A conceptual framework of accounting policy choice under SSAP 20

Purpose - To provide a framework of accounting policy choice associated with the timing of adoption of the UK Statement of Standard Accounting Practice (SSAP) No. 20, "Foreign Currency Translation". The conceptual framework describes the accounting policy choices that firms face in a setting that is influenced by: their financial characteristics; the flexible foreign exchange rates; and the stock market response to accounting decisions. Design/methodology/approach - Following the positive accounting theory context, this paper puts into a framework the motives and choices of UK firms with regard to the adoption or deferment of the adoption of SSAP 20. The paper utilises the theoretical and empirical findings of previous studies to form and substantiate the conceptual framework. Given the UK foreign exchange setting, the framework identifies the initial stage: lack of regulation and flexibility in financial reporting; the intermediate stage: accounting policy choice; and the final stage: accounting choice and policy review. Findings - There are situations where accounting regulation contrasts with the needs and business objectives of firms and vice-versa. Thus, firms may delay the adoption up to the point where the increase in political costs can just be tolerated. Overall, the study infers that firms might have chosen to defer the adoption of SSAP 20 until they reach a certain corporate goal, or the adverse impact (if any) of the accounting change on firms' financial numbers is minimal. Thus, the determination of the timing of the adoption is a matter which is subject to the objectives of the managers in association with the market and economic conditions. The paper suggests that the flexibility in financial reporting, which may enhance the scope for income-smoothing, can be mitigated by the appropriate standardisation of accounting practice. Research limitations/implications - First, the study encompassed a period when firms and investors were less sophisticated users of financial information. Second, it is difficult to ascertain the decisions that firms would have taken, had the pound appreciated over the period of adoption and had the firms incurred translation losses rather than translation gains. Originality/value - This paper is useful to accounting standards setters, professional accountants, academics and investors. The study can give the accounting standard-setting bodies useful information when they prepare a change in the accounting regulation or set an appropriate date for the implementation of an accounting standard. The paper provides significant insight about the behaviour of firms and the associated impacts of financial markets and regulation on the decision-making process of firms. The framework aims to assist the market and other authorities to reduce information asymmetry and to reinforce the efficiency of the market. © Emerald Group Publishing Limited.

Earnings behaviour of financially distressed firms:The role of institutional ownership

Using a sample of 859 U.S. bankruptcy-filing firms over the period 1986-2004, we examine the earnings behaviour of managers during the distressed period by looking at sources of abnormal accruals prior to the bankruptcy-filing year. Results show that managers of highly distressed firms shift earnings downwards prior to the bankruptcy filing. We test and provide evidence in support of two potential contributing factors. First, top-level management turnover among distressed firms leads new managers to earnings bath choices during the distressed period. Second, qualified audit opinions exert pressure on managers to follow more conservative earnings behaviour during the distressed period. Evidence is also provided that the management of distressed firms with lower (higher) institutional ownership has greater (lesser) tendency to manage earnings downwards. Results also show that higher institutional ownership mitigates the negative abnormal returns of firms with top management turnover. To the authors' knowledge, this is the first study that attempts to examine whether institutional ownership relates to market reaction in conjunction with a top management turnover or a qualified audit opinion during the distressed period. Prior studies focused on the investigation of earnings management or institutional ownership (separately) during the distressed period, but did not examine if the effect of institutional ownership on earnings behaviour also influences subsequent returns. Thus, the results of this study should be of interest to analysts, standard setters and regulatory bodies since our results show that management turnover, qualified audit opinions and firm governance mechanisms affect the quality of earnings and the level of abnormal returns. © 2007 Accounting Foundation, The University of Sydney.

Managerial discretion in distressed firms

This study examines the earnings management behaviour of 455 distressed US firms that filed for bankruptcy during the period 1986-2001. We examine (a) possible earnings management during the years prior to bankruptcy-filing, (b) whether qualified audit opinions cause conservative earnings management behaviour, (c) whether earnings management differs between firms that discontinued operations and firms that survived thereafter, and (d) the effect of earnings management on subsequent stock returns. Our results are consistent with downwards earnings management 1 year prior to the bankruptcy-filing. Results also show that (a) firms receiving unqualified audit opinions 4 or 5 years prior to the bankruptcy-filing event manage earnings upwards in subsequent years, consistent with Rosner [2003. Earnings manipulation in failing firms. Contemporary Accounting Research 20, 361-408], (b) more conservative earnings management seems to be related to the qualified audit opinions rendered in the preceding year, (c) firms with long-term negative accruals the year of bankruptcy-filing have a greater chance to survive thereafter, and (d) more pronounced (negative) earnings management is associated with more negative (next year's) subsequent returns. © 2007 Elsevier Ltd. All rights reserved.

