Accounting - Research Publications
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ItemNo Preview AvailableXBRL and the qualitative characteristics of useful financial information(Emerald, 2017-05-02)Purpose: eXtensible Business Reporting Language (XBRL) is an internet-based interactive form of reporting language that is expected to enhance the usefulness of financial reporting (Yuan and Wang, 2009). In the UK and the USA, XBRL is mandatory, and in Australia, it is voluntarily adopted. It has been reported that in the not too distant future, XBRL will be the standard format for the preparation and exchange of business reports (Gettler, 2015). Using an experimental approach, this study assesses the usefulness of financial reports with XBRL tagged information compared to PDF format information for non-professional investors. The authors investigate participants’ perceptions of usefulness in relation to the qualitative characteristics of relevance, understandability and comparability. Design/methodology/approach: This paper uses an experimental approach featuring a profit-forecasting task to determine if participants perceive XBRL-tagged information to be more useful compared to PDF-formatted information. Findings: Results reveal that financial information presented with XBRL tagging is significantly more relevant, understandable and comparable to non-professional investors. Originality/value: The authors address a gap in the literature by examining XBRL usefulness in Australia where XBRL adoption will be mandated within the not too distant future. Currently, the voluntary adoption of XBRL by preparers and users is low, possibly, because of a lack of awareness about XBRL and its potential benefits. This study yields significant implications for the accounting regulators in creating more awareness on the benefits of using XBRL and to create an impetus for XBRL adoption.
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ItemCEO talent: A dime a dozen, or worth its weight in gold?(Wiley, 2018-06-01)Very little sophisticated research exists on the size, quality, and efficiency of the labor market for CEO talent. This paper sheds light on this labor market by considering the perspectives of directors directly responsible for hiring and firing the CEOs of the largest publicly traded corporations in the United States. We find that directors overwhelmingly believe that the CEO job is exceptionally challenging and only a handful of executives are qualified to run their company and others in their industry. This suggests that the labor market for outstanding CEO talent is significantly tighter and more competitive than governance experts might realize.
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ItemThe effect of inspections, rotations and client preferences on staffing decisions(Wiley, 2019-12-01)With increased regulatory focus on audits and concerns about whether audit regulation is achieving its stated aims, it is timely to investigate how regulator inspection of audit files and partner rotations may be affecting staffing decisions. This is an important issue, which affects all audits, as the calibre of staff allocated across engagements impacts the quality of audit work delivered. This study reports the results of an experiment where auditor participants allocate staff across two audits, where regulation anticipated (none, inspection, rotation) and a client request for the best staff (absent, present) are manipulated between-subjects. We find that auditors allocate lower calibre staff when neither an inspection nor rotation is anticipated than when either is anticipated. When an inspection is anticipated, auditors allocate staff with more knowledge and compliance skills. When a rotation is anticipated, auditors allocate staff with more people skills. A client request for the best staff only has an effect when a partner is due to be rotated, where auditors allocate staff with more people skills in response to the client request. Our findings provide greater understanding of staffing decisions, which may affect audit quality if concerns around audit inspections and partner rotations are perceived by auditors as more important than the underlying risk or complexity of an engagement when allocating staff.
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ItemLinguistic Complexity in Firm Disclosures: Obfuscation or Information?(WILEY, 2018-03)ABSTRACT Prior research generally interprets complex language in firms’ disclosures as indicative of managerial obfuscation. However, complex language can also reflect the provision of complex information; for example, informative technical disclosure. As a consequence, linguistic complexity commingles two latent components—obfuscation and information—that are related to information asymmetry in opposite directions. We develop a novel empirical approach to estimate these two latent components within the context of quarterly earnings conference calls. We validate our estimates of these two latent components by examining their relation to information asymmetry. Consistent with our predictions, we find that our estimate of the information component is negatively associated with information asymmetry while our estimate of the obfuscation component is positively associated with information asymmetry. Our findings suggest that future research on linguistic complexity can construct more powerful tests by separately examining these two latent components of linguistic complexity.
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ItemGetting to Know You: Trust Formation in New Interfirm Relationships and the Consequences for Investments in Management Control and the Collaboration(Wiley, 2017-06)Abstract Trust is often posited to substitute for management control in interfirm transactions. However, this raises questions of how trust arises in new relationships, and whether trust that is not based on prior experience transacting together is sufficient to persuade managers to forgo investments in management controls. We use an experiment to test whether two features of the early stage of an interfirm relationship influence a buyer's initial trust in a supplier and have consequences for subsequent investments in management controls and in the collaboration. These two features are the autonomy of the buyer's manager to choose a supplier (i.e., delegation of decision‐making authority) and the supplier's willingness to share information with the buyer. We find that the buyer manager's initial trust in the supplier is associated positively with both the autonomy to choose the supplier and the supplier's willingness to share information. Information content and supplier characteristics are held constant, so these results are novel and distinct from prior studies of the antecedents of trust. We find that higher initial trust is associated with reduced expenditures for management controls and increased investments in the collaboration. Thus, we conclude that delegation of decision‐making authority and supplier information‐sharing behavior in the early stages of a relationship influence the formation of initial trust, which has real consequences for investments in management control and in the collaboration.
