Accounting - Research Publications
Now showing items 1-12 of 92
Underlying risk preferences and analyst risk-taking behavior
We investigate the relationship between underlying risk preferences on analysts’ work-related decisions. Specifically, we examine whether facial width-to-height ratio (fWHR), an innate personal characteristic that has been linked to financial risk tolerance, is associated with analysts’ stock coverage decisions and the boldness of their earnings forecasts and stock recommendations. We find that high-fWHR analysts cover firms with lower earnings predictability, and issue bolder forecasts and recommendations. Our findings shed new light on the black box of analyst decision making, assisting investment practitioners in evaluating the information content produced by different types of analysts and understanding the observed dispersion in analyst forecasts.
Whistleblowing Allegations, Audit Fees, and Internal Control Deficiencies
We investigate whether audit fees and auditors’ opinions on internal controls are associated with whistleblowing allegations externally filed to regulatory agencies. We find that firms subject to whistleblowing allegations have significantly higher audit fees, regardless of the substance of these allegations, whereas an auditor is more likely to issue an adverse opinion on internal controls when the allegation is substantiated, rather than frivolous. Further, our findings suggest that auditors are involved in the auditing of whistleblowing when the allegation is still in an internal stage. We also show that firms subject to external whistleblowing allegations have a lower likelihood of restating financial statements prepared in the allegation year when greater audit effort is made in that year. Our study is among the first to demonstrate the role of auditors in the context of whistleblowing.
Political Connections and the Informativeness of Insider Trades
We analyze the trading of corporate insiders at leading financial institutions during the 2007 to 2009 financial crisis. We find strong evidence of a relation between political connections and informed trading during the period in which Troubled Asset Relief Program (TARP) funds were disbursed, and that the relation is most pronounced among corporate insiders with recent direct connections. Notably, we find evidence of abnormal trading by politically connected insiders 30 days in advance of TARP infusions, and that these trades anticipate the market reaction to the infusion. Our results suggest that political connections can facilitate opportunistic behavior by corporate insiders.
Female representation on boards and CEO performance‐induced turnover: Evidence from Russia
Abstract Research Question/Issue This study examines the influence of female board representation on CEO turnover and firm value. We focus on Russia, a patriarchal country with vast gender differences, where empathy, patience, and supportiveness are considered fundamental qualities of females. Research Findings/Insights Using a sample of public firms listed on the Moscow Exchange from 2006 to 2015, we find that female representation on boards is associated with lower CEO turnover–performance sensitivity. Further, female boards appear to add firm value, as we find that CEO retention decisions are associated with improved future firm value when the decision is made by a female board. Furthermore, we identify that female representation on boards is associated with greater diligence (i.e., hold more board meetings) after retaining their underperforming CEOs. Theoretical/Academic Implications Our findings suggest that female boards tend to develop a long‐term view of CEO performance and that such boards exercise greater diligence and supportiveness, thereby adding shareholder value. Our results also indicate that patience and collaboration of corporate boards afford opportunities to develop strategic thinking, which is particularly valuable for a firm in times of crisis. Our study contributes to the research on what qualities of a board affect its decision making and effectiveness. Our research also adds to the literature on female board representation. We study Russia, where gender differences are prominent, and female representation occurs by happenstance rather than regulatorily / intentionally. Overall, we are able to attribute our findings to female representation on boards. Practitioner/Policy Implications Our study contributes to the burgeoning research on corporate governance in Russia. Although the Russian economy has demonstrated unprecedented growth among emerging markets, research on corporate governance in Russia remains scarce. Our study is among the first efforts to understand how female boards perform in a patriarchal country. Our investigation, therefore, offers important insights for policymakers and practitioners.
Can multitasking influence professional scepticism?
Motivated by concerns about the adverse effects of multitasking in audit practice and research that highlights the effects of mindset orientation on professional scepticism, we investigate how the performance of tasks consistent with different mindset orientations affects auditors’ professional scepticism in a subsequent, unrelated task. Results show that auditors who first complete a task that requires concrete (abstract) thinking display greater professional scepticism during a subsequent, unrelated task that involves evaluating a narrow and complete set of evidence (a broad and incomplete set of evidence). We discuss the implications for professional scepticism in multitasking environments.
Gambling preferences and stock price crash risk: Evidence from China
This paper investigates whether attitudes towards gambling help explain the occurrence of stock price crashes in China. By using a province's per capita welfare lottery sales as a proxy for local gambling preference, we find that firms in regions with stronger gambling preference experience greater stock price crash risk. This result is robust to a battery of sensitivity tests after addressing possible endogeneity issues by using an instrumental variable approach and propensity score matching. Furthermore, we find that the impact of local gambling attitudes on stock price crash risk is mitigated by higher quality internal monitoring and more stringent external monitoring. Lastly, we identify two channels through which gambling preferences intensify stock price crash risk: aggressive corporate strategies and speculative accounting practices. Overall, these findings suggest that local gambling preferences influence firms’ stock price crash risk.
