Jeff P. Boone

Off-Balance Sheet R&D Assets and Market Liquidity

In this study, we document the information asymmetry effects associated with off-balance sheet (unrecorded) R&D assets using a market microstructure methodology. Collectively, the evidence suggests that a potential harm (lower market liquidity) is associated with the current accounting treatment of R&D spending.

Audit Firm Tenure and the Equity Risk Premium

Although investor perceptions of audit quality play a critical role in maintaining systemic confidence in the integrity of financial accounting reports (Levitt [2000]), prior research on the effects of auditor tenure from an investor perspective is relatively sparse. In this study, we investigate whether investors price audit firm tenure for Big Five audits by examining the relation between tenure and the ex ante equity risk premium, that is, the excess of the company-specific ex ante cost of equity capital over the risk-free interest rate. Based on prior research, whereas the “auditor learning” argument predicts that audit quality will change in only one direction (i.e., improve) with tenure, the “auditor-client closeness” argument suggests that audit quality may decrease beyond some (albeit unspecified) length of tenure because of impaired auditor independence and objectivity. Consistent with prior theoretical arguments, we find some evidence of a nonlinear relation between audit firm tenure and the ex ante equity risk premium, that is, we find that the equity risk premium decreases in the early years of tenure but increases with additional years of tenure. These findings persist after we control for well-known risk factors and company characteristics that have been shown in prior research to be related to the cost of equity capital. The implications of our findings are discussed.

The impact of auditor-client relationships on the reversal of first-time audit qualifications

Purpose - To examine whether auditor-client relationships have an effect on the decision by an auditor to remove an audit qualification. Design/methodology/approach - The paper tracks the event history of a sample of firms from the issuance of a first time audit qualification for going concern and non-going concern contingencies (initial qualification issued between 1983 and 1987, all pre Statement of Auditing Standard (SAS) 58) to the issuance of a clean opinion (up through 1995 when SAS 79 was issued). Attachment theory provides a theoretical framework for the variables analyzed and discrete time survival analysis is used as the statistical method in the analysis so as to evaluate each company year from the initial unclean opinion to the year a clean opinion is issued. Findings - It is found that interpersonal and interorganizational attachment has a significant impact on those opinion decisions that require more auditor judgment (i.e. going concern). Originality/value - This study examines the linkage between auditor tenure and audit quality in a broader context than has been examined to date. Using attachment theory for the foundation, auditor tenure can be viewed as but one measure of the attachment between auditors and clients. In this study, a number of measures of both interpersonal and interorganizational attachment between auditors and clients are included. Further, auditor opinion judgments are examined as a determinant of auditor quality. Finally, discrete-time survival analysis is employed which allows the tracking of the entire event history from initial qualification to removal of the qualification, something not possible with most standard statistical techniques.

Empirical evidence for the superiority of non-US oil and gas investments

Abstract This paper provides empirical estimates of the return on US and non-US exploration investment. The estimates are obtained from a polynomial distributed lag model [Econometrica 33 (1965) 178] that relates the present value of current period reserve discoveries to current and lagged US and non-US exploration investment. The empirical evidence presented in the paper indicates that the net present value of

Does the Market Fixate on Reported Earnings for R&D Firms?

1 invested in non-US exploration is larger in a statistically significant sense than the net present value of

On R&D capitalization and value relevance: a response

1 invested in U.S exploration. In particular, results indicate that the return on non-US exploration investment is approximately 3.5 times as large as the return earned on US exploration investment. The results reported in this paper provide insights potentially useful to US energy policymakers.

The effect of the corporate alternative minimum tax on investment in oil and gas exploration and development

By mandating that research and development (R&D) spending be expensed immediately, Statement of Financial Accounting Standards (SFAS) No. 2 (FASB [1974]) potentially distorts the income statement in the sense that good news (e.g., an increase in pre-R&D earnings concurrent with a larger increase in R&D spending) could translate into reported bad news (i.e., a decline in reported earnings) and vice versa. In this paper, we focus our analysis on a directed sample of firms for which reported earnings are highly distorted by changes in R&D spending, and rely on intraday trading data and event study tests of both stock returns and trading activity (at the time of quarterly earnings announcements) to examine whether the stock market is fixated on reported earnings or whether it attempts to “look beyond” reported earnings by utilizing the information on R&D spending disclosed as part of the earnings announcement. The results suggest that R&D spending information has an effect on trading activity for all trade sizes and firm information environments, but no price effect for firms with relatively impoverished information environments. The implications of our findings are discussed.

Audit Market Response to PCAOB Censures of US Big 4 Firms

Abstract In this paper, we respond to the critique of our article (Boone and Raman, 2001) by Ronen (2001). Our position is that Ronens (2001) criticisms are not well-founded and that our study extends prior research by providing additional evidence about the ex post effects of Statement of Financial Accounting Standards (SFAS) No. 2 (Financial Accounting Standards Board (FASB), 1974, para. 12). Specifically, our study provides evidence consistent with the notion that the extant accounting and reporting for research and development (R&D) spending exacerbates information asymmetry.

Do the Big 4 and the Second-tier firms provide audits of similar quality?

Abstract This paper investigates the assertion that the U.S. corporate alternative minimum tax system diminishes exploration and development investment by U.S. corporations operating in the extractive petroleum industry. The analysis is based on an after-tax investment model in which number of wells drilled and exploration risk are endogenous variables. The model is solved using 1) the values of the relevant tax parameters specified by the tax code and 2) empirical estimates of the non-tax parameters and exogenous variables. The analysis shows that the alternative minimum tax has reduced by 9% the optimal number of exploration wells as compared to the optimal number of exploration wells prior to the introduction of the alternative minimum tax. The analysis also shows that the alternative minimum tax has 1) reduced the optimal level of exploration risk and 2) increased the importance of well-designed incentive compensation agreements for firms operating in the extractive petroleum industry.

Revisiting the Reportedly Weak Value Relevance of Oil and Gas Asset Present Values: The Roles of Measurement Error, Model Misspecification, and Time Period Idiosyncrasy

Abstract Subsequent to the first-ever Public Company Accounting Oversight Board (PCAOB) censure of a US Big 4 firm (Deloitte) in December 2007, there were two other PCAOB US Big 4 firm censures as of 2016 year-end. We examine whether these two post-2007 PCAOB censures of US Big 4 firms conveyed new information to the audit market. For both censures, we find little or no evidence of any change in the factual audit quality of the censured firm over a three-year window surrounding the censure. Our findings suggest that the quality control deficiencies (identified during inspection of specific audit engagements) that triggered the PCAOB censure were isolated occurrences rather than systemic to the firm at large, i.e., the censures do not imply an impairment in the US Big 4 firms overall factual audit quality. We also find that the negative response of investors and audit committees documented in prior research for the 2007 Deloitte censure disappeared for the later US Big 4 firm censures. Given that the PCAOB inspects (and can censure) non-US auditors who audit US-listed foreign companies, our findings are of potential interest to regulators, investors and audit committees outside the US.