We use machine learning methods to predict firm‐specific stock price crashes and evaluate the out‐of‐sample prediction performance of various methods, compared to traditional regression approaches. Using financial and textual data from 10‐K filings, our results show that a logistic regression with financial data inputs performs reasonably well and sometimes outperforms newer classifiers such as random forests and neural networks. However, we find that a stochastic gradient boosting model systematically outperforms the logistic regression, and forecasts using suitable combinations of financial and textual data inputs yield significantly higher prediction performance. Overall, the evidence suggests that machine learning methods can help predict stock price crashes.
{"title":"Out‐of‐sample predictability of firm‐specific stock price crashes: A machine learning approach","authors":"Devrimi Kaya, Doron Reichmann, Milan Reichmann","doi":"10.1111/jbfa.12831","DOIUrl":"https://doi.org/10.1111/jbfa.12831","url":null,"abstract":"We use machine learning methods to predict firm‐specific stock price crashes and evaluate the out‐of‐sample prediction performance of various methods, compared to traditional regression approaches. Using financial and textual data from 10‐K filings, our results show that a logistic regression with financial data inputs performs reasonably well and sometimes outperforms newer classifiers such as random forests and neural networks. However, we find that a stochastic gradient boosting model systematically outperforms the logistic regression, and forecasts using suitable combinations of financial and textual data inputs yield significantly higher prediction performance. Overall, the evidence suggests that machine learning methods can help predict stock price crashes.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"43 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142260780","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate whether heterogeneity in pay‐performance sensitivity (PPS) among top management team (TMT) members affects management earnings forecasts (MEFs). Extant studies find that dispersion of PPS among TMT members results in a lack of coordination among TMT members and has a significant consequence for the firm. Since the issuance of forecasts is jointly determined by TMT managers, we argue that heterogeneity in PPS among TMT members will affect forecast issuance. We find that firms are less likely to issue MEFs when PPS dispersion among TMT members is high. Moreover, the forecasts of these firms are less optimistic. Finally, our analyses reveal that the effect of dispersion of PPS among TMT members on MEFs is more pronounced when the difference in PPS between the chief executive officer and other executives is high or team tenure is short. Overall, our results suggest that heterogeneity in PPS among TMT members affects a firm's voluntary disclosures.
{"title":"Top management team incentive dispersion and management earnings forecasts","authors":"Rachana Kalelkar, Yuan Shi, Hongkang Xu","doi":"10.1111/jbfa.12833","DOIUrl":"https://doi.org/10.1111/jbfa.12833","url":null,"abstract":"We investigate whether heterogeneity in pay‐performance sensitivity (PPS) among top management team (TMT) members affects management earnings forecasts (MEFs). Extant studies find that dispersion of PPS among TMT members results in a lack of coordination among TMT members and has a significant consequence for the firm. Since the issuance of forecasts is jointly determined by TMT managers, we argue that heterogeneity in PPS among TMT members will affect forecast issuance. We find that firms are less likely to issue MEFs when PPS dispersion among TMT members is high. Moreover, the forecasts of these firms are less optimistic. Finally, our analyses reveal that the effect of dispersion of PPS among TMT members on MEFs is more pronounced when the difference in PPS between the chief executive officer and other executives is high or team tenure is short. Overall, our results suggest that heterogeneity in PPS among TMT members affects a firm's voluntary disclosures.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"15 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-09-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142224274","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Investment‐related social media platforms are transforming the traditional intermediary landscape by rapidly disseminating user‐empowered opinions and recommendations, raising concerns about the credibility of information on such platforms. We examine the differential content verifiability of SeekingAlpha.com articles with sell recommendations (short articles) versus articles with buy recommendations (long articles). We find that short articles contain greater verifiable content than long articles, and verifiable content in short articles generates greater market reactions and better mitigates return reversals than that in long articles. This asymmetry contrasts prior research evidence that greater content verifiability accompanies traditional sell‐side analyst reports with buy recommendations. Our results are robust to various confounding factors, including author effects, among others. Our results become more pronounced in the presence of greater retail ownership. Taken together, our results provide new evidence on investors’ assessment of the credibility of information on social media platforms.
