A longitudinal study of corporate earnings guidance in Australia’s continuous disclosure environment

Since the introduction of a statutory‐backed continuous disclosure regime (CDR) in 1994, regulatory reforms have significantly increased litigation risk in Australia for failure to disclose material information or for false and misleading disclosure. However, there is almost no empirical research on the impact of the reforms on corporate disclosure behaviour. Motivated by the absence of research and using management earnings forecasts (MEFs) as a disclosure proxy, this study examines (1) why managers issue earnings forecasts, (2) what firm‐specific factors influence MEF characteristics, and (3) how MEF behaviour changes as litigation risk increases. Based on theories in information economics, a theoretical framework for MEF behaviour is formulated which includes antecedent influencing factors related to firms‟ internal and external environments. Applying this framework, hypotheses are developed and tested using multivariate models and a large sample of hand-collected MEFs (7,213) issued by top 500 ASX-listed companies over the 1994 to 2008 period. The results reveal strong support for the hypotheses. First, MEFs are issued to reduce information asymmetry, litigation risk and signal superior performance. Second, firms with better financial performance, smaller earnings changes, and lower operating uncertainty provide better quality MEFs. Third, forecast frequency and quality (accuracy, timeliness and precision) noticeably improve as litigation risk increases. However, managers appear to be still reluctant to disclose earnings forecasts when there are large earnings changes, and an asymmetric treatment of news type continues to prevail (a good news bias). Thus, the findings generally provide support for the effectiveness of the CDR regulatory reforms in improving disclosure behaviour and will be valuable to market participants and corporate regulators in understanding the implications of management forecasting decisions and areas for further improvement.

Corporate governance mechanisms and earnings management in transitional countries – evidence from Chinese listed firms

The objective of this thesis is to investigate whether the corporate governance practices adopted by Chinese listed firms are associated with the quality of earnings information. Based on a review of agency and institutional theory, this study develops hypotheses that predict the monitoring effectiveness of the board and the audit committee. Using a combination of univariate and multivariate analyses, the association between corporate governance mechanisms and earnings management are tested from 2004 to 2008. Through analysing the empirical results, a number of findings are summarised as below. First, board independence is weakened by the introduction of government officials as independent directors on the boards. Government officials acting as independent directors, claim that they meet the definition of independent director set by the regulation. However, they have some connection with the State, which is the controlling shareholder in listed SOEs affiliated companies. Consequently, the effect of the independent director’s expertise in constraining earnings management is mitigated as demonstrated by an insignificant association between board expertise and earnings management. An alternative explanation for the inefficiency of board independence may point to the pre-selection of independent directors by the powerful CEO. It is argued that a CEO can manipulate the board composition and choose the "desirable" independent directors to monitor themselves. Second, a number of internal mechanisms, such as board size, board activities, and the separation of the roles of the CEO and chair are found to be significantly associated with discretionary accruals. This result suggests that there are advantages in having a large and active board in the Chinese setting. This can offset the disadvantages associated with large boards, such as increased bureaucracy, and hence, increase the constraining effects of a large and resourceful board. Third, factor analysis identifies two factors: CEO power and board power. CEO power is the factor which consists of CEO duality and turnover, and board power is composed of board size and board activity. The results of CEO power show that if a Chinese listed company has CEO duality and turnover at the same time, it is more likely to have a high level of earnings management. The significant and negative relationship between board power and accruals indicate that large boards with frequent meetings can be associated with low level of earnings management. Overall, the factor analysis suggests that certain governance mechanisms complement each other to become more efficient monitors of opportunistic earnings management. A combination of board characteristics can increase the negative association with earnings management. Fourth, the insignificant results between audit committees and earnings management in Chinese listed firms suggests that the Chinese regulator should strengthen the audit committee functions. This thesis calls for listed firms to disclose more information on audit committee composition and activities, which can facilitate future research on the Chinese audit committee’s monitoring role. Fifth, the interactive results between State ownership and board characteristics show that dominant State ownership has a moderating effect on board monitoring power as the State totally controls 42% of the issued shares. The high percentage of State ownership makes it difficult for the non-controlling institutional shareholders to challenge the State’s dominant status. As a result, the association between non-controlling institutional ownership and earnings management is insignificant in most situations. Lastly, firms audited by the international Big4 have lower abnormal accruals than firms audited by domestic Chinese audit firms. In addition, the inverse U-shape relationship between audit tenure and earnings quality demonstrates the changing effects of audit quality after a certain period of appointment. Furthermore, this thesis finds that listing in Hong Kong Stock Exchanges can be an alternative governance mechanism to discipline Chinese firms to follow strict Hong Kong listing requirements. Management of Hong Kong listed companies are exposed to the scrutiny of international investors and Hong Kong regulators. This in turn reduces their chances of conducting self-interested earnings manipulation. This study is designed to fill the gap in governance literature in China that is related to earnings management. Previous research on corporate governance mechanisms and earnings management in China is not conclusive. The current research builds on previous literature and provides some meaningful implications for practitioners, regulators, academic, and international investors who have investment interests in a transitional country. The findings of this study contribute to corporate governance and earnings management literature in the context of the transitional economy of China. The use of alternative measures for earnings management yields similar results compared with the accruals models and produces additional findings.

