Boochun Jung

Financial Reporting Quality and Labor Investment Efficiency

We examine whether accounting quality is associated with efficient investments in labor. Consistent with high quality accounting mitigating market frictions that lead to sub-optimal levels of investment, we find evidence that abnormal net hiring (measured as the absolute deviation from net hiring predicted by economic fundamentals) is negatively associated with accounting quality. These results are robust to a battery of sensitivity tests and controls for other relevant factors, including labor power and other contemporaneous investments. We further examine the channels through which accounting quality improves net hiring efficiency and provide evidence that high quality accounting reduces both over-investment in labor (over-hiring and under-firing) and under-investment in labor (under-hiring and over-firing). We also show that the effect of accounting quality on net hiring efficiency is particularly strong in highly unionized industries. Finally, we also document that abnormal net hiring is costly, in that it is associated with lower future profitability. Overall, our results suggest that accounting quality improves the efficiency of investments in labor, a key factor of production, and contribute to the emerging literature on the effects of accounting on firms’ investment decisions.

Do Financial Analysts Add Value by Facilitating More Effective Monitoring of Firms’ Activities?

Researchers argue that analysts’ information acquisition efforts increase firm value by facilitating monitoring of firms’ activities and, thereby, reducing agency costs. However, prior research provides limited and inconclusive empirical evidence to support this argument. This article extends the literature by examining (a) the relationship between analyst following and the value of firms’ equity securities and (b) given a positive relationship, whether that relationship reflects effectively enhanced monitoring of firms’ activities as a result of analysts’ information acquisition efforts. The authors document a positive relationship between analyst following and firms’ asset values, and they find support for two hypotheses regarding the source of the increased asset values. First, the cash component drives the positive relationship between analyst following and asset values. The authors interpret this evidence to imply a stronger monitoring effect for assets that are subject to higher agency costs or information asymmetry. Second, consistent with analyst following constraining asset mismanagement or motivating more efficient asset use, operating performance and total cash payout increase with analyst following. Overall, the results suggest that financial analysts facilitate more effective monitoring of firms’ activities and, thereby, reduce agency costs and increase shareholder value.

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.

Firm Characteristics Influencing Responses Towards Adoption of the Fair Value Accounting Option: A Survey of Chief Financial Officers of U.S. Firms

This paper examines the opinions of Chief Financial Officers (CFOs) of public companies in the U.S. with respect to the choice of fair value accounting for non-financial assets. Based on 209 surveyed firms, we first show that the majority of CFOs are resistant to fair value accounting for non-financial assets, similar to prior studies reporting that European firms were not willing to adopt fair value accounting when the option was given. We also examine what firm characteristics affect CFOs’ attitudes toward the adoption of fair value accounting and show that large firms, more leveraged firms, and firms with more non-financial assets and expertise in fair value measurements tend to choose the option of fair value accounting for non-financial assets.

The Impact of Dividend Covenants on Investment and Operating Performance

This paper examines the influence of dividend covenants in corporate bonds on investment and operating performance. Prior literature analytically demonstrates that by limiting dividend distribution to shareholders, dividend restrictions effectively place a minimum on investment expenditures. This suggests a positive relation between dividend covenants and investment. The literature also conjectures that the influence of dividend covenants on investment (1) mitigates the under-investment problem associated with debt financing; or (2) exacerbates over-investment. We empirically document that the presence of dividend covenants is associated with a higher level of investment and poorer future performance. Further analyses confirm that the higher level of investment is consistent with dividend covenants exacerbating over-investment, not mitigating under-investment. Our results shed light on the cost aspect of dividend covenants proposed in prior literature.

When do stock analysts find bond rating changes informative

Credit rating agencies (CRAs) have considerable privileged access to corporate management and are therefore a potentially important source of information to the equity market. We study how stock analysts incorporate bond ratings in their earnings forecasts. We develop an economic framework to explain why equity analysts might look to CRAs as an information source, especially after Regulation Fair Disclosure. Using this framework, we characterize the association between ratings changes and earnings forecast revisions surrounding these changes. We examine whether the extent to which equity analysts glean information from ratings changes is related to the extent and importance of information conveyed in the ratings change and analysts’ information uncertainty. We find that characteristics we examine are strongly related to stock analysts’ use of information in rating downgrades.