Pub Date : 2023-02-03DOI: 10.1108/raf-12-2022-0344
Patricia A. Ryan, Sriram V Villupuram
Purpose The purpose of this study is to explain the mixed results to changes in the DJIA index documented in the literature. The authors show that economic cycles, especially recessionary periods, explain the difference in findings. Design/methodology/approach The authors examine changes in the Dow Jones Industrial Average (DJIA) from 1929 to 2019 to evaluate immediate and long-term market reactions after a component change. Using multiple event-study methodologies, the authors examine the full era, the pre- and post-exchange traded fund (ETF) windows and economic cycles using both pre and post-estimation windows. Findings In aggregate, DJIA additions do not present an increase in wealth; however, wealth effects are positive during expansions and negative during recessions. Deletions have a negative wealth effect. The authors find weak evidence of an indexing effect. Additions are positive post-1998, and deletions remain negative regardless of era. In the long run, firms added to the DJIA have positive abnormal returns in the second year after inclusion. Deletions in recessionary times have negative returns three years after removal, a signal of longer-term wealth decline for these firms. Research limitations/implications The DJIA changes periodically to better represent industries relevant to the blue-chip market, and the findings have implications for fund managers and active investors. Practical implications The DJIA changes periodically to better represent industries relevant to the blue-chip market, and the findings have implications for fund managers and active investors. Originality/value Prior literature presents limited time series of data points and mixed results and implications. The authors find that the economic cycle is a driving factor that supports predicted signs and amounts of wealth change. Furthermore, the authors see limited ETF impact on DJIA changes and some impact of the choice of estimation period.
{"title":"Changes in the DJIA: market reactions and economic cycles","authors":"Patricia A. Ryan, Sriram V Villupuram","doi":"10.1108/raf-12-2022-0344","DOIUrl":"https://doi.org/10.1108/raf-12-2022-0344","url":null,"abstract":"\u0000Purpose\u0000The purpose of this study is to explain the mixed results to changes in the DJIA index documented in the literature. The authors show that economic cycles, especially recessionary periods, explain the difference in findings.\u0000\u0000\u0000Design/methodology/approach\u0000The authors examine changes in the Dow Jones Industrial Average (DJIA) from 1929 to 2019 to evaluate immediate and long-term market reactions after a component change. Using multiple event-study methodologies, the authors examine the full era, the pre- and post-exchange traded fund (ETF) windows and economic cycles using both pre and post-estimation windows.\u0000\u0000\u0000Findings\u0000In aggregate, DJIA additions do not present an increase in wealth; however, wealth effects are positive during expansions and negative during recessions. Deletions have a negative wealth effect. The authors find weak evidence of an indexing effect. Additions are positive post-1998, and deletions remain negative regardless of era. In the long run, firms added to the DJIA have positive abnormal returns in the second year after inclusion. Deletions in recessionary times have negative returns three years after removal, a signal of longer-term wealth decline for these firms.\u0000\u0000\u0000Research limitations/implications\u0000The DJIA changes periodically to better represent industries relevant to the blue-chip market, and the findings have implications for fund managers and active investors.\u0000\u0000\u0000Practical implications\u0000The DJIA changes periodically to better represent industries relevant to the blue-chip market, and the findings have implications for fund managers and active investors.\u0000\u0000\u0000Originality/value\u0000Prior literature presents limited time series of data points and mixed results and implications. The authors find that the economic cycle is a driving factor that supports predicted signs and amounts of wealth change. Furthermore, the authors see limited ETF impact on DJIA changes and some impact of the choice of estimation period.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2023-02-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47280842","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}
Pub Date : 2023-01-27DOI: 10.1108/raf-10-2022-0274
Jia Lv, Yong Ye, Runmei Luo
Purpose The purpose of this paper is to evaluate the impact of minority shareholders’ attendance at shareholders meetings on related party transaction (RPT) proposals. Design/methodology/approach This paper empirically examines the impact of minority shareholders’ attendance in shareholders’ meetings on the voting results of RPT proposals based on the hand-collected voting data of Chinese listed companies. Findings The empirical result shows a significant positive relationship between the attendance of minority shareholders and the nonagreeable vote rate of RPT proposals. Moreover, this positive relationship is strengthened when the corporate governance is poor, the negative media coverage is high, and the on-site attendance of minority shareholders is high. Conversely, good corporate governance and high positive media coverage can weaken this positive correlation. The additional analysis reveals that the number of RPTs and better market performance in the future can be significantly reduced when minority shareholders express their nonagreeable voice actively. Originality/value This paper analytically and empirically examines the impact of minority shareholders’ attendance in shareholders’ meetings on the voting results of RPT proposals based on the hand-collected voting data of Chinese listed companies. It provides direct and convincing evidence for the impact of minority shareholders’ attendance and exercise of voting rights in shareholders’ meetings on the outcome of RPT proposals. It complements the literature on the governance effects of minority shareholders’ attendance in shareholders’ meetings to exercise their voting rights in emerging capital markets. This study has practical value by guiding minority investors to participate actively in corporate governance.
