Antonio Marra

Corporate Boards, Audit Committees, and Earnings Management: Pre- and Post-SOX Evidence

Primarily motivated by the claims that the recent regulatory initiatives empowering boards and audit committees restrain earnings management, we examine whether board characteristics (composition, size, and structure) and audit committee characteristics (composition, size, activity, expertise, ownership, and tenure) are associated with earnings management before and after Sarbanes-Oxley Act (SOX). Using absolute performance-adjusted discretionary accruals, special items, and deferred tax expense as alternative constructs for earnings management, we find that earnings management does not vary with board composition and structure, or with audit committee composition, expertise, and ownership. In contrast, board size and audit committee size, activity, and tenure are associated with earnings management. More important, the strength of this association is considerably weaker for the post-SOX years compared to the pre-SOX years. Finally, we find no evidence to suggest that the overall level of earnings management declined following SOX.

Is Corporate Board More Effective Under IFRS or “It’s Just an Illusion”?

The present study contends that the increased effectiveness of corporate boards in constraining earnings management around International Financial Reporting Standards (IFRS) introduction might be “transitory” and fade away over time. Drawing on the attention-based view (ABV) of the firm, we argue that the higher effectiveness of corporate boards might have been driven by a temporary higher level of attention, which independent directors (INDs) and audit committees (ACs) allocated to accounting issues at the time of transition to IFRS. Our empirical results highlight that corporate board’s effectiveness reaches its peak around the adoption time, showing an “inverted-U” path. This study contributes to the current debate on the extent to which additional contextual factors might prevail on accounting standard regulation—per se—in improving earnings quality. We further suggest that boards’ effectiveness in monitoring the corporate financial accounting process is contextually dependent.

Comment Letter Frequency and CFO Turnover: A Dynamic Survival Analysis

Earlier research on chief financial officer (CFO) turnover considered whether one of detailed regulatory findings, such as restatements, affected the likelihood of CFO turnover. However, since the passing of Sarbanes–Oxley Act (SOX), the Security Exchange Commission (SEC) has revised the regulatory approach it uses. It now investigates companies on a more frequent basis and using Comment Letters (CLs) regularly asks registrants to explain disclosure practice with a view to possibly requiring enhanced or revised disclosures. In this new proactive environment, some registrants may repeatedly receive CLs asking questions about multiple disclosure issues. This research uses a dynamic hazard model specification to investigate whether through time CFO turnover increases as the registrants accumulate more CLs. In addition to CL frequency, a measure of the severity of SEC CLs is introduced to see if it moderates the effect of frequency.

Earnings Quality of Private and Public Firms: Business Groups versus Stand-Alone Firms

We examine how heterogeneity in organizational structure affects private firm earnings quality in the European Union. Organizational structure refers to whether the firm is organized as a single legal entity (standalone) or as a business group: the former are firms not controlling or controlled by another firm, while the latter are firms that own a majority stake in one or more subsidiaries. Private firms can be either groups or standalone firms, while public firms are de facto groups. Even though private firms are not affected by market forces, we show that private business groups face greater stakeholder pressure for earnings quality than do standalone firms, while standalone firms have stronger tax minimization incentives. Due to these differences in nonmarket forces, private business groups have higher earnings quality than standalone firms. This heterogeneity among private firms is an important unexplored factor in the study of private firms, affecting the comparison between public and private firm earnings quality. This comparison matters, because it attests to the net effects of market forces (i.e., demand versus opportunism) on public firms. We find that overall, public firms have higher earnings quality than private firms, but this relation reverses when we control for nonmarket forces by examining business groups only. Our findings suggest that, in the European Union, the negative effects of opportunism outweigh the positive effects of market demand in determining public firms’ earnings quality, and reconcile past conflicting evidence on public versus private earnings quality.

Strategy, Valuation, and Forecast Accuracy: Evidence from Italian Strategic Plan Disclosures

Abstract Using a sample of 264 strategic plan presentations by Milan Stock Exchange firms during 2001–2012, we present evidence of both a security price reaction and an increase in the accuracy of analysts’ earnings forecasts pursuant to plan disclosure. In the cross-section, the information content of the plan disclosures and the accuracy increase are incrementally associated with the extent of forward-looking narrative disclosures in the plan, after controlling for other disclosures within and outside the plan presentation and the fact that the firm has self-selected into the sample. Both quantitative and qualitative narrative disclosures are informative to investors and analysts. The results are driven by narrative disclosures about company strategy and action plans rather than about the business environment in which the company operates. Our study informs the current debate on the use of voluntary comprehensive, integrated, long-run-oriented strategic plan disclosure as a potential complement for disclosures such as quarterly earnings forecasts that have been described as an example of ‘short-termism’.