{"title":"Verifiable content in social media stock‐analysis articles: The long and short of it","authors":"Lei Chen, Shuping Chen, Tian Gao, Wuyang Zhao","doi":"10.1111/jbfa.12834","DOIUrl":"https://doi.org/10.1111/jbfa.12834","url":null,"abstract":"Investment‐related social media platforms are transforming the traditional intermediary landscape by rapidly disseminating user‐empowered opinions and recommendations, raising concerns about the credibility of information on such platforms. We examine the differential content verifiability of <jats:italic>SeekingAlpha.com</jats:italic> articles with sell recommendations (short articles) versus articles with buy recommendations (long articles). We find that short articles contain greater verifiable content than long articles, and verifiable content in short articles generates greater market reactions and better mitigates return reversals than that in long articles. This asymmetry contrasts prior research evidence that greater content verifiability accompanies traditional sell‐side analyst reports with buy recommendations. Our results are robust to various confounding factors, including author effects, among others. Our results become more pronounced in the presence of greater retail ownership. Taken together, our results provide new evidence on investors’ assessment of the credibility of information on social media platforms.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"11 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-09-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142185197","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Information economics predicts that a principal will prefer a finer performance evaluation system to a coarser one. Nevertheless, coarse performance evaluation is often used in practice. To explain this seeming contradiction, I construct a model of a principal and envious agents. I show that a coarse evaluation system can do as well as a finer one if agents are sufficiently envious, that is, if they incur large utility loss when they are paid less than their peers. This result supports the use of coarse performance evaluation that aggregates signals of good performance, in the form of fixed wages or inflated ratings.
{"title":"Coarse performance evaluation for envious agents","authors":"Eiji Ohashi","doi":"10.1111/jbfa.12832","DOIUrl":"https://doi.org/10.1111/jbfa.12832","url":null,"abstract":"Information economics predicts that a principal will prefer a finer performance evaluation system to a coarser one. Nevertheless, coarse performance evaluation is often used in practice. To explain this seeming contradiction, I construct a model of a principal and envious agents. I show that a coarse evaluation system can do as well as a finer one if agents are sufficiently envious, that is, if they incur large utility loss when they are paid less than their peers. This result supports the use of coarse performance evaluation that aggregates signals of good performance, in the form of fixed wages or inflated ratings.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"138 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-09-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142185199","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Nandu J. Nagarajan, Sridhar Panchapakesan Nerur, Bin Srinidhi, Xiaoxiao Yu
We examine how expositional quality (measured by discretionary readability and lexical focus—new measures) in the textual content of prospectuses preceding seasoned equity offerings affects the gross spread after controlling for the quality of numerical information. We measure the gross spread as the difference between the offer price and the underwriter's purchase price per share, expressed as a percentage of the offer price. We find that the gross spread is higher in firms whose prospectuses have lower discretionary readability, while the discretionary readability of the preceding 10‐K has little effect. Further, when the prospectus readability is lower than that of the preceding 10‐K, the gross spread increases more than it decreases when readability is higher by the same amount. Low focus (lexical focus) in the Use of Proceeds section of the prospectus results in a higher gross spread. However, low prospectus focus is associated with higher gross spread only in the bad‐news subsample. Overall, our results show that the gross spread is incrementally associated with textual obfuscation over the numerical quality of earnings. Moreover, our findings indicate that investors get distinctly different and useful information from different measures of textual quality in different parts of the text. Finally, we present novel insights showing that investors respond differently to different measures of textual quality, for example, readability and lexical focus, depending on whether there is good or bad news.
