Journal of Business Finance & Accounting最新文献

We examine the joint effects of litigation risk and regulation in shaping firms’ financial reporting decisions. Specifically, we investigate how these disciplining mechanisms influence firms’ disclosure of non-GAAP earnings metrics, which have been at the forefront of the SEC's regulatory concerns in recent years. We employ a plausibly exogenous shock to litigation risk based on a US circuit court ruling to explore how litigation risk influences firms’ non-GAAP earnings disclosures. We find a robust negative relation between litigation risk and both the likelihood and aggressiveness of non-GAAP reporting. However, we find a significant attenuation in the sensitivity of non-GAAP disclosure to litigation risk after the implementation of Regulation G (Reg G), despite evidence that aggressive non-GAAP reporting persists in the post-Reg G environment. Additional analyses indicate that this attenuation is actually the net result of two unique effects. First, we find that Reg G created a de facto “safe harbor” for non-GAAP reporting among firms in circuits with higher litigation risk and a “curtailment effect” among firms in the circuit with the lowest litigation risk. Overall, Reg G led to a convergence in non-GAAP reporting practices irrespective of firms’ circuit-specific litigation risk. We posit that this net attenuation of litigation risk's influence on non-GAAP reporting is likely an unintended consequence of Reg G.

We investigate the effect of affiliation with a large business group on a firm's trade credit policy while controlling for the effects of its financial health and bargaining power in the Korean setting. Group affiliation may influence trade credit finance through the internal capital market mechanism and/or the extra bargaining power mechanism. In our empirical analyses, we focus on identifying the more dominant mechanism for determining trade credit demand (TCD) and supply (TCS). First, we provide a set of empirical findings showing that a firm's affiliation with a large business group increases the firm's TCD but decreases its TCS. These findings support the extra bargaining power mechanism argument. Second, we provide another set of empirical findings that group-wise financial distress has weak positive impacts on a group affiliate's TCD and TCS. These findings support the internal capital market mechanism argument. Overall, we provide evidence that large business groups in Korea function uniquely in that the extra bargaining power mechanism greatly dominates the internal capital market mechanism when determining a group affiliate's trade credit transactions. We also provide evidence of the internal capital market mechanism functioning when an entire business group faces severe financial difficulties.

We examine whether big baths (large and non-recurring charges) affect auditors’ risk assessments and therefore result in higher audit fees. Prior studies have found that there is an asymmetric reaction from auditors on firms’ income-increasing/decreasing accruals. We argue that auditors’ response to big baths is distinguishable from other types of earnings management as big baths provide incremental information to auditors beyond other earnings manipulation indicators. Our findings show that audit fees are significantly higher for firms with big baths, compared to other firms. We also present evidence that the positive relation between big baths and audit fees is stronger for firms with weaker corporate governance and greater information asymmetry. Overall, our results suggest that auditors expand their audit effort to mitigate the greater audit risk attributable to big baths, which in turn lead to higher audit fees.

We test the effect of the establishment of a risk management committee on bank risk, bank loan performance and bank profitability. The Dodd–Frank Act of 2010 provides us with quasi-experimental variation on risk management committee establishment that facilitates identification. We identify the risk management committee effect using an instrumental variable model based on the difference-in-differences design. We find that the establishment of a risk committee has effectively reduced bank risks. In addition, risk committee member independence, more risk committee meetings and more risk committee members are all instrumental to bank risk reduction. We also find evidence that the risk reduction effect from the risk management committee is more pronounced among asset-diversified banks. Finally, the establishment of a risk committee helps with loan quality improvement and firm profitability increment, which sheds light on the bright side of stringent bank regulation.

Executive stock options are provided to risk-averse CEOs to encourage risk-taking. We show that the efficacy of such stock options is moderated by CEOs’ regulatory focus—their intrinsic motivations to avoid losses or achieve gains. We show that stock options have a negligible impact on the risk-taking behavior of CEOs who are intrinsically motivated to avoid losses or take on risks. The impact of stock options on firm risk is strongest among CEOs whose regulatory focus is moderate and whose behavior is thus more malleable. Our paper shows that CEO intrinsic risk-taking motivations have important implications for the effectiveness of extrinsic risk-taking incentives provided by stock options.

