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Article
Publication date: 13 November 2019

Qiao Xu, Guy Fernando, Kinsun Tam and Wei Zhang

This paper aims to investigate whether audit fees and financial report readability are bi-directionally related.

Abstract

Purpose

This paper aims to investigate whether audit fees and financial report readability are bi-directionally related.

Design/methodology/approach

The authors test their hypotheses with empirical data. Specifically, they adopt a two-stage simultaneous equation regression model to assess the bi-directional relationship between audit fees and financial report readability.

Findings

While poor readability increases the fees charged by the auditor, higher audit fees improve the readability of the financial reports.

Research limitations/implications

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

Practical implications

Poor financial report readability encumbers stakeholders of the firms. Understanding the interaction between financial report readability and audit fees will help both auditors and firm managers.

Social implications

Audit committees aggressively negotiating for lower audit fees should be aware of the link of low audit fees, potentially indicative of poor quality, to less readable reports. Investors and regulators too should be concerned about this relationship, especially in instances when auditors low-ball audit fees or when firms aggressively negotiate for lower audit fees.

Originality/value

To the best of authors’ knowledge, this study is the first to document the bi-directional relationship between financial report readability and audit fees and assess the positive impact of audit fees on financial report readability.

Details

Managerial Auditing Journal, vol. 35 no. 3
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 11 November 2014

Tarek Ibrahim Eldomiaty, Ola Atia, Ahmad Badawy and Hassan Hafez

The literature on the relation between dividends and stock risks include mixed results. The related studies have reached either insignificant, or positive, or negative…

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Abstract

Purpose

The literature on the relation between dividends and stock risks include mixed results. The related studies have reached either insignificant, or positive, or negative results. The authors offer a mathematical structure that addresses potential mutual benefits of dividends signaling under conditions of stock risks (systematic and unsystematic). The mathematical structure demonstrates explicitly a case of risk transfer. The purpose of this paper is to examine the potential benefits to firms and stockholders when financial managers adjust dividends per share (DPS) using percentage change in the explanatory power of systematic and unsystematic risks. This perspective is derived from a practical consideration that dividends are part of stock returns that can be adjusted to take stock risks into account.

Design/methodology/approach

The paper utilizes the specifications of the two-stage (simultaneous) regression and partial adjustment model. The sample includes quarterly data for firms listed in the Dow Jones Industrial Average and NASDAQ for the period December 31, 1989-March 31, 2011.

Findings

The authors have reached general results based on hypotheses developed from related literature. The results show that: first, benefits of risk transfer can be realized. That is, firms as well as stockholders achieve benefits when the DPS are adjusted using percentage change in the explanatory power of systematic risk only; second, dividend growth rates are affected positively by changes in systematic risks; third, the highest stock returns in the market are reached with sharp decreases in dividend growth rates; fourth, in the highest returns quartile, firm size and time do not matter but the industry type does; and fifth, the associations between dividend growth rates, systematic, unsystematic risks, and stock returns are intrinsically nonlinear.

Originality/value

The study contributes to the literature in terms of first, providing practical insights on the financial strategies that help in the use of dividends to convey the right signals to stockholders, and second, empirically show the potential benefits of adjusting dividends growth rates according to systematic and unsystematic stock risks in a unified mathematical structure that adds to the current literature.

Details

Journal of Economic and Administrative Sciences, vol. 30 no. 2
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 8 April 2014

Dennis Olson and Taisier A. Zoubi

This study aims to examine the determinants of the allowance for loan losses (ALL) and loan loss provisions (LLP) for banks in the Middle East and North African (MENA…

Abstract

Purpose

This study aims to examine the determinants of the allowance for loan losses (ALL) and loan loss provisions (LLP) for banks in the Middle East and North African (MENA) region using both a two-stage approach and simultaneous equation system to address the potential problem of estimation bias introduced by estimating the ALL and LLP separately. The paper also tests three competing hypotheses: the earnings management hypothesis, the capital management hypothesis, and the signaling hypothesis.

