bluuebunny/crossref_metadata_2025_split huggingface dataset:
Are Fundamentals Priced in the Bond Market?*
Authors: Khurana Inder K. , Raman K. K. 
Published: November 2003

AbstractTo date, the discussion of the Lev and Thiagarajan 1993 fundamentals in the prior literature has been exclusively in the context of the stock market. Our study is the first to examine the value‐relevance of these fundamentals for default risk. By focusing on the market for new bond issues, we examine the value‐relevance of the fundamental score using expected rather than realized returns. Also, by focusing on the bond market we provide a different perspective than that brought by prior studies relying solely on stock prices. We find the fundamentals to be priced in the market for new bond issues as indicators of expected future earnings and to be value‐relevant in enabling the market to discern differences in bond credit quality over and above the published bond ratings.
The Relation between Aggregate Earnings and Security Returns over Long Intervals*
Authors: Shroff Pervin K. 
Published: November 2003

AbstractThis paper provides a theoretical explanation and consistent empirical evidence for the increase in the contemporaneous correlation between returns and aggregate earnings as the return interval is lengthened. Consistent with intuition and with Easton, Harris, and Ohlson 1992, the analysis shows that aggregation over time renders the lag in accounting recognition relatively less important and thus improves the returns‐earnings R2. Interestingly, the analysis also reveals that aggregating earnings over longer periods increases the positive covariance between aggregate earnings and the accounting lag, which may further increase the R2. This positive covariance can lead to an earnings coefficient greater than one over some range of aggregation, which is consistent with the findings of Easton et al. that over the 10‐year interval the returns‐earnings regression slope coefficient is greater than one (1.7). The empirical results highlight the fact that the slope coefficient, which is greater than one and increasing with the interval, accounts for much of the increment to the returns‐earnings R2. In fact, constraining the slope coefficient to be one results in an R2 of 11 percent for the 10‐year interval, which is considerably lower than the R2 of 47 percent when the regression is unconstrained. Hence, the positive covariance between current earnings and the accounting lag, rather than the diminishing effect of the accounting lag, appears to be the dominant explanation for the observed high R2 over long intervals.
An Empirical Analysis of the Effects of Online Trading on Stock Price and Trading Volume Reactions to Earnings Announcements*
Authors: Ahmed Anwer S. , Schneible Richard A. , Stevens Douglas E. 
Published: November 2003

AbstractThis study provides evidence regarding the effects of online trading on stock price and trading volume reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996‐99) and a period without online trading (1992‐95). We conjecture that online trading has increased the proportion of naive investors in the market. We predict that this will result in (1) a decrease in the average precision of investor information prior to earnings announcements leading to higher earnings response coefficients (ERCs), (2) an increase in differential interpretation of earnings leading to higher trading volume reactions that are unrelated to price change, and (3) a decrease in differential prior precision leading to a decrease in the association between trading volume and absolute price change. We find evidence consistent with all three predictions. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.
Private Information Production, Public Disclosure, and the Cost of Capital: Theory and Implications*
Authors: Zhang Guochang 
Published: November 2003

AbstractBoth private information production by market traders and public disclosure by firms contribute to dissemination of financial information in the capital market. However, the motives and economic consequences of the two are quite different. In general, private information production is intended by investors to increase their trading profit, which has the effect of widening the information gap between informed and uninformed investors and increasing the firm's cost of capital. On the other hand, public disclosure can be used to narrow this information gap and to lower the cost of capital. This paper provides a theoretical model to examine the economic incentives behind these two forms of information dissemination and their consequences on the cost of capital. By simultaneously considering the firm's and the information traders' decisions, the paper derives an equilibrium in which the amount of private information production, the level of public disclosure, and the cost of capital are all linked to specific characteristics of the firm, of information traders, and of the market. In contrast to conventional beliefs, the paper predicts that, across firms, the cost of capital can be either positively or negatively related to the firm's disclosure level, depending on the specific factors that cause the variation within a particular sample. Similarly, the extent to which investors follow a firm and the firm's disclosure level can be either positively or negatively related to each other. Implications for empirical research are discussed.
Do Investors Overrely on Old Elements of the Earnings Time Series?*
Authors: Bloomfield Robert J. , Libby Robert , Nelson Mark W. 
Published: November 2003

AbstractThis paper reports an experiment demonstrating that MBA students overrely on old earnings performance when predicting future earnings performance in a laboratory setting. In the experiment, MBA students relied too heavily on old annual ROE information to predict future annual ROE. The experiment shows how a common cognitive error (overreliance on unreliable information) interacts with the structure of the earnings time series to create particular patterns of prediction errors. The results also suggest directions for research on two well‐known anomalies, long‐run overreactions (De Bondt and Thaler 1985, 1987) and post‐earnings‐announcement drift (Bernard and Thomas 1990).
The Interaction between Internal Control Assessment and Substantive Testing in Audits for Fraud*
Authors: SMITH J. REED , TIRAS SAMUEL L. , VICHITLEKARN SANSAKRIT S. 
Published: November 2003

