Ashok Robin

Accounting standards, the institutional environment and issuer incentives: Effect on timely loss recognition in China

Abstract Accounting income of Chinese companies reporting under both domestic ASBE accounting standards and International Accounting Standards (“IAS”) is shown to lack timely incorporation of economic losses. This is less surprising for ASBE-compliant income, because although ASBE standards are based on IAS, they lack important asymmetric rules, such as lower-of-cost-or-market, and impairment of long-term assets. More striking is the absence of timely loss incorporation in financial statements certified by international auditors as IAS-compliant. IAS resemble common-law standards and are widely believed to increase financial reporting quality. The timely incorporation of losses has become perhaps the single most important feature of income reporting under common law (Basu (1997), Ball, Kothari and Robin (2000)). We attribute the result to the comparatively low incentive of managers and auditors to recognise economic losses in a timely fashion and, conversely, to comparatively high political and tax influences on financial reporting practices. Our results imply that financial reporting cannot be improved simply by governments mandating accounting standards that evolved endogenously in different economies. The most fruitful area for Chinese accounting reform lies not in simply adopting or imitating international accounting standards, but in reforming domestic institutions such as the legal system, corporate governance and auditor training and independence.

The Impact of the 1986 Tax Reform Act on Ex-Dividend Day Returns

The 1986 Tax Reform Act, by virtue of equalizing the marginal tax rates of dividend and capital gains income for the ordinary investor, is hypothesized to decrease the ex-day abnormal returns, and to reduce the incidence and effects of short-term trading. As predicted, ex-day abnormal returns are found to decline significantly in both the NYSE and the ASE. In contrast, increased effects of short-term trading are found among the high dividend yield quintile stocks of the NYSE.

Agency Conflicts, Controlling Owner Proximity, and Firm Value: An Analysis of Dual-Class Firms in the United States

The study seeks to understand whether the proximity of the largest shareholder (controller) to the locus of management – whether the controller is a top executive, a board member, or an outsider – determines the value of US dual-class firms. Using a sample of 209 US dual class firms from the year 2000 and a corresponding control sample of single-class firms, we run cross-sectional regressions to determine the effect of the controller on firm value. We present robust evidence that dual-class firm value is negatively related to controller proximity. Dual-class structure overall is unrelated to firm value, because despite its negative effects with high proximity controllers there appear to be benefits when controller proximity is low (when the largest shareholder is an outsider). Ownership structure is a widely studied subject but most studies focus on insider ownership. More nuanced aspects of ownership such as controller proximity are needed in empirical studies and theoretical models. These nuances could help us better understand the interplay between the incentive of various parties (e.g., managers, large shareholders) and the opportunity available for extraction of private benefits. A practitioner implication is that shareholder of high-proximity dual-class firms must seek additional control mechanisms to curb agency costs. A policy implication is that investor protection (laws and institutional structure protecting shareholders) works only to a limited extent – it curbs overt acts of expropriation, but cannot eliminate acts engineered by insiders.

The design of incentive compensation for directors

Today, most firms provide equity‐based incentive compensation to their non‐executive directors. We summarize viewpoints supportive and critical of this development. We argue that the effectiveness of incentive compensation is related to the structure of the incentive pay contact. We discuss the use of options and shares as well as the issue of whether incentive pay should be geared towards current rewards or future incentives. We also discuss the critical issue of maintaining the ownership exposure of directors by providing sufficient levels of equity as well as placing restrictions on cashing out. Using our arguments above, we suggest guidelines for constructing an optimal contract. We compare 289 incentive plans offered by public companies in the USA during 1988‐1998 and find that plans deviate significantly from the optimum.

Sarbanes‐Oxley: are audit committees up to the task?

