{"title":"Putting the Aumann–Serrano Riskiness Index to work","authors":"Doron Nisani, Amit Shelef, OrrOSON David","doi":"10.1108/raf-04-2022-0134","DOIUrl":"https://doi.org/10.1108/raf-04-2022-0134","url":null,"abstract":"\u0000Purpose\u0000The purpose of this study is to estimate the convergence order of the Aumann–Serrano Riskiness Index.\u0000\u0000\u0000Design/methodology/approach\u0000This study uses the equivalent relation between the Aumann–Serrano Riskiness Index and the moment generating function and aggregately compares between each two statistical moments for statistical significance. Thus, this study enables to find the convergence order of the index to its stable value.\u0000\u0000\u0000Findings\u0000This study finds that the first-best estimation of the Aumann–Serrano Riskiness Index is reached in no less than its seventh statistical moment. However, this study also finds that its second-best approximation could be achieved with its second statistical moment.\u0000\u0000\u0000Research limitations/implications\u0000The implications of this research support the standard deviation as a statistically sufficient approximation of Aumann–Serrano Riskiness Index, thus strengthening the CAPM methodology for asset pricing in the financial markets.\u0000\u0000\u0000Originality/value\u0000This research sheds a new light, both in theory and in practice, on understanding of the risk’s structure, as it may improve accuracy of asset pricing.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":null,"pages":null},"PeriodicalIF":2.4,"publicationDate":"2023-01-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42881341","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 short sale prospect on income smoothing","authors":"Xu Sun, Tianming Zhang","doi":"10.1108/raf-01-2022-0020","DOIUrl":"https://doi.org/10.1108/raf-01-2022-0020","url":null,"abstract":"\u0000Purpose\u0000The purpose of this paper is to examine the impact of short sale prospect on future income smoothing.\u0000\u0000\u0000Design/methodology/approach\u0000This study examines how short sale prospect impacts future income smoothing. This study follows prior research and uses two measures of income smoothing. One is the correlation between the change in prediscretionary income and the change in discretionary accruals. The other is the variability of earnings relative to the variability of cash flows.\u0000\u0000\u0000Findings\u0000This study finds that short sale prospect has a negative impact on future income smoothing. This finding is robust to use different measures of short sale prospect and income smoothing and to subsample tests. Additional analysis reveals that short sale prospect, by curbing income smoothing, reduces future stock price crash risk.\u0000\u0000\u0000Originality/value\u0000To the best of the authors’ knowledge, this study is the first to examine the impact of short selling on firms’ subsequent smoothing of reported income. This study contributes to the earnings quality literature by demonstrating the governance role of short selling on future earnings smoothness.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":null,"pages":null},"PeriodicalIF":2.4,"publicationDate":"2023-01-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43981617","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}
Johannes Kabderian Dreyer, Mateus Moreira, William T. Smith, Vivek Sharma
{"title":"Do environmental, social and governance practices affect portfolio returns? Evidence from the US stock market from 2002 to 2020","authors":"Johannes Kabderian Dreyer, Mateus Moreira, William T. Smith, Vivek Sharma","doi":"10.1108/raf-02-2022-0046","DOIUrl":"https://doi.org/10.1108/raf-02-2022-0046","url":null,"abstract":"\u0000Purpose\u0000This paper aims to investigate whether environmental, social and governance (ESG) practices influence stock returns in the US stock market, looking at the period from 2002 to 2020.\u0000\u0000\u0000Design/methodology/approach\u0000The authors quasi-replicate two reference articles that found that socially responsible funds used to underperform, but that this underperformance tendency has disappeared in more recent periods.\u0000\u0000\u0000Findings\u0000Using US data, the authors show that independent of the ESG database used, portfolios of neutral stocks present consistently higher systematic risk (beta) than ESG portfolios, although this difference decreases over time. This may be due to the significant increase in demand for ESG portfolios in the past decade, and their consequent price inflation and increase in volatility. However, concerning risk-adjusted returns and contrary to the authors’ reference literature, the results are highly dependent on the rating provider used, and neither support underperformance nor indicate a tendency over time. These inconsistent results suggest that the “ESG label” is not a determinant of portfolio performance.