Christof Beuselinck

International Earnings Comparability

We investigate the comparability of accounting earnings for 14 EU countries in the period 1990-2005. Although prior studies have documented international differences in financial reporting properties, there is hardly any large-scale international evidence on the underlying fundamentals driving these differences. The European Union is a particularly interesting setting to study because of the substantial efforts to create a single economic market across countries. We focus on the accruals - cash flow association as in Ball and Shivakumar (2005; 2006) and show that accruals measurement is substantially affected by the business cycle stage and firm specific reporting incentives. Incentives arise from the equity capital market, debt financing and labor markets. These incentives are further intensified by the design of a countrys institutional framework, such as stock market development, importance of bank financing and labor union membership. In addition, our results suggest that the mandatory introduction of IFRS in 2005 did not instantly bring about the expected improvement in earnings comparability across Europe. Our results provide important insights for the ongoing debate on standards versus incentives.

Earnings Management in Business Groups: Tax Incentives or Expropriation Concealment?

This study provides evidence that Belgian firms affiliated to a business group (holding) manage their earnings more than stand-alone firms. Earnings management is especially more prevalent in fully owned group firms compared to group firms with minority shareholders. This evidence is consistent with the hypothesis that controlling shareholders face fewer constraints to manage earnings if opportunistic earnings management cannot adversely affect the value of minority shareholders and is inconsistent with the claim that group firms would engage in earnings management to hide controlling shareholders’ self-serving transactions. On the incentive part, we find that group firms strategically manage earnings in response to tax incentives. More specifically, we show that signed discretionary accruals of group firms depend significantly more on the marginal tax rate status of the firm as compared to independent firms. Finally, we document that earnings management is particularly facilitated through intra-group transactions.This paper provides evidence that Belgian firms belonging to a business group have a lower effective tax rate (ETR) and face a less positive association between pre-tax income and ETRs than independent firms.These findings suggest that individual group members apply efficient tax planning techniques in order to minimize taxes at the group level.We hypothesize that group firms strategically adjust firm-level reported earnings levels in response to tax incentives.We find evidence consistent with this hypothesis, in that the intrinsic negative association between total accruals and operating cash flows is more (less) pronounced for group firms facing a positive (zero) marginal tax rate status, compared to independent firms.In addition, we find that a group firm s net tax-paying situation is more important in its discretionary accruals reporting decisions, compared to independent firms.Finally, we identify intra-group receivables as relevant tax-reducing accruals components.Results are robust to alternative model specifications, variable definitions and measures.

Earnings Management within Multinational Corporations

Using a large sample of multinational corporations (MNCs), we examine the location of earnings management within the firm. We posit and find that MNCs manage their consolidated earnings through an orchestrated reporting strategy across subsidiaries over which they exert significant influence. Specifically, we find that headquarters’ influence on subsidiary earnings management increases with the degree of subsidiary integration and the extent of earnings management opportunities. Most importantly, we provide evidence that MNCs exploit regulatory arbitrage opportunities arising from cross-country differences in institutional quality. We document that MNCs headquartered in jurisdictions with stricter regulations manage earnings through subsidiaries domiciled in countries where regulations are weaker. A difference-in-differences estimation reveals that, in response to exogenous improvements in the quality of their home-country institutions, MNCs rebalance their reporting strategies by clustering earnings management in subsidiaries from countries with more lenient regulations. Taken together, our findings yield important insights on the drivers of earnings management location within the firm and highlight the need for better cross-country coordination in regulatory design.

Private equity investors, corporate governance and professionalization

This highly accessible book brings together the insights of leading academics and researchers to promote a better understanding of the role of private equity providers in the development of growth-oriented start-ups and the management of growth processes.

Employment protection and payout policy

This paper examines the relationship between employment protection legislation (EPL) and corporate payouts. Employees are corporate claimants who compete with shareholders to extract economic rents generated by the firm, so management is influenced by workforce power via the EPL framework in setting its corporate payout policy. For a large international sample of 21 OECD countries for the period 1985-2013, we find that a one standard deviation increase in labor protection leads to a 5.07% (12.17%) lower dividend (total) payout. Consistent with the flexibility hypothesis, we find that EPL has a greater impact on payout in firms that are more resource-constrained such as labor-intensive firms, firms that face financial constraints and firms with higher operating leverage. The effects of tightening and loosening EPL are not symmetrical. Firms increase dividend payouts after employment protection is softened but are reluctant to cut dividends when employment protection is tightened. Our results provide important insights in the dynamics between labor law regulations and corporate financing decisions.

Multinational Tax Avoidance: Is It All About Profit Shifting?

The international dimension of multinational corporations (MNCs) creates opportunities for pursuing both global as well as local (i.e., subsidiary-level) tax planning strategies. Until now, we have surprisingly little insights into the dynamics of these local versus global tax planning strategies. Using a group-level tax avoidance calculation technique and the staggered adoption of Transfer Pricing (TP) Documentation Requirements across European countries, we study the causal effect of increased shifting costs on changes in MNC tax strategies. We find that the relative importance of local tax planning increases by 50 percent in countries that introduced TP Documentation Requirements and remains stable in other countries. Importantly, we show that especially firms with higher internal agency conflicts, firms with greater target ETR pressure as well as firms with resource constraints are responsible for the results. Finally, we document that this substitution effect is strongest in subsidiaries where the MNC has the highest local knowledge.

The Value of Stable Ownership During the Global Financial Crisis

We investigate the value of stable ownership for a large sample of European firms from 2005 to 2010, using the global financial crisis as an exogenous shock and using pre-and post-crisis periods as benchmarks. Controlling for ownership concentration, we find that stable blockholder ownership results in higher stock returns during the crisis, but not before and after the crisis. The positive effect of stable ownership applies to both family blockholders and institutional blockholders. While the beneficial effect of stable ownership generally does not depend on investor protection, stable institutional blockholders are more valuable in countries with weaker investor protection. During the financial crisis, ownership stability is also associated with lower idiosyncratic risk and higher investments.

Individual Investors and Option Trading: Attention Grabbing Versus Long-Term Strategies

This paper analyzes trading records of online retail bank investors to examine whether attention-type events dominate return feedback strategies in explaining individual investors’ stock option trading decisions. We show that although individual investors are net buyers of common stock on abnormally high volume days, they follow contrarian investment strategies after extreme prior day stock price performance. Moreover, we find that individual investors especially exploit stock options to follow contrarian investment strategies in that they initiate over twice as many bullish-type (nearly half as many bearish-type) option contracts after extremely poor (good) prior-day returns. Further, we observe variance in contrarian behavior across investor types: extremely optimistic investors pursue contrarian investment strategies more (less) pronounced around highly negative (positive) prior day returns. Finally, we show that the same extreme optimists especially overweigh short-term compared to long-term return feedback information in making individual stock option trading decisions. Combined, this study provides novel insights in the dynamics of individual investors’ option trading decisions and in the distinctive roles of cognitive biases underlying this process.