Category Archives: Accounting & Finance

Self‐sacrifice or empty symbolism: A study of $1 CEOs

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Abstract

We examine whether CEOs' voluntary acceptance of a $1 salary is a credible signal of sacrifice. We find that firms with $1 salary CEOs are: (i) more likely to be associated with income-increasing accrual-based earnings management; (ii) less likely to use real earnings management; and (iii) more likely to engage in corporate tax avoidance. Our results indicate that this performance enhancement is driven by the motivation to restore salaries to their original levels. Our results suggest that extreme salary sacrifice could indicate an empty promise to improve firm performance and should be considered cautiously by investors and regulators.

Do ties still bind? Analyst behaviour after financial restatements

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Abstract

We find that, compared to non-connected analysts, analysts with professional connections to a coverage firm (i.e., connected analysts) are more likely to continue covering the firm after it issues a restatement. Furthermore, connected analysts are more likely to issue pessimistic earnings forecasts and to downgrade stock recommendations for the firm after its financial restatement. Our results also reveal the costs and benefits associated with connected analysts' pessimism – a reduced market reaction to the analysts' pessimistic research on the restating firm, and a positive effect on the market's perception of the quality of the analysts' research on non-restating firms.

Do rights matter? An intraday analysis of rights issues in Australia

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Abstract

We examine intraday abnormal returns associated with rights issue announcements in the Australian equity market over the period January 2000 to December 2022. Consistent with prior studies, we find significant abnormal returns ranging from −2.9% to −2.7% on the event day. We provide the first evidence on intraday price reactions pertaining to rights issues in Australia. Within 15 min of an announcement, we find significant abnormal trade returns of −1.2%. However, market participants are unable to profit by trading on these announcements due to transaction costs. Our results imply that the information content is fully impounded within 90 min.

Compensating balance and loan bargaining power in China

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Abstract

Chinese firms simultaneously have high levels of loans and cash holdings. Through listed firms on the Shanghai and Shenzhen Stock Exchanges, we establish a negative link between cash holdings and a firm's loan bargaining power, especially in regions with less bank competition, through a firm's passive response to bank requests rather than its voluntary excess cash reserves. Furthermore, state ownership, collateral, economic contribution, and reduced information asymmetry may effectively strengthen firm bargaining power and moderate the link. However, better marketisation strengthens the link. The banking sector may need to improve its efficiency through better credit rationing in future reforms.

Why does operating profitability predict returns? New evidence on risk versus mispricing explanations

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Abstract

This study develops new evidence on risk versus mispricing explanations of the well-known profitability premium. First, we examine whether exposure to expected downside risk is a plausible explanation. We find that high profitability is associated with both lower ex ante and ex post probabilities of future price crashes. Thus, less profitable firms exhibit greater downside risk than highly profitable firms, making a downside risk explanation implausible. Although this fact is overlooked by the market in general, it is anticipated by options traders; we find that put options of low profitability firms are relatively more expensive. Simultaneously, these firms do not exhibit greater probability of jumps, indicating that volatility(risk)-based explanations for the profitability premium are unlikely to be descriptive. Second, we find that the sticky-expectations model of Bouchaud et al. (2019, The Journal of Finance, 74, 639–674) only partially explains the profitability premium. While on average, analysts' forecast revisions correct in the same direction as recent profitability, the profitability premium still exhibits a strong relationship to the non-sticky component of analysts' forecast revisions. Third, institutional investors trade profitability-based signals but do so with a delay, likely contributing to the premium. Overall, our evidence favours the explanation that the profitability premium is related to investor mispricing of potential downside risk and provides greater clarity on recent findings in the literature.

The influence of partners’ known preferences on auditors’ sceptical judgements: The moderating role of perceived social influence pressure

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Abstract

We examine the moderating effect of auditors' perceived social influence pressure on the influence of partners' known preferences on auditors' sceptical judgements in China. We invoke social influence theory to provide complementary insights into the driving forces behind auditors' judgements, over and above the pressure arising from accountability. We hypothesise that the influence of partners' known preferences on auditors' sceptical judgements is stronger for auditors who perceive higher social influence pressure than those who perceive lower pressure. Our results support the hypothesis and establish the value of understanding auditors' perceived social influence pressure in managing partners' communication with audit teams.

Investor reactions to key audit matters: Financial and non‐financial contexts

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Abstract

We investigate how a disclosed risk item and key audit matter (KAM) relatedness combine to affect investors' riskiness assessment in financial and non-financial contexts. When management disclose a high-risk item, we find that investors react the same way across contexts with KAM relatedness having no effect. When management disclose a low-risk item, investors react differently in each context. When a KAM is related to the disclosed financial (non-financial) low-risk item, investors assess investment riskiness higher (lower) than when a KAM is unrelated to the low-risk item. Our findings indicate the varying communicative value of KAMs across financial and non-financial contexts.

Impact of the interactive and diagnostic uses of performance measurement systems on procedural fairness perception, cooperation and performance in supply alliances

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Abstract

We examine the effects of interactive and diagnostic uses of performance measurement systems (PMSs) on two behavioural factors (procedural fairness perception and cooperation) in inter-firm alliances. We further investigate whether the two behavioural factors mediate the relationship between PMS uses and alliance performance. We find that both interactive and diagnostic uses of PMS are significantly related to procedural fairness perception but only the interactive use is significantly related to cooperation. The relationships between the two uses of PMS and alliance performance are serially mediated by procedural fairness perception and cooperation. These findings contribute to management accounting studies in inter-firm alliances.

What firm risk factors drive bank loan pricing and other terms? Evidence from China

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Abstract

This study investigates how firm risk factors affect bank loan pricing. Although firm-specific stock price crash risk affects bank loan costs directly, it also prompts other risks, including financial restatement and litigation, which in turn trigger higher bank loan costs. Strong internal and external governance mechanisms help reduce agency problems and improve information transparency, alleviating the adverse effect of stock price crash risk on loan costs. Our results confirm that bankers take good corporate governance into account in their bank loan decisions. We also show that bond investors price the adverse effect of stock price crash risk, prompting higher corporate bond costs. Futher evidence suggests that banks impose stricter non-price terms, such as smaller loan size, shorter loan maturity, and a higher likelihood of collateral requirement, on firms with higher crash risk.

How important are semi‐annual earnings announcements? An information event perspective

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Abstract

Using a method that avoids the need to specify earnings expectations, we demonstrate that the period surrounding the semi-annual announcement of Australian firms' earnings is, on average, an important source of information. Although there is substantial year-to-year variation, we observe no evidence of any significant time trend, and also conclude that a shift from Australian domestic generally accepted accounting principle to International Financial Reporting Standards did not impact the association between earnings announcement windows and stock returns. We also find no evidence that the informativeness of earnings announcements varies systematically with firm size, analyst following or economic news (i.e., positive vs. negative stock returns, profits vs. losses), although we do observe significant variation across industries. Our conclusion is further supported by contrasting the earnings release date with the days immediately prior to release, or high information days other than earnings announcement windows. Using a more precise event window relative to prior studies (i.e., 3 h vs. 3 days), we confirm that earnings announcements contain significant new information about fundamentals.