\u0000\u0000\u0000Research limitations/implications\u0000If ESG ratings are a legitim benchmark for sustainability, then the costs of going sustainable in stock portfolios might be marginal for fund managers.\u0000\u0000\u0000Originality/value\u0000Two different ESG-rating agencies, Morgan Stanley Capital International (MSCI) and Thomson Reuters, are used to identify sustainable stocks. Different from the literature, the authors selected stocks for their portfolios stochastically following a uniform probability distribution, thus avoiding fund manager bias.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":null,"pages":null},"PeriodicalIF":2.4,"publicationDate":"2023-01-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42568937","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}
Sabri Boubaker, Md Hamid Uddin, Sarkar H. Kabir, Sabur Mollah
{"title":"Does cost-inefficiency in Islamic banking matter for earnings uncertainty?","authors":"Sabri Boubaker, Md Hamid Uddin, Sarkar H. Kabir, Sabur Mollah","doi":"10.1108/raf-07-2022-0193","DOIUrl":"https://doi.org/10.1108/raf-07-2022-0193","url":null,"abstract":"\u0000Purpose\u0000This paper aims to investigate a fundamental research question of whether the Islamic banking business model makes corporate earnings more uncertain. This question arises because prior research shows that Islamic banks do well in loan performance but incur more operational costs than conventional banks, indicating the systemic limitation of Islamic banks in business risk management.\u0000\u0000\u0000Design/methodology/approach\u0000The study used a sample of banks to conduct the panel regression analysis with 15 years of data for 532 banks (129 Islamic and 403 conventional) from 23 Muslim countries across the world. The authors estimate earnings uncertainty in two ways: the spread and standard deviation of the country-adjusted return over the sample period and applied the difference-in-difference approach interacting cost to income ratio with the Islamic bank dummy, checking if Islamic bank’s high operational costs contribute to more earning uncertainty.\u0000\u0000\u0000Findings\u0000Islamic banks’ returns on assets are significantly more uncertain than conventional banks due to higher operational costs. Consistent with earlier evidence, the study also finds that Islamic banks generally have fewer nonperforming loans than conventional banks. The authors conclude that Islamic banks trade-off between reducing credit risk and escalating business risk.\u0000\u0000\u0000Originality/value\u0000This study documents that the Islamic banking model helps build a safer asset portfolio but gives rise to the uncertainty of corporate earnings. Therefore, the choice between Islamic and conventional banking models involves a trade-off between credit and business risks. It is a new finding that we add to the literature body on Islamic finance.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":null,"pages":null},"PeriodicalIF":2.4,"publicationDate":"2022-12-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43708858","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":"Chief executive officer ability and cash holding decision","authors":"Efstathios Magerakis","doi":"10.1108/raf-10-2021-0284","DOIUrl":"https://doi.org/10.1108/raf-10-2021-0284","url":null,"abstract":"\u0000Purpose\u0000This paper aims to consider the effect of the chief executive officer’s (CEO) ability on the amount of cash stock at the firm level.\u0000\u0000\u0000Design/methodology/approach\u0000The empirical hypothesis is examined via fixed-effect regression models using data from US incorporated firms.\u0000\u0000\u0000Findings\u0000Consistent with the upper echelon theory and cash holding motives, the results reveal that able CEOs are associated with an increased level of cash stock, ceteris paribus. Further analysis shows that the association between CEO ability and firm cash holding is more profound for financially sound firms. The authors also demonstrate that firm size significantly affects the relationship between CEO ability and cash management. The results are robust to various sensitivity analyses and additional tests.\u0000\u0000\u0000Research limitations/implications\u0000This work is subject to limitations inherent in the use of relevant proxies. Thus, the study implements several model specifications to ensure the validity of findings in a more generic context. Future research should investigate the board structure’s role and the monitoring procedures on the CEOs’ cash holding behavior as a natural extension to this study.\u0000\u0000\u0000Practical implications\u0000The insights derived from the study are expected to advance the decision-making process of cash policies and CEO selection for shareholders, business executives and investment strategists.\u0000\u0000\u0000Originality/value\u0000Overall, the study provides new evidence that CEO ability is a contingent factor of corporate cash stock.