Design/methodology/approach

The authors adopt a simultaneous equation and three-stage approaches to test whether MENA banks jointly determine LLP and ALL and the determinants of the two accounts. The sample consists of all available electronic data for 75 banks (451 bank-year observations) in nine MENA countries over the period 2000-2008.

Findings

Evidence suggests that the two accounts are jointly determined. The results support the earnings management hypothesis – meaning that MENA banks have engaged in year-to-year income smoothing. The authors also find that LLP and ALL provide signals about future earnings.

Research limitations/implications

The authors acknowledge that the LLP account is only one of many accounts on the income statement that could be used for signaling or to manage earnings, and that the ALL is one of several accounts that could be used for signaling, earnings or capital management. Future studies could examine other accruals for their role in managing earnings, signaling and capital.

Practical implications

The results indicate that bank managers use LLP and ALL accounts to manage earnings management, policy makers may want to limit the ability of banks to manipulate earnings.

Originality/value

Prior research on the loan loss accounting practices has been based on single equation models of the determinants of LLP and ALL. An issue that has not been adequately addressed in this literature is that ALL and LLP may be interrelated and jointly determined by banks. If the two accounts are not independent of each other, failure to include one when estimating the other may lead to an omitted variable problem, while including both in the same equation induces a potential simultaneity bias. The study is the first empirical work examining whether ALL and LLP are jointly determined by banks. By jointly estimating LLP and ALL, the study permits an assessment of the magnitude of the potential error from adopting ordinary least squares estimation of a single equation model.

Details

Journal of Islamic Accounting and Business Research, vol. 5 no. 1
Type: Research Article
ISSN: 1759-0817

Keywords

Article
Publication date: 25 October 2011

Chiung‐Ju Liang, Tzu‐Tsang Huang and Wen‐Cheng Lin

Previous empirical studies on the nature of the relationship between ownership and corporate value have produced mixed results. Meanwhile, effective management of…

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Abstract

Purpose

Previous empirical studies on the nature of the relationship between ownership and corporate value have produced mixed results. Meanwhile, effective management of knowledge‐based intellectual capital has become a key factor to corporate success, both in firm performance and corporate value. Thus, this paper aims to reexamine the link among ownership, proxies for intellectual capital and corporate value in the emerging Taiwan market.

Design/methodology/approach

Using two‐stage least square estimation of panel data in a simultaneous equations framework, the authors focus on: What is the interdependent impact of ownership on corporate value through the mediating role of intellectual capital (IC)? Does ownership directly or indirectly (i.e. via IC) influence corporate value? Does it persist across industries?

Findings

The empirical results suggest that the relationship between ownership and corporate value mainly depends on industry characteristics and the nature of proxies for intellectual capital in the emerging Taiwanese market. Further, the impacts of ownership on corporate value in more traditional industries are even stronger, that is, there exists the direct impact of ownership mechanism on corporate value. Notably, for the high‐tech firms, ownership can indirectly affect corporate value through the moderating role of intellectual capital.

Research limitations/implications

The implication reminds managers and investors not merely focusing on ownership mechanisms as the main value‐creation information, but a thorough review of IC should be made in order to avoid making incorrect decisions. The limitations suggest areas for further research. For instance, it is important to extend the role of intellectual capital (i.e. to employ other variables to proxy for IC) in exploring the interdependent impact of ownership on corporate value.

Originality/value

The paper potentially adds to ongoing research by extending the importance of the concept of IC in assessing the interdependent impact of ownership on corporate value.

Details

Journal of Intellectual Capital, vol. 12 no. 4
Type: Research Article
ISSN: 1469-1930

Keywords

Article
Publication date: 1 June 1991

Charles Austin Stone and Anne‐Marie Zissu

This paper proposes an alternative method of estimating a model that predicts the outcome of a tender offer. We argue that previous econometric models designed to predict…

Abstract

This paper proposes an alternative method of estimating a model that predicts the outcome of a tender offer. We argue that previous econometric models designed to predict the outcome of a tender offer have been estimated incorrectly. Explanatory variables which are endogenous have been treated as though they were exogenous. Ignoring the endogeneity problem results in estimates of re‐gression coefficients which are inconsistent. In order to derive consistent estimates of the regression coefficients, we construct a simultaneous equation model to explain the outcome of a tender offer. Since two of the three dependent variables in the simultaneous equation model are dichotomous, it is necessary to use the two stage limited dependent variable estimator (2SLDV) to find consistent estimates of the regression coefficients.

