Pub Date : 2023-10-17DOI: 10.1108/jal-07-2023-0115
Massimo Mariani, Mavie Cardi, Francesco D'Ercole, Nicola Raimo, Filippo Vitolla
Purpose Understanding the determinants of a corporate initial public offering (IPO) success is essential for reducing investors' valuation uncertainty when participating in share offerings. In this sense, this study contributes to the existing debate by examining IPO prospectus readability. The authors specifically investigate how clear and more informative insights into pure corporate key financial numbers can lead to a higher valuation for the company after the listing process. Design/methodology/approach Through a sample of European IPOs, the authors employ a cross-sectional regression to test the relationship between prospectus readability through the Flesch reading ease (FRE) score and companies' market-to-book ratio at the period end date after the listing process. Findings The study findings show a positive impact of higher readability on the post-IPO market-to-book ratio. Thus, clear and more informative communication results in stocks being traded at a premium to their book value. This study presents a concrete call for firms to increase corporate documents’ readability to mitigate the risk of withdrawing or spoiling corporate market access. Specifically, enhanced clarity and transparency increase investors' confidence, facilitating a better understanding of companies' intrinsic value and the overall IPO process. The authors conducted several tests to validate the results. Originality/value To the best of the authors’ knowledge, this is among the first works to explore the relationship between the readability of corporate prospectus and the sustained IPO success in the European context.
{"title":"Make it easy: the effect of prospectus readability on IPO performance","authors":"Massimo Mariani, Mavie Cardi, Francesco D'Ercole, Nicola Raimo, Filippo Vitolla","doi":"10.1108/jal-07-2023-0115","DOIUrl":"https://doi.org/10.1108/jal-07-2023-0115","url":null,"abstract":"Purpose Understanding the determinants of a corporate initial public offering (IPO) success is essential for reducing investors' valuation uncertainty when participating in share offerings. In this sense, this study contributes to the existing debate by examining IPO prospectus readability. The authors specifically investigate how clear and more informative insights into pure corporate key financial numbers can lead to a higher valuation for the company after the listing process. Design/methodology/approach Through a sample of European IPOs, the authors employ a cross-sectional regression to test the relationship between prospectus readability through the Flesch reading ease (FRE) score and companies' market-to-book ratio at the period end date after the listing process. Findings The study findings show a positive impact of higher readability on the post-IPO market-to-book ratio. Thus, clear and more informative communication results in stocks being traded at a premium to their book value. This study presents a concrete call for firms to increase corporate documents’ readability to mitigate the risk of withdrawing or spoiling corporate market access. Specifically, enhanced clarity and transparency increase investors' confidence, facilitating a better understanding of companies' intrinsic value and the overall IPO process. The authors conducted several tests to validate the results. Originality/value To the best of the authors’ knowledge, this is among the first works to explore the relationship between the readability of corporate prospectus and the sustained IPO success in the European context.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135944657","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 : 2023-10-17DOI: 10.1108/jal-11-2022-0122
Mai Dao, Hongkang Xu
Purpose In this paper the authors aim to examine whether shareholder activism is associated with accounting reporting complexity (ARC). Design/methodology/approach The authors employ ordinary least squares (OLS) and a sample of 19,530 firm-year observations (representing 3,377 unique firms) over the 2010–2019 period to test the prediction. Findings The authors find that firms with shareholder activism provide more complex accounting reporting. Further, both types of activism (including Concern & Dispute and Control & Discussion) are positively associated with ARC. The authors also find that the association between shareholder activism and ARC is more pronounced when the firms have a higher level of litigation risk and a higher proportion of institutional ownership. Collectively, the findings suggest that firms with shareholder activism may be under more pressure to disclose more accounting items, leading to more complex accounting reporting. Originality/value The study may be informative to regulators considering the costs and benefits of shareholder activism in financial reporting.
