Pay for Performance and Corporate Governance Reform

Directors’ pay and corporate governance continue to generate public outrage and calls for reform. Our meta-regression analysis of all comparable UK pay-for-performance estimates finds little, if any, meaningful association between directors’ pay and corporate performance. However, there is evidence of the effectiveness of past ‘comply-or-explain’ rules, especially the Cadbury Report. Unfortunately, the effects of past reform efforts tend to erode over time. The paper also explores differences between pay-performance estimates, finding that these are largely explained by how pay and performance are measured by a given study.Directors’ pay, governance reform, meta-regression analysis

Information disclosure and the initial public offering discount : Australian evidence.

Countries vary in their policies and regulations imposing selling restrictions on insiders' shares when a firm lists on a stock exchange. The US and UK adopt a free market approach, allowing insiders of an initial public offering (IPO) firm to select whether to voluntarily impose selling restrictions on their shares. Other countries (e.g., Germany, France, the Netherlands, Italy, and Singapore) mandate selling restrictions on insiders' shares for all IPOs on their exchanges. In Australia, the Australian Securities Exchange (ASX) imposes mandatory selling restrictions on insiders' shares (MSRs) for IPO firms that do not satisfy a profit test or an assets test. Using an Australian IPO setting where insiders' shares can be subject to MSRs, the study investigates whether there is a difference in the IPO discount (underpricing) between firms with and without MSRs. The study also examines whether the IPO discount (underpricing) for firms with MSRs is affected by (i) the extent to which insider equity ownership is subject to MSRs, (ii) the length of MSRs, and (iii) the strength of firm corporate governance. To investigate these issues, the study employs a sample of Australian IPO firms listing from 1 March 2003 to 31 December 2008. In the primary tests the IPO discount (underpricing) is measured using the difference in the first-day closing price and issue price. In robustness tests, the price at the end of 3 months is used. The study reports that 81 per cent of the 711 IPO firms included in this study, failed to satisfy the profit test or the assets test and therefore had MSRs. The study finds that the IPO discount (underpricing) of firms with MSRs is significantly lower than that of firms without MSRs. This finding is contrary to the prediction that the IPO discount (underpricing) is higher for MSRs firms due to their higher financial risk. The findings suggest that primary investors of IPO firms with MSRs enjoy lower returns on the first-day of trading compared to those of IPQ firms without MSRs. Consistent with the prediction, the study finds a significant positive association between insider equity ownership subject to MSRs and the IPO discount (underpricing). However, the length of MSRs is insignificantly associated with the IPO discount (underpricing) of firms with MSRs. Furthermore, the study predicts and finds that the strength of corporate governance is significantly negatively associated with the IPO discount (underpricing) of firms with MSRs. The study contributes to the literature in the following ways. The findings provide practical insights for investors, regulatory authorities, and insiders. They inform primary investors that they are more likely to obtain higher IPO discount (underpricing) on the first-day of trading if they subscribe for the shares of IPO firms without MSRs than for those of firms with MSRs. The findings suggest that the presence of MSRs in Australian IPOs do not benefit primary investors in terms of higher underpricing relative to IPO firms without MSRs. The study suggests that the regulatory requirement for MSRs benefits the insiders of IPO firms when raising equity by listing. The ASX is reviewing the threshold levels associated with the profit and assets tests that determine the imposition of selling restrictions. The findings from this study can inform these deliberations. The findings inform investors that greater insider equity ownership subject to MSRs is associated with higher IPO discount (underpricing), favouring primary investors. However, the AXS's policy of differing lengths of selling restrictions on insiders' shares has no impact on the IPO discount (underpricing). The implication is that the length of MSRs is not an important consideration for investors. The findings that firms with MSRs and stronger corporate governance have lower IPO discount (underpricing) than firms with MSRs and weaker corporate governance suggest that governance characteristics are determinants of the issue price. Insiders of IPO firms with MSRs and strong governance can set a higher IPO issue price resulting in a lower IPO discount (underpricing)

Information disclosure and the initial public offering discount : Australian evidence.

