Pub Date : 2022-04-27DOI: 10.1108/raf-04-2021-0096
Justin Jin, Yi Liu, Zehua Zhang, Ran Zhao
Purpose
The purpose of this paper is to investigate whether and how banks’ financial constraints affect their cash tax avoidance. The authors hypothesize that banks engage in more tax planning to generate additional cash to mitigate their financial constraints.
Design/methodology/approach
The authors use a sample of US banks to conduct the panel regression analysis. The authors measure the bank tax avoidance using the cash effective tax rate and measure the bank financial constraints using the Z-score and annual payout ratio. The authors further use the implementation of the Dodd–Frank Act as a quasi-natural experiment to conduct the difference-in-difference analysis.
Findings
The authors document that financially constrained banks exhibit lower cash effective tax rates. The authors further show that banks facing greater financial constraints are less likely to pursue tax-saving activities following the Dodd–Frank Act. Moreover, the authors find that non-performing loans increase the influence of financial constraints on tax avoidance, while a financial crisis amplifies the impact of financial constraints on bank cash tax savings.
Originality/value
By extending previous research on financial constraints and tax planning, this paper is the first study to recognize financial constraints, along with the Dodd–Frank Act, as determinants of banks’ tax avoidance. This study informs policymakers about the regulation of tax avoidance in the banking industry and sheds light on possible future research on banks’ tax-planning strategies.
{"title":"The impact of financial constraints on banks’ cash tax avoidance","authors":"Justin Jin, Yi Liu, Zehua Zhang, Ran Zhao","doi":"10.1108/raf-04-2021-0096","DOIUrl":"https://doi.org/10.1108/raf-04-2021-0096","url":null,"abstract":"<h3>Purpose</h3>\u0000<p>The purpose of this paper is to investigate whether and how banks’ financial constraints affect their cash tax avoidance. The authors hypothesize that banks engage in more tax planning to generate additional cash to mitigate their financial constraints.</p><!--/ Abstract__block -->\u0000<h3>Design/methodology/approach</h3>\u0000<p>The authors use a sample of US banks to conduct the panel regression analysis. The authors measure the bank tax avoidance using the cash effective tax rate and measure the bank financial constraints using the Z-score and annual payout ratio. The authors further use the implementation of the Dodd–Frank Act as a quasi-natural experiment to conduct the difference-in-difference analysis.</p><!--/ Abstract__block -->\u0000<h3>Findings</h3>\u0000<p>The authors document that financially constrained banks exhibit lower cash effective tax rates. The authors further show that banks facing greater financial constraints are less likely to pursue tax-saving activities following the Dodd–Frank Act. Moreover, the authors find that non-performing loans increase the influence of financial constraints on tax avoidance, while a financial crisis amplifies the impact of financial constraints on bank cash tax savings.</p><!--/ Abstract__block -->\u0000<h3>Originality/value</h3>\u0000<p>By extending previous research on financial constraints and tax planning, this paper is the first study to recognize financial constraints, along with the Dodd–Frank Act, as determinants of banks’ tax avoidance. This study informs policymakers about the regulation of tax avoidance in the banking industry and sheds light on possible future research on banks’ tax-planning strategies.</p><!--/ Abstract__block -->","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"2007 18","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-04-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138518452","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 : 2022-04-25DOI: 10.1108/raf-10-2020-0305
Fangjun Sang, Pervaiz Alam, Timothy Hinkel
Purpose Prior studies find that US firms with managerial incentives may manipulate the earnings gap to obscure higher performing segments to competitors or to hide underperforming segments from external monitors. The purpose of this study is to complement extant research by examining the association between managerial incentives and segment earnings reporting of cross-listed firms in the USA and the impact of country-level characteristics on this association. Design/methodology/approach The dependent variable is the earnings gap between firm-level earnings and sum of segment-level earnings. Managerial incentives are proxied by proprietary cost and agency cost. Proprietary cost is measured by the Herfindahl index. Agency cost is measured by inefficient resource transfer activities across segments. Foreign firms in this study are companies listed on major US Stock Exchanges with headquarters outside the USA. Comparable US firms are selected using the Propensity Score Matching procedure as a control group. Findings The authors find that 1) proprietary cost motive is not the determinant of earnings gap reporting for cross-listed firms; 2) cross-listed firms motivated by agency costs are more likely to manipulate segment earnings reporting than US firms; and 3) among cross-listed firms motivated by agency costs, firms in weak rule of law countries demonstrate more manipulation in segment earnings than firms in strong rule of law countries. Originality/value Extant research with regard to segment reporting exclusively focuses on US firms, and little is known about the practice of segment reporting by cross-listed firms originating from different legal regimes. This study fills the gap in the literature by comparing cross-listed firms to US firms in the reporting of segment earnings. The results of this study have implications for regulators and investors who are interested in evaluating the extent of cross-listed firms’ financial reporting quality.