{"title":"Does the textual quality of prospectuses affect gross spread in seasoned equity offerings?","authors":"Nandu J. Nagarajan, Sridhar Panchapakesan Nerur, Bin Srinidhi, Xiaoxiao Yu","doi":"10.1111/jbfa.12824","DOIUrl":"https://doi.org/10.1111/jbfa.12824","url":null,"abstract":"We examine how expositional quality (measured by <jats:italic>discretionary readability</jats:italic> and <jats:italic>lexical focus</jats:italic>—new measures) in the textual content of prospectuses preceding seasoned equity offerings affects the gross spread after controlling for the quality of numerical information. We measure the gross spread as the difference between the offer price and the underwriter's purchase price per share, expressed as a percentage of the offer price. We find that the gross spread is higher in firms whose prospectuses have lower discretionary readability, while the discretionary readability of the preceding 10‐K has little effect. Further, when the prospectus readability is lower than that of the preceding 10‐K, the gross spread increases more than it decreases when readability is higher by the same amount. Low focus (lexical focus) in the Use of Proceeds section of the prospectus results in a higher gross spread. However, low prospectus focus is associated with higher gross spread only in the bad‐news subsample. Overall, our results show that the gross spread is incrementally associated with textual obfuscation over the numerical quality of earnings. Moreover, our findings indicate that investors get distinctly different and useful information from different measures of textual quality in different parts of the text. Finally, we present novel insights showing that investors respond differently to different measures of textual quality, for example, readability and lexical focus, depending on whether there is good or bad news.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"8 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-08-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142185314","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Accounting standards require firms to write down their inventory when its market value (or net realizable value) drops below cost. Recognizing inventory write‐downs decreases gross margins and increases scrutiny of managers’ inventory management practices. Further, it is difficult for market participants to assess inventory balances. Therefore, managers often delay recognizing inventory losses. Compared with other analysts, analysts who issue disaggregated gross margin (GM) forecasts evaluate a firm's inventories more closely, which should motivate managers to recognize expected inventory losses. Consistent with this prediction, managers’ likelihood of recognizing an expected inventory loss increases as more analysts provide GM forecasts. However, the number of analysts issuing standalone earnings per share (EPS) or EPS and other disaggregated forecasts is not associated with inventory loss recognition. We address endogeneity concerns by documenting that firms are less likely to recognize an expected inventory loss after exogenous factors cause analysts to stop issuing GM forecasts for the firm. We contribute significantly to the literature by showing that analysts' GM forecasts are closely associated with managers’ timely inventory loss recognition. This insight bridges the gap between anecdotal evidence, which suggests analysts assess inventory carefully, and scholarly research indicating that analysts' forecasts may not fully capture the effects of inventory changes. Our findings suggest that managers act as if inventory management practices are more strictly monitored only when analysts issue GM forecasts.
{"title":"Do analysts’ gross margin forecasts influence manager's decisions to recognize inventory losses?","authors":"Nusrat Jahan, Padmakumar Sivadasan","doi":"10.1111/jbfa.12828","DOIUrl":"https://doi.org/10.1111/jbfa.12828","url":null,"abstract":"Accounting standards require firms to write down their inventory when its market value (or net realizable value) drops below cost. Recognizing inventory write‐downs decreases gross margins and increases scrutiny of managers’ inventory management practices. Further, it is difficult for market participants to assess inventory balances. Therefore, managers often delay recognizing inventory losses. Compared with other analysts, analysts who issue disaggregated gross margin (GM) forecasts evaluate a firm's inventories more closely, which should motivate managers to recognize expected inventory losses. Consistent with this prediction, managers’ likelihood of recognizing an expected inventory loss increases as more analysts provide GM forecasts. However, the number of analysts issuing standalone earnings per share (EPS) or EPS and other disaggregated forecasts is not associated with inventory loss recognition. We address endogeneity concerns by documenting that firms are less likely to recognize an expected inventory loss after exogenous factors cause analysts to stop issuing GM forecasts for the firm. We contribute significantly to the literature by showing that analysts' GM forecasts are closely associated with managers’ timely inventory loss recognition. This insight bridges the gap between anecdotal evidence, which suggests analysts assess inventory carefully, and scholarly research indicating that analysts' forecasts may not fully capture the effects of inventory changes. Our findings suggest that managers act as if inventory management practices are more strictly monitored only when analysts issue GM forecasts.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"32 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142185198","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the real effects of targets’ acquisitions on their peers through investigating the real earnings management (REM) behavior of the targets’ rivals following the mergers and acquisitions (M&As). Using a difference‐in‐differences design, we find that, on average, rivals of acquisition targets would engage in more REM after M&A announcements. We further find that within rivals of the target, the post‐announcement increase in REM is more pronounced when: (1) the rival is relatively less similar to the target; (2) the rival serves as the targets’ rival more than once within a year; (3) the target earns a higher bidding premium or positive abnormal returns; or (4) the rival has the higher institutional ownership or more analyst following. Additional analyses reveal that rivals engaging in more REM would have a higher likelihood of being acquired in subsequent years and would be sold at higher premiums. We also find that targets’ rivals boost their short‐term performance by engaging in REM activities at the cost of their long‐term performance. Our results are robust to various robustness checks. Overall, our evidence suggests that an acquisition activity could have a real effect on the target's industry, i.e., the effect on the accounting choices of the whole industry.
