Litigation Risk and Abnormal Accruals

In this paper, we examine the relation between auditor litigation risk and abnormal accruals over the 1989-2007 time period. We address potential endogeneity in prior studies by jointly modeling abnormal accruals and litigation risk in a simultaneous equation system. Our findings suggest that client-specific litigation risk affects auditor incentives to acquiesce to client demands for earnings management, i.e., the higher the risk of auditor litigation, the greater the auditor’s restraining influence on the abnormal accruals reported by the client. We also find evidence that abnormal accruals increase the likelihood of auditor litigation. We also document that the 1995 Public Securities Litigation Reform Act (PSLRA) lowered the client-specific risk of auditor litigation. Litigation reform remains a topic of ongoing interest. Our findings contribute to a better understanding of the effects of litigation reform (and related changes in legal exposure) on auditor incentives and earnings management.: Litigation risk, abnormal accruals, auditor incentives

Impact of Job Complexity and Performance on CFO Compensation

Prior research suggests that Big 4 auditors provide higher quality audits by virtue of their large size. Still, the recent reforms mandated by the Sarbanes Oxley Act – by increasing client and auditor incentives for accurate reporting – may have narrowed audit quality differences across auditor groups. In this paper, we examine audit quality for Big 4 and Mid-tier auditors during 2003-06 and include clients of other smaller audit firms for comparison purposes. We examine actual audit quality (as proxied by earnings management metrics) as well as perceived audit quality (as proxied by the client- and year-specific eloading and ex ante equity risk premium metrics). We include in our analysis only those Big 4 clients for whom the Mid-tier firms are potentially viable as auditors. Relative to other smaller audit firm clients, we find Big 4 and Mid-tier audit clients to have (1) lower levels of accrual management, (2) higher levels of real earnings management, and (3) higher levels of investor-perceived accruals quality. In each case, we were unable to reject the null that Big 4 and Mid-tier audits are similar. However, we find Big 4 audit clients to have a lower client-specific ex ante equity risk premium relative to both Mid-tier and other smaller audit firm clients. Collectively, our findings indicate that in situations where a Mid-tier auditor is potentially viable, Big 4 clients could utilize a Mid-tier firm without adversely affecting audit quality. Still, the results suggest that Big 4 clients have a lower ex ante cost of equity capital which is likely related to the insurance considerations (“deep pockets”) – rather than the audit quality -- associated with having a Big 4 auditor.Auditor concentration, Audit quality, Earnings management, Cost of equity capital.

Governance convergence and accounting harmonization

Despite the regulatory efforts to promote a harmonized reporting regime, differences in local institutions often lead to heterogeneity in reporting outcomes. Our study focuses on corporate governance-a key institution-and examines whether the convergence of corporate governance increases accounting harmonization. Constructing governance convergence indexes based on both firm-level practices and country-level reforms, we find that the similarity in corporate governance increases the comparability of actual accounting practices. Exploring the underlying mechanism, we find that accounting harmonization is driven by increased contractual demand and reduced stakeholder conflicts associated with a harmonized governance regime. Furthermore, we show that accounting harmonization facilitates the role of governance convergence in increasing financial market integration. Additional analyses suggest that our results are not driven by the adoption of global accounting standards, the strength of corporate governance, or improvement in financial reporting quality. Overall, our findings suggest that governance convergence has a harmonizing effect on accounting practices, which, in turn, facilitates globalization

Restructuring and Firm Value: The Effects of Profitability and Restructuring Purpose

This study extends prior research on the information content of restructuring charges. We find that the relationship between restructuring activities and returns during the restructuring charge year is different for loss firms than for profit firms. Restructurings that are primarily intended to either eliminate personnel or exit a line of business are positively associated with returns of the loss firms, suggesting that investors view these activities as value-increasing. In contrast, common stock returns of profit firms exhibit a nonpositive association with restructuring charges. Overall, our results point to the role of the context and the content of the restructuring announcement in the market's assessment of the value relevance of restructuring charges reported in the financial statements. Copyright Blackwell Publishers Ltd 2000.

Investor pricing of CEO equity incentives

CEO equity incentives, Information quality, Cost of equity capital, M41, M52,