Countries vary in their policies and regulations imposing selling restrictions on insiders' shares when a firm lists on a stock exchange. The US and UK adopt a free market approach, allowing insiders of an initial public offering (IPO) firm to select whether to voluntarily impose selling restrictions on their shares. Other countries (e.g., Germany, France, the Netherlands, Italy, and Singapore) mandate selling restrictions on insiders' shares for all IPOs on their exchanges. In Australia, the Australian Securities Exchange (ASX) imposes mandatory selling restrictions on insiders' shares (MSRs) for IPO firms that do not satisfy a profit test or an assets test. Using an Australian IPO setting where insiders' shares can be subject to MSRs, the study investigates whether there is a difference in the IPO discount (underpricing) between firms with and without MSRs. The study also examines whether the IPO discount (underpricing) for firms with MSRs is affected by (i) the extent to which insider equity ownership is subject to MSRs, (ii) the length of MSRs, and (iii) the strength of firm corporate governance. To investigate these issues, the study employs a sample of Australian IPO firms listing from 1 March 2003 to 31 December 2008. In the primary tests the IPO discount (underpricing) is measured using the difference in the first-day closing price and issue price. In robustness tests, the price at the end of 3 months is used. The study reports that 81 per cent of the 711 IPO firms included in this study, failed to satisfy the profit test or the assets test and therefore had MSRs. The study finds that the IPO discount (underpricing) of firms with MSRs is significantly lower than that of firms without MSRs. This finding is contrary to the prediction that the IPO discount (underpricing) is higher for MSRs firms due to their higher financial risk. The findings suggest that primary investors of IPO firms with MSRs enjoy lower returns on the first-day of trading compared to those of IPQ firms without MSRs. Consistent with the prediction, the study finds a significant positive association between insider equity ownership subject to MSRs and the IPO discount (underpricing). However, the length of MSRs is insignificantly associated with the IPO discount (underpricing) of firms with MSRs. Furthermore, the study predicts and finds that the strength of corporate governance is significantly negatively associated with the IPO discount (underpricing) of firms with MSRs. The study contributes to the literature in the following ways. The findings provide practical insights for investors, regulatory authorities, and insiders. They inform primary investors that they are more likely to obtain higher IPO discount (underpricing) on the first-day of trading if they subscribe for the shares of IPO firms without MSRs than for those of firms with MSRs. The findings suggest that the presence of MSRs in Australian IPOs do not benefit primary investors in terms of higher underpricing relative to IPO firms without MSRs. The study suggests that the regulatory requirement for MSRs benefits the insiders of IPO firms when raising equity by listing. The ASX is reviewing the threshold levels associated with the profit and assets tests that determine the imposition of selling restrictions. The findings from this study can inform these deliberations. The findings inform investors that greater insider equity ownership subject to MSRs is associated with higher IPO discount (underpricing), favouring primary investors. However, the AXS's policy of differing lengths of selling restrictions on insiders' shares has no impact on the IPO discount (underpricing). The implication is that the length of MSRs is not an important consideration for investors. The findings that firms with MSRs and stronger corporate governance have lower IPO discount (underpricing) than firms with MSRs and weaker corporate governance suggest that governance characteristics are determinants of the issue price. Insiders of IPO firms with MSRs and strong governance can set a higher IPO issue price resulting in a lower IPO discount (underpricing)

Earnings management around a change of goodwill rule

The adoption of AASB 3 Business Combinations when Australia transitioned to International Financial Reporting Standards from 1 January 2005, changed the accounting for goodwill. The new goodwill rule, requiring impairment testing of goodwill rather than its systematic amortisation, may affect earnings henceforth. Our investigations show that on average, goodwill firms’ net revenue growth in the adoption year is significantly lower than the pre-adoption year. However, on average, return on assets (ROA) in the adoption year is higher than the pre-adoption year. Our findings show that managers of most goodwill firms manage earnings upwardly, in particular, using discretionary long-term accruals, and/or by not recording goodwill impairment loss, particularly at the mandatory adoption time. Of the goodwill firms, 82.5% did not record impairment loss on adoption. We find also that the magnitude of income decreasing discretionary long-term accruals of impairment goodwill firms is larger than for non-impairment goodwill firms. One plausible explanation is that some impairment goodwill firms use the new goodwill rule to take ‘big bath’ charges by managing earnings downwardly. These findings are important since extant studies assume that managers are unlikely to use discretionary long-term accruals to manage earnings (Guenther, 1994; Teoh et al., 1998, 1998a and 1998b)

Expectations and Perceptions of Overseas Students in a Post-graduate Corporate Accounting Subject: A Research Note

This study examines the expectations and perceptions of overseas students undertaking the post-graduate corporate accounting subject taught at an Australian university. An understanding of students' perceptions and expectations in learning of the subject is important in assisting accounting academics to enhance their teaching programmes, and to manage the diverse student cohorts which are now a feature of university classrooms in Australia. The findings show that overseas students expected the post-graduate corporate accounting subject to be challenging and interesting. Moreover, they expressed a strong desire that the subject should emphasise the practicalities of accounting.Learning approaches, learning environment, perceptions, expectations, corporate accounting, overseas students,