AbstractWe examine the interaction between internal control assessments and substantive testing in a model of fraud detection. The purpose of our study is to examine a two‐stage model of the auditor‐manager interaction in which the auditor assesses the “likelihood” or possibility of fraud in the first stage and conducts substantive tests in the second stage. We examine the allocation of audit resources across these two distinct facets of the audit. We find that, regardless of the auditor's allocation, the probability of undetected fraud remains the same, but the allocation of some audit resources to internal control assessment may provide cost savings for the auditor.
Commentary: Accounting Schism or Synthesis? A Challenge for the Conditional‐Normative Approach*
Authors: MATTESSICH RICHARD V. 
Published: November 2003

ABSTRACTThis paper explains the conditional‐normative accounting methodology (CoNAM) and its origin, offering a comparison of the normative, positive, and conditional‐normative approaches. It also discusses the difference between the pragmatic versus a more scientific treatment of CoNAM. However, the main thrust of the paper is directed toward the schism in academic accounting between the positive accounting theory (PAT) and the critical interpretive view (CIV). To better understand CIV, the paper attempts to explain the philosophic roots that reach from Husserl and some Marxist writers to Foucault, Derrida, and Baudrillard. This schism seems to call for a new synthesis that avoids extreme positions but draws upon insights from both camps. In this search, CoNAM might be helpful by exploring means‐end relations and connecting value judgements to accounting theory in a fairly “objective” way.
Inferring Accounting Information from Corporate Financing Choices: An Examination of Security Issuances in the Banking Industry*
Authors: Bishop Marguerite L. , Lys Thomas Z. 
Published: November 2003

AbstractThis study examines the impact of regulatory capital and several of its determinants (i.e., earnings, loan loss provisions, charge‐offs and growth) on bank managers' financing decisions and investors' interpretations of those decisions. The analysis is related to two streams of research. We add to the corporate finance literature that seeks to explain the market's reaction to security issuances by developing and testing a refined set of predictions of the demand for debt and equity capital using a sample of capital‐regulated firms (banks). We extend the accounting literature that links regulatory capital‐management decisions with bank performance by examining whether investors infer that performance.We find that bank managers' financing choices reflect their private information regarding the levels of regulatory capital, earnings, and charge‐offs in the issuance year. We document a negative market reaction to capital‐increasing issuances and a positive reaction to capital‐decreasing issuances. A cross‐sectional analysis of that market reaction indicates that investors infer managers' expectations of earnings in the issuance year.
Auditor Quality and the Accuracy of Management Earnings Forecasts*
Authors: CLARKSON PETER M. 
Published: November 2003

AbstractIn this study, we appeal to insights and results from Davidson and Neu 1993 and McConomy 1998 to motivate empirical analyses designed to gain a better understanding of the relationship between auditor quality and forecast accuracy. We extend and refine Davidson and Neu's analysis of this relationship by introducing additional controls for business risk and by considering data from two distinct time periods: one in which the audit firm's responsibility respecting the earnings forecast was to provide review‐level assurance, and one in which its responsibility was to provide audit‐level assurance. Our sample data consist of Toronto Stock Exchange (TSE) initial public offerings (IPOs). The earnings forecast we consider is the one‐year‐ahead management earnings forecast included in the IPO offering prospectus.The results suggest that after the additional controls for business risk are introduced, the relationship between forecast accuracy and auditor quality for the review‐level assurance period is no longer significant. The results also indicate that the shift in regimes alters the fundamental nature of the relationship. Using data from the audit‐level assurance regime, we find a negative and significant relationship between forecast accuracy and auditor quality (i.e., we find Big 6 auditors to be associated with smaller absolute forecast errors than non‐Big 6 auditors), and further, that the difference in the relationship between the two regimes is statistically significant.
Income Smoothing and Discretionary R&D Expenditures of Japanese Firms*
Authors: MANDE VIVEK , FILE RICHARD G. , KWAK WIKIL 
Published: November 2003

AbstractDuring the recent recession (1991 to present), Japanese firms decreased their spending on R&D for the first time since World War II. The decreases have raised concerns that Japanese managers may be making suboptimal allocations to R&D. We test whether Japanese managers adjust R&D based on short‐term performance. Our results show that Japanese firms in several industries adjust their R&D budgets to smooth profits. Interestingly, adjustments to R&D are larger in expansion years. These results, similar to those documented with U.S. managers, point to myopic decision making by Japanese managers.
The Relationship between Board Characteristics and Voluntary Improvements in Audit Committee Composition and Experience*
Authors: Beasley Mark S. , Salterio Steven E. 
Published: November 2003