{"title":"The power of minority shareholders: evidence from voting on the related party transaction proposals in China","authors":"Jia Lv, Yong Ye, Runmei Luo","doi":"10.1108/raf-10-2022-0274","DOIUrl":"https://doi.org/10.1108/raf-10-2022-0274","url":null,"abstract":"\u0000Purpose\u0000The purpose of this paper is to evaluate the impact of minority shareholders’ attendance at shareholders meetings on related party transaction (RPT) proposals.\u0000\u0000\u0000Design/methodology/approach\u0000This paper empirically examines the impact of minority shareholders’ attendance in shareholders’ meetings on the voting results of RPT proposals based on the hand-collected voting data of Chinese listed companies.\u0000\u0000\u0000Findings\u0000The empirical result shows a significant positive relationship between the attendance of minority shareholders and the nonagreeable vote rate of RPT proposals. Moreover, this positive relationship is strengthened when the corporate governance is poor, the negative media coverage is high, and the on-site attendance of minority shareholders is high. Conversely, good corporate governance and high positive media coverage can weaken this positive correlation. The additional analysis reveals that the number of RPTs and better market performance in the future can be significantly reduced when minority shareholders express their nonagreeable voice actively.\u0000\u0000\u0000Originality/value\u0000This paper analytically and empirically examines the impact of minority shareholders’ attendance in shareholders’ meetings on the voting results of RPT proposals based on the hand-collected voting data of Chinese listed companies. It provides direct and convincing evidence for the impact of minority shareholders’ attendance and exercise of voting rights in shareholders’ meetings on the outcome of RPT proposals. It complements the literature on the governance effects of minority shareholders’ attendance in shareholders’ meetings to exercise their voting rights in emerging capital markets. This study has practical value by guiding minority investors to participate actively in corporate governance.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2023-01-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44360342","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}
Pub Date : 2023-01-19DOI: 10.1108/raf-10-2022-0294
Sabri Boubaker, N. Nguyen, Vu Quang Trinh, Thanh Vu
Purpose The purpose of this paper is to study the market reactions of the banking industry to the Russian–Ukraine war. Design/methodology/approach This paper uses an event study methodology, regression analyses and interaction effects to study the effect of the war on banks stock prices and analyze factors that explain the cumulative abnormal return. Findings First, this study finds a significant decline of almost 1.5% in return on the war date. Similar patterns were observed for all continents, but Europe had the most severe drop of about 4%. Second, after excluding the contemporaneous influence of the whole market using the market model, global bank equities returns fell by about 1% on the war date, indicating that bank stocks were more severely impacted by the war than the average stock market. Net-of-market return approach further reveals that bank stock prices decreased 1.4% more on the event day compared to the prewar market average. Third, the impacts of the war and sanctions were persistent when the war continued. Banks stocks were most hit in Europe, Asia and North America. Originality/value This paper pioneers the study of the effect of the Russia–Ukraine war on the banking industry. This paper also analyzes the reaction pattern of bank stocks before, during and after the war to explain the behavior and expectations of investors toward the war.