{"title":"Shareholder activism and accounting reporting complexity","authors":"Mai Dao, Hongkang Xu","doi":"10.1108/jal-11-2022-0122","DOIUrl":"https://doi.org/10.1108/jal-11-2022-0122","url":null,"abstract":"Purpose In this paper the authors aim to examine whether shareholder activism is associated with accounting reporting complexity (ARC). Design/methodology/approach The authors employ ordinary least squares (OLS) and a sample of 19,530 firm-year observations (representing 3,377 unique firms) over the 2010–2019 period to test the prediction. Findings The authors find that firms with shareholder activism provide more complex accounting reporting. Further, both types of activism (including Concern & Dispute and Control & Discussion) are positively associated with ARC. The authors also find that the association between shareholder activism and ARC is more pronounced when the firms have a higher level of litigation risk and a higher proportion of institutional ownership. Collectively, the findings suggest that firms with shareholder activism may be under more pressure to disclose more accounting items, leading to more complex accounting reporting. Originality/value The study may be informative to regulators considering the costs and benefits of shareholder activism in financial reporting.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135944323","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}
Purpose The paper aims to review prior literature on the impact of audit quality and climate change reporting on corporate performance. It also aims to offer avenues for future research. Design/methodology/approach Based on the systematic literature review, bibliometric investigation and forest plot, the authors systematized the scientific knowledge from 183 papers. Findings Earlier studies either focused on audit quality and corporate performance or discussed the link between climate change and corporate performance. However, the way that audit quality and climate change can together influence corporate performance is yet to be examined. The authors fill the gap by examining the possible link between audit quality and climate change and establishing the influence of it on corporate performance from the existing literature. Originality/value Because of the immense importance of the company's contribution to climate change, the research findings will open up avenues for future research. In addition, findings will be useful for world policymakers in strengthening or modifying existing corporate responsibility policies.
{"title":"The impact of audit quality and climate change reporting on corporate performance: a review and future research agenda","authors":"Yazen Alaamri, Khaled Hussainey, Monomita Nandy, Suman Lodh","doi":"10.1108/jal-05-2023-0081","DOIUrl":"https://doi.org/10.1108/jal-05-2023-0081","url":null,"abstract":"Purpose The paper aims to review prior literature on the impact of audit quality and climate change reporting on corporate performance. It also aims to offer avenues for future research. Design/methodology/approach Based on the systematic literature review, bibliometric investigation and forest plot, the authors systematized the scientific knowledge from 183 papers. Findings Earlier studies either focused on audit quality and corporate performance or discussed the link between climate change and corporate performance. However, the way that audit quality and climate change can together influence corporate performance is yet to be examined. The authors fill the gap by examining the possible link between audit quality and climate change and establishing the influence of it on corporate performance from the existing literature. Originality/value Because of the immense importance of the company's contribution to climate change, the research findings will open up avenues for future research. In addition, findings will be useful for world policymakers in strengthening or modifying existing corporate responsibility policies.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136057510","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 : 2023-10-09DOI: 10.1108/jal-10-2022-0107
Manish Bansal
Purpose This paper undertakes an extensive and systematic review of the literature on earnings management (EM) over the past three decades (1992–2022). Furthermore, the study identifies emerging research themes and proposes future avenues for further investigation in the realm of EM. Design/methodology/approach For this study, a comprehensive collection of 2,775 articles on EM published between 1992 and 2022 was extracted from the Scopus database. The author employed various tools, including Microsoft Excel, R studio, Gephi and visualization of similarities viewer, to conduct bibliometric, content, thematic and cluster analyses. Additionally, the study examined the literature across three distinct periods: prior to the enactment of the Sarbanes-Oxley Act (1992–2001), subsequent to the implementation of the Sarbanes-Oxley Act (2002–2012), and after the adoption of International Financial Reporting Standards (2013–2022) to draw more inferences and insights on EM research. Findings The study identifies three major themes, namely the operationalization of EM constructs, the trade-off between EM tools (accrual EM, real EM and classification shifting) and the role of corporate governance in mitigating EM in emerging markets. Existing literature in these areas presents mixed and inconclusive findings, suggesting the need for further theoretical development. Further, the study findings observe a shift in research focus over time: initially, understanding manipulation techniques, then evaluating regulatory measures, and more recently, investigating the impact of global accounting standards. Several emerging research themes (technology advancements, cross-cultural and cross-national studies, sustainability, behavioral aspects and non-financial indicators of EM) have been identified. This study subsequent analysis reveals an evolving EM landscape, with researchers from disciplines like data science, computer science and engineering applying their analytical expertise to detect EM anomalies. Furthermore, this study offers significant insights into sophisticated EM techniques such as neural networks, machine learning techniques and hidden Markov models, among others, as well as relevant theories including dynamic capabilities theory, learning curve theory, psychological contract theory and normative institutional theory. These techniques and theories demonstrate the need for further advancement in the field of EM. Lastly, the findings shed light on prominent EM journals, authors and countries. Originality/value This study conducts quantitative bibliometric and thematic analyses of the existing literature on EM while identifying areas that require further development to advance EM research.
