Category Archives: Accounting & Finance

Optimal capital structure with supplier market power

Posted on by

Abstract

We use a real-option model to study the effect of input supplier's market power on a firm's capital structure, and identify the Nash equilibrium outcome (firm's investment and financing policies and its supplier's pricing policy). When its supplier has market power, the firm will reduce leverage ratio and delay investment. This can help explain why observed leverage ratios are lower than in traditional capital-structure models (without supplier market power). Firm value can be increased by the vertical acquisition of the supplier, which would also result in a higher leverage ratio. This helps explain the observed increase in leverage ratios after acquisitions.

Intervention of large shareholders and corporate fraud – evidence from vertical interlock in corporate pyramids in an emerging economy

Posted on by

Abstract

Through using 17,995 firm-year observations of all the Chinese A-share listed firms from 2008 to 2016 as a sample, we document that firms with vertical interlock have a lower likelihood of committing corporate fraud. We further test the underlying mechanisms, and we find that the effect of vertical interlock on the occurrence of corporate fraud is more pronounced when firms operate in a region with poor legal protection; with the legal environment being enhanced in China, the effect of vertical interlock has become less significant; and the effect of vertical interlock is also more pronounced when firms exhibit poor information environment at the firm level. Our results in this paper imply that the role of large shareholders and legal protection are substitutes in an emerging economy, and even with rapid economic and legal development in China, large shareholders keep playing a positive role in controlling fraudulent behaviours in Chinese listed firms.

Stock liquidity and tone of press releases

Posted on by

Abstract

This paper presents evidence that higher stock liquidity makes firms increase tone of press releases. I find that firms with higher stock liquidity have higher tone in press releases, relative to the tone of news initiated by media, than firms with lower stock liquidity. This relation is stronger for firms with greater short-term pressure, that is, with greater transient institutional ownership, greater sensitivity of manager's wealth to stock price, and more analyst coverage. This finding suggests that stock liquidity, by producing short-term pressure on firms, leads firms to boost press release tone.

Covenant violation and operational efficiency

Posted on by

Abstract

We examine the impact of covenant violation on corporate operational efficiency. Using an aggregate measure of operational efficiency developed by Demerjian et al. (Management Science, 58, 2012, 1229–1248), we provide strong empirical evidence that covenant violations hinder firms from achieving operational efficiency. Our finding is robust to alternative definitions of operational efficiency and various model specifications to address potential endogeneity issues. Further analyses show that lower operational efficiency is attributable to covenant-violating firms' under-investments in capital and labour. In addition, the negative effect of covenant violation on operational efficiency is not universally the same, and is less evident in violating firms with greater agency problems.

Stock market liquidity during crisis periods: Australian evidence

Posted on by

Abstract

Liquidity is an important characteristic of financial markets, affecting portfolio decisions and priced risk. During periods of market turmoil, such as occurs during financial crisis, investors have an elevated need for cash and so understanding how liquidity differs during those periods is important. We examine how stock market liquidity was impacted by two crises with distinct origins, the global financial crisis (GFC) and the COVID-pandemic. Our sample includes the S&P/ASX200 constituents for the period January 2005–December 2020. We find that the Australian stock market is less liquid during both crisis periods; spreads are wider, depth is lower, and price impact is larger (stock prices move a lot in response to small amounts of volume). Although the magnitude of the liquidity change is greater at the onset of COVID, the duration of the impact is longer during the GFC, resulting in a larger average effect. While trading volume declines during the GFC, it increases during COVID. Our results are robust to alternate liquidity proxies, methodologies and crisis period identification, and generally applicable across stock sectors.

CEO social capital, business environment, and the level of corporate risk‐taking in China

Posted on by

Abstract

We find a significant positive role of chief executive officer (CEO) social capital on the level of corporate risk-taking for Chinese listed firms from 2008 to 2019. We reveal that a better business environment tends to reduce this positive relationship. In addition, we also find that corporate innovations provide moderation effects on the relationship. Further analysis of heterogeneity tests on firm characteristics suggests that CEO social capital's effect on corporate risk-taking is significant and stronger for non-state-owned enterprises, firms with fewer female directors on their board, and firms with more cash holdings.

The challenges facing Chinese accounting scholars publishing in English (and Chinese) language journals

Posted on by

Abstract

Interviews with accounting scholars in China found that the pressure to publish in English language journals is high for reasons of tenure and promotion, but the expectation of acceptance is low. Publishing in Chinese language journals is equally as difficult because of socio-cultural factors that favour a limited group of scholars with reputational capital. Scholars in China either avoid submitting articles to English language journals, collaborate with western scholars to enhance the probability of success, or focus on quantitative methodologies because of a perception that it is less demanding on language capability compared with qualitative approaches to research.

The new audit report with key audit matters: Lessons from Thailand’s first implementation

Posted on by

Abstract

Using a mixed method research design, this study is the first to provide comprehensive evidence of the impacts of Thailand's first implementation of the new audit report with key audit matters (KAMs), which took place in 2016. Survey evidence shows that the new audit report improves the informative value and effectively narrows the deficient-standards and deficient-performance gaps. Nonetheless, financial statement users have made new demands for information that lie beyond auditors' traditional responsibility. Moreover, marginally significant evidence from archival data shows that although the disclosure of KAMs increases audit fees and audit delays, it improves audit quality. However, the market does not value KAMs.

Proprietary information and the choice between public and private debt

Posted on by

Abstract

The high costs of disclosing confidential information lead firms with proprietary information to prefer private debt (bank loan) to public debt (corporate bond). We provide empirical evidence supporting this proposition using the staggered adoption of the inevitable disclosure doctrine (IDD) by US state courts that exogenously increased the value of proprietary information. The focal firms are significantly less likely to issue bonds after the IDD adoption. Financing through public debt decreases more for firms in which the protection of proprietary information is relatively more important.

I’d do anything, but I won’t do that: Job crafting in the management accounting profession

Posted on by

Abstract

We examine management accountants' attempts to customise their roles through job crafting behaviour. In a field survey of 284 professional management accountants, we show that role identity conflicts are associated with attempts to narrow/sideline tasks and relationships in order to achieve greater fit. We also identify two key moderators of this behaviour, namely job discretion and business involvement. Our findings contribute to discussions on how and why accountants self-initiate changes to their roles and the boundary factors that shape these actions. In doing so, we challenge current perspectives on business partnering by exposing a dark side of high business involvement.