) component of quarterly earnings and, therefore, tends to overprice (underprice) accruals (cash flows). Moreover, the accrual (cash flow) mispricing appears to be distinct from post-earnings announcement drift. A hedge portfolio trading strategy that exploits both forms of market mispricing generates abnormal returns in excess of those based on unexpected earnings, accruals, or cash flow information alone.","PeriodicalId":180033,"journal":{"name":"Journal of Accounting Abstracts","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"1999-05-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114582046","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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