Christine E.L. Tan

Accelerated Share Repurchases, Bonus Compensation, and CEO Horizons

We examine whether short-term financial reporting objectives related to executive compensation and employment horizons affect managers’ decisions to undertake accelerated share repurchases (ASRs) versus open market repurchases (OMRs). In an ASR, the firm repurchases borrowed shares and simultaneously enters into a forward contract with an investment bank. This structure provides potential financial reporting advantages over OMRs in that earnings per share (EPS) benefits are recorded immediately (i.e., the reporting effects are “accelerated”) while the actual share repurchases and potential costs associated with the forward contract are deferred to a future date. Consistent with this short-term focus, we find that firms are more likely to choose ASRs over OMRs when the repurchase is accretive to EPS, when annual bonus compensation is explicitly tied to EPS performance, when CEO horizons are short, and when CEOs are more entrenched. These results are robust to controlling for endogeneity in the decision to repurchase shares. In addition, we find no evidence that compensation committees adjust executive pay for the effects of the ASR. Overall, our results suggest that short-term financial reporting benefits are a significant determinant of decisions to undertake ASRs, consistent with theories of managerial myopia.

Audit firm characteristics and Type II errors in the going concern opinion

Abstract According to SAS No. 59 (AICPA, 1988), auditors must modify their audit reports for uncertainties that may affect a companys ability to continue in existence. Using both auditor and company characteristics in a logistic regression model, we examine whether Big Six (now Big Five) (industry specialist) auditors are more likely to issue a going concern opinion on the financial statements immediately preceding bankruptcy than non-Big Six (non-specialist) auditors. We further partition the sample of bankrupt firms into groups based on probability of bankruptcy, default status, and events occurring after the date of the audit report. These partitions allow us to examine whether Big Six (industry specialist) auditors systematically outperform non-Big Six (non-specialist) auditors in issuing a going concern opinion in situations in which going concern assessment is more difficult. Our findings provide no evidence that Big Six (industry specialist) auditors outperform non-Big Six (non-specialist) auditors in the overall sample or in the sample partitions.

Legal Regimes and Investor Response to the Auditor’s Going-Concern Opinion:

This article examines how legal regime may affect the market’s reaction to the auditor’s going-concern (GC) opinion. We hypothesize that, ceteris paribus, investors in a creditor-friendly bankruptcy regime (the United Kingdom) will react more adversely to a first-time GC opinion indicating increased risk of loss associated with bankruptcy than do investors in a debtor-friendly bankruptcy regime (the United States). Our empirical results are consistent with this expectation. These findings are strengthened by additional analysis of the impact of the recent convergence in bankruptcy regime between the United States and United Kingdom on the market reaction to GC opinions in the United States. Our findings demonstrate a specific situation where the auditing standards and institutional factors interact, with their joint impact affecting the market’s reaction to the GC opinion.

Market Reactions to XBRL-Formatted Financial Information: Empirical Evidence from China

XBRL (eXtensible Business Reporting Language) facilitates the efficient processing/interpreting of corporate financial information by investors. This paper examines market reactions to financial statement filings in China in the period before and after the XBRL mandate in China to assess the extent to which XBRL may impact the processing of financial information. It finds that absolute price reactions of financial statement filings are larger (smaller) in the post-XBRL (pre-XBRL) period. This result holds for the cumulative 3-day window surrounding filings, as well as for each individual day during the event window. This paper also finds similar results for the average volume of trading around these event windows. Consistent with its expectations, its findings suggest XBRL financial statements play a significant role in investors decision making process.

Real Earnings Management and Supplemental Executive Retirement Plans

Increasingly, shareholders and regulators have been calling for a reigning in of executive salaries. Most of this discussion has focused on bonuses and stock options, the more observable portions of an executive compensation package. However long term incentive pay, such as supplemental executive retirement plans (SERPs), has become a significant portion of executive compensation and is more difficult to monitor. This paper examines whether managers use real earnings management in the form of Accelerated Share repurchases (ASR) to increase total compensation through this more obscure or ‘stealth’, area of pay. This is because ASRs tend to have a more immediate and significant impact on EPS versus open market repurchases (OMRs). While SERPs provide an opportunity for CEOs to hide compensation, stronger managerial power may enhance this opportunity. We find evidence that managers who have SERPs in place are significantly more likely to choose ASRs versus OMRs. We also find that as executives’ horizon shorten, they are also more likely to use this stronger form of earnings management (ASR). Additionally, we find that, on average, ASR firms have higher managerial power than OMR firms. Finally, we are able to provide direct evidence of the economic significance of SERP programs. Additional analyses provide further support for the link between SERPs and real earnings management in the form of share repurchase choice.