Audrey Wen-hsin Hsu

Determinants and performance effect of TQM practices: An integrated model approach

An integrated model approach is proposed to investigate the determinants and performance effects of total quality management (TQM) practices. Applying structural equation modelling to archival and survey data from 209 firms, the results support the expectation that firm size and degree of competition are positively associated with the implementation of TQM, and that leverage and product diversity are negatively associated with TQM implementation. We then find that TQM implementation has a positive effect on non-financial performance (NFP), and NFP and financial performance (FP) are also positively related. Our results suggest that TQMs direct effect on NFP mediates TQMs indirect effect on FP.

The Basu Measure as an Indicator of Conditional Conservatism: Evidence from UK Earnings Components

Following the work of Basu in 1997, the excess of the sensitivity of accounting earnings to negative share return over its sensitivity to positive share return (the Basu coefficient) has been interpreted as an indicator of conditional accounting conservatism. Although this interpretation is supported by substantial evidence that the Basu coefficient is associated with likely demands for conservatism, concerns have arisen that it may reflect factors not directly related to conservatism, and that this may adversely affect its validity as an indicator of that phenomenon. We argue that evidence on the validity of the Basu coefficient as an indicator of conditional conservatism can be obtained by disaggregating earnings into components, classifying those components by whether or not they are likely to be affected by conditional conservatism, and examining whether the Basu coefficient arises primarily from components likely to be affected by conditional conservatism. We implement this procedure for UK firms reporting under FRS 3: Reporting Financial Performance from 1992 to 2004. Although a substantial proportion of the Basu coefficient emanates from cash flow from operating and investing activities (CFOI), which cannot directly reflect accounting conservatism, its incidence across other components of earnings is predominantly within those components likely to be affected by conditional conservatism. Also, although the bias documented by Patatoukas and Thomas in 2009 is present in all of our aggregate earnings measures, it is heavily concentrated in the CFOI component of earnings and largely absent from components classified as likely to be affected by conditional conservatism. With the important caveat that researchers should test the robustness of their results to the exclusion of the element of the Basu coefficient due to cash flows, our findings are consistent with the conditional conservatism interpretation of the coefficient.

Common Membership and Effective Corporate Governance: Evidence from Audit and Compensation Committees

Manuscript Type. Empirical. Research Question/Issue. This study examines the factors associated with the presence of the same directors across the compensation committee and the audit committee in US firms, and whether such common membership enhances or undermines effective governance. Research Findings/Insights. Using 4,572 firm�?year observations in the US during fiscal years 2004–2008, the results show that common membership is more likely to occur in firms with weak corporate governance and in firms lacking financial and committee resources, and is not associated with firms having a high demand for coordination between compensation and audit committees. We also find that firms with common membership have poorer earnings quality and weaker pay�?performance sensitivity than other firms. Theoretical/Academic Implications. Our study is one of the first to propose theoretical arguments and empirical evidence on the determinants as well as the consequences of common membership across compensation and audit committees. We fill the gap in the literature by examining the interplay between these committees. Practitioner/Policy Implications. This study offers practical implications for corporations. The findings indicate that common membership is not employed to fulfill the coordinative role between audit and compensation committees and can put the effectiveness of audit and compensation committees at risk. Therefore, firms who intend to strengthen compensation practices or improve financial reporting quality should re�?examine their committee structures to ensure proper task separation.

Corporate Insolvency in the United Kingdom: The Impact of the Enterprise Act 2002

With effect from September 15, 2003, the Enterprise Act made significant changes to the governance of corporate rescue procedures in the United Kingdom which involved a shift away from a “concentrated creditor” model of governance towards a “dispersed creditor” model of governance which vests greater control rights in unsecured creditors collectively. These changes were motivated by fairness and efficiency concerns, notably the concern that the UKs administrative receivership procedure was not conducive to rescue outcomes and operated to the detriment of unsecured creditors. This article discusses the Enterprise Act reforms in the context of wider theoretical debates about the desirability (or otherwise) of secured creditor control of corporate rescue procedures. It then presents in summary form the findings of an empirical study carried out by the authors that sought to evaluate the impact of the Act by comparing the gross realizations, costs and net returns to creditors in a sample of 284 corporate insolvencies commenced before and after the law changed. Whilst we find that gross realizations have increased under the streamlined administration procedure introduced by the Act when compared with the old receivership procedure, we also find that costs have increased. These findings imply that secured creditor control of the insolvency procedure (as in receivership) may be no worse for unsecured creditors than control by dispersed unsecured creditors (as in administration) at least as regards returns.

