Search results

The purpose of this paper is to explore how non-professional investors (NPIs) with varying levels of financial sophistication interpret and perceive corporate disclosures and management credibility, specifically risk factors, when those disclosures are presented in readable and less-readable formats.

The paper uses an online experiment to test hypotheses related to the effects of financial sophistication (measured) and readability (manipulated) on NPIs’ equity valuations and perceptions of management credibility (competence and trustworthiness).

Increased readability appears to counteract less-sophisticated NPIs’ conservatism in equity valuations, such that they are not statistically significantly different from more-sophisticated NPIs’ equity valuations. Further, less-sophisticated NPIs judge management as less competent when disclosures are less readable, while more-sophisticated NPIs judge management as more competent when disclosures are less readable.

The paper has important implications for the SEC’s regulations related to plain English requirements for risk factor and other corporate disclosures. Financial sophistication varies among NPIs, and readability appears to influence these individuals in different ways.

The SEC’s Concept Release (April 13, 2016) acknowledges the need to update and improve risk factor disclosure regulations. This study provides evidence that contributes to those decisions.

The paper extends the research on processing fluency, by examining readability of disclosures with a consistent tone (negative). The NPIs surveyed are directly representative of the population of interest for risk factor disclosure regulations.

The restructuring of shipping and shipbuilding companies in the midst of rapidly shrinking global shipping demand has become a prominent issue in Korea. In shipping finance, loan syndication featuring many creditors surges as the preferred option. However, increasing the numbers of creditors in the syndicate results in two opposite effects. First is the beneficial effect from their enhanced monitoring power. On the other hand, there is the adverse effect resulting from increased difficulty in coordination when syndicate members increase, particularly in bankruptcy. Our aim of this paper is to analyze the role of finance in the shipping and shipbuilder markets, and determine the theoretical optimal number of creditors for the shipping finance syndicate based on Bolton and Scharfstein (1996). The two issues above result from moral hazard and non-verifiability: coordination among many creditors for collection of bonds in case of default, and the enhancement of monitoring private benefit exploitation by the ship-owner during default. Considering the two conflicting forces result from an increase in creditor membership, we draw conclusions on determining the optimal number of creditors by considering trade-offs between these two factors: More creditors are preferred when the monitoring effect dominates. Otherwise, less creditors are preferred.

The purpose of this paper is to analyze how “New Deal” regulatory initiatives, primarily the Securities Acts and the Securities and Exchange Commission (SEC), changed US auditors’ professional knowledge conception, culminating in the 1938 expansion of the Committee on Accounting Procedure (CAP), the first US body to set accounting principles.

The paper combines Halliday’s (1985) knowledge mandates with Hancher and Moran’s (1989) regulatory space to attain a theory-based understanding of auditors’ changing knowledge conceptions amid regulatory pressure. It draws on a range of primary and secondary sources to examine the period from 1929 to 1938.

Following the stock market crash, the newly created SEC aimed to engage auditors as a means to regulate companies’ accounting practices based on a set of codified principles. While entailing increased status, this new role conflicted with the auditors’ knowledge conception, which was based on professional judgment and personal integrity. Pressure from the SEC and academics eventually made auditors agree to a codification of their professional knowledge and create the CAP as a cooperative regulatory solution.

The paper explores the role of auditors’ knowledge conceptions in the emergence of today’s standard setting. It is suggested that auditors’ incomplete control of their professional knowledge made standard setting a form of co-regulation, located between the actors occupying the regulatory space of accounting.

The purpose of this paper is to present an overview of the flash crash, and explain why and how it happened.

The author summarizes several studies suggesting various perspectives on the flash crash and its causes. Furthermore, the author highlights recently proposed and introduced improvements and regulations to reduce the risk of having similar market collapses in the future.

It is an overview paper that highlights the state of the art on the subject.

Paper does not report any research findings of the author.

High-frequency trading (HFT) along with its pros and cons is the new normal for most of the current electronic trading activity in the markets. It is well recognized by the experts that HFT may have its important shortcomings whenever the rules and regulations are not up to date to match the technological progress offering faster computational and execution capabilities.

HFT has created a societal discussion about its benefits and potential deficiencies as the common practice for trading due to potentially unequal access to market data by various categories of participants. Such arguments help the regulators to develop improvements to reduce the market risk and nurture more robust and fair markets for all.

The paper has a tutorial value and summarizes the current state of HFT. The readers of more interest are guided to the most relevant literature for further reading.

This study reviews and discusses the accounting literature that analyzes the role of auditors and enforcers in the context of fraud.

This literature review includes both qualitative and quantitative studies, based on the idea that the findings from different research paradigms can shed light on the complex interactions between different financial reporting controls. The authors use a mixed-methods research synthesis and select 64 accounting journal articles to analyze the main proxies for fraud, the stages of the fraud process under investigation and the roles played by auditors and enforcers.

The study highlights heterogeneity with respect to the terms and concepts used to capture the fraud phenomenon, a fragmentation in terms of the measures used in quantitative studies and a low level of detail in the fraud analysis. The review also shows a limited number of case studies and a lack of focus on the interaction and interplay between enforcers and auditors.

This study outlines directions for future accounting research on fraud.

The analysis underscores the need for the academic community, policymakers and practitioners to work together to prevent the destructive economic and social consequences of fraud in an increasingly complex and interconnected environment.

This study differs from previous literature reviews that focus on a single monitoring mechanism or deal with fraud in a broadly manner by discussing how the accounting literature addresses the roles and the complex interplay between enforcers and auditors in the context of accounting fraud.

The purpose of this paper is to research how corporate communication regarding a specific corporate event (i.e. Tesla’s tweets about a new product) as well as the framing of both the event itself and the market reactions therewith in the news media influence the formation of the share price of the respective company over time. In so doing, the study provides insights into the nature of market-moving information and the role of financial news flows in shaping market reactions in today’s high-frequency news and information environment.

