Journal of Corporate Accounting & Finance

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  • The effect of insured liabilities on the demand for external audits: The case of privately‐held United States banks

    We examine the relationship between government insurance for bank deposits and bank management's voluntary audit choice for a set of privately‐held U.S. banks. Unlikely publicly‐traded banks, U.S. regulations do not require private banks to obtain annual audits. However, all U.S. banks have the feature of insurance on customer deposits that is provided by the Federal Deposit Insurance Corporation—these insured customer deposits comprise a significant portion of the debt of most banks. Consistent with prior research we find that the voluntary choice to be audited is positively related to agency costs as measured by the size of bank assets. Our results show a negative association between a bank's insured deposits and the choice to be audited but (consistent with prior literature) a positive association with uninsured liabilities. In addition, we hypothesize and find that the bank's voluntary audit choice is positively related to the bank's growth rate and related to the bank's primary federal regulator. Taken together, these findings are consistent with the notion that audits create value primarily for uninsured depositors and have implications for bank managers, their customers, and regulators.

  • Issue Information
  • Commodity price risk, profits, and value creation
  • Impact of technology in financial reporting: The case of Amazon Go

    Since the beginning of the 21st century, there is no doubt that humanity has made a huge step forward in the field of robotics. In the next 20 years, financial reporting will see a stronger change thanks to machine learning, artificial intelligence, block chain, and big data usage. With the convergence of artificial intelligence and block chain, it is now clear that in the near future the work of the accounting profession will be supported by automation. Thus, the aim of the study to introduce the effects of technological changes and transformations on the future of financial reporting. The study first introduces technological tools and provides an overview of the advantages and threats of technological changes to financial reporting. Then, the study provides a case of Amazon Go to display the transformation of financial reporting with the technological changes.

  • Is yield curve predicting a US recession in 2020?

    The yield curve spread has predicted every US recession. As of mid‐2019, the inverted yield curve spread is flashing a warning sign about a possible US recession in 2020. This article explains the yield curve spread, and discusses the possible 2020 recession triggers.

  • Real options with endogenous convenience yield

    Traditional real options theory highlights the impact of risk on the timing of investment decisions. However, in practice, corporate projects often involve a preliminary exploratory stage, incurring a running cost and convenience yield. By analogy with commodity futures theories, we model such multistage corporate projects in a feedback‐control framework, with a dynamic aggregate convenience yield/running cost that interacts with the decisions to enter or exit the preliminary stage. We provide a closed‐form solution for this compound options model. The solution provides insight and quantifies of the optimal strategy for prevalent corporate projects with a preliminary exploration stage.

  • Data‐driven auditing: A predictive modeling approach to fraud detection and classification

    This article develops and empirically tests a predictive model for audit of fraud detection with practical applications for audit operations. By analyzing real‐life accounting data, the proposed model can identify anomalous transactions and directly focus on exceptions for further investigation in real time, thus offering a significant reduction in manual intervention and processing time in audit operations. Our approach is a highly desirable supplement to the existing rule‐based models, given the growing use of information technology for analytics in auditing. The proposed approach is based on classification. Following the tenets of the principal agency theory, we discuss how our approach can help to reduce monitoring and contracting costs, disincentivize fraud, improve auditor efficiency and independence, and increase audit quality. We contribute to the current literature by discussing the implications of data‐driven audit on the moderating role of auditors in principal‐agent relationships and providing practical insights into the operational aspects of financial reporting and auditing, modeling of fraud‐detection classification models, and benefits, barriers, and enablers of implementing data driven audit in companies.

  • Management quality and acquisition performance: New evidence based on firm profitability

    Using corporate accounting profitability measures to proxy for management quality, we report evidence that acquisitions made by higher quality acquirers create greater shareholder value. More profitable acquirers earn better stock returns over the long term, although no consistent relationship is found between announcement‐period abnormal returns and firm profitability. More profitable acquirers also preserve shareholder value by reducing the likelihood of paying stock for acquisitions or overpaying the targets. Overall, our results provide new support for the hypothesis that better acquirers make better acquisitions. Our results also convey a clear message to corporate accounting and financial executives, outside investors, and other professionals. When firms with poor accounting profitability make acquisitions, it is usually not good news.

  • Measuring life cycles using binomial option pricing: The pharmaceutical industry

    This study examines the N computed using an American Binomial Option Pricing Model to address issues in evaluating firms which may be difficult to value such as new pharmaceutical firms. New pharmaceutical products can take up to 12 years to bring a new product to market. This study uses a sample of 15 pharmaceutical initial public offerings (IPOs) brought to market in 2,000. The current study uses a firm's excess market value as a measure of valuable growth opportunities. The study attempts to estimate how much remaining investment in research and development (R&D) is required for potential market success. The study solves for N in an American Binomial Option Pricing Model. The resulting N represents a number which when multiplied by R&D, results in an implied estimated amount of remaining investment in R&D, which the stock market has priced into the value of growth opportunities. The option valuation model uses the firm's excess market value as a call option on the firm's market value, and R&D times N, as the strike price. N is computed for each firm and year observation. The results of the current study suggest that the N, computed in the option‐pricing model, is negatively and highly associated with a firm's future performance and future productivity of investment in R&D.

  • Do firms with dual chief executive officers perform better than their counterparts?

    Agency theory contends that shareholder interests require protection by separation of the roles of board chair and chief executive officer (CEO). Duality (CEO also chairman of the board) increases the likelihood of the CEO entrenchment by reducing board monitoring effectiveness. Stewardship theory argues that shareholder interests are maximized by having the dual CEOs. According to stewardship theory, firms with dual CEOs have some major advantages over their counterparts. Such CEOs establish strong leadership and provide better strategic directions for the firm. Consequently, shareholders benefit form dual CEOs. Evidence on the relationship between dual CEO and firm performance is mixed. While some studies found that there is a positive relationship between two variables, others found an inverse relationship between two. This study attempts to shed some light on this issue. Results from the study indicate that there is a statistically significantly positive relationship between dual CEO and the firm's size, the number of insider director, and the percentage of shares held by the control shareholders. Results from this study indicated that there is no significant relationship between the CEO duality and financial performance in the short run. However, the firms with dual CEO, on average, perform better than their counterparts in the long run.

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