{"title":"Segment earnings and managerial incentives: evidence from foreign firms cross-listed in the USA","authors":"Fangjun Sang, Pervaiz Alam, Timothy Hinkel","doi":"10.1108/raf-10-2020-0305","DOIUrl":"https://doi.org/10.1108/raf-10-2020-0305","url":null,"abstract":"\u0000Purpose\u0000Prior studies find that US firms with managerial incentives may manipulate the earnings gap to obscure higher performing segments to competitors or to hide underperforming segments from external monitors. The purpose of this study is to complement extant research by examining the association between managerial incentives and segment earnings reporting of cross-listed firms in the USA and the impact of country-level characteristics on this association.\u0000\u0000\u0000Design/methodology/approach\u0000The dependent variable is the earnings gap between firm-level earnings and sum of segment-level earnings. Managerial incentives are proxied by proprietary cost and agency cost. Proprietary cost is measured by the Herfindahl index. Agency cost is measured by inefficient resource transfer activities across segments. Foreign firms in this study are companies listed on major US Stock Exchanges with headquarters outside the USA. Comparable US firms are selected using the Propensity Score Matching procedure as a control group.\u0000\u0000\u0000Findings\u0000The authors find that 1) proprietary cost motive is not the determinant of earnings gap reporting for cross-listed firms; 2) cross-listed firms motivated by agency costs are more likely to manipulate segment earnings reporting than US firms; and 3) among cross-listed firms motivated by agency costs, firms in weak rule of law countries demonstrate more manipulation in segment earnings than firms in strong rule of law countries.\u0000\u0000\u0000Originality/value\u0000Extant research with regard to segment reporting exclusively focuses on US firms, and little is known about the practice of segment reporting by cross-listed firms originating from different legal regimes. This study fills the gap in the literature by comparing cross-listed firms to US firms in the reporting of segment earnings. The results of this study have implications for regulators and investors who are interested in evaluating the extent of cross-listed firms’ financial reporting quality.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-04-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48378821","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 : 2022-04-14DOI: 10.1108/raf-06-2021-0152
Dave Berger
Purpose This study creates a measure of investor sentiment directly from retail trader activity to identify misvaluation and to examine the link between sentiment and subsequent returns. Design/methodology/approach Using investor reports from a large discount brokerage that include measures of activity such as net buying, net new accounts and net new assets, this study creates a measure of retail trader sentiment using principal components. This study examines the relation between sentiment and returns through conditional mean and regression analyses. Findings Retail sentiment activity coincides with aggregate Google Trends search data and firms with the greatest sensitivity to retail sentiment tend to be small, young and volatile. Periods of high retail sentiment precede poor subsequent market returns. Cross-sectional results detail the strongest impact on subsequent returns within difficult to value or difficult to arbitrage firms. Originality/value This study links a rich measure of retail trader activity to subsequent market and cross-sectional returns. These results deepen our understanding of noise trader risk and aggregate investor sentiment.