Details

Managerial Finance, vol. 17 no. 6
Type: Research Article
ISSN: 0307-4358

Article
Publication date: 1 February 2004

Pervaiz Alam and Anibal Báez‐Díaz

This study uses a simultaneous equations approach to examine the price‐earnings relationship of non‐U.S. firms that directly list their securities in U.S. capital markets…

Abstract

This study uses a simultaneous equations approach to examine the price‐earnings relationship of non‐U.S. firms that directly list their securities in U.S. capital markets or trade as American Depository Receipts (ADRs). The Hausman test shows that price changes and earnings changes are endogenously determined, thus the simultaneous equations approach is used to estimate the earnings response coefficient (ERC) and the returns response coefficient (RRC). Under the ordinary least squares (OLS) estimation, the parameter estimates are biased downward because the OLS fails to correct for endogeneity. In general, our results show that the joint estimation procedure mitigates some of the single‐equation bias. The estimated ERC and the RRC are higher under the three stage least regression (3SLS) than under the OLS regression. In addition, the product of the ERC and the RRC coefficients approaches its theoretical value of one when using the 3SLS estimation. The evidence also shows that institutional factors affect the way the market value information for these firms. We find that the ERC and RRC are insignificant for the common law non‐ADR firms and significantly positive for common law ADR firms.

Details

Review of Accounting and Finance, vol. 3 no. 2
Type: Research Article
ISSN: 1475-7702

Article
Publication date: 11 November 2014

Rick L. Andrews and Peter Ebbes

This paper aims to investigate the effects of using poor-quality instruments to remedy endogeneity in logit-based demand models. Endogeneity problems in demand models…

Abstract

Purpose

This paper aims to investigate the effects of using poor-quality instruments to remedy endogeneity in logit-based demand models. Endogeneity problems in demand models occur when certain factors, unobserved by the researcher, affect both demand and the values of a marketing mix variable set by managers. For example, unobserved factors such as style, prestige or reputation might result in higher prices for a product and higher demand for that product. If not addressed properly, endogeneity can bias the elasticities of the endogenous variable and subsequent optimization of the marketing mix. In practice, instrumental variables (IV) estimation techniques are often used to remedy an endogeneity problem. It is well-known that, for linear regression models, the use of IV techniques with poor-quality instruments can produce very poor parameter estimates, in some circumstances even worse than those that result from ignoring the endogeneity problem altogether. The literature has not addressed the consequences of using poor-quality instruments to remedy endogeneity problems in non-linear models, such as logit-based demand models.

Design/methodology/approach

Using simulation methods, the authors investigate the effects of using poor-quality instruments to remedy endogeneity in logit-based demand models applied to finite-sample data sets. The results show that, even when the conditions for lack of parameter identification due to poor-quality instruments do not hold exactly, estimates of price elasticities can still be quite poor. That being the case, the authors investigate the relative performance of several non-linear IV estimation procedures utilizing readily available instruments in finite samples.

Findings

The study highlights the attractiveness of the control function approach (Petrin and Train, 2010) and readily available instruments, which together reduce the mean squared elasticity errors substantially for experimental conditions in which the theory-backed instruments are poor in quality. The authors find important effects for sample size, in particular for the number of brands, for which it is shown that endogeneity problems are exacerbated with increases in the number of brands, especially when poor-quality instruments are used. In addition, the number of stores is found to be important for likelihood ratio testing. The results of the simulation are shown to generalize to situations under Nash pricing in oligopolistic markets, to conditions in which cross-sectional preference heterogeneity exists and to nested logit and probit-based demand specifications as well. Based on the results of the simulation, the authors suggest a procedure for managing a potential endogeneity problem in logit-based demand models.

