Auditors and Disclosure Quality: The Case of Major Customer Disclosures

2017 ◽  
Vol 37 (3) ◽  
pp. 163-189 ◽  
Author(s):  
Joseph Legoria ◽  
Kenneth J. Reichelt ◽  
Jared S. Soileau
Keyword(s):  
Voluntary Disclosure ◽  
National Level ◽  
Data Availability ◽  
Disclosure Quality ◽  
Specialized Knowledge ◽  
Auditor Quality ◽  
Second Tier ◽  
Office Size ◽  
The Relationship ◽  
Jel Classifications

SUMMARY Little is known about the relationship between disclosure quality and auditor quality. We measure disclosure quality as the likelihood of a firm fully disclosing the identity of their major customers in the Form 10-K filing. We also measure voluntary disclosure by exempt smaller reporting companies (SRCs) disclosing, and all firms disclosing the identity in the audited notes, or affirming no major customers. We expect that firms are more likely to disclose when they engage higher-quality auditors who have specialized knowledge of 10-K regulations. We hand-collect a sample of more than 26,000 (34,000) major customer disclosures that we use for our main tests (voluntary disclosure tests). We find that firms are more likely to mandatorily disclose their major customers' identity when audited by either an office- or national-level specialist whose clientele consists largely of firms with major customers. We corroborate these results with other higher-quality auditor measures: Big N, second tier, and office size. We also show that SRCs are more likely to voluntarily disclose when they engage a higher-quality auditor. We provide further evidence of an association between voluntary disclosure and a higher-quality auditor by ranking disclosure quality on audited disclosure, nonaudited disclosure, and no disclosure. JEL Classifications: M42; M41; D23. Data Availability: All data are available from public sources identified in the text.

Characteristics of Managerial Tone Priced by Auditors: Evidence Based on Annual Letters to Shareholders of Large U.S. Firms

2019 ◽  
Vol 39 (2) ◽  
pp. 139-161
Author(s):  
Adam Greiner ◽  
Lorenzo Patelli ◽  
Matteo Pedrini
Keyword(s):  
Source Credibility ◽  
Audit Fees ◽  
Data Availability ◽  
Evidence Based ◽  
Change Analysis ◽  
Audit Pricing ◽  
Client Risk ◽  
The Relationship ◽  
Jel Classifications ◽  
Corporate Disclosures

SUMMARY We examine the relationship between audit pricing and managerial tone as a proxy of source credibility. Prior research shows that source credibility influences auditors' perceptions of client risk. Textually analyzing annual letters to shareholders, we find that characteristics of managerial tone that reflect impaired source credibility are associated with higher audit fees. Additional tests, including a change analysis and controls for other managerial characteristics, future client performance, and aggressive accounting choices, corroborate and build on our inferences that managerial tone proxies for source credibility. Our study extends literature that uses corporate disclosures to measure managerial characteristics by showing that auditors price source credibility reflected in managerial tone. These findings are important because they empirically confirm that source credibility affects auditors' assessments of engagement risk and that analysis of tone can inform researchers, auditors, and investors who seek to enhance effectiveness and objectivity in assessing source credibility based on managerial tone. JEL Classifications: G21; G34; M41. Data Availability: The data in this study are available from public sources indicated in the paper.

An Analysis of Managerial Use and Market Consequences of Earnings Management and Expectation Management

2011 ◽  
Vol 86 (6) ◽  
pp. 1935-1967 ◽  
Author(s):  
Somnath Das ◽  
Kyonghee Kim ◽  
Sukesh Patro
Keyword(s):  
Earnings Management ◽  
Stock Price ◽  
Structural Models ◽  
Data Availability ◽  
Expectation Management ◽  
Earnings Targets ◽  
Market Consequences ◽  
The Relationship ◽  
Jel Classifications

