Accounting quality and firm-level capital investment

This study examines how accounting quality relates to firm-level capital investment efficiency. Our first hypothesis is that higher quality accounting enhances investment efficiency by reducing information asymmetry between managers and outside suppliers of capital. Our second hypothesis is that this effect should be stronger in economies where financing is largely provided through arm's-length transactions compared with countries where creditors supply more capital. Our results are consistent with these hypotheses both across and within countries. They are robust to alternative econometric specifications, different measures of accounting quality and investment-cash flow sensitivity, and numerous control variables.postprin

Does EVA® beat earnings? Evidence on associations with stock returns and firm values

This study tests assertions that Economic Value Added (EVA®) is more highly associated with stock returns and firm values than accrual earnings, and evaluates which components of EVA, if any, contribute to these associations. Relative information content tests reveal earnings to be more highly associated with returns and firm values than EVA, residual income, or cash flow from operations. Incremental tests suggest that EVA components add only marginally to information content beyond earnings. Considered together, these results do not support claims that EVA dominates earnings in relative information content, and suggest rather that earnings generally outperforms EVA.postprin

Conditional Conservatism and the Cost of Equity Capital: Information Precision and Information Asymmetry Effects

Prior studies report negative or insignificant relations between conditional conservatism and the cost of equity capital, arguing that conservatism reduces information risk. Using accounting-based conditional conservatism proxies, however, we find a significantly positive association between conditional conservatism and the cost of equity. This positive relation operates via improving information precision about negative earnings shocks and generally inflating information asymmetry among investors, both of which increase the cost of equity. We further find that the cost of equity effect of conditional conservatism disappears in the period after the enactment of the Sarbanes-Oxley Act (SOX), consistent with the notion that nationwide improvement of information precision about negative news and diminished information asymmetry are engendered by the SOX regulation. This study adds to researches on conditional conservatism, SOX, and the cost of equity, and also has policy implications.published_or_final_versio

The Risk Management Role of Accounting Conservatism for Operating Cash Flows

This study examines relations between accounting conservatism and the downside risk of operating cash flows (OCF) and finds both unconditional and conditional conservatism to be negatively associated with OCF downside risk measured by indicators of OCF falling below expectations, by OCF’s root lower partial moment and by OCF at risk, with several additional results. First, both unconditional and conditional conservatism enhance cash holdings and its upside potential, thus helping mitigate subsequent OCF downside risk. Second, both unconditional and conditional conservatism reduce the effects of customer bargaining power on OCF downside risk. Third, conditional conservatism increases hedge usage and unconditional conservatism substitutes for hedging in mitigating OCF downside risk. Finally, downside cash flow beta enhances unconditional and conditional conservatism and the mitigating effect of unconditional conservatism on OCF downside risk during economic downturns. These findings lend support to conservatism’s role as a risk management tool and are robust to alternative measures and various controls.postprin

Conditional Conservatism and the Cost of Equity Capital: Informational, Fundamental and Behavioral Effects

Conditional conservatism (CON) is related to the cost of equity capital in a complex way, especially in imperfect markets. Prior literature suggests that CON affects the information precision and information asymmetry, resulting in either increased or decreased cost of equity. In addition, CON may influence firms’ investment decisions and exacerbate their fundamental operating risks, and investors are asymmetrically loss-averse to more bad earnings news reporting via conservative disclosure, both of which contribute to a higher equity cost. This paper empirically examines the impact of CON on the cost of equity capital through these informational, fundamental and behavioral risk effects, and detects a significantly positive association between CON and equity cost by adopting accounting-based CON proxies and equity cost measures adjusted for unexpected cash flow shocks. Using the Sarbanes-Oxley Act (SOX) as a natural experiment, we find that the positive CON-equity cost relation disappears in the post-SOX period, consistent with diminished informational, operational, and behavioral risk effects engendered by SOX regulations.postprin

