JournalTOCs

Review of Accounting Studies
Journal Prestige (SJR): 2.757

Citation Impact (citeScore): 2
Number of Followers: 28

Hybrid journal (It can contain Open Access articles)
ISSN (Print) 1573-7136 - ISSN (Online) 1380-6653
Published by Springer-Verlag

[2469 journals]

The real effects of risk disclosures: evidence from climate change
reporting in 10-Ks
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  Abstract: Abstract We examine the economic impacts of risk disclosures in accounting reports on the real decisions made by information senders (i.e., managers of the disclosing firms). In so doing, we exploit the SEC rule enacted in 2010 regarding climate change risk (CCR) reporting in 10-Ks as a quasi-natural experimental setting in which to apply a difference-in-differences analysis. We focus on CCR because of its vast influence on economic activities and the relative ease of identifying managerial behaviors related to climate change. Our results reveal that CCR-disclosing firms tend to engage more (less) in pro-environmental (anti-environmental) activities after the SEC 2010 rule. These real effects are more pronounced in firms that are under higher pressure from climate-minded external stakeholders and when firms’ businesses are more sensitive to climate change-related risks. We also find improved environmental performance in terms of reductions in the quantity, intensity, and cost of carbon emissions surrounding the SEC 2010 rule. Overall, our findings suggest that CCR disclosures alter corporate behaviors and help curb climate change.
  PubDate: 2022-05-14
Valuation uncertainty and analysts’ use of DCF models
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  Abstract: Abstract Using textual analysis for a large sample of analyst reports on U.S. firms, we find that analysts are more likely to use a discounted cash flow (DCF) model and to discuss more cash flow and discount rate information for firms with more uncertainty, as measured by earnings quality and firm risks. The market reactions to target price changes based on a DCF model are stronger, particularly for firms with greater valuation uncertainty and when the analysts present more cash flow and discount rate discussions. These results indicate that the analyst valuation process reflects investors’ information demand under uncertainty and has a bearing on the informativeness of analyst research.
  PubDate: 2022-05-07
On the validity of asymmetric timeliness measures of accounting
conservatism
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  Abstract: Abstract This study extends the asymmetric timeliness measure (ATM) framework described in Ball et al. (Journal of Accounting Research 51(5): 1071–1097, 2013a) to investigate the validity of tests for differences in conservative accounting practices across firms and time. This extension is important because that framework is not designed to measure or test for differences in conservatism, which is the explicit focus of nearly all conservatism research. This extension identifies three structural biases (which we refer to as the misclassification, contemporaneous income, and growth biases) inherent in the Basu (Journal of Accounting and Economics 24(1): 3–37, 1997) ATM. We show that correcting for the contemporaneous income bias results in a substantial reduction in ATM estimates. Additionally, the estimated magnitude of the contemporaneous income bias is so large that the typically reported significantly positive relationship between conservatism and leverage and the negative relationship between conservatism and size become insignificant after correcting the traditional ATM to control for this bias. Also, the positive relationship between conservatism and book-to-market ratio is attenuated significantly. Developing empirical controls for the misclassification and growth biases identified in our framework is problematic, but one or both are expected to be sufficiently large as to raise significant concerns about results of conservatism studies that rely on the ATM. Until methods to control for or eliminate all sources of bias are established, we suggest that future research use ATMs that focus only on conditionally conservative accruals or on alternative measures of conditional conservatism.
  PubDate: 2022-05-02
Tax haven incorporation and financial reporting transparency
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  Abstract: Abstract A widespread perception exists that tax havens facilitate corporate opacity. This study provides new evidence on the association between tax havens and the transparency of firm financial reporting using a unique group of firms whose parent companies are incorporated in tax havens but whose headquarters or primary operations—that is, their base—are in nonhaven countries. While most research suggests a negative association between tax havens and transparency, I examine whether this association depends on the firm’s corporate governance environment as well as its capital market incentives. I find that the negative association is limited to firms subject to weak governance in the base country. In contrast, I find, among firms in stronger governance environments, a positive association between tax haven incorporation and transparency, which is most concentrated among firms with greater capital market incentives. My findings suggest that future researchers should use caution when assuming an unambiguous negative association between tax havens and corporate transparency. The study also provides unique evidence that tax planning can motivate higher transparency in certain settings.