Related party transactions, corporate governance and accounting quality in Greece

Related Party Transactions (RPTs) have been considered recently in research as a phenomenon which is associated with several financial scandals, shareholder’s wealth expropriation and is used for earnings management (EM) purposes by the reporting entity. This study aimed to: (i) assess the extent of EM and RPTs i Greece; (ii) investigate the association between RPTs and EM; (iii) investigate the association between corporate governance and EM; (iv) investigate the association between corporate governance and RPTs; and (v) investigate the impact of RPTs on Accounting Quality. Greece was selected for this study as it provides a special context due to poor investor protection, high levels of EM and unhealthy financial reporting environment where wealth extraction and EM are more likely. This study examines the relationship between earnings management and RPTs for the firms listed on the Athens Stock Exchange (ASE). Moreover, it examines the association between earnings management and corporate governance activities. The results show a negative and significant relationship between EM and RPTs. This finding does not support the conclusion that RPTs are necessarily conducted to mask fraud or the extraction of firm resources. The results show that firms audited by one of the Big 4 audit firms are associated with less EM. Additionally, the study investigates the relationship between RPTs and accounting quality. The findings show that that there is no significant difference in accounting quality between RPTs firms and non-RPTs firms. This study contributes to the EM, accounting quality and corporate governance literatures. This research suggests recommendations for researchers, data providers and policy makers on ways to reduce the problems associated with RPTs.

Theorizing accounting and other [calculative] practices in private equity:Experimenting with Schatzki’s ‘site’ ontology

This thesis contributes to social studies of finance and accounting (Vollmer, Mennicken, & Preda, 2009) and the practice theory literatures (Feldman & Orlikowski, 2011) by experimenting (Baxter & Chua, 2008) with concepts developed by Theodore Schatzki and demonstrating their relevance and usefulness in theorizing and explaining accounting and other organizational phenomena. Influenced by Schatzki, I have undertaken a sociological investigation of the practices, arrangements, and nexuses forming (part of) the social ‘site’ of private equity (PE). I have examined and explained the organization of practices within the PE industry. More specifically, I have sought to throw light on the practice organizations animating various PE practices. I have problematized a particular aspect of Schatzki’s practice organization framework: ‘general understanding’, which has so far been poorly understood and taken for granted in the accounting literature. I have tried to further explore the concept to clarify important definitional issues surrounding its empirical application. In investigating the forms of accounting and control practices in PE firms and how they link with other practices forming part of the ‘site’, I have sought to explain how the ‘situated functionality’ of accounting is ‘prefigured’ by its ‘dispersed’ nature. In doing so, this thesis addresses the recent calls for research on accounting and control practices within financial services firms. This thesis contributes to the social studies of finance and accounting literature also by opening the blackbox of investment [e]valuation practices prevalent in the PE industry. I theorize the due diligence of PE funds as a complex of linked calculative practices and bring to fore the important aspects of ‘practical intelligibility’ of the investment professionals undertaking investment evaluation. I also identify and differentiate the ‘causal’ and ‘prefigurational’ relations between investment evaluation practices and the material entities ‘constituting’ those practices. Moreover, I demonstrate the role of practice memory in those practices. Finally, the thesis also contributes to the practice theory literature by identifying and attempting to clarify and/or improve the poorly defined and/or underdeveloped concepts of Schatzki’s ‘site’ ontology framework.

Innovation and performance:benchmarking Australian firms

This article empirically analyses the link between innovation and performance using a sample of large Australian firms, with a specific aim of developing benchmarking tools. Innovation is measured by firms' investment in R&D and applications for patents, trademarks and designs. An innovation index is constructed to provide one method of benchmarking. The index incorporates a firm's innovative activities into a single figure after accounting for firm size. The index provides a ranking of the most innovative firms in Australia. A second method of benchmarking uses a stochastic production frontier. This type of analysis identifies the firms which are located closest to a ‘best practice innovation frontier’.

