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This article outlines a procedure for quantifying risk‐adjusted capital reserves that may be used for both performance evaluation and capital allocation. The author identifies and quantifies the sources of risk capital that must be addressed, to cover current investment and withstand market shocks, for any business line that exhibits earnings volatility. The author classifies risk capital into two types: market‐risk capital and earnings volatility‐related capital. Market risk capital may be divided into two categories; risks due to “normal” or “diffusion” type price movements and catastrophic moves or “stress” events. In contrast, earnings volatility‐related capital is directly related to the firm's equity‐at‐risk, in the event that market shocks lead to sustained earnings volatility. The author suggests that these risk‐adjusted capital measures may be used as a benchmark, in conjunction with net earnings, to evaluate performance, or to allocate equity capital across different operations within a firm.

We survey the literature on the Risk Augmented Mincer equation that seeks to estimate the compensation for uncertainty in the future wage to be earned after completing an education. There is wide empirical support for the predicted positive effect of wage variance and the negative effect of wage skew. We discuss robustness of the findings across specifications, potential bias from unobserved heterogeneity and selectivity and consider the core issue of students' information on benefits from education.

This study aims to investigate whether accounting-related litigation is associated with a break in the client’s earnings string and the auditor’s response to a break in the earnings string.

The authors use regression models on a sample of publicly-traded USA companies with earnings strings.

The authors find that clients’ earnings string breaks are associated with increased accounting litigation risk and audit fees. The results are more prevalent for larger breaks.

The findings suggest auditors anticipate string breaks by clients which implies that audit fee research should consider earnings string characteristics in the fee models.

The auditor’s access to private information allows them to anticipate string breaks and potential increase in litigation risk.

An earnings string break represents a convergence of concerns highly relevant to the auditor: more users relying on the financial statements with greater expectations, increased likelihood of losses to those users, an environment where the likelihood of misstatement may increase, and explicitly stated professional responsibilities in response to the latter. Despite that, and a rich earnings string literature, prior studies have not directly examined auditors’ response to a client’s string break.

This paper seeks to use an analytical approach to examine the relation of systematic risk and accounting variables.

The paper theoretically integrates the capital asset pricing model, Cobb‐Douglas function and clean surplus relation to derive the relation.

The analytical results suggest that determinants of systematic risk include earnings, sales growth, book value, dividend, degree of operating leverage (DOL), degree of financial leverage (DFL), market return, and risk‐free return. Three general conclusions are: For a firm with positive prior‐year earnings and current‐year sales growth, if the combined effect of its current book value, dividend and earnings on stock price is positive (negative), then its degree of total leverage has a positive (negative) effect on systematic risk; When the effect of book value and earnings on stock price each is positive and the effect of dividend on stock price is positive (negative), then the dividend has a positive (negative) effect on systematic risk; For a firm with positive (negative) sales growth, its DOL is positively (negatively) related with its DFL for a given level of systematic risk.

The findings have significant implications for the risk management literature and practice.

This study aims to investigate the effect of income and asset diversification on earnings management using discretionary loan loss provisions (LLP) in banks, and the role of risk level in mediating this effect.

A sample of banks operating in Middle East and North Africa countries was used to test the mediation model of Baron and Kenny (1986) with different measures of diversification and risk.

The results show that bank income and asset diversification have unique and combined effects on earnings management. The results also support the idea that a risk-mediating effect contributes to explaining this relationship among banks. Specifically, bank diversification strategies positively affect LLP-based earnings management by increasing bank risk. This result is relevant for conventional banks. However, only a direct and positive effect of diversification strategies on LLP-based earnings management can be observed in Islamic banks, and the indirect effect is not supported.

This study extends previous research by examining the unique and combined effects of income and asset diversification strategies on earnings management in the banking sector. Specifically, it provides new evidence that diversification strategies increase LLP-based earnings management, both directly and indirectly, through bank risk.

The purpose of this study is to examine whether the required disclosure and the high frequency of key audit matters (KAMs) are likely to moderate the effect of higher credit risk on earnings quality.

This study uses 15,106 Taiwanese firm-year observations to explore the relationship between earnings quality and credit risk during the 2011 to 2020 period. We use the two-stage least squares method to test whether the presence of KAM disclosures moderated the association between earnings quality and credit risk and also to examine whether higher KAM frequency moderates the association between earnings quality and credit risk.

Our results provide evidence that the presence of a KAM disclosure requirement moderates the impact of firms with higher credit risk on earnings quality. In addition, there is significant evidence that the higher the frequency of KAM disclosures the greater the moderation impact that is found.

This research investigates whether the disclosure and high frequency of KAMs moderates the effect of credit riskiness on earnings quality. This study improves our understanding of whether more KAMs disclosures would improve earnings quality of firms with higher credit risk. In addition, we also use Beneish M-SCORE, as an alternative earnings quality proxy, to reinforce our empirical results. This markedly differentiates this paper from other studies.

