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Article
Publication date: 12 February 2018

Mark Kohlbeck, Jomo Sankara and Errol G. Stewart

This paper aims to examine whether external monitors (auditors and analysts) constrain earnings strings, an indicator of earnings management, and whether this monitoring…

Abstract

Purpose

This paper aims to examine whether external monitors (auditors and analysts) constrain earnings strings, an indicator of earnings management, and whether this monitoring is more effective after the implementation of the Sarbanes-Oxley Act of 2002 (SOX), given the emphasis of SOX on improving auditing, financial reporting and the information environment.

Design/methodology/approach

Agency theory establishes the premise between external monitoring and earnings strings. Auditor tenure and number of analysts following provide measures for external monitoring quality. Using prior research, empirical models explaining the presence of an earnings strings and earnings strings trend are developed to test the hypotheses.

Findings

Pre-SOX, extreme auditor tenure, indicating lower quality external monitoring, is associated with greater earnings strings trend, and analyst coverage is associated with increased likelihood of earnings strings and greater earnings strings trend consistent with analyst pressure on management. More effective auditor and analyst monitoring occurs post-SOX in terms of reduced likelihood of earnings strings and earnings strings trend.

Originality/value

The authors provide evidence on how elements of external monitoring are associated with increased earnings strings pre-SOX. Further, they contribute to the debate on the impact of SOX on external firm monitoring and the overall financial information environment. By focusing on earnings strings, the outcome of earnings management, the authors provide a unique understanding of external monitoring that also provides insight on the overvaluation of equity and ultimate destruction of firm value. The evidence demonstrates how regulation has contributed to an improved financial reporting environment and external monitoring.

Details

Review of Accounting and Finance, vol. 17 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 October 2019

Kimberly Dunn, Mark Kohlbeck and Brian Mayhew

This paper aims to evaluate policymakers’ concerns about the lack of competition in highly concentrated markets for public company audits by examining the association…

Abstract

Purpose

This paper aims to evaluate policymakers’ concerns about the lack of competition in highly concentrated markets for public company audits by examining the association between audit fees and the inequality of Big 4 market shares at both the USA national-industry and city-industry levels.

Design/methodology/approach

Using publicly available data, this paper uses regression analysis to examine publicly available data to test research hypotheses related to the association between audit market inequalities and audit fees at both the USA national-industry and city-industry levels.

Findings

The findings support a U-shaped association between national-industry inequality and audit fees. As inequality initially increases, fees decrease; however, as inequality becomes increasingly large fees increase. The city-industry level analysis shows the opposite pattern. The results are consistent with capacity constraints at the national-industry level that are less binding at the city-industry level.

Research limitations/implications

This study provides evidence that market inequality has a non-linear association with audit price and contributes to the limited findings in industrial organization research on the importance of market share inequality in highly concentrated markets.

Originality/value

This study provides new insights into the growing body of research on audit market structure by documenting that national-industry and city-industry analysis provides different insights into the market structure. In addition, the sample period for this study (2004-2017) addresses the General Accounting Office (GAO) concern about the lack of a stable audit market in the period it examined (GAO, 2008, p. 94) and finds evidence of market structure effects not present in the earlier GAO studies (GAO, 2003, 2008).

Details

Managerial Auditing Journal, vol. 34 no. 9
Type: Research Article
ISSN: 0268-6902

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Book part
Publication date: 13 August 2018

Abstract

Details

Advances in Management Accounting
Type: Book
ISBN: 978-1-78756-440-4

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Book part
Publication date: 28 September 2020

Abstract

Details

Advances in Management Accounting
Type: Book
ISBN: 978-1-83982-913-0

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Book part
Publication date: 13 August 2018

Hsin-yi (Shirley) Hsieh, Jian Cao and Mark Kohlbeck

Purpose – We investigate the impact of CEO turnover on performance and accounting-based outcomes following major business restructurings.Design/Methodology/Approach – We

Abstract

Purpose – We investigate the impact of CEO turnover on performance and accounting-based outcomes following major business restructurings.