{"title":"Investor sentiment: a retail trader activity approach","authors":"Dave Berger","doi":"10.1108/raf-06-2021-0152","DOIUrl":"https://doi.org/10.1108/raf-06-2021-0152","url":null,"abstract":"\u0000Purpose\u0000This study creates a measure of investor sentiment directly from retail trader activity to identify misvaluation and to examine the link between sentiment and subsequent returns.\u0000\u0000\u0000Design/methodology/approach\u0000Using investor reports from a large discount brokerage that include measures of activity such as net buying, net new accounts and net new assets, this study creates a measure of retail trader sentiment using principal components. This study examines the relation between sentiment and returns through conditional mean and regression analyses.\u0000\u0000\u0000Findings\u0000Retail sentiment activity coincides with aggregate Google Trends search data and firms with the greatest sensitivity to retail sentiment tend to be small, young and volatile. Periods of high retail sentiment precede poor subsequent market returns. Cross-sectional results detail the strongest impact on subsequent returns within difficult to value or difficult to arbitrage firms.\u0000\u0000\u0000Originality/value\u0000This study links a rich measure of retail trader activity to subsequent market and cross-sectional returns. These results deepen our understanding of noise trader risk and aggregate investor sentiment.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"1 1","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-04-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42053548","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 : 2022-04-04DOI: 10.1108/raf-11-2020-0317
Linda H. Chen, G. Jiang, Kevin X. Zhu
Purpose The purpose of this study is to investigate whether within the same firm, earnings risk is exacerbated in the fiscal year end (FYE) quarters relative to that of other quarters, more importantly, if this type of earnings risk is unique. Further, the authors discuss solutions to mitigate this type of information risk. Design/methodology/approach This study provides evidence that the information risk associated with FYE quarter earnings cannot be explained by other identified risk factors. Solutions to mitigate this risk include strong corporate governance and a more streamlined financial reporting structure. Findings The paper shows that there is significantly lower earnings response coefficient for FYE quarters than for non-FYE quarters (1984–2015). Furthermore, strong corporate governance and a more streamlined financial reporting structure, either by firms willingly reducing the usage of extraordinary item reporting or by FASB codification changes such as FASB 145, can help mitigate this type of information uncertainty. Research limitations/implications This study explains that the causes of the exacerbated information risk associated with FYE quarter earnings identified in prior literature, namely, the “integral explanation” and “manipulation explanation,” are not mutually exclusive. Therefore, the authors deem it futile to disentangle the two. Instead, the authors offer two possible solutions.
{"title":"Information uncertainty of fiscal year end quarter earnings","authors":"Linda H. Chen, G. Jiang, Kevin X. Zhu","doi":"10.1108/raf-11-2020-0317","DOIUrl":"https://doi.org/10.1108/raf-11-2020-0317","url":null,"abstract":"\u0000Purpose\u0000The purpose of this study is to investigate whether within the same firm, earnings risk is exacerbated in the fiscal year end (FYE) quarters relative to that of other quarters, more importantly, if this type of earnings risk is unique. Further, the authors discuss solutions to mitigate this type of information risk.\u0000\u0000\u0000Design/methodology/approach\u0000This study provides evidence that the information risk associated with FYE quarter earnings cannot be explained by other identified risk factors. Solutions to mitigate this risk include strong corporate governance and a more streamlined financial reporting structure.\u0000\u0000\u0000Findings\u0000The paper shows that there is significantly lower earnings response coefficient for FYE quarters than for non-FYE quarters (1984–2015). Furthermore, strong corporate governance and a more streamlined financial reporting structure, either by firms willingly reducing the usage of extraordinary item reporting or by FASB codification changes such as FASB 145, can help mitigate this type of information uncertainty.\u0000\u0000\u0000Research limitations/implications\u0000This study explains that the causes of the exacerbated information risk associated with FYE quarter earnings identified in prior literature, namely, the “integral explanation” and “manipulation explanation,” are not mutually exclusive. Therefore, the authors deem it futile to disentangle the two. Instead, the authors offer two possible solutions.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-04-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45397215","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 : 2022-02-23DOI: 10.1108/raf-10-2020-0293