Financial Distress and the Earnings‐Sensitivity‐Difference Measure of Conservatism

Following Basu (1997), the difference between the sensitivity of accounting earnings to negative equity return (proxy for bad news) and its sensitivity to positive equity return (proxy for good news) is interpreted as an indicator of conditional accounting conservatism. However, there is concern that the earnings-sensitivity difference (ESD) may be affected by factors other than conditional conservatism, and that this may impair its reliability as an indicator of conditional conservatism. Motivated by such concerns and by recognition that financial distress could contribute to an ESD through a conditional-conservatism route and/or through a non-conditional-conservatism route, we examine the association between financial distress and the ESD for U.S. non-financial firms. By decomposing the association into an element arising from accruals, which can reflect conditional conservatism, and an element arising from cash flow from operating activities (CFO), which cannot directly reflect conditional conservatism, we seek evidence as to whether such association arises through a conditional-conservatism route or through a non-conditional-conservatism route. We find that positive association between financial distress and the ESD arises predominantly through the accruals component of earnings rather than the CFO component, consistent with it arising primarily because of a higher degree of conditional conservatism in relatively financially distressed firms. The inference that there is a positive association between financial distress and conditional conservatism is supported by other non-equity-return-based measures of conditional conservatism. The evidence in this paper suggests that the effect of financial distress does not significantly impair the reliability of the ESD as an indicator of conditional conservatism.

Do Compensation Committees Pay Attention to Section 404 Opinions of the Sarbanes-Oxley Act?

This study examines whether compensation committees adjust CEO/CFO compensation using the auditor opinions on internal control effectiveness (SOX 404 opinions), and whether the emphasis on internal controls depends on the level of compensation committees’ financial expertise. Following SOX 404, a firms CEO and CFO are required to evaluate the effectiveness of internal controls over financial reporting, subject to the auditors attestation. In light of recent accounting fraud, we expect and find that compensation committees adjust CEO/CFO compensation by reference to the SOX 404 opinions. Using different measures of financial expertise, we also find that the relationship is more pronounced in firms with higher levels of financial expertise. Our results suggest the importance of including directors with financial expertise on compensation committees.

The Use of Extended Credit (Channel Stuffing) to Avoid Reporting Losses

This study investigates whether managers grant extended credit at the end of the fiscal year to accelerate customer purchases and thus avoid reporting losses. This study also considers whether this kind of earnings management affects the information content of reported earnings, and whether the unexpected accounts receivable (UAR)—a relatively reliable measure of managements exercise of channel stuffing over earnings—can provide incremental information about this phenomenon. Consistent with our hypotheses, we find that managers are likely to grant extended credit at the end of the fiscal year to meet their annual financial reporting targets.

Does International Accounting Standard No. 27 Improve Investment Efficiency

We examine how the adoption of International Accounting Standard No. 27 (hereafter, IAS 27) consolidation rules affects firm-level investment efficiency. IAS 27, effective in Taiwan for fiscal years beginning after 2005, defines the “control” criteria for consolidated entities as majority control rights rather than majority financial ownership. IAS 27 discourages firms’ ability to manage earnings through the use of unconsolidated entities and reduces information asymmetry between managers and shareholders. Consistent with the standard’s intended objectives, we document that firms experience a significant increase in investment efficiency after adopting IAS 27. Firms subject to overinvestment (underinvestment) are more likely to reduce (increase) investment toward a more optimal level after IAS 27 adoption. We also find that foreign investors increase their shareholdings in Taiwanese firms after the adoption of IAS 27.

Factors in Managing Actuarial Assumptions for Pension Fair Value: Implications for IAS 19

Corporate managers make several discretionary assumptions (i.e., the rate of salary growth and assumed return rate of pension plan assets) in calculating the fair value of pension assets and value of pension liabilities. In this study, we examine the factors that can induce managers to increase (decrease) fair value of pension assets (liabilities) through pension assumptions. We use the Taiwan setting as a natural experiment because Taiwan is planning to adopt IFRS from 2013 on. The estimation of pension asset (liability) value is similar between Taiwan accounting standards (i.e., TFAS 18) and international accounting standards (IAS 19); however, fair value is only disclosed in the financial statements under TFAS 18, but is required to be recognized in the balance sheet under IAS 19. The findings under TFAS 18 can provide important implications for future adoption of IAS 19. Using two key inputs for pension pricing model, this study finds that companies are inclined to increase (decrease) the value of pension assets (liabilities) by rising (lowering) the assumed expected rate of asset returns (expected salary growth). The manipulation is more pronounced for firms with high distress risk and complex ownership structure. Prior studies find that once firms are required to recognize the fair value (i.e., adopting IAS 19) as opposed to disclose the information (i.e., TFAS 18), firms have higher incentives to manipulate the model inputs. This suggests that the regulator needs to specify the authoritative enforcement rules regarding fair value estimation, and provides more insights on firms with high distress risk and complex ownership structure.

Can Audit Committee Improve Earnings Quality More than the Supervisors in Taiwan

This study examines whether companies that are allowed to switch to the audit committee from the supervisors can achieve better earnings quality. I compare earnings quality for firms that switch to the audit committee between pre-adoption and post-adoption periods, relative to the corresponding change for a matched sample that retain the supervisors. I find that firms can improve earnings quality after they switch from the supervisors to audit committee. My findings suggest that firms adopting audit committee can embrace shareholder primacy to a larger extent than those that retain the supervisors.