ABSTRACT This study examines how managers coordinate the joint use of earnings management and expectation management by estimating the relationship between these instruments and how this relationship changes as their respective constraints change. We do this by estimating structural models of the two instruments that account for the constraints on their use as well as their effects on each other. Our results suggest that managers use earnings management and expectation management complementarily when managers' ability to use earnings management is less restricted. However, as the constraints on earnings management increase, managers substitute earnings management with expectation management. Moreover, we find that the extent of expectation management influences the extent of earnings management, but not vice versa. Examining the market consequences of the use of these instruments, we find that, while there are penalties for using both earnings management and expectation management, either as complements or as substitutes, the net stock price benefit from meeting or beating earnings targets exceeds these penalties. JEL Classifications: G14; M41. Data Availability: Data are available from public sources identified in the study.

Influential Chief Marketing Officers and Management Revenue Forecasts

2017 ◽  
Vol 93 (4) ◽  
pp. 253-281 ◽  
Author(s):  
David S. Koo ◽  
Dongyoung Lee
Keyword(s):  
Propensity Score ◽  
Voluntary Disclosure ◽  
Data Availability ◽  
Matched Pair ◽  
Top Management ◽  
Chief Marketing Officer ◽  
Chief Marketing Officers ◽  
Revenue Forecast ◽  
Jel Classifications

ABSTRACT We examine the role of the chief marketing officer (CMO) in corporate voluntary disclosure of future revenues. Using a sample of S&P 1500 firms for the period from 2003 to 2011, we find that the presence of an influential CMO in top management is positively associated with the likelihood of a firm issuing a management revenue forecast. We also find that firms with an influential CMO provide more accurate revenue forecasts than other firms. These findings extend to long-window change analyses and are robust to the use of a propensity score matched-pair approach. Overall, the results are consistent with the notion that CMO influence in top management appears to play an important role in voluntary revenue disclosures. JEL Classifications: M12; M31; M41. Data Availability: All data are publicly available from sources identified in the paper.

Auditor Quality and Loan Syndicate Structure

2011 ◽  
Vol 30 (4) ◽  
pp. 71-99 ◽  
Author(s):  
Jeong-Bon Kim ◽  
Byron Y. Song
Keyword(s):  
Ownership Structure ◽  
Data Availability ◽  
Syndicated Loans ◽  
Big 5 ◽  
External Auditors ◽  
Big 4 ◽  
Auditor Quality ◽  
Syndicate Structure ◽  
Jel Classifications

SUMMARY This study investigates whether and how the quality of external auditors hired by borrowers has an impact on loan syndicate structure. Our empirical analyses, using a sample of U.S. syndicated loans from 1996 to 2009, show the following findings: First, a larger number of banks participate in syndicated loans to borrowing firms with Big 4 (or previously Big 5 or Big 6) auditors than to those with non-Big 4 auditors. Second, the percentage of a syndicated loan retained by the lead bank(s) is smaller when the borrower is a client of a Big 4 auditor than when the borrower is a client of a non-Big 4 auditor. Third, the effect of auditor quality (Big 4 versus non-Big 4) on loan ownership structure is less pronounced when lenders are able to gather more information about the borrower prior to the loan deal. Overall, our results suggest that auditor quality plays an important role in loan syndication by alleviating information asymmetries between lead banks and non-lead participant banks. JEL Classifications: G21; G32; M42. Data Availability: Data are publicly available from sources identified in the paper.

Firm-Value Effects of Carbon Emissions and Carbon Disclosures

2013 ◽  
Vol 89 (2) ◽  
pp. 695-724 ◽  
Author(s):  
Ella Mae Matsumura ◽  
Rachna Prakash ◽  
Sandra C. Vera-Muñoz
Keyword(s):  
Selection Bias ◽  
Capital Markets ◽  
Carbon Emissions ◽  
Voluntary Disclosure ◽  
Firm Value ◽  
Data Availability ◽  
Carbon Disclosure Project ◽  
Self Selection ◽  
Jel Classifications