Alfonso Mendoza-Velázquez, Luis Carlos Ortuño-Barba, L. D. Conde-Cortés
Purpose This paper aims to examine the dynamic nexus between corporate governance (CG) and firm performance in hybrid model countries. It also investigates the effect of horizontal agency conflicts on CG adherence. Design/methodology/approach This research uses vector autoregression methods and dynamic panels to examine the cross-sectional and longitudinal association between CG and performance, using three CG adherence indexes of transparency, management and board governance. The data set includes annual market and firm performance data from a sample of 93 companies trading in the Mexican stock market for the period 2010–2016. Findings This study finds evidence of dynamic interdependence between CG and firm performance, as well as weak effects of CG adherence on firms’ performance. The adverse effect of increasing return on equity and return on assets (ROE-ROA) gaps on CG adherence, which results from agency conflicts and insider ownership, is likely behind the weak association between CG and firm performance. Originality/value The findings in this study provide evidence that hybrid systems weaken the nexus between CG and firm performance. The propensity to prefer banking and bond debt to issuing stocks, as indicated by a greater ROE-ROA gap, points to favorable provisions for majority shareholders, adverse normative environments for minority shareholders and a low level of compliance with CG measures, among other problems.
{"title":"Corporate governance and firm performance in hybrid model countries","authors":"Alfonso Mendoza-Velázquez, Luis Carlos Ortuño-Barba, L. D. Conde-Cortés","doi":"10.1108/raf-10-2020-0293","DOIUrl":"https://doi.org/10.1108/raf-10-2020-0293","url":null,"abstract":"\u0000Purpose\u0000This paper aims to examine the dynamic nexus between corporate governance (CG) and firm performance in hybrid model countries. It also investigates the effect of horizontal agency conflicts on CG adherence.\u0000\u0000\u0000Design/methodology/approach\u0000This research uses vector autoregression methods and dynamic panels to examine the cross-sectional and longitudinal association between CG and performance, using three CG adherence indexes of transparency, management and board governance. The data set includes annual market and firm performance data from a sample of 93 companies trading in the Mexican stock market for the period 2010–2016.\u0000\u0000\u0000Findings\u0000This study finds evidence of dynamic interdependence between CG and firm performance, as well as weak effects of CG adherence on firms’ performance. The adverse effect of increasing return on equity and return on assets (ROE-ROA) gaps on CG adherence, which results from agency conflicts and insider ownership, is likely behind the weak association between CG and firm performance.\u0000\u0000\u0000Originality/value\u0000The findings in this study provide evidence that hybrid systems weaken the nexus between CG and firm performance. The propensity to prefer banking and bond debt to issuing stocks, as indicated by a greater ROE-ROA gap, points to favorable provisions for majority shareholders, adverse normative environments for minority shareholders and a low level of compliance with CG measures, among other problems.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42396172","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 : 2021-12-14DOI: 10.1108/raf-10-2020-0295
Dallin M. Alldredge, Yinfei Chen, Steve Liu, Lan Luo
Purpose This study aims to examine the information transfer effects of customers’ credit rating downgrades on supplier firms. Design/methodology/approach In this study, the authors use suppliers’ cumulative abnormal returns around customers’ credit rating downgrade events to identify how shocks to customer credit impact supplier equity prices. The authors also incorporate ordinary least squares and weighted least squares regressions regression analysis of the determinants of supplier market response to customer downgrades. Findings The authors find that customer credit rating downgrades present significant negative shocks to the stock prices of supplier firms. Moreover, the authors show that the information transfer effects are determined by both firm- and industry-level factors, including the market anticipation of downgrades, the strength of the customer–supplier linkage, the industry rivals’ reactions to the downgrades and investor attention. The authors also find that the likelihood that a supplier will receive a rating downgrade is significantly higher following its primary customer firm’s downgrade. Originality/value To the best of the authors’ knowledge, this paper is the first to explore the information transfer effects of credit rating downgrades on primary stakeholders within the supply chain. The authors document that customer–supplier networks have valuable implications for the spillover effect across debt and equity holders. Information about customers’ financial stress is incorporated into suppliers’ equity prices outside of the context of customer bankruptcy.
