Category Archives: Accounting & Finance

Private family firms, generations and bank debt

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Abstract

This paper focuses on the use of bank debt by private family firms and whether it is higher for the first generations of family businesses than for their descendants and subsequent generations. We use a unique hand-collected data set of 4,041 private Spanish firms for the years 2004 to 2013. We find statistical evidence that family-controlled firms make greater use of bank credit. Moreover, we show that first-generation family firms acquire more bank debt than those of second and subsequent generations. Furthermore, during financial crises, family-controlled firms were subjected to less rationing, with increased bank financing for first generations.

Detecting overproduction: Evidence from inventory write‐down

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Abstract

We use inventory write-downs to differentiate opportunistic and non-opportunistic overproduction measures. We posit that non-opportunistic overproduction is positively associated with future write-downs because overproduction generally leads to excess inventory, while opportunistic overproduction (to inflate earnings) is negatively associated with write-downs because write-downs decrease earnings. We find that change-based proxies (deviations from past behaviour) are positively associated with the likelihood of future write-downs, whereas residual-based proxies (deviations from industry norms) are negatively associated with this likelihood, suggesting that the former (latter) primarily capture non-opportunistic (opportunistic) overproduction. Our study highlights the importance of using appropriate overproduction measures for each research setting.

Litigating crashes? Insights from security class actions

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Abstract

Investors tend to litigate large stock price declines, i.e., file ‘stock-drop lawsuits’. However, it is less clear whether the ex-ante threat of security class actions can deter stock price crashes in the first place. To answer this question, we exploit the 1999 ruling of the Ninth Circuit Court of Appeals that discourages security class actions as a quasi-exogenous shock, and find that reducing the threat of security class actions leads to a significant increase in stock price crash risk measured by negative skewness of stock returns. We reveal that the main effect is partially driven by a reduction in the timeliness of bad news disclosure and worsened earnings quality, which is consistent with the view that bad news hoarding serves as the key factor in the formation of a stock price crash. Our overall findings highlight the importance of security class actions in deterring the occurrence of firm-level negative tail events on the financial market.

Non‐GAAP earnings reporting following going‐concern opinions

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Abstract

We examine non-GAAP earnings reporting following a going-concern audit opinion (GCO). Using a propensity score-matched sample, matching first-time going-concern issuing companies with firms in financial distress that did not receive a going-concern report, we find that the likelihood and frequency of non-GAAP earnings reporting are lower following GCOs. In additional analyses, we find the negative association between the announcement of GCOs and the likelihood and frequency of non-GAAP earnings reporting stronger when GCOs are issued by industry-specialist auditors and when GCOs are unexpected, but do not find litigation risk or managers' ability to affect the association. These results are consistent with a decrease in investor demand for non-GAAP earnings disclosures following GCOs.

Do risk exposures explain accounting anomalies? A new testing method

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Abstract

I quantitatively evaluate how much of the cross-sectional return predictive ability of a range of accounting anomalies can be attributed to firm-specific stock return covariances with market risk factors. Using a novel two-step regression-based testing method, I find robust evidence that the risk factor exposures do not explain a meaningful fraction of the time-series variations in the return predictive coefficients of the anomaly variables. Out-of-sample tests further confirm that it is the mispricing component of the accounting anomalies that is mainly responsible for the return predictability.

The impact of board ethnic diversity on executive pay‐to‐performance sensitivity: Australian evidence

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Abstract

We examine how board ethnic diversity impacts executive pay-to-performance sensitivity. Using firm-year observations in Australia for the period 2007–2017, we document that board ethnic diversity leads to higher executive pay-to-performance sensitivity. The finding is robust in controlling for endogeneity using instrumental variable regression analysis, as well as using modified measures of board ethnic diversity. We also document that the impact of board ethnic diversity on executive pay-to-performance sensitivity is more pronounced for firms suffering from high agency costs and when the CEO's ethnicity is different from that of the majority of the board. This study helps to inform the debate on the issue of board ethnic diversity in Australia.

High‐temperature exposure risk, corporate performance and pricing efficiency of the stock market

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Abstract

Using the daily temperature data of the national meteorological stations, we measure the high-temperature exposure risk of Chinese A-share listed enterprises, investigate the impact of high-temperature exposure risk on corporate prime operating revenue and performance, and further discuss securities analysts' forecasts for this risk. We find that increased exposure to high temperature reduces corporate prime operating revenue, and the response of enterprises to high-temperature risk will lead to a rise in management expenses and the deterioration of business performance. Further evidence suggests that securities analysts generally underestimate or ignore the impact of high-temperature exposure risk, and our results are robust to different measures and samples.

Love thy neighbour: Evidence from capital structure decisions

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Abstract

We examine how the peer effects arising not only from the leading firm but also from a slightly better performing firm affect the capital structure decisions of a firm. There is a large body of literature documenting the importance of peer effects, but it is unclear whether managers pay close attention to activities of slightly better performers. This study uses both book- and market-value based approaches to estimate the peer effect measures. Our analysis shows that: (1) our peer effect measures induce the convergence of the follower firms' capital structure towards better performing firms; and (2) the capital structure converges more towards a slightly better performer.

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.