1,670 research outputs found
The Effect of CEO IT Expertise on the Information Environment: Evidence from Management Earnings Forecasts
Firms depend on information technology to provide high quality internal information, but prior research suggests that IT is underutilized (Venkatesh and Bala 2008). Therefore, using a sample of firms with equivalent levels of technology in their information systems, I investigate whether firms that employ CEOs with IT expertise make forecasts that are more accurate. I argue that CEOs with IT expertise are more likely to encourage the utilization of IT in making earnings forecasts, thus increasing the accuracy of the forecasts. This argument is supported by prior research that suggests that people are more likely to utilize technology if they have more experience with IT (Venkatesh et al. 2012). This research suggests that executives with IT experience are more likely to utilize IT because they perceive it as easy to use. Overall, I find that CEOs with IT expertise make forecasts that are more accurate. In additional tests, I also find that CEOs with IT expertise do not manage earnings to maintain accuracy. Finally, I find that analysts are more likely to rely on information provided by CEOs with IT expertise. Additionally, analysts benefit from the high quality information provided by CEOs with IT expertise because analysts that revise their forecasts following a forecast issued by a CEO with IT expertise make forecasts that are more accurate
Strategic Silence, Insider Selling and Litigation Risk
Prior work finds that managers beneficially time their purchases, but not sales, prior to forecasts. Focusing on if (as opposed to when) a forecast is given, we link insider selling to silence in advance of earnings disappointments. This raises the question of whether the absence of incriminating trading drives reductions in litigation risk potentially attributed to warnings. We find that the absence of a warning combined with the presence of selling exacerbates the consequences associated with the individual behaviors. Yet, selling prior to a warning typically does not offset all of the warning׳s benefit. In so doing, we supply the first robust evidence of a litigation benefit associated with warning
The influence of reporting standards and inter-firm relationships on financial reporting
Accounting information is vital for many aspects in business and numerous parties rely on reported information for a variety of purposes. Understanding how factors in a firm’s environment, such as standard setting, inter-firm relationships, managerial incentives and capital providers, influence the quality of this information is therefore crucial. This thesis focuses on two such factors, namely international financial reporting standards (IFRS) and inter-firm relationships. Chapter 2 examines the stock market reaction to 15 events relating to IFRS adoption in the United States. The goal is to assess whether investors perceive the switch to IFRS as beneficial or costly. The findings show that investors’ reaction to IFRS adoption is more positive in cases where IFRS is expected to lead to convergence benefits and that the effect of IFRS depends on a firm’s relationship with and similarity to other firms in its industry. Chapter 3 studies whether changes within IFRS, namely adopting the heavily debated new segment reporting standard IFRS 8, led to increases in segment reporting quality. The results of this study demonstrate predictable cross-sectional heterogeneity in the effects of IFRS 8 and that IFRS 8 does not lead to a general improvement in segment disclosures for all firms. However, we also do not find that firms that improve their segment disclosures experience positive capital market effects such as greater liquidity. Overall, these findings call into question whether introducing IFRS 8 improved segment disclosures. Chapter 4 focuses on inter-firm relationships and studies whether characteristics of a firm’s relationships with suppliers influence the disclosure of forward-looking information. Uncertainty about a buyers’ future performance can limit a supplier’s willingness to invest in relationship-specific assets. In such situations, a buyer may use disclosures to reliably inform suppliers about its prospects and increase a supplier’s willingness to invest. I find a positive association between the importance of relationship-specific investments in supplier industries and the likelihood a buyer discloses forward-looking information. I also find that this relationship is more pronounced when suppliers are more powerful and the cost of disclosing this information is low. Overall, the findings suggest that financial reporting can play an important role in inter-firm relationships
Firm and Country Determinants of the Quality of Financial Information
This thesis is made of three chapters which contribute to the international accounting literature.
The first chapter investigates the effect of the legal enforcement on the use of income increasing earnings management (EAR) and downward expectation management (EXP) to meet or beat analyst earnings forecasts. Using a sample of 4,934 firms from fourteen European countries, we document that the strength of the legal enforcement is negatively associated with EAR and positively associated with EXP. We provide evidence of a substitution effect between EAR and EXP only in the presence of strong legal enforcement, while they are complements when the legal enforcement is weak. We show that the capital market rewards meeting/beating firms, but it penalizes the concurrent use of EAR and EXP and this penalty is positively associated with the strength of the legal enforcement only for EAR. Our results show that legal enforcement has a significant role in the choice between EAR and EXP and that a change in the strength of legal enforcement drives how firms operate to meet or beat analyst forecasts. The contribution of this chapter is two-fold. This is the first study that examines how cross-country variation in the level of enforcement affects the interaction between EAR and EXP to meet/beat analyst forecasts. Second, this chapter is the first study that explores whether the capital market’s reaction to an earnings surprise is related to the strength of the legal enforcement.
The second chapter examines how firm-level governance and country-level enforcement interplay in affecting IFRS mandatory adoption consequences on financial reporting quality. We operationalize financial reporting quality using earnings informativeness, accruals management, and real earnings management. We use a treatment sample of 3,476 firm-year observations from 14 European countries that mandatorily adopt IFRS in 2005 and 29,596 firm-year observations from 11 non-IFRS adoption countries. To account for the confounding effects of general trends in financial reporting quality or concurrent events unrelated to IFRS adoption, we estimate annual panel regressions for IFRS adopter firms and non-IFRS adopter firms using industry-country and separate year fixed effects for the treatment and control sample. Three key findings emerge from our analyses. First, IFRS adoption is, on average, associated with an increase in financial reporting quality. However, there is considerable heterogeneity in financial reporting quality changes, suggesting that IFRS mandatory adoption is not sufficient, per se, to change firms’ reporting practices. Second, in countries characterized by weak enforcement, strong board-level monitoring appears to enhance financial reporting quality, thus suggesting a substitutive effect between firm- and country-level governance. Third, in countries characterized by strong enforcement, firms with strong board-level monitoring exhibit a higher level of financial reporting quality than firms with weak board-level monitoring, thus suggesting that country- and firm-level governance are complementary. The chapter contributes to the literature in two ways. First, this is the first study that examines whether board-based monitoring mechanisms shape IFRS mandatory adoption consequences on financial reporting quality. Second, the chapter contributes to the growing literature on the interplay between firm-level governance and country institutional characteristics. The findings point toward a substitution effects between firm-level monitoring mechanisms and country-level enforcement mechanisms when the legal system is lax, while board monitoring and legal enforcement complement each other when the legal system gets stricter.