{"title":"The effect of credit rating downgrades along the supply chain","authors":"Dallin M. Alldredge, Yinfei Chen, Steve Liu, Lan Luo","doi":"10.1108/raf-10-2020-0295","DOIUrl":"https://doi.org/10.1108/raf-10-2020-0295","url":null,"abstract":"\u0000Purpose\u0000This study aims to examine the information transfer effects of customers’ credit rating downgrades on supplier firms.\u0000\u0000\u0000Design/methodology/approach\u0000In this study, the authors use suppliers’ cumulative abnormal returns around customers’ credit rating downgrade events to identify how shocks to customer credit impact supplier equity prices. The authors also incorporate ordinary least squares and weighted least squares regressions regression analysis of the determinants of supplier market response to customer downgrades.\u0000\u0000\u0000Findings\u0000The authors find that customer credit rating downgrades present significant negative shocks to the stock prices of supplier firms. Moreover, the authors show that the information transfer effects are determined by both firm- and industry-level factors, including the market anticipation of downgrades, the strength of the customer–supplier linkage, the industry rivals’ reactions to the downgrades and investor attention. The authors also find that the likelihood that a supplier will receive a rating downgrade is significantly higher following its primary customer firm’s downgrade.\u0000\u0000\u0000Originality/value\u0000To the best of the authors’ knowledge, this paper is the first to explore the information transfer effects of credit rating downgrades on primary stakeholders within the supply chain. The authors document that customer–supplier networks have valuable implications for the spillover effect across debt and equity holders. Information about customers’ financial stress is incorporated into suppliers’ equity prices outside of the context of customer bankruptcy.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2021-12-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45423813","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 : 2021-11-12DOI: 10.1108/raf-11-2020-0326
Binod Guragai, T. Henke, GL Young
Purpose This study aims to examine the relationship between the types of discontinued operations (i.e. income-increasing versus income-decreasing) and a firm’s dividend payout policy. The authors extend our analysis to examine whether equity investors react differently to dividend payout changes that are preceded by the reporting of different types of discontinued operations. Design/methodology/approach Ordinary least squares regressions are used to test the association between discontinued operations and dividend payouts. The investor response test uses cumulative abnormal return around the announcement of dividend payout changes. Findings The authors find that firms temporarily increase (decrease) their dividend payout in the quarter following the reporting of income-increasing (income-decreasing) discontinued operations. The authors further find that these results are stronger when the magnitude of the income increase or income decrease is larger and when firms report disposal gains or losses. Although prior literature finds evidence that dividend increases are associated with a significant positive market reaction, the results show that investors do not react positively to dividend increases that are preceded by reporting income-increasing discontinued operations. Originality/value This study adds to the literature on the effects of financial reporting (i.e. the types of discontinued operations) on a firm’s payout policy (i.e. dividend payout). The authors also add to the literature that examines investors’ perceptions of a firm’s payout changes when such changes are transitory in nature.
