Juan Manuel García Lara

Board of Directors' Characteristics and Conditional Accounting Conservatism: Spanish Evidence

Abstract Using a sample of Spanish listed firms for the period 1997–2002 we find that firms where the CEO has a low influence over the functioning of the board of directors show a greater degree of accounting conservatism. We measure the influence of the CEO over the board of directors using two aggregate indexes combining six (eight) characteristics of the functioning of the board of directors and its monitoring committees: board size, proportion of non-executive directors, proportion of independent directors, whether the chairman of the board is an executive director, the number of board meetings, and the existence of an audit committee, a nomination/remuneration committee and an executive committee. We define conservatism as the asymmetric recognition speed of good and bad news in earnings, and we measure it following Basu (Journal of Accounting and Economics, 24, pp. 3–37, 1997) and Ball and Shivakumar (Journal of Accounting and Economics, 39, pp. 83–128, 2005). Our results are robust to alternative specifications and specific controls for investment opportunities and for the endogenous nature of corporate governance and earnings quality. Overall, our evidence shows that firms with strong boards use conservative accounting numbers as a governance tool, even in an institutional setting with low litigation risk such as Spain.

Earnings quality in ex‐post failed firms

Abstract This paper analyses earnings quality in ex‐post failed firms. Using a large sample of UK bankrupt firms, we find that failed firms manage earnings upwards in the four years prior to failure. This manipulation is achieved in two ways: (1) through accounting (accruals) manipulation; and (2) by implementing real operating actions that deviate from normal practice. We show that these two types of manipulation lead to reduced earnings reliability. We use conditional conservatism as a proxy for reliability, as prior literature links conditional accounting conservatism to better governance and positive economic outcomes. Our results show that conditional conservatism decreases substantially in the years prior to failure. Finally, we show that accruals manipulation is more pronounced in ex‐post bankrupt firms with low ex‐ante probability of failure, and that ex‐post bankrupt firms with high ex‐ante failure probability, having likely exhausted the opportunities for accrual manipulation, manipulate real operations more aggressively.

The Economic Determinants of Conditional Conservatism

We study the economic determinants of conditional conservatism. Consistent with prior literature, we find that contracting induces only conditional conservatism and litigation induces both conditional and unconditional conservatism. We extend prior evidence by Qiang (2007) by showing that taxation and regulation induce not only unconditional conservatism, but conditional conservatism as well. We show that in certain scenarios taxation and regulation create incentives to shift income from periods with high taxation pressure and high public scrutiny to periods with lower taxation pressure and lower public scrutiny. These income shifting strategies are implemented by recognising current economic losses that, given managerial incentives to report aggressively, would not have been recognized otherwise, or by delaying the recognition of current economic gains that would have been recognized had circumstances been different.

Segment Disclosure and Cost of Capital

We investigate whether segment disclosure influences cost of capital. Improved segment reporting is expected to decrease cost of capital by reducing estimation risk. However, in a competitive environment segment disclosure may also generate uncertainties about future prospects and lead to a larger cost of capital. Asset-pricing tests confirm that segment disclosure is a priced risk factor. Also, segment disclosure reduces ex-ante estimates of cost of equity capital and other measures connected to risk. These results suggest a negative relation between segment disclosure and cost of capital. Our results also show that competition reduces, but does not eliminate, the previous relationship.

Conservatism of earnings reported under International Accounting Standards: A comparative study

ABSTRACT In this study we analyse whether the use of IASB standards affects the conservatism of earnings of the firms that adopt them. We compare the conservatism of firms by groups of firms/countries using or not IAS. Our results show that 1) Earnings conservatism is, as pointed out in prior research, more pronounced in common-law-based developed economies; 2) The voluntary use of IASB standards in Europe (prior to 2005) has significantly increased the measures of earnings conservatism in adopting firms, and 3) The use of IAS fails to improve the relevance and reliability of accounting information in emerging/developing countries, where enforcement and investor protection is low.

Disclosure theories and disclosure measures

ABSTRACT Theories have been developed in the disclosure literature to explain the reasons behind the decision to disclose more information. Empirical evidence does not consistently support disclosure theories and results found are contradictory. The difficulty in measuring voluntary disclosure might be one of the reasons influencing on these divergences. In this paper, we investigate two key questions related to disclosure measurement. First, we aim to empirically test if use of disclosure indices that measure different information attributes determines validity of disclosure theories. Second, we investigate how disclosure indices design influences results. Results show that determinants of more specific information attributes are different than those that influence less specific attributes. Furthermore, independently of the information attribute that is measured, disclosure measure design influences results.

Earnings: Concepts vs. Reported

The paper examines three benchmark earnings concepts: (i) permanent earnings with the cost-of-equity determining the capitalization, (ii) permanent earnings with the risk-free rate determining the capitalization, and (iii) economic earnings (Hicks’s concept). The concepts can be measured empirically using stock prices. The study explains how the three concepts differ in terms of reflecting risk and growth. Critically, (i) and (ii) highlight two cases along a continuum. Case (i) renders growth irrelevant so that risk alone, as reflected by the cost-of-equity, determines the E/P yield ratio. By contrast, for (ii) the risk-free rate determines the E/P ratio because growth cancels out risk. The case is referred to as full cancelling out, FCO for short. The empirical part of the paper compares the earnings concepts to reported earnings using US data, for the period 1976 to 2015. These evaluations split firms into two categories, industrial and financial. Main findings show that for industrial firms, as an overall average, reported earnings relate closer to (ii) - that is, FCO - than to (i). Though the result is robust across methods, for distinct sub-periods (i) provides the better benchmark. As to reported earnings of financial firms, we hypothesize and find that reported earnings relate closer to (i) than (ii). This conclusion should be expected insofar financial firms rely on approximate fair value accounting, in which case earnings come close to economic earnings, (iii), and such earnings imply an average of (ii).

La Elección de base de Datos y sus Efectos Sobre la Investigación Contable Empírica en España

RESUMEN La escasa disponibilidad de datos con los que llevar a cabo estudios empíricos es uno de los problemas que tradicionalmente han sufrido los investigadores en el área de contabilidad y finanzas corporativas. Sin embargo, en los últimos años han aparecido dversas bases de datos que ofrecen información contable y financiera sobre empresas de todo el mundo. En este trabajo se analiza si la elección de la base de datos por parte del investigador afecta a los resultados de la investigación contable relacionada con el mercado de capitales. Los resultados obtenidos de una simple adaptación del modelo de Ohlson (1995) para empresas españolas muestran diferencias significativas dependiendo de la base de datos elegida para extraer la muestra analizada. Si se utilizan únicamente las observaciones comunes entre las bases de datos, las diferencias desaparecen, poniendo de manifiesto que las diferencias se deben a la distinta cobertura de empresas de cada base de datos.

The Effects of Information Differences Among Investors on the Role of Earnings Quality in Facilitating Corporate Investment

We examine whether the presence of privately informed traders, and information asymmetries between these traders and the rest of investors, undermine the role of accounting information in mitigating financing constraints and reducing under-investment problems. In line with prior research, we show that among firms prone to under-investment, those with better quality earnings invest more. We also show that this relation disappears whenever trading by informed investors generates additional information asymmetries that managers cannot reduce through improved accounting information.