Design/Methodology/Approach – We analyze a sample of 217 major operational restructurings during the period 1999–2007 using regressions and other statistical tests.

Findings – We document significant improvements in postrestructuring operating and investment efficiencies with little differentiation between restructurings that involve a change in CEO and those that involve continuing CEOs. However, we find evidence of lower accounting quality for the continuing CEO firms. First, restructuring charges of CEO turnover firms are associated with lower current period unexpected core earnings and higher future period unexpected core earnings (lower levels of classification shifting). Second, CEO turnover firms have a significantly lower percentage of (i) restructuring charge reversals and (ii) prereversal shortfalls (in meeting analyst forecast estimates) followed by reversals (suggesting lower levels of subsequent earnings management). Therefore, turnover CEOs are less likely to manipulate restructuring charges to mask true economic performance than continuing CEOs. Overall, our evidence suggests continuing CEOs undertake less substantial restructurings, while opportunistically reporting similar charges and performance improvements, consistent with attempts to pool with new CEO hires to keep their jobs.

Originality/Value – Overall, our results highlight the key economic role played by top corporate managers in major business restructurings, suggesting that CEO turnover leads to both real changes in managerial actions and altered reporting incentives.

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Book part
Publication date: 28 September 2020

Joanna Golden, Mark Kohlbeck and Zabihollah Rezaee

Purpose – The purpose of this study is to investigate whether a firm’s cost structure (specifically, its cost stickiness) is associated with environmental, social, and…

Abstract

Purpose – The purpose of this study is to investigate whether a firm’s cost structure (specifically, its cost stickiness) is associated with environmental, social, and governance (ESG) sustainability factors of performance and disclosure.

Methodology/approach – This study uses MCSI Research KLD Stats (KLD) and Bloomberg databases for the 13-year period from 2003 to 2015 in constructing ESG performance and disclosure variables, respectively. The authors adopt the general cost stickiness models from Anderson, Banker, and Janakiraman (2003) and Banker, Basu, Byzalov, and Chen (2016) to perform the analysis.

Findings – The authors find that a firm’s level of cost stickiness is positively associated with certain sticky corporate social responsibility (CSR)/ESG activities (both overall and when separately classified as strengths or concerns) but not with other nonsticky CSR activities. The authors also show that the association between cost stickiness and ESG disclosure is incrementally stronger for firms with CSR activities classified as sticky. Furthermore, the authors provide evidence that ESG disclosure is greater when both cost stickiness and the degree of sticky CSR activities increase. The authors show that when cost stickiness is high and CSR activities are sticky, management has incentives to increase CSR/ESG sustainability disclosure to decrease information asymmetry.

Originality/value – The findings present new evidence to understand how management integrates cost management strategies with various dimensions of sustainability performance decisions and show that not all ESG activities are equally effective when it comes to cost stickiness. The authors also demonstrate that increased sustainability disclosure helps reduce information asymmetry incrementally more when both costs are sticky and CSR activities are sticky.

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Article
Publication date: 2 February 2015

Tony Kang, Mark Kohlbeck and Yong Yoo

The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior…

Abstract

Purpose

The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature shows that financial statement amounts are relevant for investor decisions only when there is appropriate economic and legal infrastructure (Ball, 2001).

Design/methodology/approach

Accrual quality and accounting loss are focussed upon as indicators of firm risk in financial statements.

Findings

The evidence suggests that accounting information is factored into ex ante cost of equity capital in countries with strong economic and legal infrastructures but not in those with weak infrastructures. Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.

Originality/value

Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.

Details

Pacific Accounting Review, vol. 27 no. 1
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 9 August 2011

Mehdi Nekhili and Moêz Cherif

The purpose of this article is to study the impact of the related parties' transactions (RPTs) on firm value, and to identify the ownership and governance characteristics…

Abstract

Purpose

The purpose of this article is to study the impact of the related parties' transactions (RPTs) on firm value, and to identify the ownership and governance characteristics of companies that engage in this type of transactions.