{"title":"Reporting of discontinued operations and dividend payout policy","authors":"Binod Guragai, T. Henke, GL Young","doi":"10.1108/raf-11-2020-0326","DOIUrl":"https://doi.org/10.1108/raf-11-2020-0326","url":null,"abstract":"\u0000Purpose\u0000This study aims to examine the relationship between the types of discontinued operations (i.e. income-increasing versus income-decreasing) and a firm’s dividend payout policy. The authors extend our analysis to examine whether equity investors react differently to dividend payout changes that are preceded by the reporting of different types of discontinued operations.\u0000\u0000\u0000Design/methodology/approach\u0000Ordinary least squares regressions are used to test the association between discontinued operations and dividend payouts. The investor response test uses cumulative abnormal return around the announcement of dividend payout changes.\u0000\u0000\u0000Findings\u0000The authors find that firms temporarily increase (decrease) their dividend payout in the quarter following the reporting of income-increasing (income-decreasing) discontinued operations. The authors further find that these results are stronger when the magnitude of the income increase or income decrease is larger and when firms report disposal gains or losses. Although prior literature finds evidence that dividend increases are associated with a significant positive market reaction, the results show that investors do not react positively to dividend increases that are preceded by reporting income-increasing discontinued operations.\u0000\u0000\u0000Originality/value\u0000This study adds to the literature on the effects of financial reporting (i.e. the types of discontinued operations) on a firm’s payout policy (i.e. dividend payout). The authors also add to the literature that examines investors’ perceptions of a firm’s payout changes when such changes are transitory in nature.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2021-11-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44525911","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 : 2021-10-28DOI: 10.1108/raf-07-2020-0182
Jun Gao, Niall O’Sullivan, Meadhbh Sherman
Purpose The Chinese fund market has witnessed significant developments in recent years. However, although there has been a range of studies assessing fund performance in developed industries, the rapidly developing fund industry in China has received very little attention. This study aims to examine the performance of open-end securities investment funds investing in Chinese domestic equity during the period May 2003 to September 2020. Specifically, applying a non-parametric bootstrap methodology from the literature on fund performance, the authors investigate the role of skill versus luck in this rapidly evolving investment funds industry. Design/methodology/approach This study evaluates the performance of Chinese equity securities investment funds from 2003–2020 using a bootstrap methodology to distinguish skill from luck in performance. The authors consider unconditional and conditional performance models. Findings The bootstrap methodology incorporates non-normality in the idiosyncratic risk of fund returns, which is a major drawback in “conventional” performance statistics. The evidence does not support the existence of “genuine” skilled fund managers. In addition, it indicates that poor performance is mainly attributable to bad stock picking skills. Practical implications The authors find that the top-ranked funds with positive abnormal performance are attributed to “good luck” not “good skill” while the negative abnormal performance of bottom funds is mainly due to “bad skill.” Therefore, sensible advice for most Chinese equity investors would be against trying to “pick winners funds” among Chinese securities investment funds but it would be recommended to avoid holding “losers.” At the present time, investors should consider other types of funds, such as index/tracker funds with lower transactions. In addition, less risk-averse investors may consider Chinese hedge funds [Zhao (2012)] or exchange-traded fund [Han (2012)]. Originality/value The paper makes several contributions to the literature. First, the authors examine a wide range (over 50) of risk-adjusted performance models, which account for both unconditional and conditional risk factors. The authors also control for the profitability and investment risks in Fama and French (2015). Second, the authors select the “best-fit” model across all risk-adjusted models examined and a single “best-fit” model from each of the three classes. Therefore, the bootstrap analysis, which is mainly based on the selected best-fit models, is more precise and robust. Third, the authors reduce the possibility that findings may be sample-period specific or may be a survivor (upward) biased. Fourth, the authors consider further analysis based on sub-periods and compare fund performance in different market conditions to provide more implications to investors and practitioners. Fifth, the authors carry out extensive robustness checks and show that the findings are robust in relation to different min
