The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis

We study how corporate boards and audit committees are associated with voluntary financial disclosure practices, proxied here by management earnings forecasts. We find that in firms with more effective board and audit committee structures, managers are more likely to make or update an earnings forecast, and their forecast is less likely to be precise, it is more accurate, and it elicits a more favorable market response. Together, our empirical evidence is broadly consistent with the notion that effective corporate governance is associated with higher financial disclosure quality. Copyright 2005 The Institute of Professional Accounting, University of Chicago.

Analysts to the rescue?

In this study we use the SEC's decision to eliminate the reconciliation requirement for cross-listed companies to examine whether this loss of information prompted financial analysts to provide more informative research reports. We first document that the informativeness of analyst earnings forecasts increased, on average, in the post-regulation period for the sample of firms that stopped providing the reconciliation information (regulated firms). We next relate this change in informativeness to stock liquidity, a common proxy for information asymmetry. We do not find any change in market liquidity for regulated firms with greater analyst informativeness in the post-regulation period. In contrast, we document a decrease in market liquidity for regulated firms with lower analyst informativeness. These results support the conjecture that, when analysts compensate for the loss of information, the firm's information environment is not affected. We conclude that analysts can play an important role in capital markets as information providers and that their research can be especially valuable in times of information shortage

The determinants and valuation effects of classification choice on the statement of cash flows

In this paper we exploit the choice allowed by International Financial Reporting Standards (IFRS) regarding the presentation of interest payments on the cash flow statement to answer two related questions: First, whether the classification choice is explained by firm reporting incentives and second, whether it is value relevant. Using a UK sample, we find that firms reporting losses, with a greater proportion of their debt stemming from public sources, with CFO-based covenants and greater increases in leverage in the year of adoption are less likely to report interest payments in cash flows from operating activities (CFOA). Results also suggest that the incentive to meet or beat analyst CFO forecasts decreases, but strong corporate governance increases the probability of including interest payments in CFOA. Based on the assumption that the decision not to classify interest payments in CFOA captures lower disclosure quality or poor future expected performance, we posit that these firms should also exhibit lower valuations. Results obtained after correcting for self-selection bias confirm this assertion. We conclude that managers’ decision not to classify interest payments in CFOA is consistent with the opportunistic use of the choice allowed by IFRS

The Role and Current Status of IFRS in the Completion of National Accounting Rules–Evidence on Cyprus

The case of Cyprus with respect to the adoption of International Financial Reporting Standards (IFRS) is unique given the country’s strong reliance on international business and accounting-related services. As such, Cyprus has required the use of IFRS since 1981 not only for publicly listed firms but also for private companies regardless of their size. Cyprus’ reluctance to fully transpose Directive 2013/34/EU into national law cannot be unrelated to its long-standing requirement of financial statements that are not only prepared under IFRS but are also audited for all types of corporations registered in the Republic. We conclude that transposing the new Accounting Directive in its entirety into national law could have adverse effects on the Government tax revenue, the GDP of the services sector and the credibility of Cyprus as an international business and financial services center

Who Are the Losers of IFRS Adoption in Europe? An Empirical Examination of the Cash Flow Effect of Increased Disclosure

Unlike prior studies that examine the denominator effect, this study investigates the cash flow effect of disclosure as captured by firms exhibiting increases in default risk (DR) around the 2005 mandatory International Financial Reporting Standards (IFRS) adoption in Europe. Using the Merton (1973, 1974) option-based probability of default measure (DR) on a data set of 415 winner firms (with decreases in DR) and 295 loser firms (with increases in DR), we show that loser firms exhibit the same or better financial characteristics in the pre-IFRS adoption period compared with the winner sample. However, after IFRS, loser firms exhibit deteriorating characteristics, with smaller increases in their Tobin's q valuations, greater increases in leverage, and poorer return performance. Logistic analysis suggests that even though in the pre-IFRS period loser firms exhibit greater profitability and analyst following and lower leverage, in the post-IFRS period their profitability is less than that of winner firms while exhibiting similar leverage and analyst following characteristics. Through an examination of the determinants of the change in DR, the results suggest that loser firms incur a greater increase in DR the poorer their home country's legal enforcement environment, the lower their analyst following, and the greater their propensity to manage earnings. In general, our results are consistent with the existence of a significant cash flow effect for the loser sample

Disclosure and the Cost of Capital: Evidence from the Market's Reaction to Firm Voluntary Adoption of IAS

Using a unique international setting where the effects of disclosure on firm value can be measured in a constant regulatory environment and in isolation of other confounding factors, this paper shows that firms can increase their value through their choice of accounting standards. Specifically, we document strong positive abnormal returns at the announcement of voluntary adoption of International Accounting Standards (IAS / IFRS) by a sample of international firms and an economically significant reduction in long-run returns, consistent with a reduction in the cost of capital. Consistent with these results we also document evidence of an upgrade in analyst recommendations after the IAS / IFRS adoption announcement and a reduction in the implied cost of capital. Finally, we find strong evidence that the documented abnormal returns are consistent with signaling and bonding benefits stemming from the reduction in asymmetric information. Our results highlight the importance of increased disclosure on minority shareholder protection and on corporate governance in general. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.

Does Algorithmic Trading Affect Analyst Research Production?

We document a causal negative relationship between algorithmic trading (AT) and analyst research production, as captured by a decreased frequency of earnings forecasts and stock recommendations and lower analyst coverage. This is consistent with AT increasing the speed of price discovery, reducing the profitability of trades on analyst research by non-algorithmic traders and, consequently, their demand for analyst investment advice. Supporting evidence shows that the effect of AT on analyst research production is stronger for stock recommendations, which institutions follow primarily for investment decisions, and for forecasts issued before earnings announcements when analysts’ information discovery dominates the information interpretation role. We also find a negative relationship between AT and investment-focused institutional investors such as transient and non-monitoring investors. Our analysis demonstrates that AT can have long-lasting consequences on capital markets, beyond microstructure effects, through its negative effect on firm’s information environment