Stock market reactions to US Consumer Product Safety Commission enforcement actions

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Abstract

This study examines stock market reaction to violations of product safety regulations and firm product responsibilities in the post-enforcement period. Our event study results show that market reaction was negative to failures by firms to report product defects in a timely way. Our results also show that the stock market reaction varies depending on the type of violations, and whether there are single or multiple violations. Firms spend more on research and development and advertising in the post-enforcement period, in addition to investing in their compliance programmes which have a significant positive impact on product responsibility stewardship. Our empirical results show that the stock market reacts negatively to recall volume and refund remediation strategy. The stock market reaction is negative to social media communication about product recalls initiated by manufacturers. However, this negative effect appears to be counteracted by the positive corporate social responsibility (CSR) reputation effect of the manufacturers. Our findings imply that US manufacturing firms dealing with product recalls must be sensitive to how consumers and investors interpret the communication.

Short selling and the independence of business‐related analysts: Evidence from an emerging market

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Abstract

This paper investigates whether short-sale deregulation improves analysts' independence in an emerging market where conventional mechanisms mitigating conflicts of interest are either ineffective or absent. Short selling reduces the effectiveness of analysts' favourable opinions in creating or sustaining overvalued stock prices, thus decreasing the incentives of institutional clients of brokerages to exert pressure on related analysts to initiate coverage and issue biased opinions. Using a difference-in-difference approach, we find strong evidence that stocks that are eligible for short sales experience a greater reduction in coverage by related analysts than stocks that are ineligible for short sales. When covered firms become eligible for short sales, the quality of forecasts and recommendations issued by related analysts improves considerably. Further analyses show that shortable firms with a significant reduction in related analysts' coverage are more likely to underperform and to experience stock price crashes in the future. Altogether, our results are consistent with short selling effectively restoring related analysts' independence in emerging markets.

Who pays attention to sustainability reports and why? Evidence from Google search activity

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Abstract

We introduce country-level Google search activity as a direct measure of the level of stakeholder attention directed towards sustainability reports. We validate this measure by establishing that search activity for sustainability reports is correlated with temporal patterns in firms' supply of these reports. To frame the economic magnitude of this search behaviour, we then show that the level of attention directed towards sustainability reports is very low compared to the level of attention directed towards financial and accounting information. Next, we examine two related research questions. First, we identify who pays attention to sustainability reports. We find, consistent with the environmental Kuznets curve, that attention towards sustainability reports is strongly associated with economic development. Consistent with findings in prior research that suggest citizens in stakeholder-oriented countries have stronger preferences for firms to act prosocially, we also find that search activity for sustainability reports relative to search activity for financial performance metrics is greater in civil law countries than in common law countries. Finally, we then explore the question of why individuals pay attention to sustainability reports and find evidence that suggests sustainability reports are used for two primary purposes: evaluating the societal impacts of firms' actions; and, firm valuation.

Enhancing bank transparency: Financial reporting quality, fraudulent peers and social capital

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Abstract

This study examines the role of social norms in financial markets by relating bank transparency to social capital. Using comprehensive data on commercial banks, we provide empirical evidence that high social capital contributes to more transparent financial reporting, thereby enabling more precise risk assessments and promoting financial stability. We find that the effect of social capital is more pronounced when commercial banks are more complex and disclosure incentives of bank managers are strong. Our results suggest that more opaque reporting by peers explains lower transparency but financial misreporting is less contagious when social capital is high. Our study suggests that social capital can effectively improve reporting transparency when other mechanisms are not effective, thus securing financial system stability.

Firm culture and internal control system

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Abstract

The corporate culture within firms is a significant concern for regulators, shareholders and other stakeholders. Drawing on a large sample of US firms, we use the political preferences of the top management team (TMT) to proxy for a firm's culture and examine whether it influences the decision to implement an effective internal control system (ICS) and whether the ICS plays a mediating role between the culture created by the TMT and financial reporting quality. We find that a Republican-leaning TMT with a more conservative ideology is associated with a more effective internal control system. In addition, the TMT's political preferences affect financial reporting quality, both directly and indirectly, via the internal control system. A range of robustness tests reinforces our main findings.

Predicting accounting fraud using imbalanced ensemble learning classifiers – evidence from China

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Abstract

The current research aims to launch effective accounting fraud detection models using imbalanced ensemble learning algorithms for China A-Share listed firms. Based on a sample of 33,544 Chinese firm-year instances from 1998 to 2017, this research respectively established one logistic regression and four ensemble learning classifiers (AdaBoost, XGBoost, CUSBoost, and RUSBoost) by 12 financial ratios and 28 raw financial data. Additionally, we divided the sample into the train and test observations to evaluate the classifiers' out-of-sample performance. In detail, we applied two metrics, namely, Area under the ROC (receiver operating characteristic) curve (AUC) and Area under the Precision-Recall curve (AUPR), to evaluate classifiers' discriminability. In the supplement test, this study put forward an algebraic fused model on the basis of the four ensemble learning classifiers and introduced the sliding window technique. The empirical results showed that the ensemble learning classifiers can detect accounting fraud for the imbalanced China A-listed firms far more effectively than the logistic regression model. Moreover, imbalanced ensemble learning classifiers (CUSBoost and RUSBoost) effectively performed better than the common ensemble learning models (AdaBoost and XGBoost) in average. The algebraic fused model in the supplement test also obtained the highest average AUC and AUPR among all the employed algorithms. Our results offer firm support for the potential role of Machine Learning (ML)-based Artificial Intelligence (AI) approaches in reliably predicting accounting fraud with high accuracy. Similarly, for the Chinese settings, our ML-based AI offers utmost advantage in forecasting accounting fraud. Finally, this paper fills the research gap on the applications of imbalanced ensemble learning in accounting fraud detection for Chinese listed firms.

Accounting firm office size and tax aggressiveness

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Abstract

This paper empirically investigates the association between the size of accounting firm offices and corporate tax aggressiveness. We find that clients audited by large offices have lower levels of corporate tax aggressiveness. We also find that such a negative relation is less pronounced when an accounting firm office provides tax services or when the office possesses tax-specific industry expertise, and it is more pronounced when a client is financially important. The study contributes to the literature by documenting the role of accounting firm offices in influencing tax aggressiveness.

Liquidity ratios and corporate failures

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One of the most widespread claims in financial statement analysis is that liquidity ratios are useful for predicting failures. However, academic research has found surprisingly little empirical support for this claim. Using logistic regression splines, a non-parametric method, this paper finds that the relation between the current ratio and failures differs significantly depending on the level of the current ratio. At low, but not high levels, the current ratio is significantly negatively related to failure. Incorporating such context provides statistically and economically significant predictive power about failures. These findings help resolve the discrepancy between practitioners and the academic literature.