{"title":"Earnings management: a three-decade analysis and future prospects","authors":"Manish Bansal","doi":"10.1108/jal-10-2022-0107","DOIUrl":"https://doi.org/10.1108/jal-10-2022-0107","url":null,"abstract":"Purpose This paper undertakes an extensive and systematic review of the literature on earnings management (EM) over the past three decades (1992–2022). Furthermore, the study identifies emerging research themes and proposes future avenues for further investigation in the realm of EM. Design/methodology/approach For this study, a comprehensive collection of 2,775 articles on EM published between 1992 and 2022 was extracted from the Scopus database. The author employed various tools, including Microsoft Excel, R studio, Gephi and visualization of similarities viewer, to conduct bibliometric, content, thematic and cluster analyses. Additionally, the study examined the literature across three distinct periods: prior to the enactment of the Sarbanes-Oxley Act (1992–2001), subsequent to the implementation of the Sarbanes-Oxley Act (2002–2012), and after the adoption of International Financial Reporting Standards (2013–2022) to draw more inferences and insights on EM research. Findings The study identifies three major themes, namely the operationalization of EM constructs, the trade-off between EM tools (accrual EM, real EM and classification shifting) and the role of corporate governance in mitigating EM in emerging markets. Existing literature in these areas presents mixed and inconclusive findings, suggesting the need for further theoretical development. Further, the study findings observe a shift in research focus over time: initially, understanding manipulation techniques, then evaluating regulatory measures, and more recently, investigating the impact of global accounting standards. Several emerging research themes (technology advancements, cross-cultural and cross-national studies, sustainability, behavioral aspects and non-financial indicators of EM) have been identified. This study subsequent analysis reveals an evolving EM landscape, with researchers from disciplines like data science, computer science and engineering applying their analytical expertise to detect EM anomalies. Furthermore, this study offers significant insights into sophisticated EM techniques such as neural networks, machine learning techniques and hidden Markov models, among others, as well as relevant theories including dynamic capabilities theory, learning curve theory, psychological contract theory and normative institutional theory. These techniques and theories demonstrate the need for further advancement in the field of EM. Lastly, the findings shed light on prominent EM journals, authors and countries. Originality/value This study conducts quantitative bibliometric and thematic analyses of the existing literature on EM while identifying areas that require further development to advance EM research.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135044250","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}
Purpose The authors investigate whether firm-specific vulnerability to climate change influences foreign exchange hedging, using a novel text-based measure of firm-level climate change exposure generated by state-of-the-art machine-learning algorithms. Design/methodology/approach The authors' empirical analysis includes firm-fixed effects, random-effects regressions, propensity score matching (PSM), entropy balancing, an instrumental-variable analysis and using an exogenous shock as a quasi-natural experiment. Findings The authors' findings suggest that greater climate change exposure brings about a significant reduction in exchange rate hedging. Companies more exposed to climate change may invest significant resources to address climate change risk, such that they have fewer resources available for currency risk management. Additionally, firms seriously coping with climate change risk may view exchange rate risk as relatively less important in comparison to the risk posed by climate change. Notably, the authors also find that the negative effect of climate change exposure on currency hedging can be specifically attributed to the regulatory aspect of climate change risk rather than the physical dimension, suggesting that companies view the regulatory dimension of climate change as more critical. Originality/value Recent studies have demonstrated that climatic fluctuations represent one of the most recent sources of unpredictability, thereby impacting the economy and financial markets (Barnett et al ., 2020; Bolton and Kacperczyk, 2020; Engle et al. , 2020). The authors' study advances this field of research by revealing that company-specific exposure to climate change serves as a significant determinant of corporate currency hedging, thus expanding the existing knowledge base.