{"title":"Market reaction to the Russian Ukrainian war: a global analysis of the banking industry","authors":"Sabri Boubaker, N. Nguyen, Vu Quang Trinh, Thanh Vu","doi":"10.1108/raf-10-2022-0294","DOIUrl":"https://doi.org/10.1108/raf-10-2022-0294","url":null,"abstract":"\u0000Purpose\u0000The purpose of this paper is to study the market reactions of the banking industry to the Russian–Ukraine war.\u0000\u0000\u0000Design/methodology/approach\u0000This paper uses an event study methodology, regression analyses and interaction effects to study the effect of the war on banks stock prices and analyze factors that explain the cumulative abnormal return.\u0000\u0000\u0000Findings\u0000First, this study finds a significant decline of almost 1.5% in return on the war date. Similar patterns were observed for all continents, but Europe had the most severe drop of about 4%. Second, after excluding the contemporaneous influence of the whole market using the market model, global bank equities returns fell by about 1% on the war date, indicating that bank stocks were more severely impacted by the war than the average stock market. Net-of-market return approach further reveals that bank stock prices decreased 1.4% more on the event day compared to the prewar market average. Third, the impacts of the war and sanctions were persistent when the war continued. Banks stocks were most hit in Europe, Asia and North America.\u0000\u0000\u0000Originality/value\u0000This paper pioneers the study of the effect of the Russia–Ukraine war on the banking industry. This paper also analyzes the reaction pattern of bank stocks before, during and after the war to explain the behavior and expectations of investors toward the war.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2023-01-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41555712","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}
Pub Date : 2023-01-17DOI: 10.1108/raf-04-2022-0134
Doron Nisani, Amit Shelef, OrrOSON David
Purpose The purpose of this study is to estimate the convergence order of the Aumann–Serrano Riskiness Index. Design/methodology/approach This study uses the equivalent relation between the Aumann–Serrano Riskiness Index and the moment generating function and aggregately compares between each two statistical moments for statistical significance. Thus, this study enables to find the convergence order of the index to its stable value. Findings This study finds that the first-best estimation of the Aumann–Serrano Riskiness Index is reached in no less than its seventh statistical moment. However, this study also finds that its second-best approximation could be achieved with its second statistical moment. Research limitations/implications The implications of this research support the standard deviation as a statistically sufficient approximation of Aumann–Serrano Riskiness Index, thus strengthening the CAPM methodology for asset pricing in the financial markets. Originality/value This research sheds a new light, both in theory and in practice, on understanding of the risk’s structure, as it may improve accuracy of asset pricing.
{"title":"Putting the Aumann–Serrano Riskiness Index to work","authors":"Doron Nisani, Amit Shelef, OrrOSON David","doi":"10.1108/raf-04-2022-0134","DOIUrl":"https://doi.org/10.1108/raf-04-2022-0134","url":null,"abstract":"\u0000Purpose\u0000The purpose of this study is to estimate the convergence order of the Aumann–Serrano Riskiness Index.\u0000\u0000\u0000Design/methodology/approach\u0000This study uses the equivalent relation between the Aumann–Serrano Riskiness Index and the moment generating function and aggregately compares between each two statistical moments for statistical significance. Thus, this study enables to find the convergence order of the index to its stable value.\u0000\u0000\u0000Findings\u0000This study finds that the first-best estimation of the Aumann–Serrano Riskiness Index is reached in no less than its seventh statistical moment. However, this study also finds that its second-best approximation could be achieved with its second statistical moment.\u0000\u0000\u0000Research limitations/implications\u0000The implications of this research support the standard deviation as a statistically sufficient approximation of Aumann–Serrano Riskiness Index, thus strengthening the CAPM methodology for asset pricing in the financial markets.\u0000\u0000\u0000Originality/value\u0000This research sheds a new light, both in theory and in practice, on understanding of the risk’s structure, as it may improve accuracy of asset pricing.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2023-01-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42881341","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}
Pub Date : 2023-01-06DOI: 10.1108/raf-01-2022-0020
Xu Sun, Tianming Zhang
Purpose The purpose of this paper is to examine the impact of short sale prospect on future income smoothing. Design/methodology/approach This study examines how short sale prospect impacts future income smoothing. This study follows prior research and uses two measures of income smoothing. One is the correlation between the change in prediscretionary income and the change in discretionary accruals. The other is the variability of earnings relative to the variability of cash flows. Findings This study finds that short sale prospect has a negative impact on future income smoothing. This finding is robust to use different measures of short sale prospect and income smoothing and to subsample tests. Additional analysis reveals that short sale prospect, by curbing income smoothing, reduces future stock price crash risk. Originality/value To the best of the authors’ knowledge, this study is the first to examine the impact of short selling on firms’ subsequent smoothing of reported income. This study contributes to the earnings quality literature by demonstrating the governance role of short selling on future earnings smoothness.
