Information externalities and voluntary disclosure: Evidence from a major customer’s earnings announcement

Singapore Management University SOAR; Lee Kong Chian Fellowshi

Implications of Comprehensive Income Disclosure for Future Earning and Analysts' Forecasts

This paper examines the association of comprehensive income with subsequent period net income as well as analysts earnings forecasts. Our results support the notion that comprehensive income is incrementally useful in predicting subsequent period changes in net income. We also document that comprehensive income is associated with analysts earnings forecast revisions and forecast errors. The evidence is consistent with analysts failure to fully utilize the information disclosed in comprehensive income. The result suggests that analysts revise their year t+1s forecast downward when comprehensive income is smaller than net income but they do not revise the forecast upward when comprehensive income is greater than net income. This evidence on the asymmetric use of comprehensive income is consistent with the notion that the future recognition of unrecognized losses is more predictable than the future recognition of unrecognized gains

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