{"title":"Chinese securities investment funds: the role of luck in performance","authors":"Jun Gao, Niall O’Sullivan, Meadhbh Sherman","doi":"10.1108/raf-07-2020-0182","DOIUrl":"https://doi.org/10.1108/raf-07-2020-0182","url":null,"abstract":"\u0000Purpose\u0000The Chinese fund market has witnessed significant developments in recent years. However, although there has been a range of studies assessing fund performance in developed industries, the rapidly developing fund industry in China has received very little attention. This study aims to examine the performance of open-end securities investment funds investing in Chinese domestic equity during the period May 2003 to September 2020. Specifically, applying a non-parametric bootstrap methodology from the literature on fund performance, the authors investigate the role of skill versus luck in this rapidly evolving investment funds industry.\u0000\u0000\u0000Design/methodology/approach\u0000This study evaluates the performance of Chinese equity securities investment funds from 2003–2020 using a bootstrap methodology to distinguish skill from luck in performance. The authors consider unconditional and conditional performance models.\u0000\u0000\u0000Findings\u0000The bootstrap methodology incorporates non-normality in the idiosyncratic risk of fund returns, which is a major drawback in “conventional” performance statistics. The evidence does not support the existence of “genuine” skilled fund managers. In addition, it indicates that poor performance is mainly attributable to bad stock picking skills.\u0000\u0000\u0000Practical implications\u0000The authors find that the top-ranked funds with positive abnormal performance are attributed to “good luck” not “good skill” while the negative abnormal performance of bottom funds is mainly due to “bad skill.” Therefore, sensible advice for most Chinese equity investors would be against trying to “pick winners funds” among Chinese securities investment funds but it would be recommended to avoid holding “losers.” At the present time, investors should consider other types of funds, such as index/tracker funds with lower transactions. In addition, less risk-averse investors may consider Chinese hedge funds [Zhao (2012)] or exchange-traded fund [Han (2012)].\u0000\u0000\u0000Originality/value\u0000The paper makes several contributions to the literature. First, the authors examine a wide range (over 50) of risk-adjusted performance models, which account for both unconditional and conditional risk factors. The authors also control for the profitability and investment risks in Fama and French (2015). Second, the authors select the “best-fit” model across all risk-adjusted models examined and a single “best-fit” model from each of the three classes. Therefore, the bootstrap analysis, which is mainly based on the selected best-fit models, is more precise and robust. Third, the authors reduce the possibility that findings may be sample-period specific or may be a survivor (upward) biased. Fourth, the authors consider further analysis based on sub-periods and compare fund performance in different market conditions to provide more implications to investors and practitioners. Fifth, the authors carry out extensive robustness checks and show that the findings are robust in relation to different min","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2021-10-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48192199","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 : 2021-10-20DOI: 10.1108/raf-08-2020-0232
Rachana Kalelkar, Qiao Xu
Purpose The authors investigate whether the different tenure phases of executives have a differential effect on audit pricing. Two alternate views – career concern and power – can explain the effect of executives’ tenure on audit pricing. This paper aims to determine, which viewpoint dominates in explaining the relationship between audit pricing and executive tenure phases. Design/methodology/approach Using a sample of 11,198 firm-year observations from 2007 to 2016, the authors adopt an ordinary least squares regression model to assess the impact of the middle and long phases of executives’ tenure on audit fees. Findings Audit fees are significantly lower when executives enter the middle and long phases of tenure. The reduction in audit fees is greatest as both chief executive officers and chief financial officers enter the long tenure phase. Although audit fees gradually decrease as executive tenure is extended, they start increasing two years before the end of executive tenure. Furthermore, the negative association between the executive tenure phase and audit fees is greater when the executive is appointed externally. Finally, the long phase of executive tenure also mitigates the positive relationship between audit fees and internal control weaknesses. Research limitations/implications This study is based on US data. Future research may extend this study to other countries. Practical implications The findings are important to firms, practitioners and academicians, particularly, as the length of tenure of top executives has increased in recent years. By documenting that executives’ middle and long tenure phases reduce audit fees, the findings highlight the importance of maintaining executives in the firm. Finally, the findings have implications for investors, policymakers and auditors to identify companies with high audit risk. Originality/value This study is the first to document the impact of executives’ middle and long tenure phases on audit fees.