The third chapter examines whether informational environment benefits following cross-listing in the U.S. vanish when the financial reporting process suffers by internal control deficiencies according to the Section 302 of the Sarbanes-Oxley Act (SOX, hereafter). Previous literature documents an increase in the quality of the firm information environment following cross-listing in the U.S. and motivates this result with the bonding effect. This study disputes the idea that the cross-listing per se enhances the quality of firms’ information environment. We challenge this idea considering whether the quality of the information environment for cross-listed firms depends on an effective commitment to achieve higher levels of corporate transparency. As research setting, we use Section 302 of the SOX that requires to disclose any discovered internal control deficiency on internal controls over financial reporting. To account for the impact of general trends or concurrent events unrelated to SOX302 disclosures on information environment of cross-listed firms, we employ as benchmark group all firms listed in their home market but not in the U.S. In addition, we employ propensity-score matching models to take into account differences in firm-characteristics between cross-listed and non-cross-listed firms while estimating SOX302 disclosure treatment effect. Our analyses encompasses both changes and cross-sectional association tests. We show that cross-listed firms disclosing internal control deficiencies do not have a better information environment than their home-country peers, but only after the first disclosure on internal control deficiencies according to SOX302. Second, we show that cross-listed firms experience an improvement in the information environment if they remediate to previously disclosed internal control deficiencies. Finally, we show that these results hold only for firms domiciled in countries with weak legal institutions, while cross-listed firms from countries with strong legal institutions do not experience a significant change in the quality of the information environment once they became cross-listed, irrespective from the disclosure of an internal control deficiency. The study contributes to the literature on cross-listing in two ways. First, we show the existence of substantial heterogeneity in cross-listing effects on firm information environment, driven by the adoption of adequate internal controls over financial reporting. Second, we add to the literature on the effects of the SOX. Literature shows that cross-listed firms experience a decrease in the level of opaqueness after the adoption of the SOX. We add to this literature the evidence that the decline in the level of opaqueness depends on cross-sectional differences in corporate transparency and hence it is not homogenous across all firms
Cash flow versus accrual expectations management to meet or beat analyst cash flow and earnings forecasts
Prior literature shows firms manage analysts’ earnings expectations downward to avoid negative earnings surprises. Recent studies find an increasing number of analysts forecast both cash flow and earnings, providing two explicit targets managers seek to achieve. Nonetheless, the literature is unclear on whether firms manage analysts’ operating cash flow and/or accrual components of expected earnings to meet or beat analysts’ cash flow and earnings forecasts, and which firm characteristics motivate firms to engage in the expectations management strategies. This study decomposes earnings expectations management into its two mutually exclusive and collectively exhaustive parts: cash flow expectations management and accrual expectations management, and examines whether cross-sectional differences in the likelihood of firms engaging in downward cash flow or accrual expectations management depend on firm-specific characteristics. Overall, I find firms with lower cash flow growth and firms that miss prior-period cash flow forecasts engage in downward cash flow expectations management, and these firms engage in downward cash flow expectations management over and above downward accrual expectations management. I also find firms with better financial health, larger market shares, lower institutional ownership and less bloated balance sheets are likely to walk down both analysts’ cash flow and accrual forecasts
Earnings Management and Long-Run Stock Underperformance of Private Placements
The study investigates whether private placement issuers manipulate their earnings around the time of issuance and the effect of earnings management on the long-run stock performance. We find that managers of U.S. private placement issuers tend to engage in income-increasing earnings management in the year prior to the issuance of private placements. We further speculate that earnings management serves as a likely source of investor over-optimism at the time of private placements. To support this speculation, we find evidence suggesting that the income-increasing accounting accruals made at the time of private placements predict the post-issue long-term stock underperformance. The study contributes to the large body of literature on earnings manipulation around the time of securities issuance
Look at Me Now: What Attracts U.S. Shareholders?
This paper investigates the underlying determinants of home bias using a comprehensive data set on U.S. investors' aggregate holdings of every foreign stock. Among those foreign stocks that are not listed on U.S. exchanges, which account for more than 96 percent of our usable data sample, we find that U.S. investors prefer firms with characteristics associated with greater information transparency, such as stronger home-country accounting standards. We document that a U.S. cross-listing is economically important, as U.S. ownership of a foreign firm roughly doubles upon cross-listing in the United States. We explore the cross-sectional variation in this "cross-listing effect" and find that the increase in U.S. investment is greatest for firms that are from weak accounting backgrounds and are otherwise informationally opaque, suggesting that the key effect of cross-listing is improvements in disclosure that are valued by U.S. investors. By contrast, cross-listing does not increase the appeal of stocks from countries with weak shareholder rights, suggesting that U.S. cross-listing cannot substitute for legal protections in the home country. Nor does the cross-listing effect appear to be driven simply by increased "familiarity"� with the stock or lowered cross-border transactions costs.
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