作者研究了企业对气候变化的特定脆弱性是否会影响外汇套期保值，使用了一种新的基于文本的企业层面气候变化风险度量，该度量由最先进的机器学习算法生成。作者的实证分析包括公司固定效应、随机效应回归、倾向得分匹配(PSM)、熵平衡、工具变量分析和使用外生冲击作为准自然实验。作者的研究结果表明，更大的气候变化风险带来了汇率套期保值的显著减少。受气候变化影响较大的公司可能会投入大量资源来应对气候变化风险，因此它们可用于货币风险管理的资源较少。此外，认真应对气候变化风险的公司可能认为，与气候变化带来的风险相比，汇率风险相对不那么重要。值得注意的是，作者还发现，气候变化敞口对货币对冲的负面影响可以具体归因于气候变化风险的监管方面，而不是物理层面，这表明公司认为气候变化的监管层面更为重要。最近的研究表明，气候波动是不可预测性的最新来源之一，从而影响经济和金融市场(Barnett et al .， 2020;Bolton and Kacperczyk, 2020;恩格尔等人，2020)。作者的研究通过揭示企业对气候变化的具体敞口是企业货币对冲的重要决定因素，从而扩大了现有的知识库，从而推进了这一研究领域。
{"title":"Weathering exchange rates: estimating the effect of climate change vulnerability on foreign currency hedging using a text-based approach","authors":"Tanakorn Likitapiwat, Pornsit Jiraporn, Sirimon Treepongkaruna","doi":"10.1108/jal-06-2023-0107","DOIUrl":"https://doi.org/10.1108/jal-06-2023-0107","url":null,"abstract":"Purpose The authors investigate whether firm-specific vulnerability to climate change influences foreign exchange hedging, using a novel text-based measure of firm-level climate change exposure generated by state-of-the-art machine-learning algorithms. Design/methodology/approach The authors' empirical analysis includes firm-fixed effects, random-effects regressions, propensity score matching (PSM), entropy balancing, an instrumental-variable analysis and using an exogenous shock as a quasi-natural experiment. Findings The authors' findings suggest that greater climate change exposure brings about a significant reduction in exchange rate hedging. Companies more exposed to climate change may invest significant resources to address climate change risk, such that they have fewer resources available for currency risk management. Additionally, firms seriously coping with climate change risk may view exchange rate risk as relatively less important in comparison to the risk posed by climate change. Notably, the authors also find that the negative effect of climate change exposure on currency hedging can be specifically attributed to the regulatory aspect of climate change risk rather than the physical dimension, suggesting that companies view the regulatory dimension of climate change as more critical. Originality/value Recent studies have demonstrated that climatic fluctuations represent one of the most recent sources of unpredictability, thereby impacting the economy and financial markets (Barnett et al ., 2020; Bolton and Kacperczyk, 2020; Engle et al. , 2020). The authors' study advances this field of research by revealing that company-specific exposure to climate change serves as a significant determinant of corporate currency hedging, thus expanding the existing knowledge base.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-09-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136129518","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 : 2023-09-21DOI: 10.1108/jal-10-2022-0105
Robert Faff, David Mathuva, Mark Brosnan, Sebastian Hoffmann, Catalin Albu, Searat Ali, Micheal Axelsen, Nikki Cornwell, Adrian Gepp, Chelsea Gill, Karina Honey, Ihtisham Malik, Vishal Mehrotra, Olayinka Moses, Raluca Valeria Ratiu, David Tan, Maciej Andrzej Tuszkiewicz
Purpose The authors passively apply a researcher profile pitch (RPP) template tool in accounting and across a range of Business School disciplines. Design/methodology/approach The authors document a diversity of worked examples of the RPP. Using an auto-ethnographic research design, each showcased researcher reflects on the exercise, highlighting nuanced perspectives drawn from their experience. Collectively, these examples and associated independent narratives allow the authors to identify common themes that provide informative insights to potential users. Findings First, the RPP tool is helpful for accounting scholars to portray their essential research stream. Moreover, the tool proved universally meaningful and applicable irrespective of research discipline or research experience. Second, it offers a distinct advantage over existing popular research profile platforms, because it demands a focused “less”, that delivers a meaningful “more”. Further, the conciseness of the RPP design makes it readily amenable to iteration and dynamism. Third, the authors have identified specific situations of added value, e.g. initiating research collaborations and academic job market preparation. Practical implications The RPP tool can provide the basis for developing a scalable interactive researcher exchange platform. Originality/value The authors argue that the RPP tool potentially adds meaningful incremental value relative to existing popular platforms for gaining researcher visibility. This additional value derives from the systematic RPP format, combined with the benefit of easy familiarity and strong emphasis on succinctness. Additionally, the authors argue that the RPP adds a depth of nuanced novel information often not contained in other platforms, e.g. around the dimensions of “data” and “tools”. Further, the RPP gives the researcher a “personality”, most notably through the dimensions of “contribution” and “other considerations”.
