{"title":"The declining GAAP ETR trend over 1960-2016","authors":"Yuzhu Lu, L. Shao, Yue Zhang","doi":"10.1108/raf-09-2021-0248","DOIUrl":"https://doi.org/10.1108/raf-09-2021-0248","url":null,"abstract":"\u0000Purpose\u0000This study aims to provide a comprehensive analysis on the reasons of the observed trend in the GAAP ETR over 1960–2016.\u0000\u0000\u0000Design/methodology/approach\u0000The authors use a linear tax function which allows for time-varying coefficients to track the trend in GAAP ETR over 1960–2016. This approach can decompose the ETR trend into the trends of the statutory tax rate, the propensity to recognize taxes, the tax-related firm characteristics and their coefficients. Thus, the authors can quantify the contribution of each factor in the tax function to the ETR trend.\u0000\u0000\u0000Findings\u0000Before 1988, the declining trend in tax expense is mainly driven by changes in the statutory tax rate; in contrast, after 1988, the trend is completely explained by firms’ decreasing propensity to recognize tax expense. While prevalent across different groups of firms, the decreasing propensity to recognize tax expense in the recent 30 years is more pronounced among firms that have higher needs for tax savings or greater tax-saving advantages.\u0000\u0000\u0000Originality/value\u0000To the best of the authors’ knowledge, this study is the first one that uses a trend analysis to examine the reasons for the downward trend in tax expense over a long period (1960–2016). The results show that, although the trend appears for the full sample period, it is driven by different forces between the first and second half of the time window. A decreasing propensity to recognize tax expense is the main reason for only the trend in recent years, which calls for attention from academia and policymakers. The results also show which firms have had faster trends in their propensity to recognize tax expense, suggesting targets for tax enforcement and tax researchers.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-10-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43957465","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Risk reporting and earnings smoothing: signaling or managerial opportunism?","authors":"Hend Monjed, Salma Ibrahim, B. Jorgensen","doi":"10.1108/raf-10-2021-0286","DOIUrl":"https://doi.org/10.1108/raf-10-2021-0286","url":null,"abstract":"\u0000Purpose\u0000The 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.\u0000\u0000\u0000Design/methodology/approach\u0000This 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.\u0000\u0000\u0000Findings\u0000This 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.\u0000\u0000\u0000Originality/value\u0000The 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.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42584040","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Explanatory power of earnings for returns: nonstationarity, disaggregation and timeliness","authors":"J. Wild, Jon Wild","doi":"10.1108/raf-09-2021-0239","DOIUrl":"https://doi.org/10.1108/raf-09-2021-0239","url":null,"abstract":"Purpose This study aims to examine several hypotheses, in conjunction with fundamental accounting concepts, to explain variations in the explanatory power of earnings for returns. Design/methodology/approach The authors explore three factors for their impact on the explanatory power of earnings. First, the accounting period preceding the earnings report is characterized by distinct intratemporal subperiod behavior. Recognizing this intratemporal nonstationarity is hypothesized to increase the explanatory power of earnings. Second, disaggregation of earnings into operating components is hypothesized to increase the explanatory power of earnings. Moreover, joint consideration of these first two factors is investigated. Third, the authors hypothesize that recognizing fundamental accounting concepts such as timeliness, predictive value, objectivity and verifiability offer key insights into the explanatory power of earnings. Findings The authors explore a sample of firms with management forecasts, which yields natural intratemporal subperiods – preforecast, forecast and realization periods – to generate hypotheses rooted in fundamental accounting concepts. The empirical evidence shows that recognition of nonstationary intratemporal behavior and earnings disaggregation yields a significant increase in the explanatory power of earning for returns. These findings are linked to fundamental concepts of accounting information. Originality/value This study is unique as it examines the joint role of nonstationarity and disaggregation in assessing the information conveyed in earnings. Importantly, results on these factors are linked to fundamental accounting concepts of timeliness, predictive value, objectivity and verifiability, along with their inherent trade-offs.","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-07-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47124151","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Auditor distraction and audit quality","authors":"C. Chang, Yutao Li, Yan Luo","doi":"10.1108/raf-11-2021-0317","DOIUrl":"https://doi.org/10.1108/raf-11-2021-0317","url":null,"abstract":"\u0000Purpose\u0000The purpose of this study is to examine how auditors would react when there are exogenous negative shocks to their client portfolios.