ABSTRACT Using hand-collected carbon emissions data for 2006 to 2008 that were voluntarily disclosed to the Carbon Disclosure Project by S&P 500 firms, we examine the effects on firm value of carbon emissions and of the act of voluntarily disclosing carbon emissions. Correcting for self-selection bias from managers' decisions to disclose carbon emissions, we find that, on average, for every additional thousand metric tons of carbon emissions, firm value decreases by $212,000, where the median emissions for the disclosing firms in our sample are 1.07 million metric tons. We also examine the firm-value effects of managers' decisions to disclose carbon emissions. We find that the median value of firms that disclose their carbon emissions is about $2.3 billion higher than that of comparable non-disclosing firms. Our results indicate that the markets penalize all firms for their carbon emissions, but a further penalty is imposed on firms that do not disclose emissions information. The results are consistent with the argument that capital markets impound both carbon emissions and the act of voluntary disclosure of this information in firm valuations. JEL Classifications: G14, Q51, M14. Data Availability: Data are available from the sources identified in the study.

Interim Reporting Frequency and the Mispricing of Accruals

2018 ◽  
Vol 32 (3) ◽  
pp. 29-47
Author(s):  
Shou-Min Tsao ◽  
Hsueh-Tien Lu ◽  
Edmund C. Keung
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Data Availability ◽  
Financial Reports ◽  
Regulatory Changes ◽  
Sample Composition ◽  
Reporting Frequency ◽  
Over Time ◽  
Jel Classifications ◽  
Accrual Mispricing

SYNOPSIS This study examines the association between mandatory financial reporting frequency and the accrual anomaly. Based on regulatory changes in reporting frequency requirements in Taiwan, we divide our sample period into three reporting regimes: a semiannual reporting regime from 1982 to 1985, a quarterly reporting regime from 1986 to 1987, and a monthly reporting regime (both quarterly financial reports and monthly revenue disclosure) from 1988 to 1993. We find that although both switches (from the semiannual reporting regime to the quarterly reporting regime and from the quarterly reporting regime to the monthly reporting regime) hasten the dissemination of the information contained in annual accruals into stock prices and reduce annual accrual mispricing, the switch to monthly reporting has a lesser effect. Our results are robust to controlling for risk factors, transaction costs, and potential changes in accrual, cash flow persistence, and sample composition over time. These results imply that more frequent reporting is one possible mechanism to reduce accrual mispricing. JEL Classifications: G14; L51; M41; M48. Data Availability: Data are available from sources identified in the paper.

Tax-Advantaged Trust Use Among IPO Executives: Determinants and Implications for Valuation and Future Performance

2019 ◽  
Vol 95 (3) ◽  
pp. 145-175 ◽  
Author(s):  
Michael J. Dambra ◽  
Matthew Gustafson ◽  
Phillip J. Quinn
Keyword(s):  
Stock Price ◽  
Relevant Information ◽  
Data Availability ◽  
Market Prices ◽  
The Public ◽  
Future Performance ◽  
Estate Taxes ◽  
Price Appreciation ◽  
One Year ◽  
Jel Classifications

ABSTRACT We examine the prevalence and determinants of CEOs' use of tax-advantaged trusts prior to their firm's IPO. Twenty-three percent of CEOs use tax-advantaged pre-IPO trusts, and share transfers into tax-advantaged trusts are positively associated with CEO equity wealth, estate taxes, and dynastic preferences. We project that pre-IPO trust use increases CEOs' dynastic wealth by approximately $830,000, on average. We next examine a simple model's prediction that trust use will be positively related to IPO-period stock price appreciation. We find that trust use is associated with 12 percent higher one-year post-IPO returns, but is not significantly related to the IPO's valuation, filing price revision, or underpricing. This evidence is consistent with CEOs' personal finance decisions prior to the IPO containing value-relevant information that is not immediately incorporated into market prices. JEL Classifications: D14; G12; G32; M21; M41. Data Availability: Data are available from the public sources cited in the text.

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