Design/methodology/approach

The paper uses 3SLS simultaneous model carried out on a sample of 85 companies listed on the Paris Stock Exchange during the period 2002‐2005.

Findings

The results show that RPTs are mainly influenced by the voting rights held by the main shareholder, the size of the board of directors, the degree of independence enjoyed by the audit committee and the board of directors, the choice of external auditor, the debt ratio and the fact of being listed in the USA. Mainly the transactions carried out directly with the main shareholders, directors and/or managers that have a negative influence on firm value.

Research limitations/implications

In future studies, it will be interesting to test the impact of the level of expertise as well as the level of qualification in the field of accounting and finance of the members of the French audit committees on the frequency of RPTs.

Originality/value

The current research complements prior studies on the RPT by showing that the frequency of RPTs can be damaging to companies and can destroy their market value.

Details

Review of Accounting and Finance, vol. 10 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 11 February 2019

Chee Kwong Lau and Li Li Wong

The purpose of this paper is to answer the fundamental question about why the shares of property developers are traded at market discounts by focusing on property…

Abstract

Purpose

The purpose of this paper is to answer the fundamental question about why the shares of property developers are traded at market discounts by focusing on property developers from Hong Kong, Malaysia and Singapore.

Design/methodology/approach

It measures market discount using market-to-book ratio (MTB) and specifies the relations between MTB and the hypothetical determining factors (revenue recognition policy, investment property measurement policy, related party (RP) transaction disclosures and economic rent) in the presence of relevant control variables.

Findings

This study finds that aggressive revenue recognition and investment property measurement policies increase market discounts, but that RP transactions generally contribute positively to reduce the market discounts of property developer shares. Specifically, RP transactions are value-enhancing only if property developers adopt a conservative revenue recognition policy, because markets sensibly see RP transactions that are part of an aggressive revenue recognition policy as earnings management for tunnelling by controlling shareholders, and hence react with discounts. It is also observed that when property developers generate insufficient profit to cover their cost of equity, this generally leads to their shares being traded at market discounts. However, an aggressive revenue recognition policy can reduce market discount if early recognition contributes positively to economic rent.

Practical implications

This study provides valuable evidence of the economic consequences (market discounts) of accounting choices on recognition and measurement, and the disclosure of accounting information. This is crucial to managers of property developers in managing their firm values when exercising accounting discretion.

Originality/value

This study provides empirical evidence on market discounts as they relate to property developers, which has been limited (past studies focus on property investment companies and real estate investment trusts).

Details

Journal of Property Investment & Finance, vol. 37 no. 2
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 2 October 2017

Mohammad Tareq, Muhammad Nurul Houqe, Tony van Zijl, Dennis William Taylor and Clive Morley

The purpose of this study is to develop a new measure for discriminatory related party transactions (DRPTs). There are currently measures for such discriminatory…

Abstract

Purpose

The purpose of this study is to develop a new measure for discriminatory related party transactions (DRPTs). There are currently measures for such discriminatory transactions but the new measure has a strong theoretical basis and is less susceptible to measurement error.

Design/methodology/approach

This paper develops and tests a new measure for these discriminatory transactions. Type I and Type II error rates and the power of the new measure are compared with an existing measure using computer-simulated and real data.

Findings

The capital market sensitivity of the new measure is also tested and compared with the existing measure. The new measure is found to be superior.

Practical implications

The new measure of DRPTs has the potential to contribute to both further research on the impact of related party transactions and policy-making in relation to DRPTs.

Originality/value

This paper has developed and tested a new measure for DRPTs.

Details

International Journal of Accounting & Information Management, vol. 25 no. 4
Type: Research Article
ISSN: 1834-7649

Keywords

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