Initial losses, corporate governance and earnings management

This thesis examines the relationship between initial loss events and the corporate governance and earnings management behaviour of these firms. This is done using four years of corporate governance information spanning the report of an initial loss for companies listed on the UK Stock Exchange. An industry- and sizematched control sample is used in a difference-in-difference analysis to isolate the impact of the initial loss event during the period. It is reported that, in general, an initial loss motivates an improvement in corporate governance in those loss firms where a relative weakness existed prior to the loss and that these changes mainly occur before the initial loss is announced. Firms with stronger (i.e. better quality) corporate governance have less need to alter it in response to the loss. It is also reported that initial loss firms use positive abnormal accruals in the year before the loss in an attempt to defer/avoid the loss — the weaker corporate governance the more likely is it that loss firms manage earnings in this manner. Abnormal accruals are also found to be predictive of an initial loss and when used as a conditioning variable, the quality of corporate governance is an important mitigating factor in this regard. Once the loss is reported, loss firms unwind these abnormal accruals although no evidence of big-bath behaviour is found. The extent to which these abnormal accruals are subsequently unwound are also found to be a function of both the quality of corporate governance as well as the severity of the initial loss.

Risk management and the potential of cattle insurance in Tigray, Northern Ethiopia

This study explores the role of livestock insurance to complement existing risk management strategies adopted by smallholder farmers. Using survey data, first, it provides insights into farmers’ risk perception of livestock farming, in terms of likelihood and severity of risk, attitude to risk and their determinants. Second, it examines farmers’ risk management strategies and their determinants. Third, it investigates farmers’ potential engagement with a hypothetical cattle insurance decision and their intensity of participation. Factor analysis is used to analyse risk sources and risk management, multiple regressions are used to identify the determinants; a Heckman model was used to investigate cattle insurance participation and intensity of participation. The findings show different groups of farmers display different risk attitude in their decision-making related to livestock farming. Production risk (especially livestock diseases) was perceived as the most likely and severe source of risk. Disease control was perceived as the best strategy to manage risk overall. Disease control and feed management were important strategies to mitigate the production risks. Disease control and participation on safety net program were found to be important to counter households’ financial risks. With regard to the hypothetical cattle insurance scheme, 94.38% of households were interested to participate in cattle insurance. Of those households that accepted cattle insurance, 77.38% of the households were willing to pay the benchmark annual premium of 4% of the animal value while for the remaining households this was not affordable. The average number of cattle that farmers were willing to insure was 2.71 at this benchmark. Results revealed that income (log income) and education levels influenced positively and significantly farmers’ participation in cattle insurance and the number of cattle to insure. The findings prompt policy makers to consider livestock insurance as a complement to existing risk management strategies to reduce poverty in the long-run.

Finance past, finance future: a brief exploration of the evolution of financial practices

As we work our way through the latest financial crisis, politicians seem both powerless to act convincingly and unable to craft from the welter of diverse and antagonistic narratives a coherent and convincing vision of the future. In this article, we argue that a temporal lens brings clarity to such confusion, and that thinking in terms of time and reflecting on privileged temporal structures helps to highlight underlying assumptions and distinguish different narratives from one another. We begin by articulating our understanding of temporality, and we proceed to apply this to the evolution of financial practice during different historical epochs as recently delineated by Gordon (2012). We argue that the principles of finance were effectively in place by the eighteenth century and that consequent developments are best conceptualized as phases in which one particular aspect is intensified. We find that in different historical periods, the temporal intensification associated with specific models of finance shifts, over history, from the past to the present to the future. We argue that a quite idiosyncratic understanding of the future has been intensified in the present phase, what we refer to as proximal future, and we explain how this has come to be. We then consider the ethical consequences of privileging an intensification of proximal future before mapping an alternative model centred on intensifying distal future, highlighting early signs of its potential emergence in the shadows of our present.

The quality of financial information in the extractive industries: a value relevance analysis

The extractive industry is characterized by high levels of risk and uncertainty. These attributes create challenges when applying traditional accounting concepts (such as the revenue recognition and matching concepts) to the preparation of financial statements in the industry. The International Accounting Standards Board (2010) states that the objective of general purpose financial statements is to provide useful financial information to assist the capital allocation decisions of existing and potential providers of capital. The usefulness of information is defined as being relevant and faithfully represented so as to best aid in the investment decisions of capital providers. Value relevance research utilizes adaptations of the Ohlson (1995) to assess the attribute of value relevance which is one part of the attributes resulting in useful information. This study firstly examines the value relevance of the financial information disclosed in the financial reports of extractive firms. The findings reveal that the value relevance of information disclosed in the financial reports depends on the circumstances of the firm including sector, size and profitability. Traditional accounting concepts such as the matching concept can be ineffective when applied to small firms who are primarily engaged in nonproduction activities that involve significant levels of uncertainty such as exploration activities or the development of sites. Standard setting bodies such as the International Accounting Standards Board and the Financial Accounting Standards Board have addressed the financial reporting challenges in the extractive industry by allowing a significant amount of accounting flexibility in industryspecific accounting standards, particularly in relation to the accounting treatment of exploration and evaluation expenditure. Therefore, secondly this study examines whether the choice of exploration accounting policy has an effect on the value relevance of information disclosed in the financial reports. The findings show that, in general, the Successful Efforts method produces value relevant information in the financial reports of profitable extractive firms. However, specifically in the oil & gas sector, the Full Cost method produces value relevant asset disclosures if the firm is lossmaking. This indicates that investors in production and non-production orientated firms have different information needs and these needs cannot be simultaneously fulfilled by a single accounting policy. In the mining sector, a preference by large profitable mining companies towards a more conservative policy than either the Full Cost or Successful Efforts methods does not result in more value relevant information being disclosed in the financial reports. This finding supports the fact that the qualitative characteristic of prudence is a form of bias which has a downward effect on asset values. The third aspect of this study is an examination of the effect of corporate governance on the value relevance of disclosures made in the financial reports of extractive firms. The findings show that the key factor influencing the value relevance of financial information is the ability of the directors to select accounting policies which reflect the economic substance of the particular circumstances facing the firms in an effective way. Corporate governance is found to have an effect on value relevance, particularly in the oil & gas sector. However, there is no significant difference between the exploration accounting policy choices made by directors of firms with good systems of corporate governance and those with weak systems of corporate governance.