Christopher J. Skousen

Evidence on factors affecting the relationship between CEO stock option compensation and earnings management

Purpose - The purpose of this paper is to examine the factors affecting the relationships between CEO stock option compensation and earnings management.

Detecting and Predicting Financial Statement Fraud: The Effectiveness of the Fraud Triangle and SAS No. 99

This study empirically examines the effectiveness of Cresseys (1953) fraud risk factor framework adopted in SAS No. 99 in detection of financial statement fraud. According to Cresseys theory pressure, opportunity and rationalization are always present in fraud situations. We develop variables which serve as proxy measures for pressure, opportunity and rationalization and test these variables using publicly available information relating to a set of fraud firms and a matched sample of no-fraud firms. We identify five pressure proxies and two opportunity proxies that are significantly related to financial statement fraud. We find that rapid asset growth, increased cash needs and external financing are positively related to the likelihood of fraud. Internal versus external ownership of shares and control of the board of directors are also linked to increased incidence of financial statement fraud. Expansion in the number of independent members on the audit committee, on the other hand, is negatively related to the occurrence of fraud. Further testing indicates that the significant variables are also effective at predicting which of the sample firms were in the fraud versus no-fraud groups.

The relationship between South Korean chaebols and fraud

Purpose – In recent years, many of South Koreas most prominent organizations have been involved in large‐scale frauds. These frauds have had a devastating impact on South Korean society and resulted in unnecessary suffering and high levels of unemployment for the middle class. With the aim of understanding the causes of these scandals, this paper takes an in‐depth look at the chaebol organization.Design/methodology/approach – The paper takes a conceptual approach by first examining chaebols in greater detail. The paper then examines classical fraud theory, including the fraud triangle. The paper then examines chaebol organizations through the lens of the fraud triangle. By doing so, it is possible to understand why chaebols, in particular, are susceptible to fraud and corruption.Findings – The paper provides evidence to suggest that chaebol organizations have inherent fraud risks. In order to minimize these fraud risks, chaebol organizations must address these issues.Originality/value – This paper fulfil...

Accounting-Based Anomalies in the Bond Market

We examine the relation between future bond returns and 32 accounting-based fundamental variables shown by other researchers to be related to future stock returns. Findings indicate that the frequency of significant returns to trading strategies based on these anomalies is similar in both the bond and stock markets. The magnitude of returns is generally lower with bonds, but the significance and Sharpe ratios of these returns are comparable to those observed with stocks. Although the correlation between bond and stock returns is high, we document several intriguing differences between the returns to bond and stock trading strategies. Surprisingly, the significance of bond returns is generally robust to controlling for the equity returns of the hedge strategies.

Fraud score analysis in emerging markets

Purpose – The purpose of this research is to determine the likelihood of financial statement manipulations in companies throughout a variety of emerging market countries and compare this potential wirh that of firms within the USA.Design/methodology/approach – The authors utilize the Fraud Score Model, as set forth by Dechow et al., to determine the likelihood of financial statement manipulations. By adjusting their model to work in an international setting, the authors are able to study nine industries across 23 countries, including the USA.Findings – The results vary from industry to industry, with some countries performing extremely well in one industry, only to prove remarkably risky in the next.Originality/value – The findings may be used by a variety of market participants, especially investors, to determine the risk levels of potential foreign investments. Therefore, this research can help lead to a more overall efficient placement of global capital.

Governance, CEO Power, and Acquisitions

We examine whether governance matters for acquisitions. Acquisitions are frequently beneficial to the CEO of the acquiring firm, but can often be value-destructive to acquirer shareholders and other stakeholders such as employees. We find that corporate governance does not appear to influence whether a firm will become an acquirer after controlling for CEO power, but superior governance is associated with greater relatedness between the target and acquirer. We also find that the effect of CEO power on a firm’s acquisition activity varies according to the source of that power. Our results suggest that the relationships between governance, CEO power, and acquisition activity are complex.

Do employee dimension ratings reflect employee performance? Evidence from MSCI’s ESG database

ABSTRACT We investigate whether the ratings of employee dimension in MSCI’s ESG database reflect employee performance of a firm. Using a large panel sample with 23,739 observations from 1991 to 2015, we find a significant positive relation between employee performance and employee dimension ratings. To mitigate concerns about endogeneity issues and robustness of our study, we perform various additional tests and still obtain consistent results. Overall, our findings suggest that the employee dimension ratings in MSCI’s ESG database accurately reflect employee performance.

ASC 820 level 3 net assets and goodwill impairment losses

Ramanna and Watts (2012) suggest that firms with more unverifiable or unobservable net assets have greater incentives to reduce goodwill impairment losses. This study complements Ramanna and Watts (2012) by providing an additional test in a unique setting because level 3 assets and liabilities under ASC 820 are unverifiable or unobservable in nature. Using 701 firm-year observations from 2008 to 2013, we document a significant and negative relation between level 3 net assets of acquiring firms and goodwill impairment losses, supporting Ramanna and Watts (2012).

Reporting Quality, SOX, and the Cost of Debt

This paper studies the heretofore unexamined effect of Sarbanes-Oxley Act of 2002 (SOX) on the spread-accruals relationship. We document that SOX has no impact on the overall spread-accruals relationship but, as hypothesized, it has a moderating effect on the discretionary (but not innate) component of accruals. The latter effect however is only revealed in the subset of firms characterized by high information quality risk in the pre-SOX period. The paper also adds robustness to prior findings by reconfirming the positive relationship between accruals and cost of debt but using a sample of seasoned debt issues with available secondary market prices. Earlier studies used historical costs of debt or focused only on newly issued debt. We also reconfirm that the accrual-debt cost relationship is stronger for innate than for discretionary accruals.