Originality/value

The literature on demand modeling has focused on deriving analytical results on the consequences of using poor-quality instruments to remedy endogeneity problems in linear models. Despite the widespread use of non-linear demand models such as logit, this study is the first to address the consequences of using poor-quality instruments in these models and to make practical recommendations on how to avoid poor outcomes.

Details

Journal of Modelling in Management, vol. 9 no. 3
Type: Research Article
ISSN: 1746-5664

Keywords

Article
Publication date: 3 September 2018

Wasim Khalil Al-Shattarat, Basiem Khalil Al-Shattarat and Ruba Hamed

This study aims to examine the signalling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study aims to…

Abstract

Purpose

This study aims to examine the signalling hypothesis of dividends by testing empirically the market reaction to dividends announcements. Furthermore, this study aims to examine the information content of dividends announcements with respect to future earnings changes for a sample of Jordanian industrial firms over the period 2009 to 2015.

Design/methodology/approach

The authors mainly used the event study methodology to examine the market reaction to dividend release announcements. The market model is used to generate the expected returns. Also, the t-test is used to examine the significance of the mean and cumulative abnormal return. Furthermore, a simultaneous-equation model developed by Nissim and Ziv (2001) and Grullon et al. (2005), applying the two-stage least squares (2SLS), is used to examine the relationship between dividends changes and future earnings changes.

Findings

The results reveal consistency with the limited extant empirical evidence for developing markets and provide some new insights for Jordanian listed firms that support the signalling hypothesis. In applying the event study methodology, the information content of dividends shows that there is a significant positive market reaction to dividends announcements. The study’s findings also present a strong relationship between dividends announcements and profitability in the year of announcements and the subsequent year, whereas this relationship does not exist in the second year. The findings show that there is value-relevance for dividends, suggest that investors recognize the signalling purpose and discern that dividends announcements are useful in predicting favourable and unfavourable future earnings in the short run (the same year and subsequent year) and also show that managers may use dividends to signal earnings prospects in anticipation of expected future market benefits.

Research limitations/implications

The findings of this study could have significant policy implications. The support of a signalling effect implies an existence of information symmetry, at least theoretically, between management and investors. On the other side, this study could not reflect the levels of inside ownership or the existence of signalling substitutes even though these findings could have implications for Jordan’s existing corporate governance practices and firms’ disclosure environment. The results are specific to Jordan, but they do shed light on the generality of the rival models of dividend policy. Many of the structural characteristics of the capital market in Jordan are, however, also present in other emerging markets. The results from this study may, therefore, help provide the basis for comparative research both in the region and in other emerging markets.

Practical implications

The support of the signalling effect implies the existence of information symmetries, at least theoretically, between management and investors. These findings could have implications for Jordan’s existing corporate governance practices and firms’ disclosure environment.

Originality/value

This paper contributes to the literature by providing a workable test for the dividend signalling hypothesis, applying a simultaneous-equation model that incorporates the market reaction to dividends announcements and future earnings changes. Moreover, this paper uses a recent data set of dividends announcements in Jordan. This study provides additional insight to support the signalling hypothesis in emerging markets. Overall, current and previous studies have focused typically on investigating dividend policy in developed markets, especially the US and European markets, although there has been limited analysis of dividends changes on earnings changes for developing markets.

Details

Journal of Financial Reporting and Accounting, vol. 16 no. 3
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 28 October 2014

Mian Du, Siyan Chen and Huan Shao

The purpose of this paper is to investigate the relationship between corporate governance mechanism and firm value of the listed companies in China. Does the better…

Abstract

Purpose

The purpose of this paper is to investigate the relationship between corporate governance mechanism and firm value of the listed companies in China. Does the better corporate governance lead to the higher firm value? Or does the higher firm value make it easy to choose a better governance mechanism? Or they affect each other? In other words, this paper tries to answer whether the corporate governance mechanism is only decided by institutional arrangement, or by market choice according to firm value or performance or by the interaction of institutional arrangement and market choice? It tries to answer whether institutional arrangement maximizes the firm value, or an invisible hand pushes them to arrive at its maximum.