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ItemAudit Quality for US-listed Chinese Companies(WILEY, 2017-07)PCAOB Staff Audit Practice Alert No. 6 raised concerns regarding the quality of audit reports on financial statements filed by issuers with substantially all of their operations outside of the US. An area of specific concern is the audit of companies with operations predominantly based in mainland China. Using a sample of Chinese companies listed in the US, we examine whether measures of audit quality are affected by the location of the auditor. We find some evidence of higher levels of discretionary accruals when a US‐listed Chinese firm is audited by a small US auditor.
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ItemCausal Inference in Accounting Research(WILEY, 2016-05)ABSTRACT This paper examines the approaches accounting researchers adopt to draw causal inferences using observational (or nonexperimental) data. The vast majority of accounting research papers draw causal inferences notwithstanding the well‐known difficulties in doing so. While some recent papers seek to use quasi‐experimental methods to improve causal inferences, these methods also make strong assumptions that are not always fully appreciated. We believe that accounting research would benefit from more in‐depth descriptive research, including a greater focus on the study of causal mechanisms (or causal pathways) and increased emphasis on the structural modeling of the phenomena of interest. We argue these changes offer a practical path forward for rigorous accounting research.
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ItemFinancial Reporting and Credit Ratings: On the Effects of Competition in the Rating Industry and Rating Agencies' Gatekeeper Role(Wiley, 2019-05-01)This paper studies firms' financial reporting incentives in the presence of strategic credit rating agencies and how these incentives are affected by the level of competition in the rating industry and by rating agencies' role as gatekeepers to debt markets. We develop a model featuring an entrepreneur who seeks project financing from a perfectly competitive debt market. After publicly disclosing a financial report, the entrepreneur can purchase credit ratings from rating agencies that strategically choose their rating fees and rating inflation. We derive the following core results: (1) More rating industry competition leads to stronger corporate misreporting incentives if ratings are sufficiently precise or if rating agencies assume a gatekeeper role. Under imperfect rating industry competition, (2) agencies' gatekeeper role primarily weakens firms' misreporting incentives, which then influences rating agencies' strategies, and (3) firms' misreporting and rating agencies' rating inflation can be strategic complements when agencies assume a gatekeeper role. (4) Regulatory initiatives aimed at increasing rating industry competition or at weakening rating agencies' gatekeeper role improve investment efficiency as long as corporate misreporting incentives are not significantly strengthened.
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ItemIs Financial Reporting Still Useful? Australian Evidence(Wiley, 2019-03-01)There has been recent and growing criticism of the usefulness of financial reporting for investors, particularly the annual financial statements. In response, the IASB is pursuing several projects aimed at improving the relevance of financial information. To inform the IASB’s work, we investigate, using a mixed‐method approach, the extent and nature of the use of annual financial statements by equity investors. We examine the relevance of financial reporting for equity valuation in Australia across time. We find that financial reporting (specifically, reported net income, shareholders’ equity, and operating cash flows) remains relevant for investment decisions. We further support this finding with evidence from field interviews that provide insight into how and why financial statements are used by equity investors. The field evidence also demonstrates that no one financial statement dominates in investor decision making. Given the increasing availability of more timely, forward‐looking information from alternative sources, we examine the relevance of non‐GAAP financial information and other non‐financial information for investor decision making. We find that non‐GAAP financial information (as proxied by EBIT and EBITDA) is more value relevant than statutory measures. We further find a broad range of non‐financial information is utilized by investors in making investment decisions both as a ‘screen’ and for valuation purposes. Our findings inform regulators and other stakeholders as we provide evidence of the continuing relevance of financial statements and the complementary role of non‐GAAP financial and other information. Our evidence provides a rebuttal to the recent criticism.
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ItemAn analysis of environmental corporate social responsibility(JOHN WILEY & SONS LTD, 2019-06)This article investigates corporate social responsibility (CSR) practices while taking into account their product substitutability and environmental responsibility. CSR firms, integrating environmental and social concerns into its business operations, are introduced. The effects of the firms' social concerns, environmental responsibility, and product substitutability are all captured. First, firms' social concerns improve both outputs and CSR firms' objective function value, while reducing the profit maximization firm's profits. Second, environmental responsibility has the contrary effects. Both the outputs and the objective function values of both firms decrease with their product substitutability. Finally, social concern effects on CSR firms' performance are uncertain.