Generalist chief executive officers (CEOs) have accumulated transferrable general skills by working in multiple firms or industries. Recent decades have witnessed an increasing demand for generalist CEOs, which has resulted in a favorable job market for them. Favorable outside job opportunities reduce generalist CEOs’ career concerns and increase their agency problems and risk-taking incentives. We examine the relation between generalist CEOs and conditional conservatism. On the one hand, conditional conservatism could be positively associated with generalist CEOs because debtholders and shareholders often demand conservatism to alleviate heightened agency problems. On the other hand, a negative association could obtain because generalist CEOs can (1) create better information environments for firms, reduce information asymmetry and lessen stakeholders’ demand for conservatism and (2) have greater bargaining power and reduce the supply of conservatism. We document a positive association between generalist CEOs and conditional conservatism and show that the relationship is more pronounced in firms with a higher demand for conservatism. Our results are robust to a variety of sensitivity tests.

We examine whether the increased quantity of public information has a spillover impact on equity sales by private industry peer firms. To capture an increase in the quantity of public peer information, we use corporate spin-offs as these events cause an increase in the number of independent public entities that mandatorily disclose financial reports. Using a unique dataset on private firms’ equity sales extracted from the Securities and Exchange Commission filings pursuant to Regulation D, we find that private industry peers sell more equity following spin-offs, but the increase is not statistically significant. When we divide our spin-off sample based on the availability of segment information on subsidiaries before spin-offs, however, we find a significant an increase in private firms’ equity sales after spin-offs when parent firms did not previously disclose segment reports. Additional test results suggest that our inferences regarding private industry peers are not entirely explained by an industry-wide demand shock. Overall, we contribute to the literature by establishing an information spillover channel, incremental to the effect of common industry shocks, flowing from the public to private markets.

Research has concluded that there has been a decline in the informativeness of earnings over recent years. The reported decline has been attributed to an increasing mismatch of expenses to revenues due to the increasing expensing of investments in so-called intangible assets to the income statement. That suggests a remedy is required and, with accounting standards boards now considering intangible asset accounting, the issue is particularly pertinent. However, his paper challenges the conclusions from the research by documenting that the mismatching adds information for pricing. It does so by distinguishing higher risk investment from that booked to the balance sheet, and the market prices it as such. Further, in a seeming contradiction, the mismatching enhances matching, and empirical tests confirm. Once mismatched expenses and matched earnings are separated, there is little indication of a decline in the information content of accounting over time.

We examine the effects of equity ownership by exchange traded funds (ETFs) on corporate cash holdings. We find that firms increase their cash holdings in response to higher anticipated risks generated by ETFs. To establish a causal interpretation, we use the Russell 1000/2000 index reconstitution as an instrument for ETF ownership. We further show that shareholders place a higher value on the additional cash held by firms with higher ETF ownership. These findings are more pronounced among financially constrained firms. Overall, our results suggest that firms hold more precautionary cash to mitigate future funding needs due to higher ETF-induced risks.

This paper provides a theoretical framework and empirical support for an examination of corporate financial performance (CFP) from the perspective of an effect that is analogous to corporate social responsibility (CSR) advertising. We propose that not all companies are capable of “doing well by doing good.” Through an analytic model, we identify three key elements for determining a company's CSR advertising-analogous effect on CFP: the incremental margin (gross profit rate), the sales–CSR elasticity and sales demand in the market (market share). By re-examining the equivocal relationship between CSR and CFP based on a sample of publicly held US companies from 1991 to 2018, we document that companies in the best position to undertake CSR activities (with gross profit rates, sales–CSR elasticities and market shares above the industry medians) have a superior advertising-analogous effect to other companies. Moreover, our empirical results show that companies in the best position to undertake CSR activities face less severe agency problems when they conduct more CSR activities than other companies. Finally, in a test of whether regular advertising expenditures and CSR devotion could jointly enhance current CFP, the results show that the positive joint effect is more pronounced for companies in the best position to undertake CSR activities than for other companies.