The impact of regulatory reforms on the earnings forecasting behaviour of IPO firms

Purpose – The purpose of this paper is to jointly assess the impact of regulatory reform for corporate fundraising in Australia (CLERP Act 1999) and the relaxation of ASX admission rules in 1999, on the accuracy of management earnings forecasts in initial public offer (IPO) prospectuses. The relaxation of ASX listing rules permitted a new category of new economy firms (commitments test entities (CTEs))to list without a prior history of profitability, while the CLERP Act (introduced in 2000) was accompanied by tighter disclosure obligations and stronger enforcement action by the corporate regulator (ASIC). Design/methodology/approach – All IPO earnings forecasts in prospectuses lodged between 1998 and 2003 are examined to assess the pre- and post-CLERP Act impact. Based on active ASIC enforcement action in the post-reform period, IPO firms are hypothesised to provide more accurate forecasts, particularly CTE firms, which are less likely to have a reasonable basis for forecasting. Research models are developed to empirically test the impact of the reforms on CTE and non-CTE IPO firms. Findings – The new regulatory environment has had a positive impact on management forecasting behaviour. In the post-CLERP Act period, the accuracy of prospectus forecasts and their revisions significantly improved and, as expected, the results are primarily driven by CTE firms. However, the majority of prospectus forecasts continue to be materially inaccurate. Originality/value – The results highlight the need to control for both the changing nature of listed firms and the level of enforcement action when examining responses to regulatory changes to corporate fundraising activities.

Impact of the Corporate Law Economic Reform Program Act 1999 on initial public offering prospectus earnings forecasts

Commencing 13 March 2000, the Corporate Law Economic Reform Program Act 1999 (Cth) introduced changes to the regulation of corporate fundraising in Australia. In particular, it effected a reduction in the litigation risk associated with initial public offering prospectus disclosure.We find that the change is associated with a reduction in forecast frequency and an increase in forecast value relevance, but not with forecast error or bias. These results confirm previous findings that changes in litigation risk affect the level but not the quality of disclosure. They also suggest that the reforms’ objectives of reducing fundraising costs while improving investor protection, have been achieved.

Were regulatory changes in reporting "abnormal items" justified? : evidence of intra-period classificatory earnings management practices in Australia

Purpose Managers generally have discretion in determining how components of earnings are presented in financial statements in distinguishing between ‘normal’ earnings and items classified as unusual, special, significant, exceptional or abnormal. Prior research has found that such intra-period classificatory choice is used as a form of earnings management. Prior to 2001, Australian accounting standards mandated that unusually large items of revenue and expense be classified as ‘abnormal items’ for financial reporting, but this classification was removed from accounting standards from 2001. This move by the regulators was partly in response to concerns that the abnormal classification was being used opportunistically to manage reported pre-abnormal earnings. This study extends the earnings management literature by examining the reporting of abnormal items for evidence of intra-period classificatory earnings management in the unique Australian setting. Design/methodology/approach This study investigates associations between reporting of abnormal items and incentives in the form of analyst following and the earnings benchmarks of analysts’ forecasts, earnings levels, and earnings changes, for a sample of Australian top-500 firms for the seven-year period from 1994 to 2000. Findings The findings suggest there are systematic differences between firms reporting abnormal items and those with no abnormal items. Results show evidence that, on average, firms shifted expense items from pre-abnormal earnings to bottom line net income through reclassification as abnormal losses. Originality/value These findings suggest that the standard setters were justified in removing the ‘abnormal’ classification from the accounting standard. However, it cannot be assumed that all firms acted opportunistically in the classification of items as abnormal. With the removal of the standardised classification of items outside normal operations as ‘abnormal’, firms lost the opportunity to use such disclosures as a signalling device, with the consequential effect of limiting the scope of effectively communicating information about the nature of items presented in financial reports.