Earnings management using estimates and the timing of adoption of accounting standards: An empirical examination of pensions

This study investigates the relationship between adoption timing of Statement of Financial Accounting Standards 87 and earnings management after adoption. Earnings management, defined consistent with Schipper (1989), is tested through hypotheses using (1) a portfolio approach and (2) pension rates. One Hypothesis uses a Modified Jones (1991) Model as a proxy for discretionary accruals and the other uses pension rate estimates.^ Statistically significant relationships are found between adoption timing and (1) discretionary accruals and (2) estimated rate-of-return (ROR) on pension plan assets. Early adopting firms tend to have lower discretionary accruals after adoption than on-time adopters. They also tend to use higher ROR estimates which are not supported by higher actual returns. Thus, while early adopters may be using ROR to manage income, this tends to not result in higher discretionary accruals. ^

An examination of accounting and auditing issues related to strategic environmental initiatives

Although corporate environmental accountability is receiving unprecedented attention in the United States from policy makers, the capital market, and the public at large, extant research is limited in its examination of the implications of strategic corporate environmental initiatives on accounting and auditing. The purpose of my dissertation is to address these implications by examining the association between firm environmental initiatives and audit fees, capital expenditures, and earnings quality using multivariate regression analysis. I find that firms engaged in more strategic environmental initiatives tend to have significantly higher audit fees and capital expenditures, and significantly lower levels of earnings manipulation measured using discretionary accruals. These results support the notion that auditors do recognize the importance of environmental initiatives when conducting the year-end financial statement audit, an idea that positively reflects upon the auditor’s monitoring role. The results also demonstrate the increased amount of capital resources required to participate in strategic environmental initiatives, an anecdotal notion that had yet to be empirically supported. This empirical support provides valuable insights on how environmental initiatives materially impact corporate financial statements. Finally, my results extend the extant literature by demonstrating that the superior financial performance reported by environmentally active firms is less likely driven by earnings manipulation by management, and by implication, more likely a result of real economic gains. Taken together, my dissertation establishes a strong and timely foundation for current and future research to explore corporate environmental initiatives in the United States and globally, a topic increasingly gaining momentum in today’s more eco-conscious world.^

A comprehensive study of bankruptcy prediction: Accounting ratios, market variables, and microstructure

Bankruptcy prediction has been a fruitful area of research. Univariate analysis and discriminant analysis were the first methodologies used. While they perform relatively well at correctly classifying bankrupt and nonbankrupt firms, their predictive ability has come into question over time. Univariate analysis lacks the big picture that financial distress entails. Multivariate discriminant analysis requires stringent assumptions that are violated when dealing with accounting ratios and market variables. This has led to the use of more complex models such as neural networks. While the accuracy of the predictions has improved with the use of more technical models, there is still an important point missing. Accounting ratios are the usual discriminating variables used in bankruptcy prediction. However, accounting ratios are backward-looking variables. At best, they are a current snapshot of the firm. Market variables are forward-looking variables. They are determined by discounting future outcomes. Microstructure variables, such as the bid-ask spread, also contain important information. Insiders are privy to more information that the retail investor, so if any financial distress is looming, the insiders should know before the general public. Therefore, any model in bankruptcy prediction should include market and microstructure variables. That is the focus of this dissertation. The traditional models and the newer, more technical models were tested and compared to the previous literature by employing accounting ratios, market variables, and microstructure variables. Our findings suggest that the more technical models are preferable, and that a mix of accounting and market variables are best at correctly classifying and predicting bankrupt firms. Multi-layer perceptron appears to be the most accurate model following the results. The set of best discriminating variables includes price, standard deviation of price, the bid-ask spread, net income to sale, working capital to total assets, and current liabilities to total assets.

Understanding Annual Reports of Hospitality Firms

In her discussion - Understanding Annual Reports of Hospitality Firms - by Elisa S. Moncarz, Associate Professor, School of Hospitality Management, Florida International University, Associate Professor Moncarz initially offers: “Management bears full responsibility for the reporting function of annual reports prepared by publicly-held companies designed to provide interested parties with information that is useful in making business and economic decisions. In Part I the author reviews the content of annual reports of firms in the hospitality industry, while looking at recent developments affecting annual reports. Part 11, in a subsequent issue, will comprise an in-depth examination of the annual report of an actual firm in the hospitality industry, focusing on suggested guidelines and recommendations for how to use annual reports as an aid to the decision-making process in the hospitality industry.” This article is to be considered a primer on reading and understanding annual reports, as well as a glimpse into the dynamics that affect them. In defining what an annual report is, Associate Professor Moncarz informs you with citation, “Annual reports are required by the Securities Exchange Commission (SEC) ¹ for all companies with securities sold to the general public. These reports, which must be issued within 90 days after the close of the calendar (or fiscal) year, comprise a primary source of information about these companies,” she further reports. “Indeed, the official version of the company's history is summed up yearly in its annual report by providing full information of the company's operations over the period as well as what the company is gearing up to accomplish in the next year,” Professor Moncarz closes the definition. Why should thus happen over and above SEC requirements? The financial component is an important one; the author offers her informed view: “The major objective of financial statement reporting is to provide information that is useful to present and potential investors, creditors, and other financial statement users in making rational investment, credit, and similar decisions. Thus, financial statements represent the primary (and most reliable) source of knowledge about a particular firm in the hospitality industry.” The above two paragraphs crystallize the requirement and the objective of annual reports. “A typical annual report of a hospitality firm contains a number of standard features which may be broken down into the following three sections…” General, financial data, and supplementary data are variously bounded and circumscribed for you. As a marketing device and feel-good initiative, the annual report is a useful tool for a hospitality corporation that is in-the-black, and focused on the future, says the author. She cites the Marriott Corporation’s 1985 annual report as an example. Of course, an annual report can also be a harbinger of bad news for shareholders as well. Notes/footnotes and disclosure are key elements to the credibility of any annual report; Professor Moncarz discusses these concepts at length. “Given the likelihood that the hospitality industry will continue to face an uncertain economic environment for some time, financial statement users should become more demanding in their need for information that will help assure the firm's survival and evaluate its ability to generate earnings, increase the firm's investment value, and provide for its future growth,” Professor Moncarz says. “Accordingly, understanding annual reports in the hospitality industry should become even more critical.”