Purpose – This paper aims to study the audit committee (AC) provisions of the Sarbanes‐Oxley Act with the objective of identifying implementation issues and to recommend firm and board actions to remedy the problems that are identified.Design/methodology/approach – Standard economic theory was used to analyze the incentives and abilities of AC members, relying on results in the financial economics literature regarding outside director behavior.Findings – The framework predicts that the new provisions in conjunction with the new regulatory/liability environment will increase risk‐aversion in directors belonging to ACs. This, in turn, creates an incentive alignment problem between AC members and shareholders leading to sub‐optimal decisions with regard to the audit. In particular, it is noted that demand will increase for high‐quality audits irrespective of cost considerations. The analysis also indicates that director labor markets will not mitigate this sub‐optimality.Research limitations/implications – B...

Firm Growth and the Pricing of Discretionary Accruals

This paper examines how firm growth conditions the pricing of discretionary accruals. Given the rich growth opportunities and high information asymmetry in high-growth firms, we expect that managers have incentives to use discretionary accruals, especially income increasing (positive) discretionary accruals, to signal favorable private information to external investors. Our empirical tests reveal that overall there is no significant difference in the pricing of discretionary accruals between high-growth and low-growth firms. However, consistent with our expectations, we find that in high-growth firms compared to low-growth firms, positive discretionary accruals are priced to a greater extent, while negative discretionary accruals are priced to a smaller extent. Additional tests show that positive discretionary accruals have a relatively greater association with future firm performance in high-growth firms. Finally, we find that the pricing of positive discretionary accruals in high-growth firms is predominantly in those firms with high levels of information asymmetry.

Economic Freedom and the Impact of Technology on Productivity

A well-developed body of literature has detected positive effects of technology investments on economic growth. We contribute to this literature by studying the joint effects of technology and economic freedom on economic growth. Using two different time points, 1990 and 2000, and a sample of over 100 countries, we find that economic freedom enhances the effect of technology on economic growth. In fact, we find that the standalone effect of freedom is not as large as its interactive effect with technology.

Board Structure and Audit Committee Monitoring Effects of Audit Committee Monitoring Incentives and Board Entrenchment on Audit Fees

Our study addresses two research questions. First, are audit fees related to the presence of common members in audit and compensation committees (committee overlap)? Second, are audit fees related to whether board membership is protected by the use of a staggered voting system (board classification)? Using a treatment effects model to control for endogeneity, we find a negative relationship between audit fees and committee overlap, which is consistent with the argument that committee overlap is associated with weak corporate governance and that in an environment with weak governance, monitoring efforts by the audit committee are similarly weak. We find a positive relationship between audit fees and board classification, indicating that firms with classified boards seek greater monitoring, which is consistent with the prior literature which suggests that such firms seek the “quiet life” and wish to avoid reporting-related problems.

Labor market consequences of accounting fraud

Purpose – This paper aims to examine the research questions: Do executive and non‐executive directors face similar labor market penalties upon revelation of accounting fraud? Are all executive directors treated by markets as a homogenous group? Or, do executive directors who are top managers face stiffer penalties than other executive directors?Design/methodology/approach – Board membership of incumbent directors in US firms accused of accounting fraud are tracked for three years after the revelation. Two labor market consequences/penalties are considered. Probability of losing internal, own firm board seat is the likelihood that incumbent directors leave the accused firms board upon accounting fraud revelation. The likelihood of losing at least one external board seat (outside directorship) is also examined. Both univariate tests and multivariate LOGIT regressions are used to conduct the analysis.Findings – Compared to non‐executive directors, executive directors are more than twice as likely to lose ow...

The adjustment of stock prices to Wall Street journal corrections

Abstract This paper employs standard event study methodology to study the response of stock prices to relatively unanticipated events in the ‘Corrections and Amplifications’ section of the Wall Street Journal . Our results indicate that the market reaction to these corrections is statistically significant. We also find that the market fully adjusts to all new information on the day of the unanticipated Wall Street Journal correction. We find no discernible pattern of abnormal returns after the event day. The main implication of these findings is that researchers conducting event studies and using the Wall Street Journal Index for event dates, should screen their data for corrections.