Individualism and stock price crash risk

Employing a sample of 26,473 firms across 42 countries from 1990 to 2013, we find that firms located in countries with higher individualism have higher stock price crash risk. Furthermore, individualism can be transmitted by foreign investors from overseas markets to influence local firms’ crash risk, and can exacerbate the impact of firm risk taking and earnings management on crash risk. Moreover, the positive relation between individualism and crash risk is amplified during the global financial crisis and attenuated by enhanced country-level financial information transparency and the adoption of International Financial Reporting Standards

CEO Profile and Earnings Quality

This paper introduces the PSCORE, which aggregates nine personal characteristics of chief executive officers (CEOs), to signal the quality of earnings. The PSCORE is a composite score based on publicly available data on CEOs. The study reports strong positive relationships between the PSCORE and two different proxies for earnings quality, (i) discretionary accruals and (ii) financial statement errors, measured by deviations of the first digits of figures reported in financial statements from those expected by Benford’s Law. Further analyses indicate that the relationships between the PSCORE and the proxies for earnings quality become more pronounced when CEOs have high equity-based compensation incentives. The findings have some implications for practitioners

The impact of the institutional environment on the value relevance of fair values

Most prior studies attribute valuation discounts on certain fair valued assets to measurement error or bias. We argue that institutional differences across countries (e.g., information environment or market sophistication) affect investors’ ability to process and impound fair value information in their valuation. We predict that the impact of the institutional environment on value relevance is particularly pronounced for reported fair values of assets designated at fair value through profit or loss (hereafter, “FVO assets”), for which investor experience is lowest and complexity is highest. Using a global sample of IFRS banks, we find that FVO assets are generally less value relevant than held-for-trading assets (HFT) and available-for-sale assets (AFS). By partitioning countries into market- and bank-based economies to proxy for institutional differences, we find that the valuation discount on FVO assets is more pronounced in bank-based economies. Additional tests suggest that this valuation discount is attenuated by a richer firm-level information environment and the presence of institutional investors with fair value experience

Analyst information precision and small earnings surprises

This study proposes and tests an alternative to the extant earnings management explanation for zero and small positive earnings surprises (i.e., analyst forecast errors). We argue that analysts’ ability to strategically induce slight pessimism in earnings forecasts varies with the precision of their information. Accordingly, we predict that the probability that a firm reports a small positive instead of a small negative earnings surprise is negatively related to earnings forecast uncertainty, and we present evidence consistent with this prediction. Our findings have important implications for the earnings management interpretation of the asymmetry around zero in the frequency distribution of earnings surprises. We demonstrate how empirically controlling for earnings forecast uncertainty can materially change inferences in studies that employ the incidence of zero and small positive earnings surprises to categorize firms as suspected of managing earnings

Smoothing income in anticipation of future earnings

Recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance. We find support for this theory. Our evidence suggests that when current earnings are `poor' and expected future earnings are `good', managers `borrow' earnings from the future for use in the current period. Conversely, when current earnings are `good' and expected future earnings are `poor' managers `save' current earnings for possible use in the future. However, sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings

The effect of competition on CEO turnover

Relative performance evaluation (RPE) is likely to improve boards of director's ability to identify unfit CEOs, and competition is likely to enhance the usefulness of RPE. Consistent with our hypotheses, the frequency of CEO turnover is greater in highly competitive industries than in less competitive industries. We also find that RPE-based (firm-specific) accounting measures are more closely associated with CEO turnover in high (low) competition industries than in low (high) competition industries. These findings suggest that the lack of support for RPE in prior studies results from not considering the effects of competition. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classification: J33; J41; J63; M4

The Reversal of Abnormal Accruals and the Market Valuation of Earnings Surprises

If the market anticipates the reversing nature of abnormal working capital accruals, then the reported magnitude of earnings surprises that contain abnormal accruals will differ from the underlying magnitude that is priced by the market. We expect the market's perception of this difference to affect the ERCs associated with earnings surprises that contain abnormal accruals. We test our predictions using an abnormal accruals measure that captures the difference between reported working capital and a proxy for the market's expectations of the level of working capital required to support current sales levels. Consistent with our hypotheses, we find higher ERCs when abnormal accruals suppress the magnitude of earnings surprises, and lower ERCs when abnormal accruals exaggerate the magnitude of earnings surprises. We also find results consistent with analysts predictably considering the reversing implications of abnormal accruals in revising future earnings forecasts. These findings are consistent with market participants anticipating the reversing implications of abnormal accruals. However, analysis of subsequent stock returns provides evidence that market participants do not fully impound the pricing implications of abnormal accruals at the earnings announcement date.link_to_subscribed_fulltex

The impact of improved auditor independence on audit market concentration in China

In an attempt to increase credibility in its capital markets, China recently adopted new auditing standards. Consistent with increased auditor independence, we find that the frequency of modified opinions increases nine-fold subsequent to the adoption of the new standards. However, the increase in modified reports is followed by a decline in audit market share among large auditors - those with the greatest propensity to issue modified reports. We conjecture that this `flight from audit quality' results from lack of incentives to demand independent auditors. Our findings suggest that government regulation alone is insufficient to create financial markets that foster auditor independence. (C) 2000 Elsevier Science B.V. All lights reserved. JEL classification: G38; L15: L84; M4; O16; O53; P23

Auditor industry specialization and market segmentation: Evidence from Hong Kong

Audit fees of Big 6 and non-Big 6 accounting firms are examined for 348 publicly listed Hong Kong companies. Using more recent data than prior studies, we find evidence of Big 6 premiums for both general brand name and for industry specialization. In addition, we find that the large local firm Kwan Wong Tan & Fong, which is the market leader in the property sector, has significantly lower fees than both Big 6 and other non-Big 6 auditors in that industry. Specialization thus leads to different results for Big 6 and non-Big 6 firms and suggests a market segment not previously identified: non-Big 6 specialization, which leads to production economies and the capture of market share through lower fees for a clientele seeking low-priced audits. These results also suggest that prior studies do not recognize sufficiently that Big 6 brand-name reputation is a necessary foundation on which to achieve higher priced quality-differentiated audits based on industry specialization