Evidence that Market Participants Assess Recognized and Disclosed Items Similarly when Reliability is Not an Issue

2013 ◽  
Vol 88 (4) ◽  
pp. 1179-1210 ◽  
Author(s):  
Brian Bratten ◽  
Preeti Choudhary ◽  
Katherine Schipper
Keyword(s):  
Data Availability ◽  
Market Participants ◽  
Operating Leases ◽  
As If

ABSTRACT We provide evidence that disclosed items are not processed differently from recognized items when the disclosures are salient, not based on management estimates, and amenable to simple techniques for imputing as-if recognized amounts. For a sample of firms with both capital and operating leases, we find that as-if recognized amounts for leases are generally reliable and that both recognized lease obligations and disclosed lease obligations are associated with proxies for costs of debt and equity. The magnitudes of these associations are not statistically different across accounting treatments, suggesting that market participants impound as-if recognized operating lease obligations and recognized capital lease obligations similarly into costs of capital. Conditioning on the reliability of as-if recognized operating lease obligations, we find a difference in the association between recognized versus as-if recognized lease obligations and proxies for the costs of debt and equity when the operating lease disclosures are less reliable. Data Availability: Data used are available from public sources identified in the study.

Come on Over: Analyst/Investor Days as a Disclosure Medium

2016 ◽  
Vol 91 (6) ◽  
pp. 1725-1750 ◽  
Author(s):  
Marcus P. Kirk ◽  
Stanimir Markov
Keyword(s):  
Information Content ◽  
Short Duration ◽  
Price Impact ◽  
Senior Management ◽  
Data Availability ◽  
Market Participants ◽  
Temporal Proximity ◽  
Conference Presentations ◽  
Close Temporal Proximity ◽  
Jel Classifications

ABSTRACT Our study introduces analyst/investor days, a new disclosure medium that allows for private interactions with influential market participants. We also highlight interdependencies in the choice and information content of analyst/investor days and conference presentations, a well-researched disclosure medium that similarly allows for private interactions. Analyst/investor days are less frequent, but with longer duration and greater price impact than conference presentations. They are mostly hosted by firms that already have opportunities to interact with investors at conferences, but whose complex and diverse activities make the short duration and rigid format of a conference presentation an imperfect solution to these firms' information problems. Analyst/investor days and conference presentations tend to occur in different quarters, consistent with their competing for the time and attention of senior management. When these two mediums are scheduled in close temporal proximity to each other, analyst/investor days diminish the information content of conference presentations, but not vice versa, consistent with managers' favoring analyst/investor days over conference presentations as a disclosure medium. JEL Classifications: D82; M41; G11; G12; G14. Data Availability: Data are publicly available from the sources identified in the paper.

The Information Content of Hedge Accounting—Evidence from the European Banking Industry

2020 ◽  
Vol 19 (2) ◽  
pp. 91-115
Author(s):  
Tami Dinh ◽  
Barbara Seitz
Keyword(s):  
Accounting Information ◽  
Data Availability ◽  
Cross Sectional ◽  
Market Effects ◽  
Market Values ◽  
Hedge Accounting ◽  
Depth Analysis ◽  
European Banking ◽  
European Banks ◽  
As If

ABSTRACT This paper provides an in-depth analysis of financial information related to hedge accounting in European banks from 2005 to 2014. We show that both “as-if” earnings and “as-if” book values excluding the effects of hedge accounting are less value relevant than reported figures. This indicates that hedge accounting information is valued by the market. Further, we develop a proxy to measure whether hedge accounting is economically favorable. Only if the effects of a bank's hedge accounting are economically favorable, hedge accounting disclosures are positively associated with market values. We find cross-sectional differences when adopting hedge accounting for subsample analyses of European regions. In addition, distinguishing between troubled and non-troubled banks, the results only hold for the latter category suggesting that troubled banks suffer from biased accounting information. Our results are important for standard setters and banks when seeking to understand the capital market effects of hedge accounting and their disclosures. JEL Classifications: G21; G28; M41. Data Availability: Data are available from the public sources cited in the text.

Are Credit Ratings More Rigorous for Widely Covered Firms?