{"title":"Different tenure phases of executives and audit fees","authors":"Rachana Kalelkar, Qiao Xu","doi":"10.1108/raf-08-2020-0232","DOIUrl":"https://doi.org/10.1108/raf-08-2020-0232","url":null,"abstract":"\u0000Purpose\u0000The authors investigate whether the different tenure phases of executives have a differential effect on audit pricing. Two alternate views – career concern and power – can explain the effect of executives’ tenure on audit pricing. This paper aims to determine, which viewpoint dominates in explaining the relationship between audit pricing and executive tenure phases.\u0000\u0000\u0000Design/methodology/approach\u0000Using a sample of 11,198 firm-year observations from 2007 to 2016, the authors adopt an ordinary least squares regression model to assess the impact of the middle and long phases of executives’ tenure on audit fees.\u0000\u0000\u0000Findings\u0000Audit fees are significantly lower when executives enter the middle and long phases of tenure. The reduction in audit fees is greatest as both chief executive officers and chief financial officers enter the long tenure phase. Although audit fees gradually decrease as executive tenure is extended, they start increasing two years before the end of executive tenure. Furthermore, the negative association between the executive tenure phase and audit fees is greater when the executive is appointed externally. Finally, the long phase of executive tenure also mitigates the positive relationship between audit fees and internal control weaknesses.\u0000\u0000\u0000Research limitations/implications\u0000This study is based on US data. Future research may extend this study to other countries.\u0000\u0000\u0000Practical implications\u0000The findings are important to firms, practitioners and academicians, particularly, as the length of tenure of top executives has increased in recent years. By documenting that executives’ middle and long tenure phases reduce audit fees, the findings highlight the importance of maintaining executives in the firm. Finally, the findings have implications for investors, policymakers and auditors to identify companies with high audit risk.\u0000\u0000\u0000Originality/value\u0000This study is the first to document the impact of executives’ middle and long tenure phases on audit fees.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2021-10-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47842420","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 : 2021-10-11DOI: 10.1108/raf-06-2020-0144
Meng-Tse Cheng
Purpose This study aims to examine whether accounting comparability between two firms, as measured by De Franco et al. (2011), reflects closeness in the amounts of cash flows and accruals between the firms. Design/methodology/approach Using 278,452 pair-year observations over the years 2003–2019, the author evaluates the research question using regression models. Findings Closeness in cash flows and closeness in accruals both increase accounting comparability and the effect of closeness in cash flows is greater. The effect of closeness in earnings is greater than the combined effects of closeness in cash flows and accruals. Earnings quality strengthens, while product closeness weakens, the effects of closeness in earnings and closeness in cash flows. Originality/value To the best of the authors’ knowledge, this study is the first to empirically test the link between the closeness in earnings components and accounting comparability. This study is also the first to examine cash flows versus accruals in the context of accounting comparability.
{"title":"Accounting comparability and cash flows versus accruals","authors":"Meng-Tse Cheng","doi":"10.1108/raf-06-2020-0144","DOIUrl":"https://doi.org/10.1108/raf-06-2020-0144","url":null,"abstract":"\u0000Purpose\u0000This study aims to examine whether accounting comparability between two firms, as measured by De Franco et al. (2011), reflects closeness in the amounts of cash flows and accruals between the firms.\u0000\u0000\u0000Design/methodology/approach\u0000Using 278,452 pair-year observations over the years 2003–2019, the author evaluates the research question using regression models.\u0000\u0000\u0000Findings\u0000Closeness in cash flows and closeness in accruals both increase accounting comparability and the effect of closeness in cash flows is greater. The effect of closeness in earnings is greater than the combined effects of closeness in cash flows and accruals. Earnings quality strengthens, while product closeness weakens, the effects of closeness in earnings and closeness in cash flows.\u0000\u0000\u0000Originality/value\u0000To the best of the authors’ knowledge, this study is the first to empirically test the link between the closeness in earnings components and accounting comparability. This study is also the first to examine cash flows versus accruals in the context of accounting comparability.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2021-10-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47267929","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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