{"title":"The impact of short sale prospect on income smoothing","authors":"Xu Sun, Tianming Zhang","doi":"10.1108/raf-01-2022-0020","DOIUrl":"https://doi.org/10.1108/raf-01-2022-0020","url":null,"abstract":"\u0000Purpose\u0000The purpose of this paper is to examine the impact of short sale prospect on future income smoothing.\u0000\u0000\u0000Design/methodology/approach\u0000This study examines how short sale prospect impacts future income smoothing. This study follows prior research and uses two measures of income smoothing. One is the correlation between the change in prediscretionary income and the change in discretionary accruals. The other is the variability of earnings relative to the variability of cash flows.\u0000\u0000\u0000Findings\u0000This study finds that short sale prospect has a negative impact on future income smoothing. This finding is robust to use different measures of short sale prospect and income smoothing and to subsample tests. Additional analysis reveals that short sale prospect, by curbing income smoothing, reduces future stock price crash risk.\u0000\u0000\u0000Originality/value\u0000To the best of the authors’ knowledge, this study is the first to examine the impact of short selling on firms’ subsequent smoothing of reported income. This study contributes to the earnings quality literature by demonstrating the governance role of short selling on future earnings smoothness.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2023-01-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43981617","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}
Pub Date : 2023-01-02DOI: 10.1108/raf-02-2022-0046
Johannes Kabderian Dreyer, Mateus Moreira, William T. Smith, Vivek Sharma
Purpose This paper aims to investigate whether environmental, social and governance (ESG) practices influence stock returns in the US stock market, looking at the period from 2002 to 2020. Design/methodology/approach The authors quasi-replicate two reference articles that found that socially responsible funds used to underperform, but that this underperformance tendency has disappeared in more recent periods. Findings Using US data, the authors show that independent of the ESG database used, portfolios of neutral stocks present consistently higher systematic risk (beta) than ESG portfolios, although this difference decreases over time. This may be due to the significant increase in demand for ESG portfolios in the past decade, and their consequent price inflation and increase in volatility. However, concerning risk-adjusted returns and contrary to the authors’ reference literature, the results are highly dependent on the rating provider used, and neither support underperformance nor indicate a tendency over time. These inconsistent results suggest that the “ESG label” is not a determinant of portfolio performance. Research limitations/implications If ESG ratings are a legitim benchmark for sustainability, then the costs of going sustainable in stock portfolios might be marginal for fund managers. Originality/value Two different ESG-rating agencies, Morgan Stanley Capital International (MSCI) and Thomson Reuters, are used to identify sustainable stocks. Different from the literature, the authors selected stocks for their portfolios stochastically following a uniform probability distribution, thus avoiding fund manager bias.