\u0000\u0000\u0000Design/methodology/approach\u0000Using a sample of 31,256 firm-year observations (2001–2016), the authors investigate whether industry shocks to a subset of an auditor’s clients distract the auditor and affect the professional skepticism applied in the audits of other clients.\u0000\u0000\u0000Findings\u0000The authors find that clients of distracted auditors are more likely to meet or beat analyst consensus forecasts, suggesting that auditors’ professional skepticism is compromised by distractive events. The cross-sectional analyses reveal that the negative impact of the distractive events on audit quality is more pronounced when the distracted auditors audit less important clients, face lower third-party legal liabilities and experience higher growth. Using an alternative measure of audit quality, the additional analysis shows that clients of distracted auditors exhibit a higher probability of restating their earnings in subsequent years. Overall, the empirical evidence suggests that when distracted, auditors render lower quality audit.\u0000\u0000\u0000Originality/value\u0000The study complements recent work by Cassell et al. (2019), which shows that the 2008–2009 financial crisis affected the quality of the audits of nonbank clients of bank-specialized auditors. While Cassell et al. (2019) focus on one shock (financial crisis) to one industry (i.e. the financial services industry), the study examines more frequent shocks over a wide range of industries to identify the potential effects of distractive events, improving the generalizability of the findings to all industries and all auditors (specialist and nonspecialist) in nonrecession periods.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-07-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48368299","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The impact of ASC 842’s new leasing standards on default likelihood by industry","authors":"Kenneth J. Hunsader, Chris M. Lawrey, J. Rich","doi":"10.1108/raf-05-2021-0131","DOIUrl":"https://doi.org/10.1108/raf-05-2021-0131","url":null,"abstract":"\u0000Purpose\u0000This paper aims to examine the impact on firm financial distress by industry of one of the most recent accounting changes in the treatment of operating leases, Financial Accounting Standard Board (FASB) Accounting Standards Update (ASU) No. 2016–02, Leases released February 25, 2016. ASU 2016–02, also known as ASC 842, considerably changed how firms account for operating leases.\u0000\u0000\u0000Design/methodology/approach\u0000The authors use the Black–Scholes–Merton (BSM) option pricing methodology to estimate the change in default likelihood (DL) of nine different industries surrounding the adoption of ASC 842. In addition, the authors use univariate and multivariate analysis to test the statistical significance of firm-related factors.\u0000\u0000\u0000Findings\u0000The authors provide evidence that numerous industry’s DL increased following the FASB’s announcement of the new standard (ASC 842) regarding increased transparency in lease recognition. The effect is especially significant within the energy industry, although it is also shown in the consumer durables, manufacturing, hi-tech equipment, telecom, retail and wholesale and transportation industries. In addition, the authors find the effect is more pronounced for firms with high leverage, low financial slack, low operating return on assets, small market value and accounting for non-balance sheet recorded leases.\u0000\u0000\u0000Practical implications\u0000By investigating different industries, this study’s findings provide crucial insight to managers seeking lease financing as an operational strategy in a post-implementation environment and help them understand the impact of this new standard on their firm. Furthermore, this study answers the call of policy makers and academics to provide insight into the impact of updated leasing standards.\u0000\u0000\u0000Originality/value\u0000This is the only empirical study that examines the impact of ASC 842 on the DL of publicly traded firms by industry.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-07-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49239699","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Age diversity, firm performance and managerial ability","authors":"Qiao Xu, Guy D. Fernando, R. Schneible","doi":"10.1108/raf-09-2021-0232","DOIUrl":"https://doi.org/10.1108/raf-09-2021-0232","url":null,"abstract":"\u0000Purpose\u0000The purpose of this study is to investigate the impact of the age diversity of the top management team (TMT) on firm performance and on the managerial ability of the TMT. Furthermore, this study investigates how the relationship between age diversity and firm performance is mediated by managerial ability and the contextual nature of the relationship.\u0000\u0000\u0000Design/methodology/approach\u0000This is an empirical study which uses regression analyses and mediation analyses to evaluate the hypotheses.\u0000\u0000\u0000Findings\u0000The authors observe a negative relationship between age diversity and firm performance and also between age diversity and managerial ability of the TMT. Further, the authors find that that the negative relationship between age diversity and firm performance is mediated by managerial ability. The authors also find that the relation between performance and age diversity is context specific – the negative relationship between age diversity and firm performance is ameliorated during times of financial crisis.