Business strategy and earnings quality

ABSTRACT: Using the Miles and Snow (1978) strategy typology, this study investigates whether business strategy is associated with the quality of reported earnings. In a sample of U.S. listed firms, we predict and find that defender strategy firms are associated with higher levels of earnings management and prospector-strategy firms are associated with higher levels of accounting conservatism. However, this relation between business strategy and earnings quality is altered during high and low economic growth periods. In high-growth periods, while prospector firms exhibit lesser accounting conservatism, defender firms exhibit lesser earning management. In low-growth periods, the prospector firms become more conservative in reporting while the defender firms engage in more aggressive earnings management. Our findings provide direct evidence of the link between business strategy and earnings quality

Impact of Macro and Micro Governance Structures on Earnings Management

This study examines the macro and micro level determinants of the quality of reported earnings. The prior literature suggests that both micro and macro variables impact on discretionary accruals choice in managing earnings. However, most of the studies on earnings management have been single country studies that have focussed only on micro variables as all firms within the samples examined have been subject to the same interplay of macro economic, legal, cultural and institutional frameworks. This study addresses this gap in the literature by using a sample of 156,906 firm year observations from 63 countries over the period 1998-2007 to examine the role of thirteen micro and macro variables in determining earnings quality. The macro variables studied include legal enforcement, political system, and control of corruption, culture and adoption of IFRS. Earnings management is estimated using the modified Jones model (Dechow et al. 1995) in a cross section (DeFond and Jiambalvo 1994; Francis et al. 1998). The results of the study indicate that macro and micro level variables have a strong impact on earnings management behaviour and thus earnings quality. The limits imposed by a country's legal, cultural and institutional setting on managerial discretionary accruals choices, strongly impact the quality of reported earnings. Future research on earnings management should therefore control both micro and macro level variables

Government Quality, the Adoption of IFRS and Auditor Choice: A Cross Country Analysis

We examine the association between country-level government quality and firms’ choice of external auditors. We use a firm’s choice of a Big 4 auditor as a proxy for the demand for high-quality financial reporting. Using a cross-sectional sample of 142,193 firm-year observations from 46 countries over 1998-2007, we show that government quality of a country has a significant positive effect on the likelihood of choosing Big 4 auditors by firms in that country. We also show that firms in countries with strong governments that have adopted IFRS are more likely to choose Big 4 than non-Big 4 auditors. To our knowledge, this is the first study of its kind to provide direct evidence on the role of government quality in firms’ choice of external auditors. The results provide insights for policy makers on the importance of government quality toward improving financial reporting quality in a country

Moderating effect of carbon accounting systems on strategy and carbon performance: a CDP analysis

Carbon emissions bring significant risks and opportunities, and organisations have responded by adopting different strategies and environmental control systems, such as carbon accounting systems (CASs). However, it remains unclear whether a CAS can help reduce emissions, and what role is played by a CAS in the relationship between carbon strategy and carbon performance. Therefore, this paper analyses the strategy-accounting-performance nexus by drawing on 1672 firm-year observations of firms participating in the CDP in 2014 and 2015. The results suggest that the quality of a CAS is influenced by strategic choices; with a proactive carbon strategy being associated with a higher quality CAS. Further, proactive strategies and CASs are found to be associated with carbon savings and emissions reduction. The results indicate a moderating role of CASs on the strategy-performance relationship, with carbon strategy enabling higher carbon savings and lower emissions intensity in the presence of a high-quality CAS. Our findings suggest that formulation of carbon strategies and establishment of carbon measures can drive effective carbon mitigation

The Effects Of Carbon Emissions And Agency Costs On Firm Performance

Carbon emissions and agency costs can have an impact on firms\u27 financial performance. However, limited attention has been paid to the combined and gradual effects of these two factors on firms\u27 performance. We explore the separate and combined effects of carbon emissions and agency costs on firms\u27 financial performance by utilizing data from 2323 US firms that disclosed their environmental information to CDP from 2007 to 2016. The results indicate that firms with higher carbon emissions experience lower performance as the market reacts negatively. Further, firms with both higher carbon emissions and higher agency costs have lower performance. We also investigated year-on-year change in firm performance and found that, keeping agency costs constant, a change in carbon emissions leads to lower performance. Overall, the findings suggest that when the market responds negatively to firms\u27 environmental decisions, high agency costs exacerbate the adverse effect of high carbon emissions on firm performance

Board Ethics and Auditor Choice – International Evidence

2 Board Ethics and Auditor Choice – International Evidence ABSTRACT This study examines whether firms‟ auditor choice relates reflects the strength of board ethics. Using a large sample of firms 132,853 firm year observations from forty-six countries around the globe. and controlling for a number of firm- and country-level factors, we find that firms in countries where “high board ethical values” prevail are more likely to hire a Big 4 auditor. We also find that the relation between board ethical values and auditor choice is mitigated by the firm‟s board size. These results establish an indirect link between board ethics and financial reporting quality through the firm‟s choice of auditor

The effect of Investor Protection and IFRS Adoption on Earnings Quality around the World

This study examines the effect of investor protection and IFRS on the quality of accounting earnings for forty-six countries around the globe. Two attributes of accounting earnings are studied: the magnitude of discretionary accruals, and the avoidance of loss reporting. The results suggest that IFRS adoption per se doest not lead to increased earnings quality, at least based on the earnings attributes studied in our study. Specifically, accounting earnings quality improves as investor protection regimes become stronger, but only for IFRS adopting countries, that is, the effect of investor protection is mediated through the adoption of IFRS. The results highlight the importance of accounting enforcement to financial reporting quality and the need for standard setters and policy makers to design mechanisms that will limit managers’ earnings management practices

Climate governance effects on carbon disclosure and performance

Integration of carbon oversight into board structures and processes has the potential to improve carbon performance and demonstrate accountability to stakeholders. However, it is not clear how climate governance affects carbon disclosure. Contributing to two strands of the literature, sustainability and governance issues, this paper examines the combined impact of climate governance on carbon disclosure. We find climate governance is associated with alignment between carbon disclosure and carbon performance. The results suggest that climate governance also reduces over-acclaiming of good performance via extensive disclosure, and low-polluters disclose more to differentiate themselves. Our findings highlight the importance of the frequency of reporting to the board and time horizon of carbon reporting for improving carbon disclosure and carbon performance. In contrast to traditional governance mechanisms, our results suggest climate governance better reflects firms’ commitment to addressing sustainability issues and transparent reporting