The pros and cons of fair value accounting in a globalized economy: a never ending debate

Fair Value Accounting is not a new concept, either in business decisions or in financial reporting. Nonetheless, due to big changes that took place over the last 20 to 30 years in the worldwide economy and the influence of the 2007 financial crisis, it has reemerged as one of the “hottest topics” on the agenda of Accounting Standards setters both under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standard (IFRS). Current research seems well balanced across the pros and cons of fair value, lending ammunition both to those “in favor” and to the “opponents” of fair value accounting. Subjectivity, estimates, and managerial discretion permeate the concept, definition, and measurements of fair value, leaving such measurements open to an aggressive use of judgment and estimates. However, fair value accounting is more closely related to the needs of a globalized and information-based economy and is likely to grow in importance and use in the future. This article discusses evidence and summarizes some current papers on the informational impact of fair value measurements on market participants.

Is it Worth Having the Sopranos on Board? Corporate Governance Pollution and Organized Crime: The Case of Italy

We investigate how connections to organized crime manifest on firms’ financial statements and analyze the effect of these connections on firm performance outcomes. Using a unique dataset that identifies Italian firms connected to organized crime, we first develop a prediction model and find systematic patterns in the characteristics of connected firms. Next, we find that connected firms have lower profitability, despite reporting higher sales, and lower cost of labor. Connected firms have higher bank debt, lower cash holdings, and experience higher probability of default. On the other hand, such firms also have lower financing costs and quicker cash conversion cycles. Finally, we exploit an amendment to the Anti-Money Laundering regulation to corroborate our findings. Our collective evidence suggests that connections to organized crime can be harmful to shareholders, as criminal organizations seem to cannibalize the profits of connected firms and drain resources from them, possibly through money-laundering schemes.

Don't Judge a Book by Its Cover: The Influence of Independent Directors’ Busyness and Tenure on Earnings Quality

In this paper we argue and empirically find that factual rather than “cosmetic” independence has a differential impact on board effectiveness with reference to the quality of financial reporting. We first shed light on past conflicting findings by showing a curvilinear relation between two important independent directors’ characteristics, busyness and tenure, and levels of earnings management. By adopting an interaction perspective, we then show that independent directors’ ability to constrain earnings management is strongly impaired by their length of tenure, and it fades away entirely when independent directors are “too busy”. We also look at independent directors sitting on Audit Committees and we get identical results. This work comes in response to recent calls for more work on how independent directors’ effectiveness is impacted by directors’ attributes and shows that a co-alignment of several attributes is needed, rather than just the application of the convenient “independence” label.

Research Challenges in Accounting and Finance in a Globalized Economy Fair value measurements, Valuation models, and Management practices

Financial globalization has accelerated relentlessly over the last decade. The impact of such globalization has transformed the economies of many countries and especially those of China and India which are emerging as large suppliers and users of capital accounts. Financial globalization is a fascinating topic to study for researchers of development economics, not only because of its compelling policy relevance, but also because of the enormous variation of approaches and experiences across countries. Differences in speed and approach to financial globalization have often been driven as much by philosophy, regional fads, and political circumstances as by economic factors. Hence, cross-country studies of the effects of financial integration can potentially exploit a wide array of natural variation in experiences. In recent years fair-value measurements, valuation models and related companies and management practices have captured attention at all levels, involving, among others, market regulators, policy makers, as well as, banking and accounting oversight groups around the world. As of today, there are serious disagreements across parties who believe that fair value accounting benefits investors and of those who believe it hurts investors. JAAF Special Issue is primarily intended to enhance academic debate and shed lights on the fair value measurements, valuation issues and management practices in a globalized economy where still a consistent degree of variation is present among institutions, capital markets and investors. We encourage papers that focus on any aspect of this issue including asset valuation models, relative efficiency of market prices, and the role of management judgment in information disseminated to investors and other market participants. We thus encourage scholars to apply a wide variety of rigorous methodological approaches in order to shed further light on the following research areas that are of particular interest to advance the field of accounting and finance in a global economy: