Joseph H. Zhang

Does voluntary adoption of XBRL reduce cost of equity capital

Purpose - – The paper aims to examine whether or not firms voluntarily filing in XBRL (eXtensible Business Reporting Language) format enjoy a lower cost of capital. XBRL, or “interactive data” as the US Securities and Exchange Commission refers to it, is an information format that enables electronic exchange of standardized business and financial information. Design/methodology/approach - – The authors investigate whether voluntary adoption of XBRL impacts cost of equity capital using a sample of US firms participated in the SEC Voluntary Filer Program, each matched with a pair of non-XBRL filers (matched by two-digit SIC code, same fiscal yearend, and close total assets in the same year). The authors measure firm-specific cost of equity capital at the fiscal year of last voluntary XBRL filing, using the PEG ratio model proposed by Easton, Gode and Mohanram, and Hou Findings - – The results show that cost of equity capital is significantly and negatively associated with XBRL adoption. The magnitude of the coefficient on XBRL suggests that firms voluntarily adopting XBRL are associated with an average reduction in cost of equity capital by 17-20 basis points (conditional on different cost of capital measures). Research limitations/implications - – There is a research limitation due to the sample of voluntary XBRL adopters as of self-selection bias. The authors address this issue by using the Heckman two-stage regression procedure. Practical implications - – The study provides evidence on the economic consequence of XBRL adoption in that it benefits shareholders by reducing the cost of equity capital. The evidence should provide regulators like the SEC more incentives to mandate the XBRL standard and motivate companies to adopt the standard as well. Originality/value - – By showing that voluntary XBRL adopters are associated with lower cost of equity capital, the study provides timely and relevant empirical evidence to the economic consequences of voluntary adoption of XBRL. It also contributes to the limited empirical research on the economic consequences of new information technology and highlights the importance of institutional regulation in shaping the outcomes of new financial reporting format.

Environmental Uncertainty and Tax Avoidance

Abstract This paper examines the relationship between environmental uncertainty and tax avoidance at the firm level. We posit that managers faced with more uncertain environments are likely to engage in more tax avoidance activities. We find a significant and negative relationship between environmental uncertainty and effective tax rates, and our results persist through a battery of robust checks. We further find that managerial ability mitigates the above relationship. Moreover, we find that small, highly leveraged, and innovative firms operating in uncertain environments engage in more tax avoidance.

Goodwill impairment loss and bond credit rating

The purpose of this study is to examine the impact of goodwill impairment losses on bond credit ratings.,The authors use regression analysis to examine the relationship between goodwill impairment losses and bond credit ratings.,The empirical results show a negative relationship between the amount of goodwill impairment losses and bond credit ratings, suggesting that firms with goodwill impairment losses receive lower credit ratings. The authors perform various additional tests, including subsamples in good or bad market time, changes analysis, first time goodwill impairment firms vs subsequent impairment and the two-stage least squares regression analysis to address potential endogeneity issues. The main results persist.,This paper links and contributes to two streams of literature: goodwill impairment in accounting literature and bond credit ratings in finance literature. Whether a firm’s goodwill impairment losses affect the firm’s bond credit rating remains an interesting question that has not been examined previously. To the best of the authors’ knowledge, this is the first study that directly examines the relationship between goodwill impairment losses and bond ratings at the firm level.

Accounting Quality, Liquidity Risk, and Post-Earnings-Announcement Drift

Recent microstructure research finds that liquidity risk, in particular its information component, plays an important role in explaining the post-earnings-announcement drift (PEAD). We decompose liquidity risk into an accounting-associated component and a nonaccounting-associated component and examine their relative importance in explaining PEAD. Our research is motivated by recent findings that liquidity risk is a systematic risk and earnings quality is negatively associated with liquidity risk. We find that the accounting-associated component is more strongly related to PEAD returns than is its nonaccounting-associated counterpart. Further analyses reveal that the relation between accounting-associated liquidity risk and PEAD returns is weaker for firms with greater analyst following. We also find that in a significant market downturn, the relation between accounting-associated liquidity risk and PEAD returns becomes more pronounced. Our study is the first to document a liquidity risk-based role of accounting quality in explaining the PEAD phenomenon. It parses out the PEAD risk premia associated with accounting versus nonaccounting sources and, by so doing, sheds light on the role of accounting quality in shaping the liquidity risk-PEAD returns relation. This article is protected by copyright. All rights reserved.

Financial Analysts’ Long-Term Growth Forecasts and Market Efficiency with Respect to Firms’ Innovative Efficiency

Prior research finds that investors have difficulty pricing corporate innovation. This paper investigates the role of long-term growth forecasting financial analysts in the efficiency of stock prices and consensus sell-side analyst forecasts, with respect to information about firms’ innovative efficiency (IE). We find that, on average, like stock prices, financial analysts’ consensus earnings and target price forecasts reflect underreaction to IE-related information. We also find that evidence of analyst and investor underreaction is limited to R&D-intensive firms not followed by long-term growth forecasting analysts. We investigate two alternative perspectives on the mechanism underlying these results. The underreaction-mitigation perspective argues that long-term growth forecasting analysts cultivate increased analyst and investor attention to IE-related information and its implications for research-intensive firms’ near- and long-term prospects; thereby, mitigating underreaction in stock prices and in consensus analysts’ earnings and target price forecasts. The offsetting-bias perspective argues that optimistically biased long-term growth forecasts beget optimism in stock prices and consensus analysts’ forecasts, which, in turn, offsets investor and analyst underreaction giving the appearance of underreaction dissipation for firms followed by long-term growth forecasting analysts. Overall, the weight of the evidence from a battery of tests favors the underreaction-mitigation perspective.