How to survive in the network economy? An overview of the ideas of Prof. Carl Shapiro and Prof. Hal R. Varian.

Management; Economy;

Earnings management and institutional differences: literature review and discussion.

Management;

Evidence on (the lack of) audit-quality differentiation in the private client segment of the Belgian audit market?.

Auditor size is used as audit-quality proxy. Prior evidence on audit-quality differentiation between big 6 and non-big 6 auditors in the private client segment of the Belgian audit market is mixed. In this paper we investigate whether these mixed results tem from the inability of the dichotomous Big6/non-Big6 variable to capture auditor-size differences in a less concentrated audit market. To that end we examine whether alternative continuous measures of audit-firm size (i.e. auditor market hare, number of audit-firm clients, number of partners in the audit firm, total assets and operating profit of the audit firm) have a constraining impact on earnings management in a large sample of privately held Belgian companies (n = 1302). Overall, we do not find evidence that is supportive of quality differentiation in the private client segment of the Belgian audit market.

Earnings Management in Belgium. a Review of the Empirical Evidence

Earnings are an extensively used summary statistic of a firm’s financial performance. Various corporate reporting scandals (such as Enron and Lernout & Hauspie) have raised concerns regarding the credibility of this performance measure. This paper first discusses the empirical evidence on earnings management practices by Belgian companies. This review indicates that Belgian companies manage earnings to avoid declines in earnings or losses, to influence relations with external financiers and to reduce taxes. Belgian companies quoted on the Brussels Stock Exchange also report significantly less income-decreasing earnings management than their non-quoted counterparts, presumably to meet or beat market expectations. Belgian earnings management studies further report that larger boards and Big6 auditors may constrain the extent of incomedecreasing earnings management.

Earnings management and institutional differences Literature review and discussion.

This paper provides a review of the empirical earnings management literature. In particular, it presents a review of the factors that induce and constrain earnings management through accounting decisions. The consequences of actual or assumed earnings management are also discussed. The far majority of the literature focuses on the Anglo-Saxon context. However, major differences exist between Anglo-Saxon and continental European countries. This may result in differences in the importance of various incentives of and constraints on earnings management. In particular, we argue that explicit contracts and a firm's relations with capital markets may be less important sources of earnings management in continental Europe. Implicit contracts and the political and regulatory process may however be of major importance. We question further whether a firm's ownership and internal governance structure and the quality of the external auditor can constrain the ability to manage earnings in continental European countries.Management; Factors; Accounting; Decisions; Country; Markets;

Earnings management and institutional differences : Belgian evidence and audit quality as a constraint on earnings management.

This study reports the results of an exploratory study on earnings management in a continental European institutional environment, i.e. Belgium. The far majority of the literature (both analytical and empirical) focuses on the Anglo-Saxon context. However, major differences exist between Anglo-Saxon and continental European countries. This might result in differences in the importance of various incentives for and constraints on earnings management. For a pooled sample of 486 firm-year observations of privately held companies in the Belgian textile and paper industries, we tested whether a higher quality audit constrains earnings management more than a lower quality audit. We used the dichotomous variable big6/non-big6 auditor as a measure for audit quality and discretionary accruals as a measure of earnings management. Discretionary accruals were estimated using a cross-sectional version of the Jones' model that was slightly adapted to fit the Belgian context. We performed a univariate as well as a multivariate analysis. In the multivariate analysis, we adapted the control variables to the continental European context. In addition we also tested whether the income smoothing hypothesis holds in Belgium.Our findings do not support the hypothesis that higher audit quality constrains earnings management more than lower audit quality. This result contrasts those of prior Anglo-Saxon studies (Becker et al., 1998; Francis et al., 1997). The results do however support the income smoothing hypothesis. This finding is (1) consistent with institutional differences being important in earnings management research and (2) the results from a prior Belgian study on earnings management (Branson and Loits, 1997).Management; Studies; Companies; Industries; Multivariate analysis; Variables;

Earnings quality in privately held firms : the roles of external audits, stakeholders, and governance mechanisms.

