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Article
Publication date: 3 August 2012

Guy D. Fernando and Qiao Xu

The purpose of this paper is to investigate the way in which CEOs are shielded or rewarded for incurring R&D expenses. Strategic expenses such as R&D yield returns over a…

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1457

Abstract

Purpose

The purpose of this paper is to investigate the way in which CEOs are shielded or rewarded for incurring R&D expenses. Strategic expenses such as R&D yield returns over a long period of time even though GAAP requires them to be written off in the period they are incurred. Going beyond the existing shielding paradigm, the paper investigates whether compensation committees actively reward CEOs for incurring strategic expenses.

Design/methodology/approach

The paper uses empirical analysis by using regression analysis with CEO compensation (both cash and equity) as the dependent variable and firm size, firm performance, earnings risk, market‐to‐book ratio, R&D expenses, advertising expenses and governance variables as control, independent and test variables.

Findings

The paper shows that CEOs are not only shielded but are actively rewarded for incurring R&D expenses. The paper also shows that the shield/reward effects are stronger in manufacturing firms. Finally, the paper shows that independent compensation committees increase rewards for R&D expenses.

Research limitations/implications

Given the small sample of firms with advertising expense data, a larger sample, possibly using hand‐collected data will be required to arrive at definitive conclusions regarding shielding/rewarding for advertising. Furthermore, the shielding of both R&D and advertising expenses should be looked at in conjunction with the duration of the persistence of benefits of such strategic expenses.

Originality/value

This paper shows how compensation committees can use compensation to induce executives to undertake strategic expenses on behalf of the firm.

Details

Review of Accounting and Finance, vol. 11 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Open Access
Article
Publication date: 10 July 2017

Guy D. Fernando and Alex Thevaranjan

This paper aims to study the impact of audit quality on the components of executive cash compensation. It is predicted that as audit quality improves, greater emphasis…

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3756

Abstract

Purpose

This paper aims to study the impact of audit quality on the components of executive cash compensation. It is predicted that as audit quality improves, greater emphasis will be placed on the incentive components of cash compensation, and lower emphasis on the salary (fixed) component. Specifically, it is predicted that as audit quality enhances, greater emphasis will be placed on earnings and sales revenues in determining executive cash compensation. Using auditor specialization as a proxy for audit quality, empirical support is provided for all of our predictions.

Design/methodology/approach

This paper provides empirical support with agency theoretic predictions.

Findings

This paper developed the following hypotheses: H1 – in executive cash compensation, more weight is being placed on earnings-based measures as auditor specialization improves; H2 – in executive cash compensation, more weight is also being placed on sales revenues as auditor specialization improves; H3 – in executive cash compensation, salary levels decrease as auditor specialization improves; and H4 – the impact of auditor specialization on the weight on earnings, sales and the salary levels is lower in the post-Sarbanes–Oxley Act (SOX) period compared to pre-SOX period.

Research limitations/implications

First, the article limits itself to cash compensation, while current executive compensation is largely made of equity. Second, the measure of audit quality used, ‘national level auditor specialization’, may not be as effective in the post-SOX era.

Practical implications

Compensation committees should pay attention to audit quality (in whatever way it may be proxied by) in determining executive compensation.

Originality/value

This is the first paper to show that audit quality not only improves the earnings response coefficient in firm valuation but also enhances the weight placed on earnings (and sales revenues) in executive compensation.

Details

Journal of Centrum Cathedra, vol. 10 no. 1
Type: Research Article
ISSN: 1851-6599

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Article
Publication date: 11 January 2013

Ozer Asdemir, Guy D. Fernando and Arindam Tripathy

Research has shown that firms successfully pursuing either a cost leadership or a differentiation strategy are better able to gain competitive advantages over other firms…

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2876

Abstract

Purpose

Research has shown that firms successfully pursuing either a cost leadership or a differentiation strategy are better able to gain competitive advantages over other firms and accordingly achieve superior performance. Thus, if firms actually do realize superior performance based on their strategic orientation, capital markets should recognize this and place a positive value on such strategy‐focused firms. The aim of this paper is to empirically investigate how capital markets perceive and reward the strategies pursued by firms.

