Search

We examine whether and how auditors incorporate rollover risk in assessing a client's risk. Rollover risk is the risk associated with long-term debt maturing in 1 year, which has to be refinanced or settled shortly. Debt has two counteracting effects on firms' riskiness: increased liquidity risk and increased monitoring. The finance literature suggests that rollover risk is an apparent risk factor because it results in high liquidity risk but only a weak (or limited) monitoring benefit. Consistent with that literature, we show that auditors increase audit fees, exhibit a higher likelihood of issuing a going-concern opinion, and terminate relations with their clients more frequently as rollover risk increases. Our study is the first in the audit research literature to document that auditors factor rollover risk in their pricing, going concern, and client portfolio decisions. [ABSTRACT FROM AUTHOR]

Using a cross-country setting, we document differences in the relation between earnings quality and the two components of trading volume around earnings announcements, one related to differential interpretation of the earnings signal and the other related to pre-event differential information precision. We find that in countries with stronger investor protection, less corrupt governments, and more liquid stock markets, a noisier earnings signal increases differential interpretation of the earnings signal but decreases investors' incentive for information acquisition before earnings announcements, leading to lower pre-event differential information precision. However, these trading patterns flip in countries with weaker investor protection, more corrupt governments, and less liquid stock markets. We also find that institutional investors in countries with stronger institutions are likely to benefit more from their superior information processing skills, leading to more information acquisition both at and before earnings announcements. Overall, our study adds to the literature by documenting significant cross-country variations in investors' trading volume reactions to earnings quality. [ABSTRACT FROM AUTHOR]

Using an international sample of IPO firms and two country-level measures of financial literacy, we find strong evidence that financial literacy is negatively associated with IPO underpricing. In cross-sectional analyses, we find that the effect of financial literacy in reducing IPO underpricing is more pronounced when the information environment is less transparent. Employing path analysis, we document that information friction, firm transparency, and stock market participation are mechanisms that mediate this relationship. Our study contributes to and extends the literature by providing strong evidence that citizens' financial literacy has an important and consistent influence on IPO underpricing. [ABSTRACT FROM AUTHOR]

This study examines the economic implications of fair value liability gains and losses arising from the adoption of Statement of Financial Accounting Standards No. 159 (hereafter, FAS 159). We find a positive correspondence between a firm's FAS 159 fair value liability gains and losses and current period stock returns, consistent with the notion that these gains and losses are priced by equity investors. However, further analysis indicates that fair value gains and losses from liabilities have a statistically significant negative association with future returns, suggesting that investors misprice this earnings component and subsequently correct the mispricing. We also find that the negative association for fair value gains is stronger for firms with lower levels of institutional ownership. [ABSTRACT FROM AUTHOR]

We investigate voluntary disclosure strategies in contested takeovers and the associated economic consequences. Using a difference-in-differences research design and propensity score matching, we find that, relative to friendly takeovers, target management in contested takeovers provides more earnings guidance and conveys more good news during the takeover. Moreover, voluntary disclosure helps contested targets negotiate a better offer, and the results are stronger for targets with more information asymmetry. Collectively, targets adopt voluntary disclosure and alter their strategies under the threat of contested takeover to enhance their bargaining power. Voluntary disclosure by contested targets serves as a negotiation tactic that potentially benefits target shareholders. [ABSTRACT FROM AUTHOR]

We examine the relation between disaster risk and banks' loan loss provisions (LLP). We propose a disaster risk measure based on the natural disasters declared as major disasters by the Federal Emergency Management Agency over a 15-year span. We theoretically support and empirically validate our measure using three different approaches, including the UN Sendai Framework for disaster risk reduction, which relates disaster risk to natural hazard exposure, vulnerability and capacity, and hazard characteristics. Using more than 445,000 bank-quarter observations, we document that banks located in U.S. counties with higher disaster risk recognize larger LLP after controlling for other bank-level factors related to LLP. We employ several techniques to ensure the robustness of our findings, including difference-in-differences estimation and matched samples. In additional analysis, we explore the characteristics that better enable banks to recognize disaster risk in their LLP, and investigate the consequences of managing disaster risk through LLP. Our results are important, especially because of the increasing concern about disaster risk and because they inform the growing debate on the economic consequences of disaster risk and the ability of the banking system to proactively manage the resulting credit risk through LLP. [ABSTRACT FROM AUTHOR]

