Journal of Corporate Accounting & Finance

Publisher:: Wiley
Publication date:: 2021-02-01

ISBN:: 1044-8136

Issue Number

No. 35-1, January 2024

Latest documents

Issue Information
Earnings management around reverse stock splits
Utilizing a sample of 1258 reverse stock splits from 1988 to 2019, we contrast earnings management by firms that initiate reverse splits for diverse reasons. Literature suggests that the incentives for reverse splits vary based on firms' stock price ranges. As such, we use the pre‐split and target‐price ranges to separate the sample into three groups. We find a stark difference in discretionary accruals across these groups. While previous studies have treated earnings management and reverse splits as substitutes, we hypothesize that firms at risk of delisting may employ these two mechanisms as complements. Consistent with the hypothesis, we document a strong positive association between reverse splits and post‐split discretionary accruals for firms with pre‐split prices below $1. This relationship, however, is non‐existent among the remaining two groups. Our findings have two important implications for investors: (i) firms with different motives behind reverse splits exhibit different earnings management behavior and (ii) firms that are likely facing exchange delisting use discretionary accruals in complement with reverse stock splits.
The spouse effect and CEO risk‐taking
We examine how a CEO's family life affects their corporate decisions. Specifically, we investigate whether a CEO's spouse's professional status affects the CEO's risk‐taking behavior. Using a sample of S&P 500 firms from the 2010 to 2012 period, we find evidence that CEOs with spouses who are professionals, defined as working spouses, spouses holding graduate degrees, or spouses graduated from Ivy League schools, tend to adopt riskier corporate policies. Our evidence suggests that firms led by CEOs with professional spouses exhibit higher accounting return volatility, make more aggressive financial reporting decisions, and invest more in risky assets. We do not find a significant association between professional spouses and firms’ market return volatility. Our results are consistent with the indirect channel theory, which suggests that CEOs with professional spouses might be inclined to undertake higher risks, potentially stemming from heightened conflicts between family and work commitments or improved wealth diversification attributed to their spouses' professional standing.
The timeliness of 10‐K filings, financial performance, and stock returns
Using a dataset constructed from the EDGAR database, this study investigates whether the timing of filing 10‐Ks contains useful information to investors. We argue and find that firms with better earnings news are more likely to file their 10‐Ks early. We further show that firms experience earnings increase would accelerate the filing of their 10‐Ks. We explore whether the timeliness measure is useful for predicting future financial performance and stock returns. We find that firms filing 10‐Ks early in the current year are more likely to have better earnings and higher stock returns in future years. Our results are robust to different measures of timeliness, before and after the statutory filing deadline changes, and subsamples of firms with large or small market capitalization.
Top management team incentive dispersion and audit fees
We study whether heterogeneity in pay‐performance sensitivities (PPS) across top management team (TMT) members influences audit fees. Evidence from current literature reveals that the heterogeneity in PPS among TMT affects TMT managers’ motivation to coordinate their activities to manipulate earnings. Since the quality of earnings lowers auditors’ financial reporting risk, we posit that audit fees will be lower when dispersion in the PPS among TMT is high. We demonstrate that audit fees are negatively linked with dispersion in PPS among TMT members. This finding is robust to numerous sensitivity testing. Overall, our findings suggest that firms benefit from the heterogeneity in PPS among TMT members in the form of lower audit fees.
Examining auditors’ ability to evaluate the reasonableness of fair value estimates
One of the most difficult challenges facing contemporary auditors is evaluating the reasonableness of fair value estimates (FVEs) made by management. Both practitioners and academic studies have shown auditors to be deficient when tasked with assessing FVEs. However, it is not well understood whether the root cause of this deficiency lies in auditors’ lack of knowledge to appropriately evaluate estimates or auditors’ lack of willingness to challenge management. Using the setting of common auditors in M&A transactions, this study empirically examines whether the audit deficiency can be resolved by providing auditors with additional knowledge or willingness. Our results show that common auditors significantly outperform their peers when tasked with assessing the reasonableness of FVEs in purchase price allocations and reducing overallocation to goodwill when managers have incentives to do so. Further, the evidence is consistent with common auditors demonstrating improved performance in challenging information environments, but not in scenarios where risks to auditors may be perceived to be higher. The results suggest that it is their greater asset‐specific knowledge that drives mitigation of the audit deficiency and that targeting improvements to knowledge rather than willingness is likely to be more effective in improving auditors’ ability to evaluate FVEs.
Do geographic distances proxy a high probability of foreign divestment? Evidence from Japanese multinational firms
We aim to provide an unambiguous explanation for the positive influence of the geographic distance between a firm's home and host country on divestment decisions of Japanese multinational firms’ outbound merger and acquisition (M&A). Our analysis of 868 acquisitions made by 496 firms in 45 countries and regions from 2005 to 2015 highlights the importance of drawing a clear distinction among various foreign divestment motives before inferring the impact of geographic distances rashly, especially whether it is failure‐driven or global business strategy‐driven. We further find that its impact hinges on parent firm‐ and deal‐level attributes, that is, geographic distance is less salient for large firms, young firms, and foreign operations under a complete control mode; however, the opposite was the case for firms with a high debt burden.
Repatriation tax and dividend policy
This paper examines the impact of the repatriation tax provision of the Tax Cuts and Jobs Act (TCJA) on firms’ dividend policy. Our findings show that the firms most affected by the repatriation tax provision, that is, those with high foreign sales, reward shareholders by substantially increasing dividends per share, but maintain aggregate dollar dividends. Dividend per share (DPS) increasing firms repurchase at significantly higher magnitudes than non‐dividend per share increasing firms, suggesting that DPS increasing firms partially utilize repurchases to avoid substantial increases in their long‐term aggregate dividend commitments. We also investigate whether managers reap the rewards of dividend increases, finding that firms with high levels of executive ownership and foreign sales are more likely to increase their dividends per share after the TCJA was enforced. Overall, our results highlight the importance of the interconnection between dividends and repurchases in examining the response of firm payout policy to external shocks.
Exploring the research landscape of implied volatility index: A bibliometric analysis
The purpose of this study is to present a comprehensive literature review on Implied Volatility (IV) and its significance for investment decisions. The study employs a combination of bibliometric information, qualitative synthesis, and citation analysis to provide an overview of the current research on IV. Additionally, the study maps the research field by identifying leading journals, authors, research centers, and publications. The findings of the study highlight the importance of IV both theoretically and practically, and the fragmented nature of existing knowledge. The comprehensive literature review conducted in this study contributes to the existing body of knowledge on IV. The research limitations of the study are due to the use of a single database for data extraction, which may have resulted in missing some relevant articles. It is suggested that future studies may use multiple databases to improve the comprehensiveness of the literature review.
The effect of real earnings management on earnings persistence and informativeness before and during COVID‐19
This study examines the effect of real earnings management (REM) on earnings persistence and informativeness and also considered in the context of the COVID‐19 pandemic. REM is quantified by two aggregate metrics. The sample consists of 2256 firm‐year observations of listed companies in Vietnam from 2016 to 2021. We find evidence that REM is negatively associated with the persistence of earnings and its components, with REM affecting cash flows more strongly than accruals. We also find that REM limits the relationship between current earnings and future cash flows. Furthermore, when confronted with the COVID‐19 pandemic, the effect of REM on earnings quality does not improve.