Design/methodology/approach

The paper uses Tobin's Q as a measure of market perception. By regressing Tobin's Q against relevant control variables and proxies for differentiation and cost leadership strategies, the paper evaluates the relationship between market perception and firm strategy. Furthermore, the paper also conducts abnormal returns analyses (both portfolio and regression analysis) to determine whether the market accurately prices the different strategies, given the complexity in both the nature and the implementation of such strategies.

Findings

The analysis shows that markets place a positive value on firms successfully pursuing either a cost leadership or a differentiation strategy; moreover markets place a higher value on firms pursuing a differentiation strategy compared to a cost leadership strategy. The abnormal returns analyses show that the market is not able to fully price the superior performance generated by pursuing differentiation strategy resulting in abnormal returns from portfolios formed based on higher levels of differentiation.

Research limitations/implications

By providing detailed information to the market about the strategies they follow, firms will enable markets to value their strategies accurately, thus reducing their cost of capital. Fundamental investors looking to earn abnormal returns can use firm strategy in their portfolio selection. A variety of characteristics are conceived to influence a firm's strategic positioning and market perception of such characteristics. This evaluation is limited to a macro level assessment of the implications of the overall strategy pursued by a firm. Future research, in the form of detailed field studies, could be directed at evaluating the market perceptions and other implications of multi‐dimensional, lower level, operational strategies on a firm‐by‐firm basis.

Originality/value

To the best of the authors' knowledge, this is the first paper to show how financial markets value firm strategy. The paper also provides evidence to the complexity of a differentiation strategy, and how such complexity can lead to market mis‐pricing.

Details

Managerial Finance, vol. 39 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 2 November 2010

Guy D. Fernando, Ahmed M. Abdel‐Meguid and Randal J. Elder

The purpose of this paper is to investigate the impact of certain audit quality attributes, namely auditor size, auditor industry specialization and auditor tenure on a…

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4011

Abstract

Purpose

The purpose of this paper is to investigate the impact of certain audit quality attributes, namely auditor size, auditor industry specialization and auditor tenure on a client firm's cost of equity capital.

Design/methodology/approach

The paper uses empirical data to construct a measure of ex ante cost of equity capital for each firm and year using analyst forecasts. Independent audit quality measures used are auditor size, auditor industry specialization and auditor tenure. Firm cost of equity capital is regressed against the three independent variables and appropriate control variables.

Findings

The paper finds that auditor size (auditor is a member of the BigX), auditor industry specialization and auditor tenure are negatively associated with the client firm's cost of equity capital. However, the paper finds that this effect is limited only to small client firms, potentially reflecting the poor information environment associated with such firms.

Practical implications

The study highlights the importance of audit quality attributes in determining the firm's cost of capital. It also highlights ways in which firms (especially small firms) can reduce the cost of equity capital by improving their information environment through the judicious selection of auditors.

Originality/value

This is believed to be the first paper to examine whether the effects of three audit quality attributes (auditor size, auditor industry specialization and auditor tenure) on a firm's cost of capital are dependent on the client's size. The paper empirically shows that such effects are more pronounced for smaller clients.

Details

Review of Accounting and Finance, vol. 9 no. 4
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 7 August 2009

Hsihui Chang, Guy D. Fernando and Woody Liao

The purpose of this paper is to investigate the impact of the Sarbanes‐Oxley Act (SOX) on market‐based measures of earnings quality and cost of capital.

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1771

Abstract

Purpose

The purpose of this paper is to investigate the impact of the Sarbanes‐Oxley Act (SOX) on market‐based measures of earnings quality and cost of capital.

Design/methodology/approach

The paper uses empirical data to determine measures for the market's perception of earnings quality and the ex‐ante cost of capital. The measures for 2001 (pre‐SOX) are compared to the measures for 2003 (post‐SOX).