Design/methodology/approach

This paper establishes an analytic framework of simultaneous equations based on causality, which includes five endogenous variables: ownership of larger shareholders, managerial ownership, director compensation, debt financing and firm value. It adopts 1,644 data samples from 274 Chinese listed companies in Shanghai and Shenzhen Stock Exchange during 2007- 2012 after the non-tradable shares reform. Ordinary least squares (OLS) estimation of single equation, 2SLS and 3SLS estimation of simultaneous equations are respectively done to show the differences of these three kinds of estimations.

Findings

The empirical results show that differences exist among OLS, 2SLS and 3SLS estimation. Finally, 3SLS estimation should be adopted because the OLS and 2SLS estimation are biased. There are endogenous relationships between corporate governance mechanism and firm value. Through the 3SLS estimation, it is found that first, ownership concentration and firm value affect each other positively. Second, managerial ownership and firm value affect each other positively; third, director compensation and firm value affect each other negatively, while director compensation and firm performance affect each other positively. Finally, debt financing level and firm value are negatively related to each other.

Practical implications

It means that ownership of large shareholders, managerial ownership, director compensation and debt financing in the Chinese listed companies are found to have a root in the interaction between institutional arrangement and market choice. It is also found that adverse selection occurs when creditors loan to the listed companies. Managerial compensation is positively related to accounting profit, but it is negatively related to firm value because managers increase profit due by earning management. This could only increase the accounting profits and obtain huge cash compensation, but not increase firm value and even harm the interests of shareholders.

Originality/value

This paper not only shows the difference between OLS and 2SLS estimation but also compares the estimation of 2SLS and 3SLS in terms of empirical methods. It gives answers to the following questions: whether the relationship is one-way causality or bilateral causality between ownership concentration, managerial ownership, director compensation and firm value; whether governance mechanism affects firm value by institutional arrangement, or market drives both of them to strike a balance by an invisible hand. In other words, does it make them arrive at equilibrium through the competitive selection process when shareholders, directors, managers and creditors attempt to maximize themselves of their interests?

Details

Chinese Management Studies, vol. 8 no. 4
Type: Research Article
ISSN: 1750-614X

Keywords

Article
Publication date: 27 June 2008

Denise M. Rotondo and Joel F. Kincaid

The purpose of this paper is to explore the relationships between four general coping styles, work and family conflict, and work and family facilitation in a simultaneous

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Abstract

Purpose

The purpose of this paper is to explore the relationships between four general coping styles, work and family conflict, and work and family facilitation in a simultaneous equations framework

Design/methodology/approach

Data from the MIDUS study were analyzed using two‐staged least squares regression to incorporate the reciprocity between the work and family domains into the model. Hypotheses about direct action, advice seeking, positive thinking, and cognitive reappraisal as they affect work family (W‐F) and family‐work (F‐W) conflict were tested. The impact of the coping styles on work and family facilitation has not been studied before and was also included.

Findings

The efficacy of individual coping styles on conflict and the relationships between coping and facilitation were not uniform and varied depending on the source domain. Positive thinking was associated with higher W‐F and F‐W facilitation. Direct‐action was associated with lower F‐W conflict and higher F‐W facilitation. Reappraisal and advice seeking were associated with higher F‐W conflict, but advice‐seeking was related to higher W‐F facilitation. As expected, significant reciprocal effects for conflict were found; both W‐F and F‐W conflict are significant predictors of F‐W and W‐F conflict, respectively. And, an increase in F‐W conflict was predicted to have twice the impact of factors increasing W‐F conflict. W‐F facilitation was significant in predicting levels of F‐W facilitation; F‐W facilitation did not influence levels of W‐F facilitation.

Originality/value

The paper suggests the family domain should be the target for problem‐focused coping strategies, most likely because greater control can be exercised at home. Practical suggestions to help employees identify strategies to lower conflict and raise facilitation, thus promoting balance, are discussed.

Details

Journal of Managerial Psychology, vol. 23 no. 5
Type: Research Article
ISSN: 0268-3946

Keywords

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