Using a multi-method case study approach, combining quantitative intraday event studies with a qualitative text analysis of financial online news and tweets by Elon Musk and Twitter, the authors shed light on the complex interaction between market events, financial information and stock market reactions. The analysis covers a period of four days, encompassing the announcement and introduction of the new battery pack for Model S and X by Tesla as well as the accompanying and follow-up reporting by the financial news media.

Findings show that market reactions are driven by business events and expectations among the market rather than the follow-up reporting by financial news media. Financial online news instead seems to heavily rely on Elon Musk’s attention-triggering news to sustain its 24-h airtime with a variety of reporting tools, keeping the highly demanded audience engaged. Eventually, Twitter accounts of media visible companies and personalities, such as Tesla and its CEO Elon Musk, have been found to be useful market information sources for day traders and shareholders to trade at a profit.

The study is a response to recent discussions about the legitimacy of Twitter communication by CEOs or representatives of listed companies. The findings show that Twitter communication needs to be well considered in light of strict market regulations (e.g. SEC in the USA) regarding insider-trading and the publication of market-relevant information. In addition, corporate financial communication should avoid impetuous communication via social media channels as this could have deterrent effects on the market valuation of a listed company.

This paper empirically examines whether the order of liability and preferred stock accounts presented on the balance sheet is consistent with how the stock market values their riskiness.

This paper measures a firm’s riskiness with idiosyncratic risk and employs the first-difference design to test the relation between idiosyncratic risk and the order of current liabilities, noncurrent liabilities and preferred stock, respectively. Further, the paper tests whether operating liabilities are viewed as riskier than financial liabilities. Finally, the authors partition their sample based on the degree of financial distress and investigate whether the results differ between the two subsamples.

The paper finds that current liabilities are viewed as riskier than noncurrent liabilities and preferred stock is viewed as less risky than current and noncurrent liabilities, consistent with the ordering on the balance sheet. Further, the paper finds that operating liabilities are viewed as riskier than financial liabilities. Finally, the authors find that total liabilities and preferred stock (redeemable and convertible classes) are viewed as riskier for distressed firms than for nondistressed firms.

The authors thoroughly investigate the riskiness of several classes of claims and document that the classification of liabilities and preferred stock classes is relevant to common stockholders for assessing their associated risk.

Negative disclosure tone in 10-K annual reports has economic consequences, yet relatively little is known about how it is generated. Boards of directors play an important governance role with respect to mandatory disclosures and personally sign off on Form 10-K, leading us to expect directors to influence financial reporting narratives. This study investigates whether the negative tone of firms' narrative annual report disclosures is associated with the human and social capital of its board of directors.

Multivariate regression analyses of negative disclosure tone (Loughran and McDonald, 2011) on board members' average age, gender, education, financial expertise and turnover is performed. A host of supplemental tests to corroborate our primary analysis, including using Sarbanes-Oxley's financial expert mandate as an exogenous shock to board composition, impact threshold for a confounding variable, placebo analysis, portfolio tests of more and less negative disclosing firms and portfolio tests of “loud” versus “quiet” boards are conducted.

Evidence that directors' gender, education, financial expertise and board turnover are associated with more negative disclosure tone, while directors' age is associated with less negative disclosure tone is found. The study also looked within the board to differentiate whether these findings are driven by characteristics of inside directors or outside directors serving on the audit committee, or both, as these are the specific groups of directors we would expect to play a role in disclosure. It was found that negative disclosure tone is associated with a lower bid-ask spread, so this study interpreted more negative tone as containing more descriptive information.

This study helps decode the “black box” of annual report disclosure tone, which Loughran and McDonald (2011) show has important economic implications. The results help inform stakeholders such as policymakers, executives and capital market participants as to how board member traits are associated with disclosure. The findings are particularly important as this study bears witness to the increasing prominence of gender/diversity mandates (e.g. Israel, Norway, California) and financial expertise mandates (e.g. Sarbanes-Oxley).

Previous literature provides mixed evidence about the effectiveness of a code of ethics in limiting managerial opportunism. While some studies find that code of ethics is merely window-dressing, others find that they do influence managers' behavior. The present study investigates whether the quality of a code of ethics decreases the cost of equity by limiting managerial opportunism.

In order to test the hypothesis, the authors perform an empirical analysis on a sample of US companies in the 2004–2012 period. The results are robust to a battery of robustness analyses that the authors performed in order to take care of endogeneity.

Empirical results indicate that a higher quality code of ethics is associated with a lower cost of equity. In other words, firms with a more comprehensive code of ethics and better-designed implementation procedures limit managerial opportunism and pay a lower cost of equity because they are perceived by investors to be less risky.

The authors contribute to the literature in two ways. First, by looking at the market reaction to the code of ethics, thus capturing all its indirect possible benefits and second, by measuring not only the existence but also the quality of a code of ethics. Based on the results, policymakers may choose to further promote codes of ethics as an effective corporate governance mechanism.

This paper aims to investigate the pricing of discretionary earnings in South Africa. This is a unique setting, as South African listed firms also report mandatory non-GAAP earnings (“headline earnings”).

Results are based on multivariate regression analyses for South African firms that report from 2010 to 2019.

Findings show that the value-relevance of discretionary earnings exceeds that of both GAAP earnings and headline earnings. In addition, placement of discretionary earnings reconciliations communicates information about the decision-usefulness of earnings.

Discretionary earnings remain the most value-relevant earnings measure, despite the divergent decision-useful characteristics offered by headline earnings and GAAP earnings. Therefore, the most decision-useful earnings reflect unique industry or firm characteristics rather than the assurance arising from regulation.