  PubDate: 2022-04-27
Empirical implications of incorrect special item tax rate assumptions
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  Abstract: Abstract The use of assumed tax rates to adjust special items (e.g., restructuring charges, asset writedowns, etc.) is common in empirical accounting research as these items are reported pre-tax and are often used in research designs that include after-tax earnings. This study explores the potential empirical consequences of assuming an incorrect tax rate in adjusting special items. We focus on special items given their prevelance in the literature as well as the wide variation in tax rate assumptions from these studies. Our investigation shows that the tax rate assumed can be critical to the interpretation of results. Importantly, our evidence suggests extreme tax rate assumptions, in particular the highest statutory rate, are especially problematic and yield dramatically biased estimates. Our review of the tax consequences of special items suggests that, in almost all circumstances, the marginal tax rate is the theoretically correct rate to apply to these items when adjusting for tax. Consistent with this view, our empirical evidence, with a limited exception, suggests that marginal tax rates represent the best estimate of the true tax rate. By providing empirical evidence on the potential empirical consequences of these varied tax rate assumptions, we offer a guide for future researchers on the importance of this critical design choice.
  PubDate: 2022-04-22
Taxes and director independence: evidence from board reforms worldwide
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  Abstract: Abstract We examine whether changes to corporate governance resulting from board reforms affect corporate tax behavior. While the connection between corporate governance and tax behavior has been the subject of intense interest in the literature, a lack of exogenous variation in governance has hampered inferences. Our inquiry exploits a set of major board reforms that capture shocks to board reforms for firms in 31 countries. The results indicate that corporate tax avoidance decreases significantly following major board reforms. We find that the influence of board reforms on corporate tax behavior is stronger in firms with relatively higher agency conflicts and more opaque information environments.
  PubDate: 2022-04-21
When doing good for society is good for shareholders: importance of
alignment between strategy and CSR performance
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  Abstract: Abstract We investigate the association between firms’ strategy and their corporate social responsibility (CSR) performance and whether the alignment between strategy and CSR activities affects firms’ financial performance. We describe firms’ strategies as innovation differentiation, marketing differentiation, and cost leadership Miller, (1986). We expect a higher benefit from CSR for firms that rely more on innovation differentiation and a lower benefit for firms that rely more on marketing differentiation and cost leadership. We measure firms’ strategy through a textual analysis of 10-K filings and collect CSR data from KLD Ratings. We find that innovation differentiation strategy is positively associated with CSR performance, while cost leadership (marketing differentiation) is negatively (insignificantly) associated with CSR performance. Moreover, we find that innovating differentiators with higher CSR performance achieve higher financial performance. Finally, we provide additional evidence that information asymmetry and financial constraints moderate the alignment between firms’ strategy and CSR performance.
  PubDate: 2022-04-21
Regulatory interventions in response to noncompliance with mandatory
derivatives disclosure rules
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  Abstract: Abstract We investigate regulatory actions in response to violations of mandatory derivatives disclosure rules (SFAS 161) and the outcomes of these regulatory interventions using a hand-collected sample of derivatives disclosures. Derivatives are used by nearly two-thirds of U.S. nonfinancial firms, and they are one of the most complex types of financial contracts. Consequently, inadequate derivatives disclosures could pose significant challenges to financial statement users in assessing the risk and financial health of enterprises. First, we document that firms with high proprietary and agency costs are less likely to comply with SFAS 161. Next, by examining derivatives-related SEC comment letters, we further show that this noncompliance significantly increases the likelihood of receiving a comment letter. We also find that comment letter resolution is longer for firms with strong proprietary motivations than for those with strong agency incentives. Finally, we find that compliance with regard to derivatives disclosures following comment letter resolution improves for firms with high agency costs but not for firms with high proprietary costs. Collectively, our results imply that, when derivatives-related proprietary costs are high, benefits of noncompliance likely outweigh the costs. Moreover, the SEC’s review effectiveness depends crucially on whether firms’ initial motivation for noncompliance is proprietary versus agency.
  PubDate: 2022-04-20
The association between current earnings surprises and the ex post bias of
concurrently issued management forecasts
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  Abstract: Abstract The vast majority of managers’ earnings forecasts are issued concurrently (i.e., bundled) with their firm’s current earnings announcement. We document a predictable bias in these forecasts—the forecasts fail to fully reflect the persistence of the current earnings surprise. Specifically, we find that managers issue (1) optimistically biased forecasts alongside negative earnings surprises and (2) pessimistically biased forecasts alongside large positive earnings surprises. Bayesian updating implies this bias could be unintentional, but we find that the bias is stronger when managers have greater incentives and fewer constraints to issue biased forecasts, suggesting that, to some extent, the bias might be intentional. Relatedly, although managers typically have better information about their firm’s earnings than analysts, we show that analyst reliance on these biased management forecasts represents a mechanism (and an alternative interpretation) for a similar analyst underreaction to current earnings attributed in the literature to analysts’ cognitive bias. We also find that, on average, investors do not appear to initially understand the bias in these forecasts but do unravel it over longer windows. However, investors more quickly unravel the bias when the manager has a history of issuing biased forecasts and when the firm has more sophisticated investors. Overall, we document that managers’ forecasts appear to repeatedly underweight the persistence of current earnings surprises, are biased in ways that improve investors’ perceptions of managers’ ability, and that this behavior concentrates in subsamples where outsiders have a harder time recognizing any bias.