Ownership structure and concentration and the timeliness of corporate earnings : Malaysian evidence

This thesis provides the first evidence on how ownership concentration and structure relate to the timeliness of price discovery and reporting lags in Malaysia. Based on a sample of 1,276 Malaysian firms from 1996 to 2009, the results show that ownership concentration and the identity of the largest shareholder matter to the timeliness of price discovery and reporting lags. Specifically, closely-held firms are more timely in their price discovery and have shorter reporting lags, particularly if the largest shareholder is a foreigner or a financial institution. Government-owned firms have longer reporting lags, as expected, but we find no evidence that family-owned firms have significantly different timeliness of price discovery and reporting lags than other firms. Additional analysis shows that prior to the implementation of the Malaysian Code of Corporate Governance, firms were more timely in their price discovery but longer in their reporting lag.

The creative instability hypothesis

This paper provides an analysis of why many ‘stars’ tend to fade away rather than enjoying ongoing branding advantages from their reputations. We propose a theory of market overshooting in creative industries that is based on Schumpeterian competition between producers to maintain the interest of boundedly rational fans. As creative producers compete by offering further artistic novelty, this escalation of product complexity eventually leads to overshooting. We propose this as a theory of endogenous cycles in the creative industries.

The effects of deep cracks on the rain-induced instability of slopes : A case study

Rainfall can disrupt the balance of natural soil slope. This imbalance will be accelerated by existence of cracks in soil slope, which lead to decreasing shear strength and increasing hydraulic conductivity of the soil slope. Some research works have been conducted on the effects of surface-cracks on slope stability. However, the influence of deep-cracks is yet to be investigated. Limited availability of deep crack data due to the lack of effective sub-soil investigation methods could be one of the obstacles. To emphasize the effects of deep cracks in soil slope on its rain-induced instability, a natural soil slope in Indonesia that failed in 31st October 2010 due to heavy rainfall was analyzed for stability with and without deep cracks in the slope. The slope stability analysis was conducted using SLOPE/W coupling with the results of transient seepage analysis (SEEP/W) that simulate the pore-water pressure development in the slope during the rainfall. The results of Electrical Resistivity Tomography (ERT) survey, bore-hole tests and geometrical survey conducted on the slope before its failure were used to identify the soil layers’ stratification including deep cracks, the properties of different soil layers, and geometrical parameters of the slope for the analysis. The results showed that it is vital to consider the existence of deep crack in soil slopes in analysing their instability induced by rainfalls.

Effects of slope inclination on the rain-induced instability of embankment slopes

Rainfall has been identified as one of the main causes for embankment failures in areas where high annual rainfall is experienced. The inclination of the embankment slope is important for its stability during rainfall. In this study, instrumented model embankments were subjected to artificial rainfalls to investigate the effects of the slope inclination on their stability. The results of the study suggested that when the slope inclination is greater than the friction angle of the soil, the failure is initiated by the loss of soil suction and when it is smaller than the friction angle of the soil, the failure is initiated by the positive pore water pressure developed at the toe of the slope. Further, slopes become more susceptible to sudden collapse during rainfall as the slope angle increases.

Gender-diverse boards and properties of analyst earnings forecasts

Using a sample of 2,200 US listed firm year observations (2001-2007)this study shows a positive (negative) relation between female participation in corporate boards and analysts' earnings forecast accuracy (dispersion), after controlling for earnings quality, corporate governance, audit quality, stock price informativeness and potential endogeneity. Our findings are important as they suggest that board diversity adds to the transparency and accuracy of financial reports such that earnings expectations are likely to be more accurate for these firms.

