Journal of Business Finance & Accounting最新文献

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.

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.

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.

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.

We study the association between earnings-per-share (EPS)-motivated share repurchases and wealth transfer between the repurchasing firm's ongoing shareholders and selling/transacting shareholders. Compared to other repurchases, EPS-accretive repurchases are associated with greater wealth transfer from ongoing to selling shareholders, thereby reducing shareholder value for ongoing shareholders. We also find that EPS-accretive repurchases used to meet/beat analyst forecasts are associated with incrementally more wealth reduction for ongoing shareholders, compared to other EPS-accretive repurchases. These findings suggest that, compared to other repurchases, repurchases driven by EPS concerns are more likely to benefit selling shareholders at the expense of ongoing shareholders (all else equal). Using quarterly earnings announcements, we find that investors price this one-time repurchase-induced wealth reduction for ongoing shareholders. Despite this, however, investors appear to take a positive overall view of EPS-driven repurchases, suggesting that the benefits of such repurchases for ongoing shareholders outweigh the one-time wealth reduction from such repurchases. Consistent with this, we find that EPS-motivated repurchases are associated with better future operating performance.

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.

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.

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.

Investors are increasingly placing reliance on alternative performance measures (APMs). Key performance indicators (KPIs) are a subset of these APMs that illustrate industry-specific firm financial and operational performance. In this study, we investigate analysts’ demand for KPI-related information in earnings conference calls and whether managers adjust their decisions about voluntary KPI disclosure in subsequent earnings calls. Using 51 KPIs for six industries, we find that after analysts request KPI-related information, managers increase both the likelihood and intensity of their KPI disclosure in subsequent earnings conference calls. This effect is more pronounced when the firm has less relevant earnings and lower proprietary costs, and when analysts are connected to management. Analyst KPI demand leads to a higher coverage of KPIs in subsequent news and generates benefits in analyst forecast dispersion, cost of capital and stock liquidity. Our study highlights the role that analysts play in voluntary KPI disclosure when there is an absence of mandatory integrated reporting.

Using the enforcement of the General Data Protection Regulation (GDPR) as our empirical setting, we examine how stricter data privacy and data protection requirements affect shareholder wealth, firms’ investment decisions, and data breaches. Consistent with consumer privacy negatively affecting firms, we find that U.S. firms exposed to the GDPR lose 0.7%–1.1% in market value relative to unexposed firms in the week in which the regulation became enforceable. We find that the decrease in market value is partially attributable to a decrease in sales growth. GDPR-exposed firms increase their investment above that of control firms and become less likely to report a data breach post-regulation. The decrease in data breach likelihood is statistically and economically significant, resulting in up to 34 million records not being leaked, which costs between $205 million and $561 million to firms in breach mitigation expenses per year. The results of this study should be of interest to academics and regulators worldwide by examining the costs and benefits of regulating data.