  PubDate: 2022-04-20
Does stock liquidity shape voluntary disclosure' Evidence from the SEC
tick size pilot program
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  Abstract: Abstract Employing the SEC Tick Size Pilot Program, which increases the minimum trading unit of a set of randomly selected small-capitalization stocks, we examine whether and how an exogenous change in stock liquidity affects corporate voluntary disclosure. Using difference-in-differences analyses with firm fixed effects, we find that treatment firms respond to the liquidity decline by issuing fewer management earnings forecasts, while, in contrast, control firms do not exhibit a significant change. Next we show that the effect is more pronounced when firms experience more severe liquidity decreases during the TSPP and rule out a set of alternative explanations. Further strengthening the identification, we find a consistent reversal effect after the end of the pilot program. To generalize our findings, we use voluntary 8-K filings and conference calls as alternative voluntary disclosure proxies and find similar effects. Overall, these findings show how an exogenous change in stock liquidity shapes the corporate information environment.
  PubDate: 2022-04-18
Bank financial reporting opacity and regulatory intervention
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  Abstract: Abstract I study the association between bank financial reporting opacity, measured by delayed expected loan loss recognition, and the intervention decisions made by bank regulators. Examining U.S. commercial banks during the 2007–09 financial crisis, I find that delayed expected loan loss recognition is negatively associated with the likelihood of regulatory intervention (measured by either severe enforcement action or closure). This result is robust to using various specifications and research designs. In additional analyses, I find evidence suggesting that this association is driven by regulators exploiting financial reporting opacity to practice forbearance. My findings contribute to the extant literature on bank opacity, regulatory forbearance, and the consequences of loan loss provisioning by suggesting that delayed expected loan loss recognition affects regulatory intervention decisions.
  PubDate: 2022-04-18
Expert advice in the presence of conflicts of interest: the case of
star-crossed acquisitions
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  Abstract: Abstract Expert advice is presumed to be more valuable, but, when the expert has a conflict of interest, overcoming that conflict is difficult. We examine the performance of acquirers who hire an adviser that employs an expert—a star analyst—who covers the target and show that such “star-crossed” acquirers fare worse than other acquirers along multiple dimensions, including lower announcement returns and higher subsequent goodwill impairments. We consider various explanations for these outcomes, and the evidence strongly points toward star-crossed acquirers being unable to mitigate their advisers’ conflict of interest. Surprisingly, our analysis suggests that star-crossed managers are uninformed ex-ante about the low quality of the deals. Finally, we posit that a star-crossed adviser’s advantage increases with the opacity of the target firm’s accounting. Consistent with this, we find that, in star-crossed deals only, acquirer announcement returns decrease with target opacity.
  PubDate: 2022-04-18
Trust, social capital, and the bond market benefits of ESG performance
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  Abstract: Abstract We investigate whether a firm’s social capital and the trust that it engenders are viewed favorably by bondholders. Using firms’ environmental and social (E&S) performance to proxy for social capital, we find no relation between social capital and bond spreads over the period 2006–2019. However, during the 2008–2009 financial crisis, which represents a shock to trust and default risk, high-social-capital firms benefited from lower bond spreads. These effects are stronger for firms with higher expected agency costs of debt and firms whose E&S efforts are more salient. During the crisis, high-social-capital firms were also able to raise more debt, at lower spreads, and for longer maturities. We find no evidence that the governance element of ESG is related to bond spreads. The gap between E&S performance of firms in the bottom and top E&S terciles has narrowed since the financial crisis, especially in the year prior to accessing the bond market.
  PubDate: 2022-04-14
Double trouble' IRS’s attention to financial accounting
restatements
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  Abstract: Abstract We examine whether the Internal Revenue Service (IRS) uses public information to obtain qualitative signals regarding the quality of firms’ financial information or management integrity. Using the procurement of public information as a proxy for IRS attention, we test whether public signals of poor information quality (restatements) lead to an increase in IRS attention. To begin, we document that the IRS is both more likely and quicker to acquire public filings announcing a restatement than any other filing of the firm. Furthermore, we examine instances in which the IRS is more likely to learn of a restatement and find an increase in attention around both press releases and media coverage of the restatement. Next we examine the implications of increased IRS attention. Employing path analysis, we find that IRS attention is associated with both higher levels of future tax settlements and a greater likelihood of the mention of a tax audit. Overall our results are consistent with the IRS responding to signals of poor information quality or management integrity as if financial misreporting and tax reporting are related.