本文通过调查并购（M&As）后目标公司竞争对手的实际收益管理（REM）行为，研究目标公司并购对同行的实际影响。利用差异设计，我们发现，平均而言，并购目标的竞争对手会在并购公告发布后进行更多的实际收益管理。我们进一步发现，在目标公司的竞争对手内部，当出现以下情况时，并购公告发布后 REM 的增加会更加明显：(1) 竞争对手与目标公司的相似度相对较低；(2) 竞争对手在一年内不止一次成为目标公司的竞争对手；(3) 目标公司获得了更高的竞购溢价或正的异常回报；或 (4) 竞争对手拥有更高的机构所有权或更多的分析师关注。其他分析表明，参与更多 REM 的竞争对手在随后几年被收购的可能性更高，而且会以更高的溢价出售。我们还发现，目标公司的竞争对手通过参与 REM 活动提高了短期业绩，但却牺牲了长期业绩。我们的结果经得起各种稳健性检验。总体而言，我们的证据表明，收购活动会对目标公司所在行业产生实际影响，即对整个行业的会计选择产生影响。
{"title":"The real effects of M&As on targets’ peers","authors":"Linda Du, Wen Li, Jianfei Sun","doi":"10.1111/jbfa.12825","DOIUrl":"https://doi.org/10.1111/jbfa.12825","url":null,"abstract":"This paper studies the real effects of targets’ acquisitions on their peers through investigating the real earnings management (REM) behavior of the targets’ rivals following the mergers and acquisitions (M&As). Using a difference‐in‐differences design, we find that, on average, rivals of acquisition targets would engage in more REM after M&A announcements. We further find that within rivals of the target, the post‐announcement increase in REM is more pronounced when: (1) the rival is relatively less similar to the target; (2) the rival serves as the targets’ rival more than once within a year; (3) the target earns a higher bidding premium or positive abnormal returns; or (4) the rival has the higher institutional ownership or more analyst following. Additional analyses reveal that rivals engaging in more REM would have a higher likelihood of being acquired in subsequent years and would be sold at higher premiums. We also find that targets’ rivals boost their short‐term performance by engaging in REM activities at the cost of their long‐term performance. Our results are robust to various robustness checks. Overall, our evidence suggests that an acquisition activity could have a real effect on the target's industry, i.e., the effect on the accounting choices of the whole industry.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"30 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-08-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142185200","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine how product market competition affects firms’ disclosure content. Theory suggests that competition leads firms to strategically disclose to avoid proprietary costs; however, the empirical evidence has been mixed. We investigate whether firms manage disclosure content to protect proprietary information, a disclosure strategy under‐researched in the literature. We use a topic‐modeling technique to extract and compare thematic topics that industry peers disclose in management discussion and analysis (MD&A) in 10‐K filings. Exploiting large reductions in US import tariff rates as an exogenous shock to product market competition, we find that firms differentiate disclosure topics in response. This effect is more pronounced when disclosures incur higher proprietary costs, as theoretically predicted, and stronger for firms with greater product similarity to industry peers and those with longer MD&A disclosure texts.
{"title":"Product market competition and disclosure content differentiation: A topic modeling analysis","authors":"Yongqiang Chu, Bo Huang, Haitong Li, Junqi Liu","doi":"10.1111/jbfa.12827","DOIUrl":"https://doi.org/10.1111/jbfa.12827","url":null,"abstract":"We examine how product market competition affects firms’ disclosure content. Theory suggests that competition leads firms to strategically disclose to avoid proprietary costs; however, the empirical evidence has been mixed. We investigate whether firms manage disclosure content to protect proprietary information, a disclosure strategy under‐researched in the literature. We use a topic‐modeling technique to extract and compare thematic topics that industry peers disclose in management discussion and analysis (MD&A) in 10‐K filings. Exploiting large reductions in US import tariff rates as an exogenous shock to product market competition, we find that firms differentiate disclosure topics in response. This effect is more pronounced when disclosures incur higher proprietary costs, as theoretically predicted, and stronger for firms with greater product similarity to industry peers and those with longer MD&A disclosure texts.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"37 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-08-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141934207","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Muhammad Jahangir Ali, Balasingham Balachandran, Huu Nhan Duong, Premkanth Puwanenthiren, Michael Theobald
We examine the impact of options trading on audit pricing for a sample of US firms over the period from 2004 to 2021. We find that options trading is significantly and negatively related to audit fees, indicating that firms characterized by higher options trading incur lower audit fees. Auditors spend a lower number of days auditing firms with higher options trading and firms with higher options trading experience lower probabilities of lawsuits, and misstatements, and lower likelihood of material weaknesses and auditor opinion on internal controls. The impact of options trading on audit fees is stronger when the auditor is located further away from the audited firm, for firms with non‐specialized auditors, higher information asymmetry problems, poorer earnings and lower governance quality. Overall, our findings underscore the significance of options trading in improving a firm's information environment and reducing litigation risk, resulting in lower audit fees.
