Gregory D. Kane

The role of institutional ownership in the market for auditing services: an empirical investigation

Abstract In this paper, we report the results of an investigation of the relation between auditor firm size and the level of institutional ownership. In this paper, we argue that institutional owners demand high audit quality. As a result, they prefer audits conducted by large audit firms because they perceive that these firms, on average, provide relatively higher audit quality. Because institutional owners have large holdings, they have more influence over management. Therefore, the greater the level of institutional ownership, the more likely that a firm will provide audits conducted by a large audit firm. Our findings support this assertion-institutional ownership is positively associated with the audit firm size, even after controlling for other variables that could account for such an association, including client firm size, debt, growth and business complexity.

Earnings Conservatism and Value Relevance Across the Business Cycle

Prior research has demonstrated higher value relevance of current earnings during economic expansions relative to contractions. We largely attribute such a result to expected growth prospects being captured in the current earnings coefficient when a direct proxy for expected future earnings is omitted from the returns-earnings model. We demonstrate that the conservatism and value relevance of current earnings is actually higher during economic contractions when including a proxy for future earnings expectations. We further demonstrate that the value-relevance of expected future earnings is higher during expansions, when the association between historical accounting information and future growth opportunities likely weakens. Copyright (c) 2009 The Authors Journal compilation (c) 2009 Blackwell Publishing Ltd.

The Impact of Recession on the Prediction of Corporate Failure

In this paper, we hypothesize that recessionary business cycles can contribute to corporate failure. Specifically, we test for a relationship between failure and (1) knowledge that failure occurred during a recession and (2) knowledge that the predictor variables were measured during a recession. We are able to show that accounting-based logistic regression models used to predict corporate failure are sensitive to the occurrence of a recession. Furthermore, our results indicate that such models are sensitive to knowledge that the predictor variables were generated during a recession and to knowledge that failure ultimately occurred during a recession. Copyright Blackwell Publishers Ltd 1998.

Ratio Analysis Using Rank Transformation

This paper presents an alternate method for transforming financial ratios. Ratios are ranked and scaled into a uniform distribution with boundaries between 0 and 1. Conceptually, we suggest that this method solves a number of methodological problems associated with ratios, including constrained choice of regression models, ratio outliers, negative ratios, and non-normal distributions. Scaled ranks of financial ratios are also conceptually appealing because they appear to capture comparative ordinal data about cross-sectional relationships between firms.The study empirically tests scaled rank transformations by examining the association of the transformations with stock returns. Results show that models using relative ranked accounting ratios have more explanatory and predictive power than untransformed, log-transformed and square-root transformed ratios.

The Relationship between Changes in Fixed Plant Investment and the Likelihood of Emergence from Corporate Financial Distress

Companies experiencing financial distress can attempt to mitigate financial distress through changing the investment in the fixed asset base. Management may choose to expand the asset base in hopes of increasing sales. Alternatively, management may choose to contract the asset base in order to eliminate and/or reduce investment in unprofitable or risky ventures, improve liquidity, reduce earnings volatility, and reduce the need for operating capital.In this study, we examined how observed changes in the investment base affect the likelihood of emergence from a financially distressed condition. We find that, when management chooses to contract the investment in property, plant, and equipment, the likelihood of emergence from financial distress is significantly improved. On the other hand, when management chooses to expand property, plant, and equipment in the face of distress, the distress is only intensified. Our explanation is that companies that choose to contract their fixed asset base in times of trouble are taking steps that will most likely improve their financial condition—they are less likely to need working capital, and can better tolerate increased levels of long-term debt. Conversely, increasing the fixed asset base amplifies the need for working capital, and borrowing money to facilitate the expansion simply increases the necessary uses of that working capital because the debt must be serviced. As a result, companies descend even deeper into financial distress and decrease the likelihood that they will emerge therefrom.

The problem of how to account for asset securitization transactions

Abstract Asset securitization is a sophisticated new financial tool that has enabled increasing numbers of firms to liquefy their balance sheets and find alternative sources of investment capital. The purpose of this paper is to highlight some of the fundamental accounting problems associated with asset securitization. A simple case is presented that can be used as a basis for discussions about how to account for asset securitization transactions. A description of asset securitization, as well as current and prospective treatment alternatives, is also provided.