Igor Goncharov

Do Fair Value Adjustments Influence Dividend Policy

We examine the impact of positive fair value adjustments on dividend policy. If fair value adjustments are transitory in nature and managers are able to assess their implications for future earnings, fair value adjustments in net income is expected to have no distribution consequences. However, positive fair value adjustments may lead to higher dividends when management incorrectly assesses their persistence. This can have a procyclical impact because higher dividends increase leverage, and thus risk. We use a Russian setting that mandates fair value accounting for financial instruments and requires disclosure of unrealised fair value adjustments in income. We find no empirical support for the concern that dividends increase in response to positive fair value adjustments. Rather, there is a negative relationship between positive fair value adjustments and dividend changes, which holds after controlling for dividend policy determinants and any endogenous nature of the revaluation decision. We discuss several possible explanations for this finding.

Stale and scale effects in markets-based accounting research : evidence from the valuation of dividends

Abstract This study revisits prior research on the valuation of dividends in an accounting-based valuation framework. Using a battery of tests, we show that market value deflation is essential in market-based tests of dividend displacement and signalling because it controls for ‘stale’ information in addition to scale (size) differences across firms. For US firms, we show that after controlling for ‘stale’ information, the empirical association between dividends and market values switches from positive to negative. This switch is not explained by scale differences across firms. Further, we show that after controlling for staleness, the valuation of dividends remains positive for European firms. This result is explained by the relatively stronger association of dividends with future earnings in these settings (i.e. signalling). Lastly, our country-specific estimates of dividend valuation provide a potentially valuable index for studies aimed at examining the effects of accounting and securities regulation on information asymmetries in an international context.

Asymmetric trading by insiders – comparing abnormal returns and earnings prediction in Spain and Australia

This paper examines whether the ‘external governance’ imposed by comparative financial accounting standards reduces the trading advantage of insiders. We do this by directly comparing insider trading returns and insider’s ability to predict future earnings from accruals in Spain and Australia. Results show higher excess returns and greater prediction of future earnings from conditioned insider trading in Australia that is then utilized by financial analysts to lower forecast errors – particularly in contrarian-based accruals trading. Possible explanations include: (i) a high asymmetric quality for market-based accruals, (ii) information transfer from informed insiders to uninformed insiders and financial analysts and (iii) a more timely dissemination of financial information in Spain through different ownership and governance structures.

Why Do Countries Mandate Accrual Accounting for Tax Purposes

This study investigates why countries mandate accruals in the definition of corporate taxable income. Accruals alleviate timing and matching problems in cash flows, which smoothes taxable income and thus better aligns it with underlying economic performance. These accrual properties can be desirable in the tax setting as tax authorities seek more predictable corporate tax revenues. However, they can also make tax revenues procyclical by increasing the correlation between aggregate corporate tax revenues and aggregate economic activity. We argue that accruals shape the distribution of corporate tax revenues, which leads regulators to incorporate accruals into the definition of taxable income to balance the portfolio of government revenues and expenditures. Using a sample of 26 OECD countries, we find support for several theoretically motivated factors explaining the use of accruals in tax codes. We first provide evidence that corporate tax revenues are less volatile in high accrual countries, but high accrual countries collect relatively higher (lower) tax revenues when the corporate sector grows (contracts). Critically, we then show that accruals and smoother tax revenues are favored by countries with higher levels of government spending on public services and uncertain future expenditures, while countries with procyclical other tax collections favor cash rules and lower procyclicality of corporate tax revenues.

The Comprehensive Income Issue in Europe

The recent financial crisis and the lobbying of European politicians and banks have led to a vigorous debate about ‘fair value’ gains and losses and highlights plans by current standard setters. The IASB Discussion Paper (2008), Preliminary Views on Financial Statement Presentation promises to extend the ‘fair value’ concept into an aggregated comprehensive income statement. We augment the debate by providing empirical findings on information, measurement, prediction and conservatism issues. Aggregated comprehensive income is found to be inferior to GAAP net income as a general valuation and prediction metric, and switches the conservative attributes of income towards a more timely recognition of good news over bad news. Results are robust to country specific regressions, controls for non-linearities, the impact of reporting incentives, and the underlying accounting framework (local GAAP, US GAAP, IFRS). Disaggregated components are incrementally more value relevant for analysts. For regulators the choice about income measurement boils down to a dilemma whether to ignore the volatile and complex price signals of unrealised gains and losses, to service the narrower demands from the analyst community, or to reduce the conservative role that accounting plays in agency contracting. Our research supports a disaggregated approach without mixing the function and nature attributes of income.

Why) Do Central Banks Care about Their Profits

We document that central banks are significantly more likely to report slightly positive profits than slightly negative profits, especially amid greater political pressure, the public’s receptiveness to more extreme political views, and when governors are reappointable. The propensity to report small profits over small losses is correlated with more lenient monetary policy and higher inflation. We conclude that profitability concerns, although absent from standard theory, are present and effective in practice. These findings inform a debate about the political economy of central banking, monetary stability, and the effectiveness of non-traditional central banking.

R&D investments, profitability and regulation of the pharmaceutical industry

Pharmaceutical firms frequently attract political attention due to their high accounting profitability. We study the U.S. pharmaceutical industry to test the two opposing views of how regulators use accounting information in the political process: The “public interest hypothesis�? predicts that while regulators act in the public interest, they may find it costly to infer whether accounting profitability accurately captures monopolistic rents. The “private interest hypothesis�? predicts that while regulators may know how accounting rules and their application distort profits, they choose to use unadjusted profits in regulation to achieve private benefits. We show that the abnormal profitability of pharmaceutical firms is a distortion introduced by the requirement for the immediate expensing of R&D costs and the effect of such expensing on reported accounting profits and book equity. We further show that the pharmaceutical firms’ high profitability triggers excessive regulatory scrutiny and increases regulation of the pharmaceutical industry. Although the high profitability has a greater impact on regulation when the public is more receptive to populist ideas, its effect is reduced when pharmaceutical firms increase their political contributions. Overall, our results both support the private interest hypothesis and help explain why regulators do not undo accounting distortions.