Changjiang Wang

Debt Maturity Structure and Accounting Conservatism

This study examines the association between debt maturity structure and accounting conservatism. Short-maturity debt can mitigate agency costs of debt arising from information asymmetry and suboptimal investment problems inherent in debt financing. As such, debt-contracting demand for accounting conservatism is expected to be lower in the presence of more short-maturity debt. We find that short-maturity debt is negatively associated with accounting conservatism. As firms could commit to more accounting conservatism to gain access to long-maturity debt, we conduct lead-lag tests of the direction of causality, and the results suggest that more short-maturity debt leads to less conservative reporting, rather than the reverse. We also find the negative relation between short-maturity debt and accounting conservatism is more pronounced among financially distressed firms, where ex ante severity of agency costs of debt are higher. Collectively, our results contribute to our understanding of the role of accounting conservatism in debt contracting and show how debt maturity, a key and pervasive feature of creditor protection in debt contracting, affects accounting conservatism.

Managerial Ability and Credit Ratings

We test whether credit rating analysts consider managerial ability as a credit risk factor and find that higher-ability managers obtain more favorable credit ratings. Controlling for past performance, these results suggest that managerial ability is itself a significant credit rating factor. Cross-sectional analyses indicate that managerial ability is beneficial specifically in firms facing financial or competitive pressure. We find that high ability managers mitigate the adverse impact on ratings of other credit risk factors including negative earnings and low interest coverage. Our results contribute to a growing literature documenting economic benefits to hiring and retaining high quality management.

Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings Forecasts

This paper examines the relation between analyst coverage and whether firms meet or beat analyst earnings forecasts. We distinguish between whether a firms reported quarterly earnings meet (i.e., equal or exceed by one cent) or beat (i.e., exceed by more than one cent) its consensus analyst earnings forecasts. We find a positive relation between analyst coverage and whether a firm meets or beats analyst forecasts. However, the more pronounced relation is that between analyst coverage and meeting analyst forecasts. Also, when we consider exogenous shocks to analyst coverage due to brokerage mergers or closures and conglomerate spinoffs, we continue to find a robust positive relation only between analyst coverage and meeting analyst forecasts. To shed light on the causal relation involved, we examine and find that greater analyst coverage is associated with a significantly larger market reaction to negative earnings surprises. We also document that firms with greater analyst coverage are more likely to guide analyst earnings forecasts downwards. Taken together, our evidence suggests that greater analyst coverage raises the pressure on managers to meet analyst earnings forecasts. This article is protected by copyright. All rights reserved.

Is Other Comprehensive Income Reported in the Income Statement More Value Relevant? The Role of Financial Statement Presentation

This study examines (a) whether other comprehensive income (OCI) is more value relevant when reported in a more prominent and transparent location in financial statements, (b) how economic condition affects value relevance of OCI reported in different locations, and (c) whether value relevance of OCI is affected by the implementation of Accounting Standard Update (ASU) 2011-05, which requires reporting OCI in either a combined statement of income and comprehensive income or a separate statement of comprehensive income (SCI), and prohibits reporting OCI only in the statement of changes in shareholders’ equity (SSE). Using manually collected data for the period 2000-2012, we find that investors consistently priced OCI reported in the SSE during the entire test period. We also find that investors priced OCI reported in the SCI only during recent financial crisis period (2007-2009) when the magnitude and volatility of OCI significantly increased. Further evidence shows that this finding is not driven by the investment bias of transient investors. Finally, we find that value relevance of OCI decreases for firms that changed the reporting location of OCI from SSE to SCI following the implementation of ASU 2011-05 compared with firms that did not change the reporting location. As investors are expected to be more capable of incorporating information reported in a more transparent location into price, this study explores some plausible explanations for the puzzling finding and calls for future research.

International Diversification, SFAS 131, and Post-Earnings Announcement Drift

Using 1990 through 2013 data of U.S. firms with foreign operations, we show that (1) the serial correlation of analyst forecast errors increases to the degree that firms diversify internationally, (2) post-earnings-announcement drift (PEAD) based on analyst forecast errors increases to the degree that firms increase international operations, and (3) international diversification’s impact on the serial correlation of analyst forecast errors and its associated drift is significantly reduced after the implementation of SFAS 131, which requires firms to report disaggregated information of operating segments based on the way management organizes the segments within the enterprise for making operating decisions and assessing performance. When we replicate our tests using seasonally differenced earnings, we fail to observe patterns similar to those using analyst forecast errors. Overall, the results of our study suggest that investors’ underreaction to announced earnings is a likely explanation for PEAD. Our findings also indicate that disclosures required under SFAS 131 are informative in helping analysts more accurately predict earnings, which can help capital markets price internationally diversified firms’ earnings.

Is There a Relation Between Residual Audit Fees and Analysts’ Forecasts?

We examine the relationship between residual audit fees and the ability to predict future earnings. Recent research suggests that residual audit fees contain information about accounting quality. However, residual audit fees could either represent high accounting quality or a risk premium for low accounting quality. We extend this literature by providing evidence that residual audit fees are indicative of a lower quality information environment which has a negative impact on investors’ ability to anticipate future earnings. Specifically, we first show that residual audit fees are negatively associated with the ability of current earnings to predict future earnings. Furthermore, residual audit fees are negatively associated with analyst forecast accuracy and positively associated with the dispersion in analyst forecasts. Overall, our results are consistent with the notion that residual audit fees are indicative of poor earnings quality, and that this lower quality manifests itself in a lower quality information environment for investors and analysts.