AbstractThis study empirically examines the relation between certain board of director characteristics and the extent that audit committee composition voluntarily exceeds minimum mandated levels and includes outside directors with financial reporting and audit committee knowledge and experience. This study focuses on board characteristics because the board directly controls audit committee membership. Such staffing decisions can directly affect the ability of the audit committee to monitor management's financial reporting process on behalf of the board. Results suggest that Canadian firms that voluntarily include more outside directors on the audit committee than the mandated minimum have larger boards with more outsiders serving on those boards and are more likely to segregate the board chairperson position from the CEO/president positions. Additionally, firms that voluntarily create audit committees composed of outsider members with a breadth of relevant financial reporting and audit committee knowledge and experience have boards that are larger, have more outside members, and are less likely to be chaired by the CEO/president. Implications of these findings for auditors, institutional investors, regulators, and other interested parties are discussed.
The Association between Auditor Choice, Ownership Retained, and Earnings Disclosure by Firms Making Initial Public Offerings*
Authors: Copley Paul A. , Douthett Edward B. 
Published: November 2003

AbstractUsing a system of three simultaneous equations, we test the predictions of Datar, Feltham, and Hughes 1991 and Hughes 1986 between auditor choice, earnings disclosures, and retained ownership in U.S. firms making initial public offerings of securities. Using a sample of initial public offerings between 1990 and 1997, we find that the demand for high‐quality auditors increases with firm risk. Additionally, we find that auditor choice, earnings disclosure, and risk are determinants of retained ownership, which is consistent with the predictions of Datar et al. and Hughes that auditor choice and direct disclosure are substitute signals for ownership retention. Further, our results suggest that the signals chosen (i.e., retained ownership, auditor choice, and disclosure) are related through their cost structures and are chosen jointly to minimize the overall cost to the entrepreneur.
The Disposition of Audit‐Detected Misstatements: An Examination of Risk and Reward Factors and Aggregation Effects*
Authors: BRAUN KAREN WILKEN 
Published: November 2003

AbstractWhile professional standards indicate that auditors have the responsibility to both detect and report material errors, empirical evidence shows that auditors waive approximately 50 percent of material errors (Wright and Wright 1997). Unlike prior research that has examined factors that may affect auditors' decisions to waive single material misstatements, the current study examines auditors' propensity to waive proposed adjusting journal entries (henceforth PAJEs) that exceed materiality, either individually or in aggregate, under several different aggregation contexts. These contexts are represented in the form of different cases that vary in terms of the materiality and income direction of the individual and aggregate PAJEs. The current paper posits that auditors will be more likely to waive PAJEs in excess of materiality (i.e., make a “non‐GAAS” decision) when there is potential reward for doing so or when there is little litigation risk from doing so. The case decisions of 155 audit partners and managers indicate that they are not affected by potential reward (Client's Relative Fees), but are affected by potential risk (the Client's Financial Health, the PAJE's Subjectivity, and the PAJEs' Aggregate Directional Effect on Income). However, these factors are not equally influential across all aggregation contexts. Additionally, auditors are more likely to make non‐GAAS decisions when they are evaluating immaterial PAJEs that aggregate to a material level than when they are evaluating a single material PAJE.
Are Reviewers' Judgements Influenced by Memo Structure and Conclusions Documented in Audit Workpapers?*
Authors: Tan Hun‐Tong , Yip‐Ow Jackson 
Published: November 2003

AbstractThis paper investigates how the initial conclusion reached by the preparer of audit workpapers and the manner with which the preparer structures the associated evidence can influence the reviewer's judgement in an audit setting. We conducted an experiment in which auditors reviewed the work of a preparer who had concluded that the account of the client's major customer was either collectible or not collectible. The preparer's memo was structured in a neutral manner or stylized to emphasize (de‐emphasize) evidence consistent (inconsistent) with the preparer's conclusion. Results showed that reviewers placed less reliance on the conclusions reached by the preparer when the preparer's memo was stylized than when the memo was structured in a neutral manner. These results suggest that reviewers are sensitive to stylization attempts by preparers. Implications of the paper are discussed.
The Shielding of CEO Compensation from the Effects of Strategic Expenditures*
Authors: Duru Augustine , Iyengar Raghavan J. , Thevaranjan Alex 
Published: November 2003