{"title":"Pitching business school researcher profiles","authors":"Robert Faff, David Mathuva, Mark Brosnan, Sebastian Hoffmann, Catalin Albu, Searat Ali, Micheal Axelsen, Nikki Cornwell, Adrian Gepp, Chelsea Gill, Karina Honey, Ihtisham Malik, Vishal Mehrotra, Olayinka Moses, Raluca Valeria Ratiu, David Tan, Maciej Andrzej Tuszkiewicz","doi":"10.1108/jal-10-2022-0105","DOIUrl":"https://doi.org/10.1108/jal-10-2022-0105","url":null,"abstract":"Purpose The authors passively apply a researcher profile pitch (RPP) template tool in accounting and across a range of Business School disciplines. Design/methodology/approach The authors document a diversity of worked examples of the RPP. Using an auto-ethnographic research design, each showcased researcher reflects on the exercise, highlighting nuanced perspectives drawn from their experience. Collectively, these examples and associated independent narratives allow the authors to identify common themes that provide informative insights to potential users. Findings First, the RPP tool is helpful for accounting scholars to portray their essential research stream. Moreover, the tool proved universally meaningful and applicable irrespective of research discipline or research experience. Second, it offers a distinct advantage over existing popular research profile platforms, because it demands a focused “less”, that delivers a meaningful “more”. Further, the conciseness of the RPP design makes it readily amenable to iteration and dynamism. Third, the authors have identified specific situations of added value, e.g. initiating research collaborations and academic job market preparation. Practical implications The RPP tool can provide the basis for developing a scalable interactive researcher exchange platform. Originality/value The authors argue that the RPP tool potentially adds meaningful incremental value relative to existing popular platforms for gaining researcher visibility. This additional value derives from the systematic RPP format, combined with the benefit of easy familiarity and strong emphasis on succinctness. Additionally, the authors argue that the RPP adds a depth of nuanced novel information often not contained in other platforms, e.g. around the dimensions of “data” and “tools”. Further, the RPP gives the researcher a “personality”, most notably through the dimensions of “contribution” and “other considerations”.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-09-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136129338","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 : 2023-09-19DOI: 10.1108/jal-01-2023-0016
Pamela Fae Kent, Richard Kent, Michael Killey
Purpose This study aims to provide insights into US and Australian analysts' views regarding the relative importance of disclosing the direct method (DM) or indirect method (IM) statement of cash flows and forecasting firm performance. Design/methodology/approach Evidence is collected from responses to 104 surveys and 52 interviews completed by US and Australian analysts from 2017 to 2022. The survey and interview questions are developed with reference to the literature. Findings US and Australian analysts believe that the DM format provides incremental benefits compared to the IM for (1) confirming the reliability of earnings; (2) improving earnings confidence; (3) more accurate ex ante forecasts of operating cash flow and earnings; and (4) identifying opportunistic accruals manipulation. Analysts view that DM disclosure can lower firm-level cost of equity, although US interviewees more uniformly expect lower costs of equity under DM disclosure when firms yield low earnings quality. DM disclosure is also more important during unstable economic periods, as proxied by COVID-19. Originality/value Limited research currently exists regarding disclosure of the DM or IM and its impact on analysts' forecasting accuracy, earnings quality, economic uncertainty and cost of equity. Previous research has relied on archival research to examine differences between the DM and IM methods and are limited by data availability. Our findings are particularly relevant to the US market with few US firms reporting the DM format.
