Baljit K. Sidhu

The Role of R&D Capitalisations in Firm Valuation and Perfor Mance Measurement

We investigate the value‐relevance of capitalised R&D on the balance sheet, and the extent to which R&D accruals improve the association between accounting‐based measures of firm perfor Mance and capital market returns for Australian listed companies. This is a regulatory setting where management discretion in the capitalisation decision is permitted and can be empirically observed. Our results suggest that capitalised R&D on the balance sheets of selective capitalisers is value‐relevant; that is, the ability of capitalised R&D to explain infor Mation contained in prices (given infor Mation conveyed by other components of the balance sheet) is statistically significant. For the same group of firms R&D accruals (particularly the initial capitalisation) improve accounting earnings as a measure of perfor Mance but only for the pooled sample using contemporaneous returns. The results for the fully expensing sample are less clear, perhaps due to the small sample size.

Does CEO Pay Reflect Performance? Some Australian Evidence

We examine the relation between Australian CEO pay and accounting and share price performance indicators, as well as firm size, from 1987 to 1992 inclusive. Our results show no evidence of a linkage between CEO pay and performance. This finding is robust to the use of single year or pooled tests, as well as the specific identification of CEO changes. ‘‘Long window’’ analysis of the pay-performance relation yields similar results. Possible explanations include incomplete disclosure of CEO compensation, the influence of other claimholders (e.g., debtholders), the existence of alternative monitoring mechanisms and the extent to which CEO compensation is effectively deferred. However, subject to these possibilities, our results can be interpreted as consistent with allegations that Australian CEOs have had, by international standards, a relatively small proportion of total compensation ‘‘at risk’’.

The Incentives of Australian Public Companies Lobbying Against Proposed Superannuation Accounting Standards

The release of AASB 1028 Accounting for Employee Entitlements followed a period of intense lobbying and debate, resulting in a standard that contained significantly less stringent requirements than those proposed in the preceding exposure draft. This paper examines the incentives for public companies to lobby on the proposals in ED 53 Accounting for Employee Entitlements for the recognition of superannuation commitments of Australian companies. First, it analyses written submissions of public companies to identify the relative importance of superannuation as opposed to other types of employee benefits, and to identify the issues within superannuation that were of particular concern. Second, characteristics of lobbying companies are compared with non-lobbying companies to identify whether the types of arguments put by lobbyists are indicative of systematic differences between lobbying and non-lobbying companies. It is found that companies responding to ED 53 were predominantly concerned with issues relating to defined benefit superannuation plans and the adverse effects of the proposals on income volatility. Consistent with this, companies sponsoring defined benefit plans were more likely to lobby against the proposals. Companies that chose to lobby were also larger in size and had higher income volatility than non-lobbying companies. The paper provides a mapping between the arguments used by lobbying companies and their economic characteristics and evidence that, at least in the case of superannuation issues, lobbying behaviour truthfully revealed the preferences of lobbyists. The findings differ from those of comparable U.S. studies, the most obvious reason for this being institutional differences. This underscores the need to control for institutional differences and to exercise caution in generalising results across countries.

The marketing accounting interface – lessons and limitations

The disciplines of Marketing and of Accounting are facing challenges that threaten their respective roles in the firm and beyond; the Marketing profession faces renewed threats to its place at the boardroom table, while the Accounting profession is beset by calls for indicators of shareholder value well beyond what is permitted under the traditional accounting model. Much has been written about the need for marketing and accounting to get more in tune with the financial value of the firm. Little has been written about the need (or opportunity) for marketing to work more closely with the accounting function in reporting value creation or performance enhancements achieved through its activities. And yet, the accounts represent the primary and formal mechanism by which the firm reports its past financial performance, for internal control purposes and to the financial community. In the face of a widening accounting-finance gap (evidenced by growing Market to Book ratios) a closer marketing-accounting communication may allow accounting to increase its relevance to shareholder value without compromising its aversion to numbers involving uncertainty and judgment. This paper explores the issues giving rise to these challenges and urges a stronger marketing-financial analyst dialogue underpinned by a stronger marketing-accounting shared language. We address some of the obstacles on this path, given that both groups have different objectives, methods and metrics, and discuss ways in which each discipline can leverage off the other.

