Discontinued SEC Required Disclosures: the Value of Repairs and Maintenance Expenditures using a Variance Decomposition Approach

On December 13, 1994, the Securities and Exchange Commission (SEC) eliminated certain schedules that included repairs and maintenance (R&M) disclosures previously required in annual reports and registration statements filed with the SEC. The purpose of this research is to determine if market participants utilized R&M information when making investment decisions. Resulting from a variance decomposition approach, the findings indicate that market participants did use R&M disclosures in their investment decisions. Thus, as a possible policy implication of this research, the SEC may want to reconsider the decision to eliminate the required R&M expenditure disclosures

Effects of variable magma supply on mid-ocean ridge eruptions : constraints from mapped lava flow fields along the Galápagos Spreading Center

Author Posting. © American Geophysical Union, 2012. This article is posted here by permission of American Geophysical Union for personal use, not for redistribution. The definitive version was published in Geochemistry Geophysics Geosystems 13 (2012): Q08014, doi:10.1029/2012GC004163.Mapping and sampling of 18 eruptive units in two study areas along the Galápagos Spreading Center (GSC) provide insight into how magma supply affects mid-ocean ridge (MOR) volcanic eruptions. The two study areas have similar spreading rates (53 versus 55 mm/yr), but differ by 30% in the time-averaged rate of magma supply (0.3 × 106 versus 0.4 × 106 m3/yr/km). Detailed geologic maps of each study area incorporate observations of flow contacts and sediment thickness, in addition to sample petrology, geomagnetic paleointensity, and inferences from high-resolution bathymetry data. At the lower-magma-supply study area, eruptions typically produce irregularly shaped clusters of pillow mounds with total eruptive volumes ranging from 0.09 to 1.3 km3. At the higher-magma-supply study area, lava morphologies characteristic of higher effusion rates are more common, eruptions typically occur along elongated fissures, and eruptive volumes are an order of magnitude smaller (0.002–0.13 km3). At this site, glass MgO contents (2.7–8.4 wt. %) and corresponding liquidus temperatures are lower on average, and more variable, than those at the lower-magma-supply study area (6.2–9.1 wt. % MgO). The differences in eruptive volume, lava temperature, morphology, and inferred eruption rates observed between the two areas along the GSC are similar to those that have previously been related to variable spreading rates on the global MOR system. Importantly, the documentation of multiple sequences of eruptions at each study area, representing hundreds to thousands of years, provides constraints on the variability in eruptive style at a given magma supply and spreading rate.This work was supported by the National Science Foundation grants OCE08–49813, OCE08–50052, and OCE08– 49711.2013-02-2

Beyond financial reporting disclosures

Financial disclosures, as a corporate communication mechanism, are being challenged for their relevance and adequacy in providing information able to satisfy the changing stakeholders\u2019 requirements. New disclosure forms and narratives, superseding traditional financial reporting, are capturing the attention of academics and practitioners, trying to address the information value for companies, managers, consultants, investors, analysts and the social communities. This Special Issue addresses these topics investigating new venues of corporate disclosure. Broadly, it focuses on the contents of non-financial disclosure and their relevance for capital markets and their impact on organizations and users\u2019 behavior

The influence of management and auditors on consolidation decisions

Historically, the decision over whether or not to consolidate was guided by bright-line rules, which outlined the minimum percentage of ownership required in a subsidiary for it to be considered controlled by a reporting entity and thus included in the consolidated financial statements (CFSs). Today, U.S. GAAP and IFRS use a principles-based approach, which is guided by the concept of control to determine whether a subsidiary is to be consolidated in the CFSs. In this context, a debate exists between managers and auditors about which subsidiaries should be consolidated. To deepen our understanding of how managers and auditors grapple with consolidation decisions, we interviewed several CFOs and audit partners to determine if they are anchored to legalistic mechanisms or if, instead, they are strategically developing ways to support the consolidation decision. Based on our interviews, we find that opportunistic transactions\u2014criticized at the time of the rules-based approach\u2014still exist due to the search for legalistic mechanisms that protect underlying choices influenced by economic incentives. Such results are crucial for analysts and investors to properly interpret consolidated financial performance

Firm Equity Investment Decisions and US GAAP and IFRS Consolidation Control Guidelines: An Empirical Analysis