{"title":"Do environmental, social and governance practices affect portfolio returns? Evidence from the US stock market from 2002 to 2020","authors":"Johannes Kabderian Dreyer, Mateus Moreira, William T. Smith, Vivek Sharma","doi":"10.1108/raf-02-2022-0046","DOIUrl":"https://doi.org/10.1108/raf-02-2022-0046","url":null,"abstract":"\u0000Purpose\u0000This paper aims to investigate whether environmental, social and governance (ESG) practices influence stock returns in the US stock market, looking at the period from 2002 to 2020.\u0000\u0000\u0000Design/methodology/approach\u0000The authors quasi-replicate two reference articles that found that socially responsible funds used to underperform, but that this underperformance tendency has disappeared in more recent periods.\u0000\u0000\u0000Findings\u0000Using US data, the authors show that independent of the ESG database used, portfolios of neutral stocks present consistently higher systematic risk (beta) than ESG portfolios, although this difference decreases over time. This may be due to the significant increase in demand for ESG portfolios in the past decade, and their consequent price inflation and increase in volatility. However, concerning risk-adjusted returns and contrary to the authors’ reference literature, the results are highly dependent on the rating provider used, and neither support underperformance nor indicate a tendency over time. These inconsistent results suggest that the “ESG label” is not a determinant of portfolio performance.\u0000\u0000\u0000Research limitations/implications\u0000If ESG ratings are a legitim benchmark for sustainability, then the costs of going sustainable in stock portfolios might be marginal for fund managers.\u0000\u0000\u0000Originality/value\u0000Two different ESG-rating agencies, Morgan Stanley Capital International (MSCI) and Thomson Reuters, are used to identify sustainable stocks. Different from the literature, the authors selected stocks for their portfolios stochastically following a uniform probability distribution, thus avoiding fund manager bias.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2023-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42568937","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}
Pub Date : 2022-12-23DOI: 10.1108/raf-07-2022-0193
Sabri Boubaker, Md Hamid Uddin, Sarkar H. Kabir, Sabur Mollah
Purpose This paper aims to investigate a fundamental research question of whether the Islamic banking business model makes corporate earnings more uncertain. This question arises because prior research shows that Islamic banks do well in loan performance but incur more operational costs than conventional banks, indicating the systemic limitation of Islamic banks in business risk management. Design/methodology/approach The study used a sample of banks to conduct the panel regression analysis with 15 years of data for 532 banks (129 Islamic and 403 conventional) from 23 Muslim countries across the world. The authors estimate earnings uncertainty in two ways: the spread and standard deviation of the country-adjusted return over the sample period and applied the difference-in-difference approach interacting cost to income ratio with the Islamic bank dummy, checking if Islamic bank’s high operational costs contribute to more earning uncertainty. Findings Islamic banks’ returns on assets are significantly more uncertain than conventional banks due to higher operational costs. Consistent with earlier evidence, the study also finds that Islamic banks generally have fewer nonperforming loans than conventional banks. The authors conclude that Islamic banks trade-off between reducing credit risk and escalating business risk. Originality/value This study documents that the Islamic banking model helps build a safer asset portfolio but gives rise to the uncertainty of corporate earnings. Therefore, the choice between Islamic and conventional banking models involves a trade-off between credit and business risks. It is a new finding that we add to the literature body on Islamic finance.
{"title":"Does cost-inefficiency in Islamic banking matter for earnings uncertainty?","authors":"Sabri Boubaker, Md Hamid Uddin, Sarkar H. Kabir, Sabur Mollah","doi":"10.1108/raf-07-2022-0193","DOIUrl":"https://doi.org/10.1108/raf-07-2022-0193","url":null,"abstract":"\u0000Purpose\u0000This paper aims to investigate a fundamental research question of whether the Islamic banking business model makes corporate earnings more uncertain. This question arises because prior research shows that Islamic banks do well in loan performance but incur more operational costs than conventional banks, indicating the systemic limitation of Islamic banks in business risk management.\u0000\u0000\u0000Design/methodology/approach\u0000The study used a sample of banks to conduct the panel regression analysis with 15 years of data for 532 banks (129 Islamic and 403 conventional) from 23 Muslim countries across the world. The authors estimate earnings uncertainty in two ways: the spread and standard deviation of the country-adjusted return over the sample period and applied the difference-in-difference approach interacting cost to income ratio with the Islamic bank dummy, checking if Islamic bank’s high operational costs contribute to more earning uncertainty.\u0000\u0000\u0000Findings\u0000Islamic banks’ returns on assets are significantly more uncertain than conventional banks due to higher operational costs. Consistent with earlier evidence, the study also finds that Islamic banks generally have fewer nonperforming loans than conventional banks. The authors conclude that Islamic banks trade-off between reducing credit risk and escalating business risk.\u0000\u0000\u0000Originality/value\u0000This study documents that the Islamic banking model helps build a safer asset portfolio but gives rise to the uncertainty of corporate earnings. Therefore, the choice between Islamic and conventional banking models involves a trade-off between credit and business risks. It is a new finding that we add to the literature body on Islamic finance.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-12-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43708858","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}
Pub Date : 2022-11-01DOI: 10.1108/raf-10-2021-0284
Efstathios Magerakis
Purpose This paper aims to consider the effect of the chief executive officer’s (CEO) ability on the amount of cash stock at the firm level. Design/methodology/approach The empirical hypothesis is examined via fixed-effect regression models using data from US incorporated firms. Findings Consistent with the upper echelon theory and cash holding motives, the results reveal that able CEOs are associated with an increased level of cash stock, ceteris paribus. Further analysis shows that the association between CEO ability and firm cash holding is more profound for financially sound firms. The authors also demonstrate that firm size significantly affects the relationship between CEO ability and cash management. The results are robust to various sensitivity analyses and additional tests. Research limitations/implications This work is subject to limitations inherent in the use of relevant proxies. Thus, the study implements several model specifications to ensure the validity of findings in a more generic context. Future research should investigate the board structure’s role and the monitoring procedures on the CEOs’ cash holding behavior as a natural extension to this study. Practical implications The insights derived from the study are expected to advance the decision-making process of cash policies and CEO selection for shareholders, business executives and investment strategists. Originality/value Overall, the study provides new evidence that CEO ability is a contingent factor of corporate cash stock.