\u0000\u0000\u0000Social implications\u0000In an environment where diversity is beginning to be valued, insights into the impact of different types of diversity on performance become important. Age diversity is a critical component of diversity. Therefore, insights into the impact of age diversity on performance will be of interest to managers, academics and even regulators.\u0000\u0000\u0000Originality/value\u0000To the best of the authors’ knowledge, this study is the first to evaluate the impact of age diversity on the market perception of firm performance of US firms using a large, comprehensive, multi-year data set. Furthermore, this is the only study to evaluate the impact of age diversity on managerial ability and show the mediating effect of managerial ability on the relationship between age diversity and firm performance.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-07-13","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42440889","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Yu-Feng Jiang, Adrian C. H. Lei, Tao Wang, Chuntao Li
{"title":"Corporate site visits, private information communication, and earnings management: evidence from China","authors":"Yu-Feng Jiang, Adrian C. H. Lei, Tao Wang, Chuntao Li","doi":"10.1108/raf-06-2021-0147","DOIUrl":"https://doi.org/10.1108/raf-06-2021-0147","url":null,"abstract":"\u0000Purpose\u0000This paper aims to provide new evidence that corporate site visits give institutional investors better opportunities to obtain information and exert monitoring powers, which reduce listed firms’ earnings management.\u0000\u0000\u0000Design/methodology/approach\u0000This paper explores how private communications affect firms’ earnings management by using a sample of institutional investors’ visits to the corporate sites of Chinese listed firms between 2010 and 2018. This study uses the performance-matched Jones model (Kothari et al., 2005) to measure accrual-based earnings management and Roychowdhury’s (2006) method to measure real earnings management. The authors also perform several robustness checks including an alternative measure of accounting accruals, a two-stage instrumental regression and the Heckman two-step approach.\u0000\u0000\u0000Findings\u0000Using a sample of institutional investors’ site visits to Chinese listed firms during the 2010–2018 period, this study finds that institutional investors’ site visits reduce listed firms’ earnings manipulation activities (both accrual-based and real). This association is robust to several checks, including an alternative measure of accounting accruals, a two-stage instrumental regression and the Heckman two-step approach. This study further documents that other private communication approaches such as private in-house meetings and conference calls moderate the effect of site visits.\u0000\u0000\u0000Practical implications\u0000As the Shenzhen Stock Exchange is one of the few stock markets to mandate that listed firms record and disclose their private communication information, this study also has implications for researchers and policymakers who work in other stock markets.\u0000\u0000\u0000Originality/value\u0000To the best of the authors’ knowledge, this study is the first comprehensive study of the impact of private communications on earnings management. This study extends the earnings management literature by examining institutional investors’ information acquisition process and revealing a negative association between their site visits and listed firms’ earnings management. Moreover, this study examines the effects not only on traditional accounting accruals but also on real earnings management. In addition to studies that emphasize the effect of corporate site visits on individuals and market reactions, this study examines the effect of site visits on firms’ financial misbehavior. This study shows that institutional investors’ corporate site visits provide external monitoring that mitigates listed firms’ earnings management behavior.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-06-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49417952","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"On tree-structured linear and quantile regression-based asset pricing","authors":"J. Galakis, Ioannis D. Vrontos, P. Xidonas","doi":"10.1108/raf-10-2021-0283","DOIUrl":"https://doi.org/10.1108/raf-10-2021-0283","url":null,"abstract":"\u0000Purpose\u0000This study aims to introduce a tree-structured linear and quantile regression framework to the analysis and modeling of equity returns, within the context of asset pricing.\u0000\u0000\u0000Design/Methodology/Approach\u0000The approach is based on the idea of a binary tree, where every terminal node parameterizes a local regression model for a specific partition of the data. A Bayesian stochastic method is developed including model selection and estimation of the tree structure parameters. The framework is applied on numerous U.S. asset pricing models, using alternative mimicking factor portfolios, frequency of data, market indices, and equity portfolios.\u0000\u0000\u0000Findings\u0000The findings reveal strong evidence that asset returns exhibit asymmetric effects and non- linear patterns to different common factors, but, more importantly, that there are multiple thresholds that create several partitions in the common factor space.