  PubDate: 2022-03-31
Brokerage relationships and analyst forecasts: evidence from the protocol
for broker recruiting
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  Abstract: Abstract We offer novel evidence on how the nature of brokerage-client relationships can influence the quality of equity research. We exploit a unique setting provided by the Protocol for Broker Recruiting to examine whether relaxed broker noncompete agreement enforcement generates spillover effects on sell-side analysts. Entry into this agreement reassigns ownership of the client relationship from the brokerage to individual brokers, potentially generating a greater standard of care. Using a generalized difference-in-differences research design, we provide evidence consistent with brokers reducing pressure on analysts to produce optimistic research following protocol entry. This effect is concentrated among less experienced and non-All Star analysts, who previously may have faced the greatest pressures to sacrifice objectivity. Additionally, we find that analysts issue more accurate forecasts and generate reports with heightened market reactions following protocol entry. Our collective evidence sheds new light on how the nature of brokerage relationships can influence analysts’ research production.
  PubDate: 2022-03-28
Collusive versus coercive corporate corruption: evidence from demand-side
shocks and supply-side disclosures
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  Abstract: Abstract We examine whether and how collusive and coercive forms of corporate corruption influence firm value. Our identification strategy exploits (i) the exogenous criminal prosecutions of regional government officials as part of China’s anti-corruption campaign as demand-side shocks and (ii) the unique reporting of entertainment and travel costs by Chinese firms as supply-side disclosure of corruption-related spending. Among firms for which corruption is likely to be perceived as collusive (coercive) by investors, we find that exposure to corruption-related political risk measured by abnormal entertainment and travel costs has a significantly negative (positive) relation with market reactions to the anti-corruption prosecutions. These findings are consistent with investors’ anticipation of a future decline in potential benefits (costs) arising from rent-sharing collusion (rent-extracting coercion). We also find that the collusion (coercion) effect is more pronounced for firms in regions with greater government economic intervention (in industries with stronger business competition). Furthermore, we provide evidence that the ex ante market reactions corroborate with the direction of changes in ex post operating performance of firms. Overall, our results suggest that investors can recognize differences in the economic consequences between collusive and coercive corruption and that the disclosure of corruption-related spending could help investors assess a firm’s exposure to corruption-related risk.
  PubDate: 2022-03-25
On the tax efficiency of startup firms
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  Abstract: Abstract We examine the choice of organizational structure for VC-backed startup firms. These firms overwhelmingly organize as C-corporations rather than as tax advantaged limited liability companies (LLCs). This results in foregone tax savings of $43.9 billion, or 4.9% of the total equity invested in the sample firms. The decision is puzzling, given plausible estimates of the direct costs involved, but appears related to “hassle” and other transition costs generated by participants implementing a new form. Firms with more employees and investors are likely to choose the C-corporation. VCs appear to prefer the C-corporation form, as receiving VC money is associated with most LLC firms switching to a C-corporation within 30 days. Greater VC preferences for C-corporations are linked to a preference for familiarity, and less attention to taxes.
  PubDate: 2022-03-25
The economic consequences of ceasing option backdating
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  Abstract: Abstract The 2002 enactment of Section 403(a) of the Sarbanes-Oxley Act (SOX403) made option backdating less viable for firms. I examine whether the loss of the benefits obtained from option backdating is associated with more fraud after the enactment of SOX403. For firms suspected of backdating options (suspect firms), I find an increase in fraudulent financial reporting after the enactment of SOX403. The increase in fraud is more prominent for suspect firms more affected by SOX403. I also find an increase in insider trading profits from fraud for individuals who formerly benefited from option backdating. My study highlights an unintended consequence of SOX403. The opportunistic timing of executive option compensation appears to be replaced with fraudulent activities that are likely more value-destroying.
  PubDate: 2022-03-17
Stock price reactions to ESG news: the role of ESG ratings and
disagreement
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  Abstract: Abstract We investigate whether environmental, social, and governance (ESG) ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. The relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens, while the rating with the most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value-relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.
  PubDate: 2022-03-10
Political information flow and management guidance
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  Abstract: Abstract We examine whether politically connected firms play a role in disseminating political information via their management guidance. Using campaign financing activity or the presence of a government affairs office to proxy for firms’ access to political information, we find that politically connected firms are more likely to issue management guidance, and their guidance is more likely to discuss government policies. Further, these relations are attenuated for firms facing high proprietary costs of disclosure. To provide evidence on the source of the political information disclosed through guidance, we examine the timing of when guidance is issued. We find that politically connected firms are more likely to issue guidance and change their government policy–related disclosures prior to the public revelation of government policy decisions. Collectively, these findings suggest that the privileged information firms obtain through their political connections is shared with investors through voluntary disclosures.
  PubDate: 2022-03-07