The Choice of Debt Source by UK Firms

Peer reviewed

Do Individuals or Firms Matter More? The Case of Patent Generation

This paper studies the relative importance of individual inventors’ human capital and firms’ organizational capital in promoting a firm’s innovation output. We decompose the variation in innovation output into inventor- and firm-specific components. Inventors’ human capital is about 13 times as important as firms’ organizational capital in explaining a firm’s innovation performance in terms of patent counts and citations, while inventors’ human capital is only about the same as important when explaining the firm’s innovation styles in terms of patent exploratory and exploitive scores. In the cross section, inventors contribute more to innovation output when they are better networked, in firms with higher inventor mobility, in industries in which innovation is more difficult to achieve, and in publicly traded firms. Additional tests suggest that our main findings continue to hold after accounting for inventors’ endogenous moving. This paper highlights the importance of individual inventors in enhancing firm innovation and sheds new light on the theory of the firm.

Accounting Earnings Announcements, Institutional Investor Concentration, and Common Stock Returns

[Excerpt] This study examines the relation between the level of institutional investor ownership and the magnitude of security price variability at quarterly earnings announcement dates. Prior research consistently documents a negative association between firm size and announcement-date return variability. One explanation for this finding is that as more timely, alternative information becomes available on large firms prior to an announcement date, their security prices become informative, thereby reducing the information content of the earnings announcement. Large firms are closely followed by institutional investors. These investors dedicate substantial resources to information search. Therefore, the link between size and information production may be attributable to the influence of institutional investors on the information production process. Because institutional trades can also affect security prices, however, the precise impact of institutional following on the variability of prices at quarterly earnings dates is not evident.

The effect on the performance of listed family and non-family firms

Purpose: The purpose of this paper is to examine whether the ownership of public firms is related to accounting and market performance, comparing family and non-family listed firms. Design/methodology/approach: We use regression analysis, considering a sample of Portuguese family and non-family firms for the period between 1999 and 2010. Findings: Overall, the results show that family firms are older, are more indebted and have higher debt costs than non-family firms. However, they present lower levels of risk. The evidence suggests that family firms outperform non-family firms when we consider a market performance measure. The market performance of family-controlled firms is more sensitive to the crisis periods and age, compared to their counterparts. The empirical findings suggest that under economic adversity, the performance is especially compromised by the firms’ age. Research limitations/implications: A limitation of this study is the small size of the sample, which derives from the small size of the Portuguese stock market, the Euronext Lisbon. Originality/value: This paper offers some insights on the ownership of public firms and firm performance by investigating a small European economy. The study also contributes to the stream of firm performance, considering new independent variables as determinants of firm performance, such as operational risk. Finally, the study examines the interaction between ownership and performance under both steady and adverse economic conditions, giving the opportunity to analyze whether firm performance differs according to market conditions.

Assessing earnings management in european publicly traded firms

We investigate if investors may benefit from using the accruals quality measure to assess the level of earnings management exercised by firms when preparing their accounting statements. More earnings management is expected to be associated with high information asymmetry among stock market participants because it makes earnings information less precise, thus providing an information advantage to informed investors relative to liquidity traders. Our results based on a sample of European publicly traded firms are consistent with a positive association between earnings management and information asymmetry. However, given some previous studies suggesting that accruals based measures may be noisy indicators of earnings management we further develop and test a method to enhance the performance of accruals quality in detecting earnings management.