Andrew B. Jackson

Mandatory Audit Firm Rotation and Audit Quality

This study investigates the effect a regime of mandatory audit firm rotation would have on audit quality in an Australian setting. Using two measures of audit quality, being the propensity to issue a going-concern report and the level of discretionary accruals, the study examines the switching patterns of clients in their current voluntary switching capacity, and the levels of audit quality. We find that audit quality increases with audit firm tenure, when proxied by the propensity to issue a going concern opinion, and is unaffected when proxied by the level of discretionary accruals. We conclude that given the additional costs associated with switching auditors there are minimal, if any, benefits of mandatory audit firm rotation. Other initiatives to address concerns about auditor independence and audit quality therefore need be considered before imposing mandatory audit firm rotation.

The Impact of Sentiment on Price Discovery

We study how investor sentiment affects the speed with which prices reflect information. Price discovery is more timely for firms with greater sensitivity to sentiment, as measured by a sentiment beta. Our research improves our understanding of the price formation process when sentiment is not assumed to be constant. Our research design is novel as it considers a sentiment beta as well as economy-wide sentiment. This provides more comprehensive evidence on the impact of differing types of sentiment on the price formation process.

Chief Executive Officer Departures and Market Uncertainty

This study investigates the effect on stock return volatility of a significant event in the life of a firm, a change in its Chief Executive Officer (CEO). Citing weaknesses in the prior literature, we bring a new approach to re-examine the issue. Firstly, we use a relatively unbiased classification system using both company announcements and media reports. Secondly, we use short-term stock return volatility as a more accurate estimator to isolate the effect of a single disclosure. We find strong evidence that the level of stock return volatility increases following announcements of CEO departures, and that the increase is significantly higher following announcements of forced departures compared to voluntary departures. The results are consistent with signalling effect theory in that forced dismissals convey previously unknown information to the market. Signed cumulative abnormal returns are also more negative for a forced CEO departure.

Stock Return Volatility Surrounding Management Earnings Forecasts

The primary aim of this study is to investigate the stock return volatility surrounding management earnings forecasts. Disclosure by managers of expected earnings are particularly important communications, and as such, it is important to understand the capital market implications surrounding them. In doing so, the research questions are essentially aimed at examining the stock return volatility, first, at the release of a management earnings forecast, and second, at the eventual announcement of the realised earnings for that period. The first test investigates whether there is an increase in volatility surrounding a management earnings forecast for those firms who release them compared to a matched-firm sample of firms without a management earnings forecast at that date, and then further examines that result based on different forecast antecedents and forecast characteristics. In brief, the evidence using the Garman and Klass (1980) ‘best analytic scale-invariant estimator’ of volatility in an Australian context, between 1993 and 2003, finds that stock return volatility is greater for bad news forecasts, forecasts of low specificity, and forecasts issued by firms perceived ex ante as being of lower credibility using both permutation analysis and modelling daily volatility.

The Impact of Litigation Risk on the Strategic Timing of Management Earnings Forecasts

This paper examines whether managers strategically time their earnings forecasts (MEFs) as litigation risk increases. We find as litigation risk increases, the propensity to release a delayed forecast until after the market is closed (AMC) or a Friday decreases but not proportionally more for bad news than for good news. How costly this behaviour is to investors is questionable as share price returns do not reveal any under-reaction a strategically timed bad news MEF released AMC. We also find evidence consistent with managers timing their MEFs during a natural no-trading period to better disseminate information.

Inconsistent Signals, Earnings Announcements and Market Uncertainty

We test the proposition in Johnstone (2016) that new information may lead to higher, rather than lower, uncertainty about firms’ future payoffs. Based on the Bayesian rule, we hypothesize earnings news that is inconsistent with investors’ prior belief will lead to higher market uncertainty. Using earnings signals in the past few quarters to proxy for investors’ prior belief, we find supporting evidence that, relative to consistent earnings news, inconsistent news results in an increase in market uncertainty measured by implied volatility. Inconsistent earnings news has a larger effect on market uncertainty when prior beliefs are stronger and when the news is negative. Overall, our evidence highlights the importance of prior belief and inconsistent signals in understanding the effect of earnings news on market uncertainty.

Do Management Earnings Forecasts Resolve Uncertainty around Earnings Announcements

The purpose of a management earnings forecast is to forecast the eventual earnings figure released to the market at the earnings announcement date. To the extent that management earnings forecasts should reduce periodic shocks by reducing information asymmetry, stock return volatility is expected to be lower for firms who release them surrounding the earnings announcement date. Specifically, this paper asks the question whether stock return volatility surrounding earnings announcements is lower for firms who do release a management earnings forecast compared to those who do not, contingent on forecast accuracy. The empirical results show otherwise, specifically that for firms issuing a management earnings forecast, which is ex post accurate, do not experience stock return volatility at any statistically significantly lower levels. This result is interpreted that old news is still news.