Edward B. Douthett

The Association between Auditor Choice, Ownership Retained, and Earnings Disclosure by Firms Making Initial Public Offerings*

Using a system of three simultaneous equations, we test the predictions of Datar, Feltham, and Hughes 1991 and Hughes 1986 between auditor choice, earnings disclosures, and retained ownership in U.S. firms making initial public offerings of securities. Using a sample of initial public offerings between 1990 and 1997, we find that the demand for high-quality auditors increases with firm risk. Additionally, we find that auditor choice, earnings disclosure, and risk are determinants of retained ownership, which is consistent with the predictions of Datar et al. and Hughes that auditor choice and direct disclosure are substitute signals for ownership retention. Further, our results suggest that the signals chosen (Le., retained ownership, auditor choice, and disclosure) are related through their cost structures and are chosen jointly to minimize the overall cost to the entrepreneur.

Differential Levels of Disclosure and the Earnings-Return Association: Evidence from Foreign Registrants in the United States

Foreign companies listing on U.S. exchanges are required to report financial information under U.S. GAAP on Form 20-F using either Item 17 or Item 18 disclosure rules. These two disclosure rules differ in that Item 17 allows many exemptions from U.S. GAAP, while Item 18 requires disclosure of all financial information in accordance with U.S. GAAP. This study examines the differential earnings-return association between Item 17 and Item 18 filers. We find significantly higher earnings-return associations for Item 18 filers than for Item 17 filers. While the earnings-return association of Item 18 foreign firms is not different from that of matched U.S. firms (which fundamentally use Item 18 rules), the earnings-return association of Item 17 foreign firms is significantly lower than that of matched U.S. firms. Overall, the results are consistent with the idea that higher levels of disclosure may be related to lower discount rates and higher earnings response coefficients.

THE ROLE OF ACCOUNTING INFORMATION IN STOCK MARKET LIBERALIZATION: EVIDENCE FROM KOREA

A stock market liberalization is a decision by a countrys government to allow foreigners to buy securities in that countrys capital market. This study examines how the liberalization of the Korean stock market affected stock price behavior and changed the role accounting information for investment decisions. The Korean stock market opened its door to foreign investment in 1991. Prior to this, market inefficiencies, such as the co-movement of stock prices with industry or market indices or investment based on rumor and speculation, were widespread. Since the opening of the stock market to foreigners, a more rational pricing behavior has emerged. This setting provides a unique opportunity to investigate how stock price behavior has changed with market liberalization and what was the role of accounting information in this process. Our results indicate that the co-movement behavior of stock prices by industry decreased and stock price differentiation based on individual firm characteristics increased after market liberalization. The results also show that the explanatory power of accounting numbers increased after market liberalization. Overall, the results imply that foreign investors contributed to the improvement of market efficiency with the opening up of capital markets in Korea. We believe that our results provide useful evidence to other capital markets that are in a similar situation.

Keiretsu Affiliation and Equity Values in Japan

This study examines the association between keiretsu affiliation and corporate equity value in Japan. We hypothesize that, ceteris paribus, keiretsu firm value, measured as Tobins Q, is higher than non-keiretsu firm value, reflecting the improved or active monitoring role of the keiretsu arrangement. The empirical tests are supportive after controlling for other financial and ownership variables. The results also show that keiretsu firm value is positively related to the strength of the keiretsu. This is additional evidence that the monitoring provided by the keiretsu relationship does indeed increase corporate equity value, and that the source of the increase in value is not merely a result of cross-shareholding, but inherent to the keiretsu arrangement. However, the effect of keiretsu membership and influence on market equity values has apparently diminished since 1990 (the post-market crash period in Japan).

Are Governmental Accounting Measures Value Relevant to the Citizenry

We examine the relevance of governmental accounting information to the citizenry by analyzing the association between various financial and non-financial measures of local government performance and residential property values. The link between government performance measures and residential property values is based on a model of housing value capitalization developed by Yinger (1982). Using a model of firstdifferences, we find that changes in housing values are associated with government financial measures, including reported surplus and changes in outstanding debt. Further, we find that changes in housing values are also associated with non-financial measures of performance by county schools. Overall our results suggest that both financial and non-financial government performance measures are economically relevant to citizen property owners.

Response to Discussion on 'Differential Levels of Disclosure and the Earnings-Return Association: Evidence from Foreign Registrants in the United States'

The discussant raises a number of points that need to be considered in relation to our paper and future research. We will address the points in same order presented by the discussant.