{"title":"Chief executive officer ability and cash holding decision","authors":"Efstathios Magerakis","doi":"10.1108/raf-10-2021-0284","DOIUrl":"https://doi.org/10.1108/raf-10-2021-0284","url":null,"abstract":"\u0000Purpose\u0000This paper aims to consider the effect of the chief executive officer’s (CEO) ability on the amount of cash stock at the firm level.\u0000\u0000\u0000Design/methodology/approach\u0000The empirical hypothesis is examined via fixed-effect regression models using data from US incorporated firms.\u0000\u0000\u0000Findings\u0000Consistent with the upper echelon theory and cash holding motives, the results reveal that able CEOs are associated with an increased level of cash stock, ceteris paribus. Further analysis shows that the association between CEO ability and firm cash holding is more profound for financially sound firms. The authors also demonstrate that firm size significantly affects the relationship between CEO ability and cash management. The results are robust to various sensitivity analyses and additional tests.\u0000\u0000\u0000Research limitations/implications\u0000This work is subject to limitations inherent in the use of relevant proxies. Thus, the study implements several model specifications to ensure the validity of findings in a more generic context. Future research should investigate the board structure’s role and the monitoring procedures on the CEOs’ cash holding behavior as a natural extension to this study.\u0000\u0000\u0000Practical implications\u0000The insights derived from the study are expected to advance the decision-making process of cash policies and CEO selection for shareholders, business executives and investment strategists.\u0000\u0000\u0000Originality/value\u0000Overall, the study provides new evidence that CEO ability is a contingent factor of corporate cash stock.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42350180","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}
Pub Date : 2022-10-25DOI: 10.1108/raf-11-2021-0322
Kun Yu, Priya S. Garg
Purpose This study aims to investigate how credit rating agencies and banks, important credit market participants, incorporate corporate social responsibility (CSR)-related information in their assessment of firm’s creditworthiness. Design/methodology/approach The authors collect stand-alone CSR reports published by Fortune 500 companies from 2002 to 2014 and use file size as a readability measure to investigate the impact of stand-alone CSR reports’ readability on firms’ credit ratings and cost of borrowing. Findings The authors find that firms with higher CSR report readability enjoy higher credit ratings and lower costs of bank loans, suggesting that rating agencies and banks perceive lower default risk for firms with more readable CSR reports. Further analysis indicates that the positive association between CSR report readability and credit ratings is more pronounced for firms with high CSR performance. Conversely, the negative association between CSR report readability and bank loan spreads is more pronounced for firms with low CSR performance and credit quality, suggesting complementary roles of rating agencies and banks in their use of CSR reports. Originality/value Overall, the results highlight the importance of improving the textual characteristics of CSR reports, especially readability, in reducing information risk in the credit market.
