Are Positive Reactions to Bad News Plausible? The Consideration of Fraud Detection in Audit and Reporting Delays

I formulate a model to emphasize the fraud detection role of auditors in the financial market and relate the role to audit and financial reporting delays. In the model, an auditor considers whether to perform extended audit procedures after observing a red flag generated from regular audit procedures. An audit delay is represented by the event of extending audit procedures and manifested as a financial reporting delay observed by the market. I derive a simple closed-form condition characterizing when a positive market reaction to a delay is possible. The condition provides a theoretical basis for formulating empirically testable hypotheses. I discuss why the fundamental logic behind the counter-intuitive positive-reaction result also applies to other contexts such as internal control weakness disclosure. Documented evidence in the literature suggests that “positive reactions to bad news” (PR2BN) is a general phenomenon. I also discuss other empirical implications of the model, with suggestions for regression equation specifications

Failure Risk and Quality Cost Management in Single versus Multiple Sourcing Decision

The advantage of multiple sourcing to protect against supplier failures arising from undependable products due to latent defects is examined using a model with non-linear external failure costs. Prior research has focused only on supplier failures arising from unreliable supply, such as late/insufficient/no delivery. I derive a closed-form characterization of the optimal production quota allocation for the LUX (Latent defect-Undependable product-eXternal failure) setting. The allocation determines the optimal supply base, with intuitive properties that hold under a mild requirement. The requirement includes the special case of equal procurement costs charged by suppliers but also allows unequal costs without any particular order. The key result of the paper is a necessary and sufficient condition determining whether single or multiple sourcing is optimal. Another condition is obtained to determine the exact size of the optimal supply base, provided the mild requirement holds. With minor modifications, the results also hold when a buyer-initiated procurement contract can be used to elicit private information on the suppliers’ unit variable production costs

Knowledge Spillover and Accounting Firms’ Competitive Strength in the M&A Advisory Market

Accounting firms participating in M&A advisory teams can leverage their knowledge accumulated through assurance services to give the teams a competitive advantage in advising on transactions with hard-to-value targets. Consistently, we document that bidders are more likely to select accounting firms to advise on transactions involving such targets. Knowledge spillover aids in estimating the target’s value, which translates into higher service quality offered by accounting firms as captured by higher acquirer announcement-period stock returns and lower likelihood of overpaying for the target. The effects we document are concentrated in cases when the accounting firm is the audit-specialist in the target’s industry or target’s auditor and the target has low reporting quality. Our results help explain why Thomson Reuters ranks accounting firms among top global advisors, particularly in the mid- and low-end M&A advisory market

Can Strategic Uncertainty Help Deter Tax Evasion? – An Experiment on Auditing Rules

This paper adds to the economic-psychological research on tax compliance by experimentally testing a simple auditing rule that induces strategic uncertainty among taxpayers. Under this rule, termed the bounded rule, taxpayers are informed of the maximum number of audits by a tax authority, so that the audit probability depends on the joint decisions among the taxpayers. We compare the bounded rule to the widely studied flat-rate rule, where taxpayers are informed that they will be audited with a constant probability. The experimental evidence shows that, as theoretically predicted, the bounded rule induces the same level of compliance as the flat-rate rule when strategic uncertainty is low, and a higher level of compliance when strategic uncertainty is high. The bounded rule also suppresses the "bomb crater" effect often observed in prior studies. The results suggest that strategic uncertainty due to interactions among taxpayers could be an effective device to deter tax evasion

Processing of carbon-fiber-reinforced Zr41.2Ti13.8Cu12.5Ni10.0Be22.5 bulk metallic glass composites

Carbon-fiber-reinforced bulk metallic glass composites are produced by infiltrating liquid Zr41.2Ti13.8Cu12.5Ni10.0Be22.5 into carbon fiber bundles with diameter of the individual fiber of 5 mum. Reactive wetting occurs by the formation of a ZrC layer around the fibers. This results in a composite with a homogeneous fiber distribution. The volume fraction of the fibers is about 50% and the density of the composite amounts to 4.0 g/cm(^3)

Ubiquitous Internet in an integrated satellite-terrestrial environment: The SUITED solution

yesThe current Internet architecture appears to not be particularly suited to addressing the emerging needs of new classes of users who wish to gain access to multimedia services made available by ISPs, regardless of their location, while in motion and with a guaranteed level of quality. One of the main objectives of so-called nextgeneration systems is to overcome the limitations of today¿s available Internet by adopting an approach based on the integration of different mobile and fixed networks. The SUITED project moves in this direction since it aims at contributing to the design and deployment of the global mobile broadband system (GMBS), a unique satellite/terrestrial infrastructure ensuring nomadic users access to Internet services with a negotiated QoS. A description of the main features of the GMBS architecture, characterized by the integration of a multisegment access network with a federated ISP network is given in this article. The GMBS multimode terminal is schematically described, and an overview of the so-called QoS-aware mobility management scheme, devised for such a heterogeneous scenario,is provided

Tail-Heaviness, Asymmetry, and Profitability Forecasting by Quantile Regression

We show that quantile regression is better than ordinary-least-squares (OLS) regression in forecasting profitability for a range of profitability measures following the conventional setup of the accounting literature, including the mean absolute forecast error (MAFE) evaluation criterion. Moreover, we perform both a simulated-data and an archival-data analysis to examine how the forecasting performance of quantile regression against OLS changes with the shape of the profitability distribution. Considering the MAFE and mean squared forecast error (MSFE) criteria together, quantile regression is more accurate relative to OLS when the profitability to be forecast has a heavier-tailed distribution. In addition, the asymmetry of the profitability distribution has either a U-shape or an inverted-U-shape effect on the forecasting accuracy of quantile regression. An application of the distributional shape analysis framework to cash flows forecasting demonstrates the usefulness of the framework beyond profitability forecasting, providing additional empirical evidence on the positive effect of tail-heaviness and supporting the notion of an inverted-U-shape effect of asymmetry

Mixture and Continuous 'Discontinuity' Hypotheses: An Earnings Management Model with Auditor-Required Adjustment

A model emphasizing cookie-jar earnings management and the effect of auditor-required adjustment is formulated, with the optimal misreporting strategy generally characterized and the closed-form solutions for particular functional form assumptions derived. Using simulation results based on the model, I show that the widely documented discontinuity in the earnings triplet distributions (i.e., earnings, earnings change, and earnings surprise) can be partly due to a steep increase in density appearing like a discontinuity when a continuous distribution is plotted in terms of frequency counts in histogram bins. Additionally, I point out the puzzling volcano shape of the earnings triplet distributions that can be found in prior studies. Simulation results show that the model is capable of accommodating this phenomenon, which can arise from the mixture of a spiky distribution of managed earnings with a bell-shaped distribution of unmanaged earnings. This mixture is due to the auditor’s adjustment decision, which seems stochastic from the public’s or client firm’s perspective. Taken together, the results of this paper provide a unified explanation to two perplexing, salient features of the earnings triplet distributions. Potential applications of the model are suggested, including the construction of an earnings manipulation measure distinct from but complementary to abnormal accruals