{"title":"Analysts’ perceptions of cash flow reporting: earnings reliability, confidence and implications for evaluating firm performance","authors":"Pamela Fae Kent, Richard Kent, Michael Killey","doi":"10.1108/jal-01-2023-0016","DOIUrl":"https://doi.org/10.1108/jal-01-2023-0016","url":null,"abstract":"Purpose This study aims to provide insights into US and Australian analysts' views regarding the relative importance of disclosing the direct method (DM) or indirect method (IM) statement of cash flows and forecasting firm performance. Design/methodology/approach Evidence is collected from responses to 104 surveys and 52 interviews completed by US and Australian analysts from 2017 to 2022. The survey and interview questions are developed with reference to the literature. Findings US and Australian analysts believe that the DM format provides incremental benefits compared to the IM for (1) confirming the reliability of earnings; (2) improving earnings confidence; (3) more accurate ex ante forecasts of operating cash flow and earnings; and (4) identifying opportunistic accruals manipulation. Analysts view that DM disclosure can lower firm-level cost of equity, although US interviewees more uniformly expect lower costs of equity under DM disclosure when firms yield low earnings quality. DM disclosure is also more important during unstable economic periods, as proxied by COVID-19. Originality/value Limited research currently exists regarding disclosure of the DM or IM and its impact on analysts' forecasting accuracy, earnings quality, economic uncertainty and cost of equity. Previous research has relied on archival research to examine differences between the DM and IM methods and are limited by data availability. Our findings are particularly relevant to the US market with few US firms reporting the DM format.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-09-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135014705","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 : 2023-09-15DOI: 10.1108/jal-03-2023-0055
Rasha Kassem, Kamil Omoteso
Purpose Using a qualitative grounded theory approach, this study explores the methods experienced external auditors use to detect fraudulent financial reporting (FFR) during standard audits. Design/methodology/approach Semi-structured interviews were conducted with 24 experienced external auditors to explore the methods they used to detect FFR successfully during standard external audits. Findings The authors find 58 methods used for FFR detection, out of which the following methods are frequently used and help in detecting more than one type of FFR: (1) specific analytical procedures, (2) positive confirmation, (3) understanding of the client's business and industry, (4) the inspection of specific documents, (5) a detailed analysis of the audit client's anti-fraud controls and (6) investigating tip-offs from suppliers, employees and customers. Research limitations/implications Based on the grounded theory approach, the authors theorise that auditors must return to the basics and focus on specific audit procedures highlighted in this study for effective fraud detection. Practical implications The study provides practical guidance, including 58 methods used in audit practice to detect FFR. This knowledge can improve auditors' skills in detecting material misstatements due to fraud. Besides, analytical procedures and positive confirmation helped external auditors in this study detect all forms of FFR, yet they are overlooked in the external audit practice. Therefore, audit firms should emphasise the significance of these audit procedures in their professional audit training programmes. Audit regulators should advise auditors to consider positive confirmation instead of negative confirmation in financial audits to increase the likelihood of FFR detection. Moreover, audit standards (ISA 240 and SAS 99) should explicitly require auditors to conduct a detailed analysis of the client's anti-fraud controls. Originality/value This is the first study to identify actual, effective methods used by external auditors in detecting FFR during the ordinary course of an audit.