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":null,"pages":null},"PeriodicalIF":2.4,"publicationDate":"2022-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42350180","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":"Corporate social responsibility report readability, credit ratings and cost of borrowing","authors":"Kun Yu, Priya S. Garg","doi":"10.1108/raf-11-2021-0322","DOIUrl":"https://doi.org/10.1108/raf-11-2021-0322","url":null,"abstract":"\u0000Purpose\u0000This study aims to investigate how credit rating agencies and banks, important credit market participants, incorporate corporate social responsibility (CSR)-related information in their assessment of firm’s creditworthiness.\u0000\u0000\u0000Design/methodology/approach\u0000The authors collect stand-alone CSR reports published by Fortune 500 companies from 2002 to 2014 and use file size as a readability measure to investigate the impact of stand-alone CSR reports’ readability on firms’ credit ratings and cost of borrowing.\u0000\u0000\u0000Findings\u0000The authors find that firms with higher CSR report readability enjoy higher credit ratings and lower costs of bank loans, suggesting that rating agencies and banks perceive lower default risk for firms with more readable CSR reports. Further analysis indicates that the positive association between CSR report readability and credit ratings is more pronounced for firms with high CSR performance. Conversely, the negative association between CSR report readability and bank loan spreads is more pronounced for firms with low CSR performance and credit quality, suggesting complementary roles of rating agencies and banks in their use of CSR reports.\u0000\u0000\u0000Originality/value\u0000Overall, the results highlight the importance of improving the textual characteristics of CSR reports, especially readability, in reducing information risk in the credit market.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":null,"pages":null},"PeriodicalIF":2.4,"publicationDate":"2022-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48546868","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":"Product market competition and earnings management: the role of managerial ability","authors":"Md Mahmudul Hasan, Md. Safayat Hossain, G. Gotti","doi":"10.1108/raf-06-2021-0169","DOIUrl":"https://doi.org/10.1108/raf-06-2021-0169","url":null,"abstract":"\u0000Purpose\u0000This study aims to examine whether and how managerial ability is associated with the relation between product market competition and earnings management. The authors argue that high-ability managers may moderate the underlying relations in both directions, and they are likely to trade off relative costs between accrual-based earnings management (AEM) and real earnings management (REM).\u0000\u0000\u0000Design/methodology/approach\u0000This study uses ordinary least square regressions to examine the association of managerial ability on the relations between product market competition and earnings management. The paper follows prior literature to measure managerial ability, product market competition and earnings management.\u0000\u0000\u0000Findings\u0000This study shows empirical evidence that high-ability managers in high-competition industries are likely to engage in AEM but less likely to engage in REM. These findings overall indicate that high-ability managers in high-competition industries trade-off between different forms of earnings management based on their relative costliness and choose the one that is relatively less costly.\u0000\u0000\u0000Practical implications\u0000This study has important practical implications as the findings identify situations when important stakeholders, such as the board of directors and investors, may take precautions to prevent managers’ opportunistic behaviors. The findings of this study also might be helpful for firms when it comes to selecting managers. The findings may provide some input to the firms in considering the risks and benefits trade-offs of recruiting a high versus low-ability manager in a more or less competitive environment.\u0000\u0000\u0000Originality/value\u0000The findings of this study show new insight into how managerial ability moderates the relation between product market competition and different types (i.e. accrual-based and real activity-based) of earnings management.\u0000","PeriodicalId":21152,"journal":{"name":"Review of Accounting and Finance","volume":null,"pages":null},"PeriodicalIF":2.4,"publicationDate":"2022-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42194977","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 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":null,"pages":null},"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":null,"pages":null},"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":null,"pages":null},"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}