{"title":"Corporate social responsibility report readability, credit ratings and cost of borrowing","authors":"Kun Yu, Priya S. Garg","doi":"10.1108/raf-11-2021-0322","DOIUrl":"https://doi.org/10.1108/raf-11-2021-0322","url":null,"abstract":"\u0000Purpose\u0000This study aims to investigate how credit rating agencies and banks, important credit market participants, incorporate corporate social responsibility (CSR)-related information in their assessment of firm’s creditworthiness.\u0000\u0000\u0000Design/methodology/approach\u0000The authors collect stand-alone CSR reports published by Fortune 500 companies from 2002 to 2014 and use file size as a readability measure to investigate the impact of stand-alone CSR reports’ readability on firms’ credit ratings and cost of borrowing.\u0000\u0000\u0000Findings\u0000The authors find that firms with higher CSR report readability enjoy higher credit ratings and lower costs of bank loans, suggesting that rating agencies and banks perceive lower default risk for firms with more readable CSR reports. Further analysis indicates that the positive association between CSR report readability and credit ratings is more pronounced for firms with high CSR performance. Conversely, the negative association between CSR report readability and bank loan spreads is more pronounced for firms with low CSR performance and credit quality, suggesting complementary roles of rating agencies and banks in their use of CSR reports.\u0000\u0000\u0000Originality/value\u0000Overall, the results highlight the importance of improving the textual characteristics of CSR reports, especially readability, in reducing information risk in the credit market.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48546868","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}
Pub Date : 2022-10-25DOI: 10.1108/raf-06-2021-0169
Md Mahmudul Hasan, Md. Safayat Hossain, G. Gotti
Purpose This study aims to examine whether and how managerial ability is associated with the relation between product market competition and earnings management. The authors argue that high-ability managers may moderate the underlying relations in both directions, and they are likely to trade off relative costs between accrual-based earnings management (AEM) and real earnings management (REM). Design/methodology/approach This study uses ordinary least square regressions to examine the association of managerial ability on the relations between product market competition and earnings management. The paper follows prior literature to measure managerial ability, product market competition and earnings management. Findings This study shows empirical evidence that high-ability managers in high-competition industries are likely to engage in AEM but less likely to engage in REM. These findings overall indicate that high-ability managers in high-competition industries trade-off between different forms of earnings management based on their relative costliness and choose the one that is relatively less costly. Practical implications This study has important practical implications as the findings identify situations when important stakeholders, such as the board of directors and investors, may take precautions to prevent managers’ opportunistic behaviors. The findings of this study also might be helpful for firms when it comes to selecting managers. The findings may provide some input to the firms in considering the risks and benefits trade-offs of recruiting a high versus low-ability manager in a more or less competitive environment. Originality/value The findings of this study show new insight into how managerial ability moderates the relation between product market competition and different types (i.e. accrual-based and real activity-based) of earnings management.
{"title":"Product market competition and earnings management: the role of managerial ability","authors":"Md Mahmudul Hasan, Md. Safayat Hossain, G. Gotti","doi":"10.1108/raf-06-2021-0169","DOIUrl":"https://doi.org/10.1108/raf-06-2021-0169","url":null,"abstract":"\u0000Purpose\u0000This study aims to examine whether and how managerial ability is associated with the relation between product market competition and earnings management. The authors argue that high-ability managers may moderate the underlying relations in both directions, and they are likely to trade off relative costs between accrual-based earnings management (AEM) and real earnings management (REM).\u0000\u0000\u0000Design/methodology/approach\u0000This study uses ordinary least square regressions to examine the association of managerial ability on the relations between product market competition and earnings management. The paper follows prior literature to measure managerial ability, product market competition and earnings management.\u0000\u0000\u0000Findings\u0000This study shows empirical evidence that high-ability managers in high-competition industries are likely to engage in AEM but less likely to engage in REM. These findings overall indicate that high-ability managers in high-competition industries trade-off between different forms of earnings management based on their relative costliness and choose the one that is relatively less costly.\u0000\u0000\u0000Practical implications\u0000This study has important practical implications as the findings identify situations when important stakeholders, such as the board of directors and investors, may take precautions to prevent managers’ opportunistic behaviors. The findings of this study also might be helpful for firms when it comes to selecting managers. The findings may provide some input to the firms in considering the risks and benefits trade-offs of recruiting a high versus low-ability manager in a more or less competitive environment.\u0000\u0000\u0000Originality/value\u0000The findings of this study show new insight into how managerial ability moderates the relation between product market competition and different types (i.e. accrual-based and real activity-based) of earnings management.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42194977","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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