Market uncertainty and disclosure of internal control deficiencies under the Sarbanes-Oxley Act

This study examines cross-sectional differences in stock market reactions to the disclosure of internal control deficiencies under Section 302 of the Sarbanes-Oxley Act. We hypothesize that the market punishment for internal control problems will be less severe for internal control disclosure that helps reduce market uncertainty around the disclosure. We also predict that such a relation is dependent on the types of disclosure and the market\u27s prior knowledge of the credibility of firms\u27 financial reporting. Consistent with our hypothesis, we find that when firms disclose their internal control deficiencies, their abnormal stock returns are negatively associated with changes in market uncertainty (e.g., changes in the standard deviations of daily stock returns) around the disclosure. We also find that the impact of the uncertainty reduction is greater for voluntary disclosures of non-material weakness, especially those made in the context of previous suspicious events. The negative impact of changes in market uncertainty on the abnormal stock returns remains intact even after controlling for possible simultaneity. An analysis using financial analysts\u27 earnings forecasts dispersion as an alternative proxy for uncertainty confirms the results

Pricing of seasoned equity offers and earnings management

This study examines the relationship between earnings management by firms offering seasoned equity issues and the pricing of their offers. We hypothesize that seasoned equity offering (SEO) firms employing aggressive accounting decisions also more aggressively push up their offer prices, thereby leading to a decrease in the degree of underpricing. Consistent with our prediction (the issuer\u27s greed hypothesis), evidence indicates that SEO firms making opportunistic accounting decisions issue new shares at inflated prices. Our findings remain robust after controlling for other determinants of SEO underpricing and the possible endogeneity of pricing and earnings management

Are all management earnings forecasts created equal? expectations management versus communication

Recent studies associate management earnings forecasts (MEFs) with expectations management. These studies, however, neither provide evidence on the extent and scope of expectations management through MEFs nor consider alternative incentives for issuing MEFs. Consequently, existing evidence does not help regulators assess whether MEFs effectively facilitate communication with investors. We investigate to what extent managers exploit their earnings forecasts as a tool of expectations management or as a communication device. By examining relations among MEFs, analysts\u27 forecasts, and actual earnings, we classify MEFs into three incentive categories: (1) expectations management, (2) communication, and (3) other incentives. We find that a significant proportion (approximately 45 percent) of MEFs is issued to convey accurate earnings information to the market (that is, communication incentive). We also find that the fraction of MEFs for the expectations-management incentive increases post-Regulation Fair Disclosure. The evidence from examination of the various managerial motives for each incentive category supports our classification. Additional analysis using alternative classifications based on bad/good news and pessimistic/optimistic forecasts reveals that our proposed classification of MEFs works better in defining expectations management than these other classifications. This implies that more caution is warranted in defining expectations management when investigating the association between managerial motives and incentives for issuing MEFs

Underwriter choice and earnings management: evidence from seasoned equity offerings

Using a sample of seasoned equity offerings (SEOs), this paper examines the association between the choice of financial intermediary and earnings management. We contend that with more stringent standards for certification and intense monitoring, highly prestigious underwriters restrict firms\u27 incentives for earnings management to protect their reputation and to avoid potential litigation risks, while firms with greater incentives for earnings management avoid strict monitoring by choosing low-quality underwriters. Consistent with our predictions, we find an inverse association between underwriter quality and issuers\u27 earnings management. In addition, we find that underwriter quality is positively related to SEOs\u27 post-issue performance, even after controlling for the effect of earnings management. We also find that firms with low underwriter prestige and high levels of earnings management underperform the most. However, the effect of underwriter choice on post-issue performance does not last long

Positive and negative information transfers from management forecasts

We examine positive and negative information transfers associated with management earnings and revenue forecasts. Positive information transfers are due to industry commonalities whereas negative information transfers are caused by competitive shifts. We argue that positive and negative intra-industry information transfers offset each other and lead to an overall finding of no information transfers even though they exist. We also conjecture that the type of information transfers from the same management forecast can be positive or negative based on the characteristics of the information receiver. We hypothesize positive information transfers to non-rival firms and negative information transfers to rivals. Consistent with our prediction, we find negative (positive) information transfers between forecasting firms and non-forecasting rival (non-rival) firms in the same industry. Through analyses using competitors identified by Hoover\u27s and 10-K reports, we show more general evidence of negative information transfers to rival firms

The impact of CEO/CFO outside directorships on auditor selection and audit quality

We examine whether outside directorships of chief executive officer/chief financial officer (CEO/CFO) and resulting network ties to auditors affect auditor selection decisions and subsequent audit quality. The network ties arise when the CEO/CFO of a firm (home firm) serves as an outside director of another firm that hires an auditor (connected auditor). Using a sample of firms that switch auditors in the post-Sarbanes-Oxley Act period, we find that home firms are more likely to appoint connected auditors. We also find that home firms hiring connected auditors experience a significant decline in subsequent audit quality, compared to those hiring non-connected auditors. Specifically, the increases in the likelihood of misstatements, the magnitude of absolute discretionary accruals, and the propensity to meet or beat earnings benchmarks after home firms appoint connected auditors are significantly greater, compared to those for other firms switching to non-connected auditors. We further find that the decline in audit quality is more pronounced when the network is established at the local office level

Deleterious effects in reproduction and developmental immunity elicited by pulmonary iron oxide nanoparticles

With the extensive application of iron oxide nanoparticles (FeNPs), attention about their potential risks to human health is also rapidly raising, particularly in sensitive subgroups such as pregnant women and babies. In this study, we a single instilled intratracheally FeNPs (1, 2, and 4 mg/kg) to the male and female parent mice, mated, then assessed reproductive toxicity according to the modified OECD TG 421. During the pre-mating period (14 days), two female parent mice died at 4 mg/kg dose, and the body weight gain dose-dependently decreased in male and female parent mice exposed to FeNPs. Additionally, iron accumulation and the enhanced expression of MHC class II molecules were observed in the ovary and the testis of parent mice exposed to the highest dose of FeNPs, and the total sex ratio (male/female) of the offspring mice increased in the groups exposed to FeNPs. Following, we a single instilled intratracheally to their offspring mice with the same doses and evaluated the immunotoxic response on day 28. The increased mortality and significant hematological- and biochemical- changes were observed in offspring mice exposed at 4 mg/kg dose, especially in female mice. More interestingly, balance of the immune response was shifted to a different direction in male and female offspring mice. Taken together, we conclude that the NOAEL for reproductive and developmental toxicity of FeNPs may be lower than 2 mg/kg, and that female mice may show more sensitive response to FeNPs exposure than male mice. Furthermore, we suggest that further studies are necessary to identify causes of both the alteration in sex ratio of offspring mice and different immune response in male and female offspring mice.