\u0000\u0000\u0000Originality/Value\u0000To the best of the authors' knowledge, this paper is the first to explore and apply a tree-structured and quantile regression framework in an asset pricing context.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":" ","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-05-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43277535","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Earnings autocorrelation and accounting restatements","authors":"David B. Bryan, Terry W. Mason","doi":"10.1108/raf-07-2021-0189","DOIUrl":"https://doi.org/10.1108/raf-07-2021-0189","url":null,"abstract":"<h3>Purpose</h3>\u0000<p>This study aims to examine whether earnings autocorrelation affects the risk of an accounting restatement.</p><!--/ Abstract__block -->\u0000<h3>Design/methodology/approach</h3>\u0000<p>This paper uses logistic regression and identifies restatements between 2004 and 2016. Following prior research, (Dao <em>et al.</em>, 2012; Francis and Michas, 2013; Francis <em>et al.</em>, 2013; Lennox and Li, 2014; Lobo and Zhao, 2013; Paterson and Valencia, 2011), this study allows time between the end of our sample period and the date that this study obtained the restatement data because it takes time for material misstatements to be identified.</p><!--/ Abstract__block -->\u0000<h3>Findings</h3>\u0000<p>Bryan <em>et al.</em> (2018) report a negative association between autocorrelation and audit fees, suggesting that auditors view lower autocorrelation as increasing inherent risk. This study finds that autocorrelation is negatively related to accounting restatements, implying that although auditors react to lower autocorrelation by increasing their risk assessments (Bryan <em>et al.</em>, 2018), their risk response is not sufficient. This study finds that autocorrelation has a fairly large effect: a shift from the 75th to the 25th percentile of autocorrelation is associated with a 9.38% increase in the likelihood of a restatement.</p><!--/ Abstract__block -->\u0000<h3>Originality/value</h3>\u0000<p>This study contributes to the stream of research that investigates the determinants of restatements. Not only do this study identifies autocorrelation as a factor that contributes to restatements, but importantly, this study’s results reveal a fairly substantial effect size: a shift from the 75th to the 25th percentile of autocorrelation is associated with a 9.38% increase in the likelihood of a restatement. While Bryan <em>et al.</em> (2018) find that autocorrelation affects audit fees, this study links autocorrelation to a more drastic consequence: accounting restatements.</p><!--/ Abstract__block -->","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"2007 33","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-04-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138518450","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The impact of stakeholder management on restatement disclosure transparency","authors":"Brian Hogan, Colin Reid","doi":"10.1108/raf-04-2021-0112","DOIUrl":"https://doi.org/10.1108/raf-04-2021-0112","url":null,"abstract":"<h3>Purpose</h3>\u0000<p>The purpose of this paper is to explore the impact of a particular firm’s stakeholder orientation, particularly employee orientation, on corporate communications with stakeholders concerning financial irregularities.</p><!--/ Abstract__block -->\u0000<h3>Design/methodology/approach</h3>\u0000<p>This study explores the impact of a particular firm’s stakeholder orientation, particularly employee orientation, on corporate communications with stakeholders concerning financial irregularities. Using a sample of 762 firm restatements, the authors separate their observations by disclosure transparency (high or low transparency of disclosure) and use logit regressions to examine whether companies with stronger employee orientation make more or less transparent restatement disclosures.</p><!--/ Abstract__block -->\u0000<h3>Findings</h3>\u0000<p>The findings show that higher levels of investment in employee orientation are associated with less transparent restatement disclosures. Further, examining a subsample of restatements in which managers may have greater discretion over how a restatement is disclosed confirms this finding. However, supplemental tests show that increased external monitoring may mitigate these effects.</p><!--/ Abstract__block -->\u0000<h3>Practical implications</h3>\u0000<p>The findings provide support that other stakeholders, such as shareholders, should weigh the potential pros/cons of management investments in corporate social responsibility (CSR). These concerns are more important now as firms continue to embrace a stakeholder-focused model of management which allocates resources to numerous stakeholder groups.</p><!--/ Abstract__block -->\u0000<h3>Originality/value</h3>\u0000<p>This paper extends the growing body of research that assesses the impact of CSR on firm outcomes (Kim <em>et al.</em>, 2012; Guo <em>et al.</em>, 2016; Hmaittane <em>et al.</em>, 2019). Further, this paper contributes to the disclosure transparency literature by finding an association between CSR investment levels and the manner in which a firm discloses a restatement.</p><!--/ Abstract__block -->","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":"2004 5","pages":""},"PeriodicalIF":2.4,"publicationDate":"2022-04-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138518460","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}