A method for predicting rain-induced instability of an individual slope

Awareness to avoid losses and casualties due to rain-induced landslide is increasing in regions that routinely experience heavy rainfall. Improvements in early warning systems against rain-induced landslide such as prediction modelling using rainfall records, is urgently needed in vulnerable regions. The existing warning systems have been applied using stability chart development and real-time displacement measurement on slope surfaces. However, there are still some drawbacks such as: ignorance of rain-induced instability mechanism, mislead prediction due to the probabilistic prediction and short time for evacuation. In this research, a real-time predictive method was proposed to alleviate the drawbacks mentioned above. A case-study soil slope in Indonesia that failed in 2010 during rainfall was used to verify the proposed predictive method. Using the results from the field and laboratory characterizations, numerical analyses can be applied to develop a model of unsaturated residual soils slope with deep cracks and subject to rainwater infiltration. Real-time rainfall measurement in the slope and the prediction of future rainfall are needed. By coupling transient seepage and stability analysis, the variation of safety factor of the slope with time were provided as a basis to develop method for the real-time prediction of the rain-induced instability of slopes. This study shows the proposed prediction method has the potential to be used in an early warning system against landslide hazard, since the FOS value and the timing of the end-result of the prediction can be provided before the actual failure of the case study slope.

Real - time prediction of rainfall induced instability of residual soil slopes associated with deep cracks

The early warning based on real-time prediction of rain-induced instability of natural residual slopes helps to minimise human casualties due to such slope failures. Slope instability prediction is complicated, as it is influenced by many factors, including soil properties, soil behaviour, slope geometry, and the location and size of deep cracks in the slope. These deep cracks can facilitate rainwater infiltration into the deep soil layers and reduce the unsaturated shear strength of residual soil. Subsequently, it can form a slip surface, triggering a landslide even in partially saturated soil slopes. Although past research has shown the effects of surface-cracks on soil stability, research examining the influence of deep-cracks on soil stability is very limited. This study aimed to develop methodologies for predicting the real-time rain-induced instability of natural residual soil slopes with deep cracks. The results can be used to warn against potential rain-induced slope failures. The literature review conducted on rain induced slope instability of unsaturated residual soil associated with soil crack, reveals that only limited studies have been done in the following areas related to this topic: - Methods for detecting deep cracks in residual soil slopes. - Practical application of unsaturated soil theory in slope stability analysis. - Mechanistic methods for real-time prediction of rain induced residual soil slope instability in critical slopes with deep cracks. Two natural residual soil slopes at Jombok Village, Ngantang City, Indonesia, which are located near a residential area, were investigated to obtain the parameters required for the stability analysis of the slope. A survey first identified all related field geometrical information including slope, roads, rivers, buildings, and boundaries of the slope. Second, the electrical resistivity tomography (ERT) method was used on the slope to identify the location and geometrical characteristics of deep cracks. The two ERT array models employed in this research are: Dipole-dipole and Azimuthal. Next, bore-hole tests were conducted at different locations in the slope to identify soil layers and to collect undisturbed soil samples for laboratory measurement of the soil parameters required for the stability analysis. At the same bore hole locations, Standard Penetration Test (SPT) was undertaken. Undisturbed soil samples taken from the bore-holes were tested in a laboratory to determine the variation of the following soil properties with the depth: - Classification and physical properties such as grain size distribution, atterberg limits, water content, dry density and specific gravity. - Saturated and unsaturated shear strength properties using direct shear apparatus. - Soil water characteristic curves (SWCC) using filter paper method. - Saturated hydraulic conductivity. The following three methods were used to detect and simulate the location and orientation of cracks in the investigated slope: (1) The electrical resistivity distribution of sub-soil obtained from ERT. (2) The profile of classification and physical properties of the soil, based on laboratory testing of soil samples collected from bore-holes and visual observations of the cracks on the slope surface. (3) The results of stress distribution obtained from 2D dynamic analysis of the slope using QUAKE/W software, together with the laboratory measured soil parameters and earthquake records of the area. It was assumed that the deep crack in the slope under investigation was generated by earthquakes. A good agreement was obtained when comparing the location and the orientation of the cracks detected by Method-1 and Method-2. However, the simulated cracks in Method-3 were not in good agreement with the output of Method-1 and Method-2. This may have been due to the material properties used and the assumptions made, for the analysis. From Method-1 and Method-2, it can be concluded that the ERT method can be used to detect the location and orientation of a crack in a soil slope, when the ERT is conducted in very dry or very wet soil conditions. In this study, the cracks detected by the ERT were used for stability analysis of the slope. The stability of the slope was determined using the factor of safety (FOS) of a critical slip surface obtained by SLOPE/W using the limit equilibrium method. Pore-water pressure values for the stability analysis were obtained by coupling the transient seepage analysis of the slope using finite element based software, called SEEP/W. A parametric study conducted on the stability of an investigated slope revealed that the existence of deep cracks and their location in the soil slope are critical for its stability. The following two steps are proposed to predict the rain-induced instability of a residual soil slope with cracks. (a) Step-1: The transient stability analysis of the slope is conducted from the date of the investigation (initial conditions are based on the investigation) to the preferred date (current date), using measured rainfall data. Then, the stability analyses are continued for the next 12 months using the predicted annual rainfall that will be based on the previous five years rainfall data for the area. (b) Step-2: The stability of the slope is calculated in real-time using real-time measured rainfall. In this calculation, rainfall is predicted for the next hour or 24 hours and the stability of the slope is calculated one hour or 24 hours in advance using real time rainfall data. If Step-1 analysis shows critical stability for the forthcoming year, it is recommended that Step-2 be used for more accurate warning against the future failure of the slope. In this research, the results of the application of the Step-1 on an investigated slope (Slope-1) showed that its stability was not approaching a critical value for year 2012 (until 31st December 2012) and therefore, the application of Step-2 was not necessary for the year 2012. A case study (Slope-2) was used to verify the applicability of the complete proposed predictive method. A landslide event at Slope-2 occurred on 31st October 2010. The transient seepage and stability analyses of the slope using data obtained from field tests such as Bore-hole, SPT, ERT and Laboratory tests, were conducted on 12th June 2010 following the Step-1 and found that the slope in critical condition on that current date. It was then showing that the application of the Step-2 could have predicted this failure by giving sufficient warning time.