2018 ◽  
Vol 93 (6) ◽  
pp. 61-94 ◽  
Author(s):  
Samuel B. Bonsall ◽  
Jeremiah R. Green ◽  
Karl A. Muller
Keyword(s):  
Credit Rating ◽  
Credit Ratings ◽  
Economic Consequences ◽  
Data Availability ◽  
Press Coverage ◽  
Rating Agencies ◽  
Credit Rating Agency ◽  
Business Press ◽  
Market Participants ◽  
Reputational Costs

ABSTRACT We study how business press coverage can discipline credit rating agency actions. Because of their greater prominence and visibility to market participants, more widely covered firms can pose greater reputational costs for rating agencies. Consistent with rating agencies limiting such risk, we find that ratings for more widely covered firms are more timely and accurate, downgraded earlier and systematically lower in the year prior to default, and better predictors of default and non-default. We also find that the recent tightening of credit rating standards is largely explained by growing business press coverage of public debt issuers. Additionally, we find that credit rating agencies take explicit actions to improve their ratings by assigning better educated and more experienced analysts to widely covered firms. Moreover, we document that missed defaults of more visible firms create greater negative economic consequences for rating agencies, and that rating improvements following the financial crisis were greater for more visible firms. Data Availability: All data are publicly available from the sources identified in the text.

The Effects of Increased Book-Tax Difference Tax Return Disclosures on Firm Valuation and Behavior

2011 ◽  
Vol 33 (2) ◽  
pp. 35-65 ◽  
Author(s):  
Michael P. Donohoe ◽  
Gary A. McGill
Keyword(s):  
Structural Break ◽  
Substantial Reduction ◽  
Tax Compliance ◽  
Data Availability ◽  
Market Participants ◽  
Real Effects ◽  
Ex Post ◽  
Ex Ante ◽  
Study Techniques ◽  
And Behavior

ABSTRACT We use event study techniques to gauge market participants' ex ante perceptions regarding the benefits and burdens of the Schedule M-3, and structural break analysis to investigate whether managers make ex ante or ex post changes in book-tax differences as a result of this mandatory change in federal tax return disclosures. We find evidence suggesting investors believe ex ante the substantial increase in book-tax difference disclosures will increase future tax burdens and/or tax-compliance costs. Investors also appear to believe the M-3 may be more costly for firms having the types of book-tax differences that attract additional IRS scrutiny (e.g., discretionary permanent differences) and when such firms are weakly monitored. Further, we find evidence of a substantial reduction in our proxy for discretionary permanent book-tax differences prior and subsequent to the implementation of the M-3 and other regulatory events, suggesting both ex ante and ex post real effects on firm behavior. JEL Classifications: G14; H25; H26; M48. Data Availability: Data used in this study are available from public sources identified in the paper.

Tax Equalization in Mutual Funds

2011 ◽  
Vol 33 (2) ◽  
pp. 89-110 ◽  
Author(s):  
Steven L. Gill ◽  
Christopher Schwarz
Keyword(s):  
Decision Making ◽  
Mutual Funds ◽  
Data Availability ◽  
Decision Making Process ◽  
Costs And Benefits ◽  
Additional Fund ◽  
Fund Families ◽  
As If

ABSTRACT By making an annual tax election, open-ended mutual funds can treat redeeming shareholders as if they have been allocated a pro-rata share of taxable gains, when in fact they have not (known as “equalization”). Equalization provides significant benefits to shareholders and funds; however, it also leads to additional fund-level costs. In this study, we use equalization elections to examine how managers weigh the costs and benefits of tax minimization. Overall, our results suggest both are important in the decision-making process. Even though funds and investors both benefit, only 10 percent of funds use equalization. Funds in larger fund families and with higher expense ratios, both proxies for the additional infrastructure necessary to calculate equalization dividends, are more likely to use equalization. Equalization is also used when its benefits are highest, such as by funds with greater redemptions and larger unrealized gains. Data Availability: Contact the first author.