{"title":"Effective methods for detecting fraudulent financial reporting: practical insights from Big 4 auditors","authors":"Rasha Kassem, Kamil Omoteso","doi":"10.1108/jal-03-2023-0055","DOIUrl":"https://doi.org/10.1108/jal-03-2023-0055","url":null,"abstract":"Purpose Using a qualitative grounded theory approach, this study explores the methods experienced external auditors use to detect fraudulent financial reporting (FFR) during standard audits. Design/methodology/approach Semi-structured interviews were conducted with 24 experienced external auditors to explore the methods they used to detect FFR successfully during standard external audits. Findings The authors find 58 methods used for FFR detection, out of which the following methods are frequently used and help in detecting more than one type of FFR: (1) specific analytical procedures, (2) positive confirmation, (3) understanding of the client's business and industry, (4) the inspection of specific documents, (5) a detailed analysis of the audit client's anti-fraud controls and (6) investigating tip-offs from suppliers, employees and customers. Research limitations/implications Based on the grounded theory approach, the authors theorise that auditors must return to the basics and focus on specific audit procedures highlighted in this study for effective fraud detection. Practical implications The study provides practical guidance, including 58 methods used in audit practice to detect FFR. This knowledge can improve auditors' skills in detecting material misstatements due to fraud. Besides, analytical procedures and positive confirmation helped external auditors in this study detect all forms of FFR, yet they are overlooked in the external audit practice. Therefore, audit firms should emphasise the significance of these audit procedures in their professional audit training programmes. Audit regulators should advise auditors to consider positive confirmation instead of negative confirmation in financial audits to increase the likelihood of FFR detection. Moreover, audit standards (ISA 240 and SAS 99) should explicitly require auditors to conduct a detailed analysis of the client's anti-fraud controls. Originality/value This is the first study to identify actual, effective methods used by external auditors in detecting FFR during the ordinary course of an audit.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135354307","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 : 2023-08-22DOI: 10.1108/jal-08-2022-0089
Zhe Li, Xinrui Liu, Bo Wang
PurposeAccounting scandals and earnings management problems at large firms such as Global Crossing and Enron have resulted in lots of wealth loss not only to corporate investors but also led tremendous damage to societies. Hence, policymakers and academic researchers have started to explore mechanisms to prevent improprieties in financial reporting and further enhance firm value. Using data from United States (US)-listed companies between 2000 and 2018, this article explores the effect of ex-military executives on earnings quality, the role of financial analysts in their interplay and the firm value implication of earnings quality driven by ex-military executives.Design/methodology/approachThis study employs a firm fixed-effects model to validate the main conjecture and adopts the weighted least squares, Granger causality analysis, instrumental variable approach, propensity score matching, entropy balancing approach and dynamic system Generalized Method of Moments (GMM) estimator to address robustness and endogeneity issues.FindingsAuthors reveal that companies run by ex-military senior executives exhibit lower levels of accruals-based and real earnings management than those without. The effect of management military leadership on constraining earnings management is more prominent for companies with low analyst coverage, suggesting that the military experience of executives could be a substitute for external monitoring. Authors also find that these ethical managers alleviate the negative impact of earnings management on firm value and that companies managed by these managers exhibit higher firm performance.Practical implicationsThis study highlights the importance of the intrinsic motivation behind the effect of military experience on senior managers' personalities and offers essential stakeholder-related implications regarding the effect of military experience. The military experience of senior managers helps facilitate the attainment of broader corporate governance and economic objectives.Originality/valueThis article adds new insights to the literature on the role of managerial military experience in decision-making processes, financial reporting outcomes and firm performance by employing the upper echelons and imprinting theoretical perspectives.