Shades of Gray: Internal Control Reporting by Chinese U.S.-listed Firms

Chinese firms listing in the U.S. via reverse mergers (CRMs) have dominated prior media, regulator and research attention. Yet CRMs have effectively ceased, leaving Chinese firms listing via initial public offerings (CIPOs) as the relevant remaining class of Chinese firms listing on U.S. exchanges. This study documents salient differences between CIPOs, CRMs and U.S.-domiciled U.S.-listed firms by examining Sarbanes-Oxley Act Section 302 and 404 ineffective internal control (IIC) and related disclosures that underlie financial reporting quality, with three main findings. First, both CIPOs and CRMs report significantly more IICs than U.S.-domiciled counterparts. Second, both CIPOs and CRMs under-report IICs to a greater degree than U.S.-domiciled counterparts (CIPO for only 302 disclosures). Third, CIPOs report and under-report IICs significantly less than CRMs. Collectively, our results clarify and recast prior characterizations of internal controls underlying the reporting quality of Chinese firms listed in the U.S. and elsewhere.preprin

Accounting conservatism and bankruptcy risk

Date posted: June 6, 2010 ; Last revised: July 14, 2015This study examines the relation between accounting conservatism and bankruptcy risk using a large sample of U.S listed firms from fiscal year 1989 to 2007. We present evidence that unconditional and conditional conservatism generally mitigate subsequent bankruptcy risk by creating cushions for bad times and reducing information asymmetry about bad news. We identify two channels for accounting conservatism to mitigate bankruptcy risk: enhancing cash holdings and constraining earnings management. The effect of accounting conservatism does not change for firms with extreme distress and income smoothing, but weakens for firms with debt contracts referenced by credit default swaps (CDS), consistent with CDS lowering debtholder monitoring. Results are robust to reverse causality, relations between unconditional and conditional conservatism, and alternative measures of bankruptcy risk and accounting conservatism. These findings extend research on accounting conservatism, bankruptcy risk and debt contracting, and help inform debates regarding conservatism's role as a pervasive property and long-standing tenet of financial accounting.postprin

Liability of Foreignness in Global Stock Markets: Liquidity Dynamics of Foreign IPOs in the US

Using a unique dataset of foreign and domestic IPOs listings in the US from 1990 to 2012, we study how foreignness affects IPO liquidity. We find that foreign IPOs enjoy higher liquidity than IPOs in their home countries, but do not fully gain the same liquidity benefits as for IPOs of domestic US issuers. In contrast to prior evidence for mature cross-listed firms, we show that liquidity differentials between foreign and domestic IPOs in the US are determined by information asymmetry related to foreignness rather than to home-country institutional environment characteristics. Thus, our results extend prior findings to reveal salient differences in liquidity and liquidity determinants between IPOs offerings by foreign and domestic firms in the US.postprin

A randomised feasibility study to investigate the impact of education and the addition of prompts on the sedentary behaviour of office workers

Abstract Background Office workers have been identified as being at risk of accumulating high amounts of sedentary time in prolonged events during work hours, which has been associated with increased risk of a number of long-term health conditions. There is some evidence that providing advice to stand at regular intervals during the working day, and using computer-based prompts, can reduce sedentary behaviour in office workers. However, evidence of effectiveness, feasibility and acceptability for these types of intervention is currently limited. Methods A 2-arm, parallel group, cluster-randomised feasibility trial to assess the acceptability of prompts to break up sedentary behaviour was conducted with office workers in a commercial bank (n = 21). Participants were assigned to an education only group (EG) or prompt and education group (PG). Both groups received education on reducing and breaking up sitting at work, and the PG also received hourly prompts, delivered by Microsoft Outlook over 10 weeks, reminding them to stand. Objective measurements of sedentary behaviour were made using activPAL monitors worn at three time points: baseline, in the last 2 weeks of the intervention period and 12 weeks after the intervention. Focus groups were conducted to explore the acceptability of the intervention and the motivations and barriers to changing sedentary behaviour. Results Randomly generated, customised prompts, delivered by Microsoft Outlook, with messages about breaking up sitting, proved to be a feasible and acceptable way of delivering prompts to office workers. Participants in both groups reduced their sitting, but changes were not maintained at follow-up. The education session seemed to increase outcome expectations of the benefits of changing sedentary behaviour and promote self-regulation of behaviour in some participants. However, low self-efficacy and a desire to conform to cultural norms were barriers to changing behaviour. Conclusions Prompts delivered by Microsoft Outlook were a feasible, low-cost way of prompting office workers to break up their sedentary behaviour, although further research is needed to determine whether this has an additional impact on sedentary behaviour, to education alone. The role of cultural norms, and promoting self-efficacy, should be considered in the design of future interventions. Trial registration This study was registered retrospectively as a clinical trial on ClinicalTrials.gov (ID no. NCT02609282 ) on 23 March 2015