Josep Garcia-Blandon

ACCOUNTING RESEARCH: A CRITICAL VIEW OF THE PRESENT SITUATION AND PROSPECTS

Abstract In this study we critically review the internal procedures of the accounting community for generating and disseminating knowledge. We contend that academic journals on accounting research are scarce, publish few articles and apply high rejection rates, and the review process is lengthy and expensive. Additionally, an academic elite has unparalleled predominance in comparison to other business disciplines, reflected in an unusual share of published articles with authors affiliated to a small number of academic institutions, and the predominance of certain topics and methodologies. The discipline does not allow the collaborative, iterative and flexible features of innovative knowledge communities. The disciplines internal procedures favour restriction, control, slowness, and expiration, rather than participation, speed and renewal. They are ill suited for advancing knowledge and bode badly for successful research. As a result, accounting academics present low research performance and the discipline is facing steady decline. More importantly, the discipline is handicapped in producing innovative knowledge able to contribute to critical research and long term social well-being. We also focus on the Spanish institutional situation, arguing that Spanish requirements for reaching tenured positions are difficult for accountants to meet. We highlight the need to raise awareness of the problem and change the procedures.

The interaction effects of firm and partner tenure on audit quality

This paper investigates the impact of firm and partner tenure on audit quality, where audit quality is proxied by discretionary accruals. We study a sample of Spanish listed companies between 2005 and 2011 and address both the individual and the interaction effects of firm and partner tenure. Our study is motivated by the current debate, particularly intense at the EU level, on the impact of the auditor rotation regime on the quality of auditing. We find that, without considering the interaction effects, firm and partner tenure do not seem to play a relevant role as determinants of audit quality. Importantly, the interaction of firm and partner tenure shows stronger effects on audit quality than both forms of tenure separately considered. Finally, our analysis suggests that audit quality is maximized when medium firm and partner tenures interact. However, results for the interaction variables are sensitive to the accruals estimation method.

Does the Annual General Meeting Involve the Release of Relevant Information in Non-Common Law Markets? Evidence from Spain

ABSTRACT Although the investigation of the effects of corporate events on stock prices is a well- established line of research in accounting and finance, only a limited attention has been devoted to one of the most important corporate events: the Annual General Meeting (AGM). The current empirical evidence is not only scarce, but is also limited to the US and the UK, countries whose legal tradition is based on the common law. In these countries the AGM has been found to involve the release of relevant information to the market. Nevertheless, since the influential paper by La Porta et al. (1998), evidence reported in common law countries cannot be automatically extrapolated to countries with a different legal tradition. In this paper, we have investigated the effects of AGM on stock returns, volatility and trading volumes, in the Spanish stock market. As expected, our results indicate that the information content of the AGM is lower in Spain than in common law countries. In fact, the AGM does not have any significant effect in any of the three indicators. After examining possible explanations, we conclude that no relevant information seems to be released to the market during AGM, thus having zero impact on returns, volatility and trading volumes. Nevertheless, the behaviour of cumulative returns and trading volumes suggests that market participants expect the release of relevant information during these meetings.

Accrual management as an indication of money laundering through legally registered Mafia firms in Italy

Purpose - The purpose of this paper is to investigate how accounting is used to disguise and carry out money laundering activities in specific socio-economic and political contexts and whether discretionary accruals can provide evidence of such illicit practices performed through legally registered Mafia firms (LMFs). Design/methodology/approach - The study is based on a sample of 224 Italian firms identified as LMFs, due to having been confiscated by judicial authorities because of their owners being accused of Mafia-type association. Using a multivariate regression model, specifically developed discretionary accrual proxies for LMFs are compared with those of a population of lawful firms (LWFs). Findings - The results reveal that in the pre-confiscation years, LMFs manage aggregate, revenue and expense accruals more than LWFs do, in order to smooth earnings and disguise/carry out money laundering. In contrast, in the post-confiscation years, there is no significant difference in the level of accrual management between LMFs and LWFs, as a consequence of the effective intervention of legal administrators. Originality/value - This study adopts discretionary revenue and expense accrual proxies that provide additional insight into the simultaneous manipulation of revenues and expenses, linked to money laundering, which may not be fully detected by traditional aggregate accrual models. Furthermore, it suggests that the incentive for LMFs to manage accruals may be fostered by the irrelevance of their financial statements to trades with stakeholders. Finally, this paper may provide regulators with financial accounting signals which could be included in risk assessment models aiming to detect money laundering activities within firms.

The Impact of Absorbed and Unabsorbed Slack on Firm Profitability: Implications for Resource Redeployment

Abstract This paper undertakes an empirical analysis of the impact of absorbed and unabsorbed slack, employing three different measures for each slack type, on firm profitability. We find that unabsorbed slack has a more favorable influence on future firm profitability than absorbed slack. While all the absorbed slack indicators have a significant negative influence on future profitability, the three unabsorbed slack indicators present positive, negative, and non-significant influences, respectively. The fewer constraints of unabsorbed slack on the redeployment to exploit new opportunities point to its comparative advantage over absorbed slack. We find evidence for the differential impact of absorbed versus unabsorbed slack on profitability in firms with lower levels of slack, which suggests firms prefer to withdraw resources from current business and redeploy them to develop new and more favorable business opportunities.