{"title":"Does options trading affect audit pricing?","authors":"Muhammad Jahangir Ali, Balasingham Balachandran, Huu Nhan Duong, Premkanth Puwanenthiren, Michael Theobald","doi":"10.1111/jbfa.12821","DOIUrl":"https://doi.org/10.1111/jbfa.12821","url":null,"abstract":"We examine the impact of options trading on audit pricing for a sample of US firms over the period from 2004 to 2021. We find that options trading is significantly and negatively related to audit fees, indicating that firms characterized by higher options trading incur lower audit fees. Auditors spend a lower number of days auditing firms with higher options trading and firms with higher options trading experience lower probabilities of lawsuits, and misstatements, and lower likelihood of material weaknesses and auditor opinion on internal controls. The impact of options trading on audit fees is stronger when the auditor is located further away from the audited firm, for firms with non‐specialized auditors, higher information asymmetry problems, poorer earnings and lower governance quality. Overall, our findings underscore the significance of options trading in improving a firm's information environment and reducing litigation risk, resulting in lower audit fees.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"7 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-08-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141880417","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Auditing theory predicts fee discounting when multiple potential successor auditors bid for the client. However, the empirical evidence on this issue varies as more recent research attributes prior evidence of fee discounting to measurement errors related to audit fees’ partial‐year reporting. We argue that the mixed results of previous literature are partially attributable to a failure to identify competitive auditor changes. We use U.S. Securities and Exchange Commission (SEC) disclosures of audit firm changes to identify cases with multiple potential successor auditors, which suggests more competition for the client. We compare each disclosing firm's audit fees between the first year following the auditor change year and all other years of the same disclosing firm. We find that successor audit firms discount audit fees in the first full year following the auditor change, compared to all other years, within the same disclosing firm. The fee discounting continues until at least the second full year of the engagement. Results also suggest Big N successor firms discount fees to win new engagements from smaller successor audit firms. Audit fee discounting occurs when companies dismiss their audit firm rather than when audit firms resign. Finally, we find no evidence of impaired audit quality for the 2 years following the auditor change.
{"title":"Do audit firms discount initial full‐year audit engagements with multiple potential successor auditors?","authors":"Thomas C. Omer, Ming (Mike) Yuan","doi":"10.1111/jbfa.12823","DOIUrl":"https://doi.org/10.1111/jbfa.12823","url":null,"abstract":"Auditing theory predicts fee discounting when multiple potential successor auditors bid for the client. However, the empirical evidence on this issue varies as more recent research attributes prior evidence of fee discounting to measurement errors related to audit fees’ partial‐year reporting. We argue that the mixed results of previous literature are partially attributable to a failure to identify competitive auditor changes. We use U.S. Securities and Exchange Commission (SEC) disclosures of audit firm changes to identify cases with multiple potential successor auditors, which suggests more competition for the client. We compare each disclosing firm's audit fees between the first year following the auditor change year and all other years of the same disclosing firm. We find that successor audit firms discount audit fees in the first full year following the auditor change, compared to all other years, within the same disclosing firm. The fee discounting continues until at least the second full year of the engagement. Results also suggest Big N successor firms discount fees to win new engagements from smaller successor audit firms. Audit fee discounting occurs when companies dismiss their audit firm rather than when audit firms resign. Finally, we find no evidence of impaired audit quality for the 2 years following the auditor change.","PeriodicalId":48106,"journal":{"name":"Journal of Business Finance & Accounting","volume":"18 1","pages":""},"PeriodicalIF":2.9,"publicationDate":"2024-08-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"141886736","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"管理学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
京公网安备 11010802042870号
京ICP备2023020795号-1
扫码关注我们
求助内容：
应助结果提醒方式：