We examine the relation between institutional investors' horizons and bank transparency. The novelty of this research is to consider three important aspects of transparency: disclosure quality, private information gathering and auditor fees. We find strong evidence indicating that banks dominated by long‐term (short‐term [ST]) institutional shareholders exhibit higher (lower) levels of disclosure quality. However, there is no evidence that investor horizon has a differential effect on private information gathering and audit pricing. The study employs alternative proxies and estimations such as two‐stage least squares and propensity score matching to address endogeneity. We also document that banks with higher ST institutional shareholding are associated with lower crash risk. These findings are particularly significant because poor bank transparency has been identified as a contributing factor to the 2007–2009 financial crisis. [ABSTRACT FROM AUTHOR]

We examine whether audit quality inputs are related to the conformity of financial statements to Benford's law. We find that overall financial statement conformity increases with audit fees, nonaudit fees, and audit report lag, and decreases with audit firm tenure. We also find that these audit quality inputs are more strongly associated with income statement conformity than with cash flow statement conformity. Our findings document the role that auditing plays in enhancing the conformity of financial statements to Benford's law. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Extant theories suggest that managers may use hedging either to alleviate underinvestment problems caused by costly external financing or to promote overinvestment by circumventing the scrutiny of external capital markets. We empirically investigate this issue using a hand-collected data set of hedging and investment behavior of oil and gas exploration and production firms. We do not find evidence that hedging alleviates underinvestment problems. However, we do find a strong positive relation between the extent of hedging and the propensity to overinvest. Further analyses indicate that the relation between hedging and overinvesting is stronger in settings where the firms' information environment is more transparent. A more transparent information environment makes it easier for outside capital providers to distinguish between value-enhancing and value-destroying investment decisions so that greater discretion over internally generated funds becomes more valuable to overinvesting managers. Our study highlights the role of hedging in facilitating overinvestment and the conditions under which this role is likely to be more salient. [ABSTRACT FROM AUTHOR]

We examine whether the facial attractiveness of borrower firms' chief financial officers (CFOs) influences bank loan contracting terms. Using a machine learning‐based algorithm to measure facial attractiveness, we document that firms led by CFOs with greater facial attractiveness receive more favourable loan contracts from their banks. We further show that the relation between CFO facial attractiveness and bank loan contracting terms is significantly influenced by the characteristics of both the borrower and the lender. Collectively, our results suggest that loan contracting is not an entirely rational process, as the 'beauty premium' is at least partly driven by taste‐based discrimination. [ABSTRACT FROM AUTHOR]

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We first review the recent research published in the Journal of International Accounting Research (JIAR) on the influence of international institutions on accounting practices. We follow this with a discussion of the literature by studying the influence of institutions on tax avoidance and tax evasion. We then propose a new methodological approach that draws on the theory of institutional hierarchy proposed by Williamson (2000) and examine the relative importance of three broad types of institutions (informal, formal, and media) in curtailing perceived tax evasion activities. We contribute to the international accounting literature by summarizing the recent research that addresses tax avoidance and tax evasion and by providing preliminary evidence on how employing an institutional hierarchy approach can address the interdependencies between commonly used institutional factors. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: H26; G28; O16. [ABSTRACT FROM AUTHOR]

We explore how expansionary monetary policy (EMP) influences bank loan loss provisioning. We find that banks' discretionary loan loss provisions (DLLPs) increase during periods of EMP. This effect is stronger for banks with greater risk-taking, a larger proportion of influential stakeholders, lower ex-ante transparency of loan loss provisions, and more stringent bank regulation, which is consistent with external stakeholders requiring more conservative and timelier loan loss provisioning. We also find that both the timeliness and the validity of banks' loan loss provisions (LLPs) increase during EMP periods. Our results are robust to the use of instrumental variable estimation and exogenous variations in monetary policy. Lastly, we show that conservative (i.e., higher DLLPs) and timely loan loss provisioning discipline banks from excessive risk-taking during periods of EMP. [ABSTRACT FROM AUTHOR]

Recent post-SOX studies have consistently found that the presence of audit committee (AC) directors with multiple directorships is associated with lower financial reporting quality. An implicit assumption of these studies is that AC directors distribute their effort equally across all their directorships. Using a firm size-based proxy and firm risk-based (i.e. probabilities of litigation and of misstatements) proxies to measure relative directorship importance, we investigate (1) whether and how AC directors who serve on multiple AC directorships allocate their effort to different directorships unequally, and (2) whether the unequal prioritization of effort across multiple AC directorships relates to AC monitoring effectiveness. We find a positive (no) relation between the risk-based (firm size-based) directorship importance measures and AC effectiveness, suggesting that AC directors serving on multiple boards unequally allocate their effort to different directorships based on incentives related to firm risk and not to firm size. Our results have relevance for regulators, boards of directors, investors, and other stakeholders. [ABSTRACT FROM AUTHOR]