Findings

The results indicate that in the post‐SOX period, the market's perception of earnings quality has improved, while the firms' cost of equity capital has decreased.

Research limitations/implications

At a time when debate is raging as to the overall impact of SOX on the US economy, this study provides some evidence as to its beneficial nature. A limitation is that the method of computing restricts the sample, potentially creating biases.

Originality/value

This is the first study to investigate the impact of SOX on the market's perception of earnings quality and the firms' cost of equity capital.

Details

Review of Accounting and Finance, vol. 8 no. 3
Type: Research Article
ISSN: 1475-7702

Keywords

Open Access
Article
Publication date: 10 July 2017

Vincent Charles and Rajiv D. Banker

Abstract

Details

Journal of Centrum Cathedra, vol. 10 no. 1
Type: Research Article
ISSN: 1851-6599

Content available
Article
Publication date: 4 February 2014

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138

Abstract

Details

Review of Accounting and Finance, vol. 13 no. 1
Type: Research Article
ISSN: 1475-7702

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Book part
Publication date: 4 October 2021

B. Guy Peters, Eduardo Grin and Fernando Luiz Abrucio

If intergovernmental relations are necessary in normal times, it should be even more required to face complex intergovernmental problem (CIP) as the COVID-19 pandemic…

Abstract

If intergovernmental relations are necessary in normal times, it should be even more required to face complex intergovernmental problem (CIP) as the COVID-19 pandemic. However, collaboration between governments depends on institutional rules as well as on political will. To discuss this issue, the analytical model is based on two dimensions: institutional design and political agency. As for the first dimension, since COVID-19 pandemic is considered as a CIP, three aspects are relevant when discussing how federations can organize the coordination between different levels of government: autonomy of subnational governments, mechanisms of coordination, and policy portfolio. As for political agency, the performance of political leadership (national presidents and governors) will be analyzed. The possibility of sharing collective goals across the federation is also a consequence of the political agency that takes place within the institutional systems of each federation. In short, it seeks to analyze the relationship between institutional design and political agency to deal with this CIP in five American federations.

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Book part
Publication date: 4 October 2021

Abstract

Details

American Federal Systems and COVID-19
Type: Book
ISBN: 978-1-80117-166-3

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Article
Publication date: 20 October 2021

Rachana Kalelkar and Qiao Xu

The authors investigate whether the different tenure phases of executives have a differential effect on audit pricing. Two alternate views – career concern and power – can…

Abstract

Purpose

The authors investigate whether the different tenure phases of executives have a differential effect on audit pricing. Two alternate views – career concern and power – can explain the effect of executives’ tenure on audit pricing. This paper aims to determine, which viewpoint dominates in explaining the relationship between audit pricing and executive tenure phases.

Design/methodology/approach

Using a sample of 11,198 firm-year observations from 2007 to 2016, the authors adopt an ordinary least squares regression model to assess the impact of the middle and long phases of executives’ tenure on audit fees.

Findings

Audit fees are significantly lower when executives enter the middle and long phases of tenure. The reduction in audit fees is greatest as both chief executive officers and chief financial officers enter the long tenure phase. Although audit fees gradually decrease as executive tenure is extended, they start increasing two years before the end of executive tenure. Furthermore, the negative association between the executive tenure phase and audit fees is greater when the executive is appointed externally. Finally, the long phase of executive tenure also mitigates the positive relationship between audit fees and internal control weaknesses.

Research limitations/implications

This study is based on US data. Future research may extend this study to other countries.

Practical implications

The findings are important to firms, practitioners and academicians, particularly, as the length of tenure of top executives has increased in recent years. By documenting that executives’ middle and long tenure phases reduce audit fees, the findings highlight the importance of maintaining executives in the firm. Finally, the findings have implications for investors, policymakers and auditors to identify companies with high audit risk.

Originality/value

This study is the first to document the impact of executives’ middle and long tenure phases on audit fees.

Details

Review of Accounting and Finance, vol. 20 no. 5
Type: Research Article
ISSN: 1475-7702

Keywords

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