The purpose of this study is to examine the association between two reporting mechanisms used by managers to communicate risk information to the capital market: risk disclosure and earnings smoothing.

This study juxtaposes two competing hypotheses, the “opportunistic” and the “signaling”, and empirically investigates whether one dominates the other for a sample of large UK firms for the period 2005–2015. This study also uses the global financial crisis as an arguably exogenous shock on overall risk in the economy to investigate its effect on managers' joint use of textual risk disclosures and earnings smoothing.

This study finds that risk disclosure and earnings smoothing are negatively associated. This finding supports that managers with incentives to mask the firm’s true underlying risk through smoothing earnings provide lower levels of risk-related disclosures. This study documents that the trade-off between risk disclosure and earnings smoothing is more pronounced during the global financial crisis period than before and after the crisis period. Further, this study demonstrates a more negative association for firms with higher volatility of cash flows. This negative association is robust to various model specifications, additional corporate governance related controls and an alternative measure of earnings smoothing.

The findings provide new empirical evidence about the association between risk disclosure and earnings smoothing and support the opportunistic hypothesis, especially when firms are faced with increased risk.

The purpose of this paper is to examine how publicly available accounting risk metrics influence the aggressiveness of managers’ discretionary accounting decisions by making those decisions more transparent to the public.

The experiment used a 2 × 3 between-participants design, randomly assigning 122 financial reporting managers among conditions in which we manipulated whether the company was currently beating or missing analysts’ consensus earnings forecast and whether an accounting risk metric was indicative of low risk, high risk or a control. Participants chose whether to manage company earnings by deciding whether to report an amount of discretionary accruals that was consistent with the “best estimate” (i.e. no earnings management) or an amount above or below the best estimate.

Aggressive (income-increasing) earnings management is deterred when managers believe such behavior will cause their firm to be flagged as aggressive (i.e. high risk) by an accounting risk metric. Some managers attempt to “manage” the risk metric into an acceptable range through conservative (income-decreasing) earnings management. These results suggest that by making the aggressiveness of accounting choices more transparent, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing).

The operationalization of the manipulated variables of interest may limit the study’s generalizability.

Users of accounting risk metrics (e.g. investors, auditors, regulators) should be cautious when relying on such risk metrics that may be of limited reliability and usefulness due to managers’ incentives to manipulate their companies’ risk scores by being overly conservative in an effort to prevent being labeled “aggressive”.

By increasing the transparency of the aggressiveness of accounting choices, public risk metrics may reduce one type of earnings management (income-increasing), while simultaneously increasing another (income-decreasing).

The purpose of this paper is to examine the relationship between and corporate environmental responsibility (CER) and audit risk.

A survey participation request was mailed to 5,008 US auditors at random. The request provided a link to an electronic survey. The final sample consists of anonymous responses from 163 auditors.

The authors find that auditors, on average, do not perceive a significant relationship between corporate environmental strengths and audit risk; however, they do perceive an increase in audit risk among firms with corporate environmental concerns. Use of CER in the risk assessment process also varies across types of CER: 15 per cent of auditors use corporate environmental strengths to assess audit risk, while 43 per cent of auditors use corporate environmental concerns to assess audit risk. Perception of the CER/audit risk relationship is a significant determinant of CER use. Finally, both types of CER are found to have average usefulness in the risk assessment process.

The findings are limited to US auditors; results may not be transferable to other countries.

Studies involving the impact of CER on earnings generally involve archival data. By examining the impact of CER on audit risk, using a unique dataset, the authors present a different and timely setting to study the CER/earnings relationship. To the best of the authors' knowledge, this is the first paper to document the relationship between CER and audit risk.

The purpose of this study is to investigate whether within the same firm, earnings risk is exacerbated in the fiscal year end (FYE) quarters relative to that of other quarters, more importantly, if this type of earnings risk is unique. Further, the authors discuss solutions to mitigate this type of information risk.

This study provides evidence that the information risk associated with FYE quarter earnings cannot be explained by other identified risk factors. Solutions to mitigate this risk include strong corporate governance and a more streamlined financial reporting structure.

The paper shows that there is significantly lower earnings response coefficient for FYE quarters than for non-FYE quarters (1984–2015). Furthermore, strong corporate governance and a more streamlined financial reporting structure, either by firms willingly reducing the usage of extraordinary item reporting or by FASB codification changes such as FASB 145, can help mitigate this type of information uncertainty.

This study explains that the causes of the exacerbated information risk associated with FYE quarter earnings identified in prior literature, namely, the “integral explanation” and “manipulation explanation,” are not mutually exclusive. Therefore, the authors deem it futile to disentangle the two. Instead, the authors offer two possible solutions.