Information Transfer of Bankruptcy Announcements: Examining the Impact of Auditor Opinions

2019 ◽  
Vol 34 (1) ◽  
pp. 45-66
Author(s):  
Jeffrey R. Casterella ◽  
Rosemond Desir ◽  
Matthew A. Stallings ◽  
James S. Wainberg
Keyword(s):  
Capital Market ◽  
Stock Price ◽  
Information Transfer ◽  
Data Availability ◽  
Going Concern ◽  
Market Participants ◽  
Audit Firms ◽  
Peer Firms ◽  
Going Concern Opinion ◽  
The Impact

SYNOPSIS Auditing standards require auditors to consider whether there is “substantial doubt” that their client will remain a going concern and to, accordingly, modify the audit report (PCAOB AS 2415). Prior research reports larger negative excess returns for bankrupt firms when bankruptcies occur without a prior going concern opinion. We investigate whether such audit opinions can also have an impact on industry peer firms. We find that peer firms experience significantly larger negative stock price drops when rivals' bankruptcies are not preceded by a going concern opinion. In addition, we find evidence of incremental stock price declines for peer firms when Big N audit firms fail to issue a going concern opinion. These findings should be of significant interest to regulators, auditors, and capital market participants as they serve to enhance our current understanding of the importance of going concern opinions for the share pricing of industry peer firms. JEL Classifications: G14; G33; M4; M42. Data Availability: All data are from public sources identified in the manuscript.

Evaluating the Credibility of Voluntary Internal Controls Certification

2017 ◽  
Vol 16 (3) ◽  
pp. 91-117
Author(s):  
Mukesh Garg ◽  
Ferdinand A. Gul ◽  
Jayasinghe Wickramanayake
Keyword(s):  
Corporate Governance ◽  
Audit Fees ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Reports ◽  
The Public ◽  
Market Participants ◽  
Voluntary Certification ◽  
Alternative Measures ◽  
Demand Effect

ABSTRACT This study finds that CEOs' and CFOs' voluntary certification of internal controls over financial reports (ICFR) in Australia are associated with higher quality earnings, suggesting that disclosures are credible. The results are robust to two-stage regression analysis, propensity score matching, and alternative measures of earnings quality. We use three-stage regression modeling to address the issue of the joint effects of ICFR and audit fees on accruals quality and the demand effect of corporate governance on audit fees. Using audit fees as a determinant of credible ICFR certification, we find that auditors charge lower fees for firms with good ICFR. Such firms are also associated with better corporate governance. The findings of our study have implications for policymakers, regulators, and capital market participants. JEL Classifications: M4; G12; G32; G34. Data Availability: The data are available from the public sources identified in the text.

The Impact of SEC Disclosure Monitoring on the Uncertainty of Fair Value Estimates

2015 ◽  
Vol 91 (2) ◽  
pp. 349-375 ◽  
Author(s):  
Daniel A. Bens ◽  
Mei Cheng ◽  
Monica Neamtiu
Keyword(s):  
Fair Value ◽  
Securities And Exchange Commission ◽  
Data Availability ◽  
Market Uncertainty ◽  
Market Participants ◽  
Comment Letters ◽  
Value Reporting ◽  
The Impact ◽  
Level 2

ABSTRACT We investigate the role played by the Securities and Exchange Commission (SEC) in monitoring fair value disclosures in regulatory filings. Specifically, we assess whether SEC action via the issuance of fair value comment letters to registrants is followed by reductions in uncertainty about the firms' fair value estimates. We hypothesize that registrants that receive a comment letter focusing on their fair value disclosure policies experience reductions in investor uncertainty regarding their fair value estimates in the post-letter period, compared to the pre-letter period. Supporting this prediction, we find that for the periods after the fair value comment letters, the associations between Level 2 and 3 fair value assets and our measures of uncertainty are significantly reduced. These findings are robust to a series of tests designed to ensure that we do not simply capture general changes in market uncertainty levels for firms investing in these types of assets. Our study contributes to the further understanding of market participants' perception of fair value disclosures by investigating the role of SEC enforcement. This finding is important given recent criticisms of fair value reporting emanating from the highest levels of government and industry. Data Availability: Data are available from public sources identified in the paper.

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