Journal of Business Finance & Accounting最新文献

This study provides evidence that managerial loss avoidance is one cause of the zero-earnings discontinuity and that investor loss aversion is a plausible explanation for diversity in the appearance of that discontinuity. de la Rosa and Lambertsen in 2022 theoretically show that when investors are loss averse, the earnings discontinuities proposed by Guttman et al. in 2006 emerge at investor reference points and are an increasing function of loss aversion. In this study, I test these propositions using a sample drawn from 49 countries in which cross-country differences in loss aversion are measurable. Net income distributions exhibit significant discontinuity at zero earnings only among countries ranked high in loss aversion. Multivariate analysis corroborates that the firm-level likelihood of loss avoidance is also an increasing function of loss aversion. Consistent with loss aversion plausibly impacting loss avoidance through a pricing effect, the market penalty for missing the zero-earnings threshold is also an increasing function of loss aversion. Additional analyses test competing theories on whether managers’ loss aversion facilitates loss avoidance through stronger performance or opportunistic reporting. These results suggest that performance (opportunistic reporting) plays a more extensive role in loss avoidance in more loss-averse (less loss-averse) countries.

By issuing earnings forecasts for both current and future years simultaneously, managers provide the multiyear data needed for more accurate valuations and help investors sort out transitory and permanent shocks. We examine whether and how firms’ issuance of multiyear earnings forecasts mitigates equity mispricing. We find that growing, better- performing, and high litigation-risk firms, and firms that missed their guidance issue more multiyear forecasts, whereas firms facing greater forecasting difficulty issue fewer. After firms issue multiyear forecasts, mispricing tends to be corrected, especially when underpriced firms issue both long- and short-term good news forecasts and when overpriced firms issue long-term bad news forecasts. The delayed response to earnings (i.e., PEAD) decreases when firms issue multiyear forecasts. Analysts’ 12-month-ahead price forecasts become more accurate when multiyear earnings forecasts are issued, suggesting that more accurate analyst valuation is one channel through which equity mispricing is corrected. Lastly, we find that the current-period earnings–return relation becomes more linear when firms issue multiyear earnings forecasts, which suggests that investors underreact less to extreme news because the future years’ forecasts embed earnings persistence data. However, the greater linearity may reflect the higher earnings persistence of firms self-selecting to issue multiyear earnings forecasts.

Companies voluntarily adopt lead independent directors (LIDs) for the benefits they could bring to the board, such as further improving board independence, mitigating unresolved agency issues, enhancing board monitoring, and countering criticisms of corporate governance. We find that companies with LIDs have more conservative tax policies. The influence of LIDs on corporate tax policies is greater when the level of tax avoidance is more aggressive compared to their size and industry peers. We also find that investors favorably value the more conservative tax policies of companies with LIDs. Companies with LIDs have lower tax risk, pursue more conservative tax planning, such as lower UTB settlements, and are less likely to use tax shelters. These companies do not have aggressive valuation allowance releases and have fewer permanent book-tax differences. Lastly, we also find an associated non-tax benefit: CEOs in companies with LIDs do not have a higher likelihood of subsequent forced turnover for not engaging in tax avoidance. Thus, he investors’ higher valuation of more conservative corporate tax policies reduces the likelihood of subsequent forced CEO turnover.

Accounting theory suggests that equity book-to-market ratios (BTM) should not exceed one if a firm's return on equity exceeds its cost of capital or if it employs conservative accounting. Yet, BTM is above one for many firms, particularly in recession years. Recession risk is the extent to which a firm's equity returns are more sensitive to market returns during recessions than at other times, which could result in BTM above one. Thus, we address whether recession risk helps explain this apparent incongruity. We find that BTM above one generates predictable returns and that these returns (i) are concentrated in recession years; (ii) are explained by a modified version of HML, the BTM-based return explanation factor; and (iii) likely reflect risk rather than mispricing. We also find that returns of firms with BTM above one are more sensitive to expected market risk premiums during recessions. In addition, we find BTM above one reflects potentially overstated equity book values, but only in nonrecession years. In contrast, high BTM below one does not generate predictable returns and reflects potentially overstated equity book values in recession and nonrecession years. Together, our findings reveal that recession risk helps explain BTM above one, which means that BTM above one has implications for risk assessment, return prediction, and asset underimpairment identification. Our study calls into question using HML as a return explanation factor for BTM above one and using BTM as a generic measure of conservative accounting or as the key indicator of overstated asset book values.

This study examines the impact of common institutional ownership (CIO) on environmental information disclosure (EID) within China's unique institutional context. We find that CIO significantly reduces EID in portfolio firms. To address potential endogeneity issues, we employ alternative measures, fixed effects models, entropy balancing, and instrumental variable estimation. Mechanism analysis reveals that the negative impact of CIO on EID is primarily driven by their better access to and preference for private information, as well as concerns about litigation risks. Furthermore, this negative effect is less pronounced in heavily polluting industries, firms participating in mandatory disclosure pilot programs, regions with higher local government attention to environmental issues, and firms with greater QFII ownership. We also investigate the role of state-owned CIO in influencing EID and find that their negative impact is only significant in privately owned firms, not in state-owned enterprises (SOEs). Additionally, the influence of state-owned CIO weakens over time as government attention to corporate environmental information intensifies. These findings highlight the positive role of regulatory and governmental efforts in promoting EID.

We investigate the association between rollover risk, measured as long-term debt maturing in the current year deflated by total assets, and tax avoidance, measured as the cash effective tax rate. Consistent with cash being particularly valuable for firms with high-rollover risk, we find that firms pay less in cash taxes when the amount of long-term debt becoming due is significant relative to total assets. This finding contrasts with that of Alexander and Pisa, who scale debt due in the current year by total long-term debt. We also find that the positive association between rollover risk and tax avoidance strengthens for firms with more severe financial constraints. Firms with high-rollover risk appear to use tax-related cash for debt repayment to reduce their refinancing needs. Moreover, rollover risk firms engaging in tax avoidance benefit from a lower probability of future firm failure. Additional tests corroborate our main finding in that the positive relation between rollover risk and tax avoidance is stronger for firms with greater information asymmetry or default risk and weaker for firms with greater financial flexibility. Finally, we find that firms avoid cash taxes preemptively in preparation for long-term debt maturing beyond 1 year. Our results highlight the interdependence of corporate financial and tax policy decisions.

We use satellite night light data to estimate the extent of gross domestic product (GDP) manipulation in China and investigate the impact of such manipulation on local firms. Firms located in provinces with higher levels of GDP manipulation experience a higher cost of equity, lower investment efficiency, and weaker profit growth. Using a difference-in-difference test, we show that the cost of equity decreases and firm performance improves following unexpected turnovers of top government officials, which significantly reduces GDP manipulation. Additionally, our findings suggest that local firms may collude with government officials in costly data manipulation. We show that firms in provinces with higher levels of GDP manipulation receive more government subsidies, and that firms with lower pay–performance sensitivity (PPS) are more likely to collude.