It is asserted in the literature that rules-based accounting standards leave room for transaction structuring and that numerous accounting scandals have been linked to companies structuring transactions to avoid bright-line rules. Prior research suggests that bright-line accounting standards motivated companies to avoid the equity method or consolidation accounting by keeping their equity ownership percentages below the key thresholds of 20 percent and 50 percent. However, in recent years, much has changed regarding U.S. GAAP and IFRS principles, especially in terms of the guidelines surrounding business combinations and the concept of control. Now, given the similarity of the U.S. GAAP and IFRS equity investment accounting standards and their more recent emphasis on the control concept, one would not expect either U.S. GAAP or IFRS firms to engage in transaction-structuring behavior, holding concentrated ownership percentages at, or right below, 50 percent. Our study extends prior research by investigating whether this phenomenon (of investment percentages being concentrated right at 50 percent or just below) exists in today’s FASB and IASB reporting environments and if so, why? Using ownership data from 2004–2008, we investigate whether firms engage in strategic investment behavior in the vicinity of the 50 percent ownership threshold within the U.S. GAAP and IFRS reporting environments. Interestingly, our univariate results indicate that despite a shift in the accounting standards to a more principles- based definition of control, U.S. GAAP-compliant and IFRS-compliant companies continue to behave in a manner indicative of purposeful transaction structuring around the 50 percent threshold, as evidenced by an unusually heavy concentration of investment at or below 50 percent. This finding could mean that U.S. GAAP- and IFRS- compliant companies (and their auditors) are continuing to anchor to the old bright-line guidance regarding consolidation accounting. We supplement our univariate tests with a regression analysis to examine potential incentives that could explain this investment behavior. We find that leverage has a significant positive marginal effect—increased leverage is associated with a greater likelihood of choosing to keep the investment level at or below 50 percent

Classification Shifting in an International Setting: Investor Protection and Financial Analysts Monitoring

Prior research on publicly traded U.S. firms provides evidence that managers engage in classification shifting to opportunistically manage “core” earnings. We extend this line of research in a broader international setting, by examining (1) whether the level of investor protection affects managers\u27 decisions to engage in classification shifting behavior and (2) whether coverage by financial analysts mitigates this behavior. Based on an international sample of firms from 40 countries, we observe evidence consistent with classification shifting in both strong and weak investor protection countries using four separate measures of investor protection. We then explore the potential monitoring role of financial analysts in mitigating classification shifting. We provide evidence that higher financial analyst following mitigates classification shifting, primarily in weak investor protection countries. Overall, our results provide evidence of classification shifting in a broad international setting and evidence of financial analysts\u27 influence in reducing this form of earnings managemen

The Predictive Ability of Geographic Segment Disclosures by U.S. Companies: SFAS No. 131 vs. SFAS No. 14

This research considers whether recent modifications to segment reporting adequately address analysts\u27 concerns regarding the usefulness of geographic data. Forecast errors for models utilizing SFAS No. 131 geographic sales data are compared to forecast errors for models utilizing SFAS No. 14 geographic sales data. The results indicate a significant improvement in the predictive accuracy of geographic sales disclosures provided under SFAS No. 131. Additional analysis suggests this enhanced predictability may be associated with the revised requirements that companies report sales for the country of domicile and for each individually material country. Overall, our findings appear to support the FASB\u27s argument that segment information by country is more informative and useful. Based on our findings, recommendations are presented regarding possible amendments to SFAS No. 131 that may further enhance the predictive ability of geographic segment data

Client Satisfaction and Big 6 Audit Fees

This study examines whether client satisfaction can help explain cross-sectional variation in Big 6 audit fees paid by Fortune 1000 clients. After controlling for other factors related to audit fees (including audit quality attributes), client satisfaction with the audit team is positively associated with fees. It appears that a dimension of client satisfaction unrelated to audit quality attributes is the factor associated with an audit fee premium. This dimension of satisfaction may reflect other aspects of service quality not documented in the literature, or it may simply enable an auditor to earn economic rents through enhanced bargaining power. Client satisfaction with the audit firm does not appear to be priced in this segment of the audit market. The results are consistent with the view that a Big 6 audit is a service that is differentiable in the eyes of client management, and the results highlight the importance of the audit team composition in allowing a Big 6 audit firm to differentiate the audit product. Also, if auditors are earning local rents due to enhanced satisfaction levels, then a perfect competition model may not be appropriate for the audit services market