While the extant empirical literature on earnings management focuses on incentives, constraints and consequences in US listed companies, we present results on nonlisted companies that operate in a continental European environment (Belgium); and we consider not just the effects of internal mechanisms and external auditing but also of stakeholder relations. Methodologically, special care is taken of an errors-in-variables problem induced by a two-step procedure. We find clear evidence that earnings are managed (downward) for tax purposes, but also that relationships with banks and suppliers act as a restraining factor in this field. Another factor of moderation of downward manipulation appears to be a large board. Employee power does not seem to affect accruals management. Lastly, in our sample, audit quality does not exhibit any statistically clear relation with the auditor's visibility (for instance, big-N or not).Audit quality; Auditing; Companies; Earnings management; Effects; Governance;

Audit quality, public ownership and firms' discretionary accruals management.

Francis et al. (1999) and Becker et al. (1998) report evidence that audit quality acts as a constraint on both income-increasing and income-decreasing earnings management in public firms. These results raise several interesting questions. First, are incentives for and constraints on earnings management independent of whether earnings are above or below target? Second, does audit quality also restrain earnings management in private firms as it does in public firms? Third, does public ownership itself act as a constraint on earnings management? One could argue that, relative to private ownership, public ownership increases the scrutiny of a firm's financial statements which may in turn restrain a firm's earnings-management behavior.Accordingly, we study publicly available financial statements of a matched sample of public and private Belgian firms. Following Francis et al. 1999, DeFond and Subramanyam 1998, Becker et al. 1998, we use discretionary accruals as a measure of earnings management. One finding is that audit quality and public ownership act as constraints on income-decreasing earnings management. We also find that, to a large extent, public ownership and auditor type are substitutes: for example, a firm that is both public and big-6-audited typically does not show more restraint in earnings management than a firm that has only one of these characteristics. Lastly, we do not have any evidence that audit quality and public ownership constrain income-increasing earnings management. Thus, our study contributes to the literatures on audit quality differentiation and especially earnings management. First, we provide supportive evidence of audit quality differentiation between Big 6 and non-Big 6 auditors in the private clients segment of the audit market. Second, we provide evidence on differences in the level of discretionary accruals between public and private firms.Management; Companies;

Post-Enron implicit audit reporting standards: sifting through the evidence.

The accounting scandals and the demise of Andersen have increased auditors' ex ante business risk. As a result, stock markets revised downward the value of the audit firms (Asthana et al. 2003; Chaney and Philipich 2002; Krishnamurthy et al. 2002; Callen and Morel 2002). One commonsensical reaction on behalf of auditors should have been to apply the existing rules more carefully and, thus, issue more non-clean audit opinions. This is exactly what we see. Closer scrutiny reveals that the higher incidence of non-clean audit opinions is not due to the (substantial) changes in the audit client list or their balance sheets. Instead, shifts in the client characteristics seem to have masked the Enron effect, and especially so in the non-Big5 sample. This study mirrors earlier results where auditors relaxed their standards following a drop in business risk (Geiger and Raghunandan, 2001, 2002; Francis and Krishnan, 2002).Andersen; Auditor reporting; Enron; Modified opinion; Qualified opinion; Reporting; Research;

Effects of local fiscal policy on firm profitability

For decades, scholars and policy-makers have been interested in how fiscal policy influences entrepreneurship. Until now, research has focused on fiscal policy at the federal or regional level and used macro-economic outcome measures. Considerably less attention was given to how municipal governments can influence economic outcomes at the micro level. The present study examines the effect of municipal taxes, spending and tax compliance costs on firm profitability within the Flemish hospitality industry. This is an interesting research setting, since Flemish municipalities have far-ranging fiscal autonomy which has resulted in a proliferation of local taxes, many of which are specific to the hospitality industry. The findings reveal that local taxes have a negative impact on firm profitability, while aggregate public spending has a positive influence. The tax effect is economically relevant and exceeds the public spending impact. Finally, we find no impact of compliance costs from local taxes