{"title":"Military-experienced senior executives, corporate earnings quality and firm value","authors":"Zhe Li, Xinrui Liu, Bo Wang","doi":"10.1108/jal-08-2022-0089","DOIUrl":"https://doi.org/10.1108/jal-08-2022-0089","url":null,"abstract":"PurposeAccounting scandals and earnings management problems at large firms such as Global Crossing and Enron have resulted in lots of wealth loss not only to corporate investors but also led tremendous damage to societies. Hence, policymakers and academic researchers have started to explore mechanisms to prevent improprieties in financial reporting and further enhance firm value. Using data from United States (US)-listed companies between 2000 and 2018, this article explores the effect of ex-military executives on earnings quality, the role of financial analysts in their interplay and the firm value implication of earnings quality driven by ex-military executives.Design/methodology/approachThis study employs a firm fixed-effects model to validate the main conjecture and adopts the weighted least squares, Granger causality analysis, instrumental variable approach, propensity score matching, entropy balancing approach and dynamic system Generalized Method of Moments (GMM) estimator to address robustness and endogeneity issues.FindingsAuthors reveal that companies run by ex-military senior executives exhibit lower levels of accruals-based and real earnings management than those without. The effect of management military leadership on constraining earnings management is more prominent for companies with low analyst coverage, suggesting that the military experience of executives could be a substitute for external monitoring. Authors also find that these ethical managers alleviate the negative impact of earnings management on firm value and that companies managed by these managers exhibit higher firm performance.Practical implicationsThis study highlights the importance of the intrinsic motivation behind the effect of military experience on senior managers' personalities and offers essential stakeholder-related implications regarding the effect of military experience. The military experience of senior managers helps facilitate the attainment of broader corporate governance and economic objectives.Originality/valueThis article adds new insights to the literature on the role of managerial military experience in decision-making processes, financial reporting outcomes and firm performance by employing the upper echelons and imprinting theoretical perspectives.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46764839","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 : 2023-08-18DOI: 10.1108/jal-03-2023-0047
F. Federsel, Rolf Uwe Fülbier, Jan Seitz
PurposeA gap between research and practice is commonly perceived throughout accounting academia. However, empirical evidence on the magnitude of this detachment remains scarce. The authors provide new evidence to the ongoing debate by introducing a novel topic-based approach to capture the research-practice gap and quantify its extent. They also explore regional differences in the research-practice gap.Design/methodology/approachThe authors apply the unsupervised machine learning approach Latent Dirichlet allocation (LDA) to compare the topical composition of 2,251 articles from six premier research, practice and bridging journals from the USA and Europe between 2009 and 2019. The authors extend the existing methods of summarizing literature and develop metrics that allow researchers to evaluate the research-practice gap. The authors conduct a plethora of additional analyses to corroborate the findings.FindingsThe results substantiate a pronounced topic-related research-practice gap in accounting literature and document its statistical significance. Moreover, the authors uncover that this gap is more pronounced in the USA than in Europe, highlighting the importance of institutional differences between academic communities.Practical implicationsThe authors objectify the debate about the extent of a research-practice gap and stimulate further discussions about explanations and consequences.Originality/valueTo the best of the authors' knowledge, this is the first paper to deploy a rigorous machine learning approach to measure a topic-based research-practice gap in the accounting literature. Additionally, the authors provide theoretical rationales for the extent and regional differences in the research-practice gap.
{"title":"Research-practice gap in accounting journals? A topic modeling approach","authors":"F. Federsel, Rolf Uwe Fülbier, Jan Seitz","doi":"10.1108/jal-03-2023-0047","DOIUrl":"https://doi.org/10.1108/jal-03-2023-0047","url":null,"abstract":"PurposeA gap between research and practice is commonly perceived throughout accounting academia. However, empirical evidence on the magnitude of this detachment remains scarce. The authors provide new evidence to the ongoing debate by introducing a novel topic-based approach to capture the research-practice gap and quantify its extent. They also explore regional differences in the research-practice gap.Design/methodology/approachThe authors apply the unsupervised machine learning approach Latent Dirichlet allocation (LDA) to compare the topical composition of 2,251 articles from six premier research, practice and bridging journals from the USA and Europe between 2009 and 2019. The authors extend the existing methods of summarizing literature and develop metrics that allow researchers to evaluate the research-practice gap. The authors conduct a plethora of additional analyses to corroborate the findings.FindingsThe results substantiate a pronounced topic-related research-practice gap in accounting literature and document its statistical significance. Moreover, the authors uncover that this gap is more pronounced in the USA than in Europe, highlighting the importance of institutional differences between academic communities.Practical implicationsThe authors objectify the debate about the extent of a research-practice gap and stimulate further discussions about explanations and consequences.Originality/valueTo the best of the authors' knowledge, this is the first paper to deploy a rigorous machine learning approach to measure a topic-based research-practice gap in the accounting literature. Additionally, the authors provide theoretical rationales for the extent and regional differences in the research-practice gap.","PeriodicalId":45666,"journal":{"name":"Journal of Accounting Literature","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-08-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47680862","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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