Divestment from Fossil Fuel Companies: Confluence between Policy and Strategic Viewpoints

In October 2014, the Australian National University announced that it was divesting from seven fossil fuel-intensive companies. This announcement sparked an unprecedented response in the community, both positive and negative. We examine this decision, the divestment movement in general, the science behind the issue and strategic responses, both policy and organisational. We argue that a confluence between policy responses and organisational responses is beginning to emerge that will lead to greater action on climate change.

The Usefulness of Long-Term Accruals

Though empirical evidence strongly supports the role of short-term operating accruals in improving operating cash flows as a measure of performance, there is little support or consensus with respect to the effect of long-term accruals. We provide evidence that long-term accruals do reduce timing and matching problems in cash flows. In return-earnings regressions, long-term accruals are found to improve earnings as a measure of firm performance, although not to the same extent as short-term accruals. Further, our analysis highlights differences in economic and statistical properties between short-term and long-term accruals and demonstrates how these differences impede the ability of long-term accruals to improve earnings as a performance measure in a return-earnings context. The incremental explanatory power of long-term accruals is shown to be hampered by the lack of present-value considerations in the existing accounting model, timeliness problems, and measurement error in the indirect method of computing cash flows and accruals.

The value relevance of superannuation disclosures by Australian‐listed firms sponsoring defined benefit plans

This paper investigates the value relevance of (employer sponsored defined benefit plan) superannuation disclosures required by AASB 1028. It addresses the competing claims by standard setters and lobbyists that such disclosures would (not) enhance the relevance and reliability of financial statements. It presents three principal findings. First, disclosed superannuation information is value relevant in the industrial sector, where these items tend to be material. Second, the market weights on the required disclosures are typically higher than those on recognised assets and liabilities. Third, and in contrast to the findings in similar US studies, accrued benefits do not have higher explanatory power relative to vested benefits.

The Diffusion of Tax Effect Accounting in Australia

Abstract This paper examines the impact of regulation and earnings management incentives on the evolution of tax effect accounting in Australia. Following the release of the first accounting standard on the issue the method spread roughly equally throughout the mining and industrial sectors. Amendments to the standard, which loosened the recognition criteria for tax loss carry forwards, led to a significant increase in the proportion of companies (particularly industrials) adopting income tax allocation. Subsequent amendments restricting such carry forwards were associated with a significant decline in the proportion of companies allocating tax (particularly miners). We also observe differential financial statement effects between mining and industrial companies and, within both sectors, differential financial statement effects across time. Consistent with the arguments of Leppinus (1977) and Gibson (1984) the adoption of tax effect accounting is, on average, earnings enhancing in the post-DS4 period. How...

Editorial: Enhancing the Usefulness of Management Research

Towards the end of last year, the Area Editors had a long and fruitful discussion as to role that the Australian Journal of Management could play in enhancing management research within Australia, regionally, and on a global basis. We had fairly universal support that the Journal was not just about Australian research and, indeed, a perusal of past issues will show that we have had many diverse and interesting papers using data from many corners of the world, throwing light on management problems. The only stipulation that we place is that there are lessons that go somewhat beyond the specific geographic scope of the studies we publish, whether directly or by analogy.

Exchange-Sponsored Analyst Coverage: Exchange-Sponsored Analyst Coverage

Several major stock exchanges, including the NASDAQ and NYSE Euronext, have recently embarked on schemes to sponsor and promote analyst coverage for firms listed on their exchanges. We evaluate the efficacy of one such scheme pioneered by the Singapore Exchange (SGX). We find that sponsored analysts produce forecasts with similar bias, but lower accuracy than those issued by analysts voluntarily following a firm. In analyses that control for self-selection into the SGX Scheme, we find that sponsored firms enjoy at best minor improvements in their information environments and stock liquidity. Any benefits accruing from the Scheme are insufficient to make sponsored firms fully comparable to those of firms with voluntary analyst following on the measured attributes.