AbstractThis study investigates whether and why compensation committees shield CEO compensation from income‐decreasing effects of strategic expenditures. We document that firms do shield recurring strategic expenditures such as research and development and advertising expenditures. We also find that firms shield research and development expenditures more than advertising expenditures. Our results are consistent with prior findings that suggest that compensation committees shield CEOs from nonroutine transactions such as restructuring charges and extraordinary losses. Using a two‐task principal‐agent framework, we show that such shielding improves the efficiency of the contract by making the shielded income measure more congruent with the principal's objectives.
Brand Name Audit Pricing, Industry Specialization, and Leadership Premiums post‐Big 8 and Big 6 Mergers*
Authors: Ferguson Andrew , Stokes Donald 
Published: November 2003

AbstractThis paper investigates brand name, industry specialization, and leadership audit pricing in the wake of the mergers that created the Big 6 and the Big 5 accounting firms. For samples of Australian listed public companies in each of the postmerger years 1990, 1992, 1994, and 1998, we estimate national audit fee premiums for the Big 6/5 auditors and the industry specialists and leaders. We find limited support for the ability of the Big 6/5 to obtain fee premiums over non‐Big 6/5 for those industries not having specialist auditors. Nonspecialist Big 6/5 auditors are able to obtain fee premiums over nonspecialist non‐Big 6/5 auditors for those industries having specialist auditors. However, this result only holds among the smaller half of our sample. We do not find strong support for the presence of industry specialist premiums in the postmerger years, especially after 1990, using various definitions of industry specialist. We find, at best, limited support for the presence of industry leadership premiums. The evidence suggests that after the Big 8/6 audit firm mergers, some caution is required in generalizing the Craswell, Francis, and Taylor 1995 finding of national market industry specialist premiums. More generally, the study raises questions about the tenuous link between the concept of specialization and national market‐share statistics.
Accounting Recognition, Moral Hazard, and Communication*
Authors: LIANG PIERRE JINGHONG 
Published: November 2003

AbstractTwo complementary sources of information are studied in a multiperiod agency model. One is an accounting source that partially but credibly conveys the agent's private information through accounting recognition. The other is an unverified communication by the agent (i.e., a self‐report). In a simple setting with no communication, alternative labor market frictions lead to alternative optimal recognition policies. When the agent is allowed to communicate his or her private information, accounting signals serve as a veracity check on the agent's self‐report. Finally, such communication sometimes makes delaying the recognition optimal. We see contracting and confirmatory roles of accounting as its comparative advantage. As a source of information, accounting is valuable because accounting reports are credible, comprehensive, and subject to careful and professional judgement. While other information sources may be more timely in providing valuation information about an entity, audited accounting information, when used in explicit or implicit contracts, ensures the accuracy of the reports from nonaccounting sources.
Cancellation of Executive Stock Options: Tax and Accounting Income Considerations*
Authors: Mawani Amin 
Published: November 2003

AbstractCanadian firms face a trade‐off between reporting higher accounting income and paying lower taxes that arises from their ability to cancel in‐the‐money executive stock options and making a substitute cash payment to the executive instead of issuing shares. Firms' trade‐off hypotheses are operationalized in a multilateral framework and empirically tested using insider‐trading data. The multilateral approach is designed to control for the incentive effects of alternative compensation schemes and to determine the cancellation payment that keeps the executive indifferent between receiving cash or shares. The results show that firms consider both taxes and financial reporting costs in determining their option cancellation behavior.
Accounting Choices and Risk Management: SFAS No. 115 and U.S. Bank Holding Companies*
Authors: Hodder Leslie , Kohlbeck Mark , McAnally Mary Lea 
Published: November 2003

AbstractThis paper provides evidence that regulatory contracts affect firms' accounting choices and risk‐management decisions. Specifically, we investigate whether an exogenous shock to regulatory risk induced by Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 1993), encouraged U.S. banks to deviate from portfolio and risk benchmarks when they adopted the standard. Because we cannot observe relevant benchmarks, we model portfolio and risk decisions as functions of macroeconomic and firm‐specific factors using data from a period when regulatory capital was immune to SFAS No. 115 accounting. We examine a sample of 230 publicly traded banks and find that (1) irrespective of adoption timing, banks classified too few securities available for sale (AFS) relative to estimated benchmarks; (2) weaker banks that adopted the standard early classified far more securities as AFS relative to benchmarks; (3) banks altered the size of their securities portfolios along with the levels of interest‐rate risk and credit risk as regulatory capital decreased; and (4) the level of interest‐rate risk on banks' loan portfolios increased at the time of SFAS No. 115 adoption. We also explore the 1995 Financial Accounting Standards Board (FASB) amnesty when firms could “readopt” SFAS No. 115. We find that banks used the 1995 FASB amnesty to undo strategic initial SFAS No. 115 adoption decisions. Taken together, our findings suggest that SFAS No. 115 caused some of the accounting and economic consequences predicted by bankers, analysts, and academics.