When one size does not fit all: Using ex post subjective ratings to provide parity in risk-adjusted compensation
Firms typically use a ‘one-size-fits-all’ (OSFA) compensation contract that specifies a common formulaic relation between performance and compensation (i.e., a performance bonus) for non-executive managers in similar jobs. However, a contract that is appropriate on average, may be suboptimal for individual managers if heterogeneity in the operating environment creates varying compensation risk. We use field data from a retail firm that introduced an OSFA bonus compensation plan for its store managers. The common bonus formula is based on a weighted sum of objective measures of performance and a subjective rating made by supervisors. The firm intended the supervisors’ discretionary subjective rating to evaluate performance on dimensions that are difficult to measure (e.g., store appearance). We test and find that supervisors give uniformly higher subjective ratings to managers whose objective measure of sales performance is measured with greater noise, and to managers who face higher performance target difficulty, the latter assessed both prior to (ex ante) and subsequent to (ex post) the evaluation period. These results obtain after controlling for manager ability and performance, and for alternative mechanisms to mitigate differences in compensation risk (e.g., salary changes, sales target changes, and bonus adjustments). The evidence suggests that supervisors use discretion in subjective ratings to provide manager-specific risk premiums for non-executive managers who are subject to an OSFA contract.
The Influence of Performance Measurement on the Processual Dynamics of Strategic Change
We draw on a five-year longitudinal dataset to investigate the influence of performance measurement in the processual dynamics of strategic change, and particularly in enacting effective strategic change. Our model examines the role of performance measurement in driving strategy-consistent operational changes and in ensuring that desired objectives of the strategic change process are achieved. We investigate these roles for performance measurement over time and empirically document lags between changes in strategic priorities, changes in operational processes and subsequent changes in firm performance. We find that performance measurement supports the implementation of strategic change by influencing the extent to which changes to operational tasks and activities are made in response to new strategic priorities, as well as influencing the quality and impact of these operational changes, as reflected in improved contemporaneous and future firm performance.
Greater Reliance on Major Customers and Auditor Going Concern Opinions
(Canadian Academic Accounting Association, 2020)
In this study we predict and provide evidence that distressed firms that rely more heavily on major customers for sales have a comparatively higher incidence of receiving going concern opinions (GCOs). Moreover, we find that the effect of increased reliance on major customers is driven by firms that are more distressed. We also theorize that variations in key characteristics of the relationship between distressed firms and their largest major customer are incrementally linked to GCOs, and present evidence consistent with this. Specifically, we find that the effect of greater reliance on major customers is driven by firms that are relatively smaller than their largest major customer. Additionally, we find that greater reliance on major customers is positively (negative) associated with GCOs when firms are in a shorter (longer) relationship with their major customer and when firms have a different auditor to (same auditor as) the largest major customer. Overall, our study indicates that supply‐chain relationships are relevant business risks associated with auditors’ going concern assessments.
Earnings Management in Domestic and Foreign IPOs in the United States: Do Home Country Institutions Matter?
(Taylor & Francis (Routledge), 2020)
Using a large sample of domestic and foreign IPOs in the US, we investigate how threats of enforcement by the Securities and Exchange Commission (SEC) and private litigation influence earnings management in IPO prospectuses. We propose that perceptions of foreign institutions may influence SEC enforcement action and private litigation. We provide evidence that enforcement and litigation threats are negatively related to the strength of legal institutions in the foreign IPO’s country of origin. We find earnings management is more pronounced in foreign IPOs from countries with strong legal institutions. We further explore whether earnings management is priced in the IPO market and find no relation between IPO proceeds and earnings management. Our results are consistent with upward earnings management as in Stein (1989), the magnitude of which is reduced when the anticipated cost of enforcement and litigation is higher. Collectively, our results cast doubt on the validity of the bonding hypothesis.
Manager ‘Growth Mindset’ and Resource Management Practices
We study the relation between a manager’s growth mindset and their use of resource management practices. Growth mindset is based on implicit person theory and is an established and measurable psychological construct. It refers to a person’s deeply held beliefs about whether, in general, people can learn, develop, and change throughout their lives or whether “who they are” is relatively fixed by initial talent endowments (termed a ‘fixed mindset’). Given the demonstrated importance of a growth mindset for educational outcomes and the emerging research studying the influence of mindset on behavior within organizations, we explore whether school principals’ mindset is associated with their resource management practices. Using survey and archival data from 257 primary and secondary school principals, we find that a growth mindset is associated with greater use of budgets to explain and discuss budget variances with key constituents and as an enabler in their managerial role. Principals with a growth mindset also engage in fundraising activities and use non-financial rewards for their teachers significantly more than fixed mindset principals. We also find that the relations between a principal’s mindset and some of these practices are different depending on the school’s performance context.