Do investors value disclosed versus recognised employee share options differently?

Prior research provides evidence consistent with footnote disclosures are being valued by investors. However, there are arguments as to whether the market would acquire and/or process disclosed versus recognised information in the same way. Prior studies have been inconclusive on the findings. This research provides evidence for the conditions under which differential valuation exist. Three factors are examined. First, I investigate whether the differential valuation is related to the reliability of the accounting estimates. Second, due to higher processing costs on disclosures relative to &ldquo;recognised&rdquo; information, I investigate whether sophistication of investors contributes to the differential valuation. Finally, I examine systematic biases arisen from how investors process information due to limited attention paid to disclosures. The results show that the market does process information in a complicated way. Investors discern the reliability of accounting estimates and value them differently when processing the information.<br /

Does the change of accounting regulation on employee share options give rise to greater scope for earnings management?

Purpose &ndash; The purpose of this paper is to address the concern about the impact of accounting regulatory change pertaining to employee share options (ESOs) on earnings management. Following Australia&rsquo;s adoption of International Financial Reporting Standards (IFRS) in 2005, companies are required to recognise the fair value of ESOs as expenses. Due to inherent imprecision in the estimate of ESO&rsquo;s fair value, the regulatory change from disclosure to recognition was widely claimed to potentially give rise to an alternative mechanism to manage earnings. This study provides empirical evidence on whether the regulatory change leads to earnings management problems. Design/methodology/approach &ndash; This study uses the regulatory change in accounting for ESOs to provide a direct test of earnings management between disclosed versus recognised regimes for the same sample of firms. The sample consists of Australian firms from S&amp;P/ASX300 for the period from 2003 to 2006.Findings &ndash; The results show that, although the accounting regulatory change from disclosure to recognition may provide an alternative earnings management vehicle, there is no evidence of this occurring. There could be several reasons for this finding. First, the statistical tests lack power. Second, there are stricter audit tests on recognised amounts than on disclosed amounts. Third, given the concern of excessive pay and the close scrutiny of compensation, managers may have already understated ESO values in the disclosure regime. Finally, managers have limited time and resources and the effort involved in the adoption of IFRS in 2005 could have restricted the time available to manage earnings via the ESO reporting channel.Originality/value &ndash; This study adds to the limited research on whether a change in accounting regulation for employee share options from disclosure to recognition gives rise to greater scope for earnings management. One reason for the lack of empirical evidence in the research is due to the problem of designing a test. Bernard and Schipper suggest that within-firm studies have limitations for comparing the effects of recognition versus disclosure when the change is driven by an estimate becoming more reliable. A cross-sectional study is also problematic due to self-selection bias if firms can choose between disclosure versus recognition. This study circumvents potential design problems raised by Bernard and Schipper by setting a test using regulatory change which allows the test to be compared directly using the same company.<br /

Auditor Style and Financial Statement Comparability

The term “audit style” is used to characterize the unique set of internal working rules of each Big 4 audit firm for the implementation of auditing standards and the enforcement of GAAP within their clienteles. Audit style implies that two companies audited by the same Big 4 auditor, subject to the same audit style, are more likely to have comparable earnings than two firms audited by two different Big 4 firms with different styles. By comparable we mean that two firms in the same industry and year will have a more similar accruals and earnings structure. For a sample of U.S. companies for the period 1987 to 2011, we find evidence consistent with audit style increasing the comparability of reported earnings within a Big 4 auditor's clientele.This accepted article is published as Jere R. Francis, Matthew L. Pinnuck, and Olena Watanabe (2014) Auditor Style and Financial Statement Comparability. The Accounting Review: March 2014, Vol. 89, No. 2, pp. 605-633. Doi: 10.2308/accr-50642. Posted with permission. </p

sj-docx-1-aum-10.1177_03128962221137235 – Supplemental material for Earnings management: Who do managers consider and what is the relative importance of ethics?

Supplemental material, sj-docx-1-aum-10.1177_03128962221137235 for Earnings management: Who do managers consider and what is the relative importance of ethics? by Paul Coram, James R. Frederickson and Matthew Pinnuck in Australian Journal of Management</p

The valuation relevance of Greenhouse Gas Emissions under the European Union Carbon Emissions Trading Scheme

Abstract: This study examines the valuation relevance of greenhouse gas emissions under the European Union Carbon Emissions Trading Scheme. We posit that carbon emissions affect firm valuation only to the extent that a firm's emissions exceed its carbon allowances under a cap-and-trade system and the extent of its inability to pass on carbon-related compliance costs to consumers and end-users. We measure a firm's ability to pass on the future costs by its market power and its carbon performance relative to its industry peers. The results show that firms' carbon allowances are not associated with firm valuation but the allocation shortfalls are negatively associated. We also find that the negative association between firm values and carbon emission shortfalls is mitigated for firms with better carbon performance relative to their industry peers and for firms in less competitive industry sectors. These findings, which suggest that the valuation impact of carbon emissions is unlikely to be homogenous across firms or industrial sectors, have important implications for future research design and for the disclosure and recognition of a firm's greenhouse gas liabilities