Earnings management and the role of the audit committee: an investigation of the influence of cross-listing and government officials on the audit committee

This paper extends research on the corporate governance practices of transitional economies by examining whether the ability of the audit committee to constrain earnings management in Chinese firms is associated with the listing environment and the presence of government officials on the audit committee. Despite considerable regulatory reforms by the Chinese Securities Regulatory Commission, there remain incentives for Chinese firms to manage earnings. However, government initiatives to encourage domestic firms to cross-list on the Hong Kong Stock Exchange are accompanied by improved governance. We find that the expertise and independence of the audit committee for cross-listed (CL) Chinese firms are associated with lower abnormal accruals, our measure of earnings management. Both domestic only listed firms and CL Chinese firms appoint government officials as independent members on the audit committee. However, due to the political connection between government officials and the controlling shareholder (the State), these appointments can severely mitigate audit committee independence. Subsequently, we find a significant and positive association between audit committee independence and experience and earnings management when there are government officials on the audit committee.

Corporate ownership, corporate governance reform and timeliness of earnings : Malaysian evidence

This paper provides the first evidence showing that ownership concentration and the identity of the largest shareholder matter to the timeliness of corporate earnings, measured by a stock price-based timeliness metric and the reporting lag. Using panel data of 1276 Malaysian firms from 1996 to 2009, we find a non-linear relationship between concentrated ownership, measured by the largest shareholding in a firm, and the reporting lag but not the timeliness of price discovery. Although firms with government as the largest shareholder and political connections have a significantly shorter reporting lag, only the former are timelier in price discovery. Firms with family and foreigners as the largest shareholder however are less timely in price discovery. While the reporting lag is shorter in the period after the integration of the Malaysian Code of Corporate Governance (MCCG) into Bursa listing rules, its impact on the timeliness of price discovery is mostly immaterial.