Audit Partner Tenure and Independence in a Low Litigation Risk Setting

Abstract We investigate whether long audit partner tenures impair auditor independence, as proxied by the opinion of the audit report, with a sample of Spanish companies for the period: 2002–2010. The Spanish audit market constitutes an ideal setting in which to address this issue, as it is characterized by unusually lengthy engagements with the audit firm. The motivation relies, on the one hand, on the current discussion about the necessity to reinforce the independence of auditors and, on the other hand, on the very limited available research at the partner level. The main result is the lack of significant effects of partner tenure on independence. This finding is robust to various checks. Unlike prior research, we also address the joint effects of firm and partner tenure on independence. Results indicate that partner tenure does not compromise independence, even under long or extremely long audit firm tenures. These findings might have some interesting policy implications, in particular for the intense current debate on auditor rotation regimes which is taking place within the European Union.

Earnings Management Behaviour Under the Recent Economic Downturn in Spain

This study analyses the influence of the recent economic downturn on earnings management (EM), as well as the manipulation of real activities through cash flow from operations (CFO), with a sample of Spanish listed firms from 2004 to 2009. We find evidence that the recent economic downturn has changed the patterns of firms’ EM. On the one hand, the crisis influence higher earnings generation as indebtedness increase. On the other hand, results support the hypothesis of an opportunistic behaviour of managers with higher firm market valuation. They have incentives to reduce earnings during the recession and push earnings for the recovery phase of the business cycle. The study finds also a significant relationship between EM and abnormal CFO generation. The downturn influences positive abnormal CFO generation with indebtedness, as well as negative abnormal CFO generation with firm size and market valuation. It has no significant influence through abnormal accruals on abnormal CFO generation.

Ex-Dividend Day Returns When Dividend and Capital Gains are Taxed at the Same Rate

Due to the overwhelming international evidence that stock prices drop by less than the dividend paid on ex-dividend days, the ex-dividend day anomaly is considered a stylized fact. Two main approaches have emerged to explain this empirical regularity: the tax-clientele hypothesis and the microstructure of financial markets. Although the most widely accepted explanation for this fact relies on taxes, the ex-dividend day anomaly has been reported even in countries where neither dividends nor capital gains are taxed. The 2006 tax reform in Spain established the same tax rate for dividends and capital gains. This paper investigates stock returns on ex-dividend days in the Spanish stock market after the 2006 tax reform using a random coefficient model. Contrary to previous research, we do not observe an ex-dividend day anomaly. Unlike previous investigations, which are mostly concerned with suggesting explanations as to why this anomaly has occurred, we are in the somewhat strange position of discussing why this anomaly has not occurred. Our findings are robust across companies and stock dividend yields, thus supporting a tax-based explanation for the ex-dividend day anomaly.

Usefulness of fair valuation of biological assets for cash flow prediction

ABSTRACT This study develops an empirical analysis of the relevance of accounting information when biological assets are measured at fair value. We use an international sample of firms with biological assets. We find that biological assets influence unpredictability when they are measured at historical cost (HC). In this case, the ability of accounting data to predict future cash flows diminishes as the proportion of biological assets on total assets increases. The valuation at fair value (FV) switches this negative influence of biological assets to a positive one. We find that when they are measured at FV, the prediction accuracy of future cash flows improves as the ratio of biological assets to total assets increases. This evidence is robust to different measures of prediction accuracy, as well as to the improvement of accounting standards, regardless of FV, over time. The evidence is weaker for bearer plants.

Evaluating the link between commercial governance ratings and firm performance in a cross-European setting

Purpose The purpose of this paper is to explore the ability of commercial governance ratings (CGR) to predict firm performance. Design/methodology/approach Based on the review of the corporate governance literature, the authors pose five hypotheses on the relationship between CGR and firm performance. Then, the authors test these hypotheses for the latest version of the Institutional Shareholder Services Inc. (ISS) index (Quickscore) with a sample of firms formed by the constituents of the Standard and Poor’s Europe 350 stock market index. Findings The authors have not found a consistent significant relationship between Quickscore ratings and firm performance. This main result holds across a variety of checks. Research limitations/implications Some of the additional analyses are conducted with rather small samples. The results of these analyses have to be carefully taken. Recommendations for further research are offered. Practical implications The results call into question the usefulness of CGR, marketed by influential consultant companies, and which are becoming increasingly popular among investors, as reliable predictors of firm performance. Originality/value Despite an increasing body of research on the use of CGR as predictors of firm performance, the available research is heavily concentrated in the US market. No previous study has explored this relationship using the recently developed ISS index Quickscore in a cross-European setting. The use of a cross-country sample of companies allows the authors to address the impact of institutional factors on the CGR-firm performance relationship. Moreover, the authors do not limit the study to the overall scores of the index but examine also the partial scores (pillars) which intend to assess specific dimensions of governance. This makes the evaluation of the relationship more complex and challenging.