Does the information environment affect the value relevance of financial statement data?

Recent studies demonstrate that the usefulness of financial statement data for valuation of stocks varies depending on specific economy- and firm-level conditions. This empirical study identifies a novel firm-level influential condition. It hypothesizes and finds that for firms that trade at a premium to book value the value-relevance of two fundamental financial statement value drivers (i.e. earnings and book value), is negatively related to the level of sophistication of the firm's information environment. However, for firms that trade at a discount to book value, the level of sophistication of information environment does not affect the value-relevance of these financial statement value drivers. The level of complexity of the firm's information environment is proxied by the firm's capitalized value. The empirical analysis is based on a sample of nonfinancial firms listed on the London Stock Exchange

Size management by European private firms to minimize proprietary costs of disclosure

We examine size management by European private firms for which disclosure requirements increase at size thresholds. Our estimates suggest at least 8% of firms near thresholds that impose income statement disclosure manage size downward, and the average firm that manages size sacrifices more than 6% of its assets. We find that multiple determinants of proprietary costs predict this behavior, and that size management to avoid mandatory audits, which are similarly imposed at size thresholds, is of comparable magnitude. Our results triangulate the economic significance of proprietary costs in a setting largely without confounding capital market, agency, or compliance costs

Online support system for students in higher education: Proof-of-concept study

Background: Providing support to the increasing numbers of students facing mental health difficulties in higher education (HE) can be difficult due to stigma or lack of resources. Alternative and/or complementary sources of support are needed, such as online interventions that are recognised for their therapeutic value and cost-effectiveness. Objectives: We aim to provide evidence supporting the conceptual and practical value of a newly developed online multimedia intervention system for HE students who face mild to moderate symptoms of anxiety and depression and study-skills difficulties. Methods: Students from five universities were invited to participate in a cross-sectional proof-of-concept study. Students were invited through the universities' internal communication channels. Following demonstration of each part of the system, students completed a survey with quantitative and qualitative questions. Results: Response was largely positive. Positive responses on the features of the questionnaire ranged between 65% and 86%; on the features of the workshops ranged between 57% and 91%; on 'My place' ranged between 65% and 79%; on the animated videos ranged between 79% and 92%; and on the overall system ranged between 78% and 89%. Participants indicated areas for improvement and ways in which such improvement could be accomplished; these then guided the development of the system. Conclusions: The results confirm the need for such a system. It can complement student support services (SSS) by dealing with cases with mild to moderate difficulties, hence allowing SSS to prioritise and effectively address more severe cases. Potentially this method can provide a meaningful alternative to SSS; this is worth investigating further

The ability of analysts’ recommendations to predict optimistic and pessimistic forecasts

Previous researches show that buy (growth) companies conduct income increasing earnings management in order to meet forecasts and generate positive forecast Errors (FEs). This behavior however, is not inherent in sell (non-growth) companies. Using the aforementioned background, this research hypothesizes that since sell companies are pressured to avoid income increasing earnings management, they are capable, and in fact more inclined, to pursue income decreasing Forecast Management (FM) with the purpose of generating positive FEs. Using a sample of 6553 firm-years of companies that are listed in the NYSE between the years 2005–2010, the study determines that sell companies conduct income decreasing FM to generate positive FEs. However, the frequency of positive FEs of sell companies does not exceed that of buy companies. Using the efficiency perspective, the study suggests that even though buy and sell companies have immense motivation in avoiding negative FEs, they exploit different but efficient strategies, respectively, in order to meet forecasts. Furthermore, the findings illuminated the complexities behind informative and opportunistic forecasts that falls under the efficiency versus opportunistic theories in literature

The Impact of Error-Management Climate, Error Type and Error Originator on Auditors’ Reporting Errors Discovered on Audit Work Papers

We examine factors affecting the auditor’s willingness to report their own or their peers’ self-discovered errors in working papers subsequent to detailed working paper review. Prior research has shown that errors in working papers are detected in the review process; however, such detection rates only rarely exceed 50% of the seeded errors. Hence, measures that encourage auditors to be alert to their own (or their peers’) potential errors any time they revisit the audit working papers may be valuable in detecting such residual errors and potentially correcting them before damage occurs to the audit firm or its client. We hypothesize that three factors affect the auditor’s willingness to report post detailed review discovered errors: the local office error-management climate (open versus blame), the type of error (mechanical versus conceptual) and who committed the error (the individual who committed the error (self) or a peer). Local office error-management climate is said to be open and supportive where errors and mistakes are accepted as part of everyday life as long as they are learned from and not repeated. In alternative, a blame error-management climate focuses on a “get it right the first time” culture where mistakes are not tolerated and blame gets attached to those admitting to or found committing such errors. We find that error-management climate has a significant overall effect on auditor willingness to report errors, as does who committed the error originally. We find both predicted and unpredicted significant interactions among the three factors that qualify these observed significant main effects. We discuss implications for audit practice and further research

Where do firms manage earnings?

Despite decades of research on how, why, and when companies manage earnings, there is a paucity of evidence about the geographic location of earnings management within multinational firms. In this study, we examine where companies manage earnings using a sample of 2,067 U.S. multinational firms from 1994 to 2009. We predict and find that firms with extensive foreign operations in weak rule of law countries have more foreign earnings management than companies with subsidiaries in locations where the rule of law is strong. We also find some evidence that profitable firms with extensive tax haven subsidiaries manage earnings more than other firms and that the earnings management is concentrated in foreign income. Apart from these results, we find that most earnings management takes place in domestic income, not foreign income.Arthur Andersen (Firm) (Arthur Andersen Faculty Fund