Kimberly Dunn

Auditor tenure, auditor specialization, and information asymmetry

Purpose - The purpose of this paper is to examine the relation between a companys bid-ask spread, a proxy for information asymmetry, and auditor tenure and specialization. Design/methodology/approach - The tests use clustered regression for a sample of 31,689 company-years from 1992 to 2001 and control for factors known to impact bid-ask spread in cross-section. Findings - The findings suggest that the markets perception of disclosure quality is higher and private information search opportunities are fewer for companies engaging industry specialist auditors. In addition, the paper finds that information asymmetry has a U-shaped relation to auditor tenure. This U-shaped relation holds for both specialists and non-specialists; however, the bid-ask spread for specialists tends to fall below that of non-specialists at all tenure intervals. Research limitations/implications - The findings may directly result from auditor tenure and specialization or it may be that those auditor-related characteristics are a subset of concurrent choices made by the company that impacts disclosure quality. Practical implications - Companies have incentives to lower information asymmetry and the findings document that the choice of a specialist auditor and the length of the auditor relationship can potentially influence this objective. Originality/value - The paper provides information to academics, regulators, companies, and auditors concerning the effect of auditor-client relationships on the level of information asymmetry. In addition, it shows the importance of industry specialization and audit firm tenure on audit quality.

Analyst Industry Diversification and Earnings Forecast Accuracy

This study of the effects of both number of business segments followed by an analyst and analyst industry diversification on individual analyst earnings forecast accuracy applies a new measure of an analysts diversification. The measure uses a combination of the number of two-digit SIC code business segments reported by the company and the number of two-digit SIC code business segments followed by the individual analyst to calculate an analysts diversification measure for each analyst-company combination. The analysis indicates that as an analyst follows more business segments and a greater diversification of industry, his earnings forecasts are significantly less accurate. These results have implications for researchers who use analyst earnings forecasts in studies; investors who use forecasts for company valuation; and brokerage firms in evaluating individual analysts and assigning analysts to companies.

Mail survey reliability through follow‐up mailings: the case of auditor changes

Two of the possible problems that may arise from gathering data by mail questionnaire are: survey recipients fail to respond, or they respond but provide unreliable data. Extant research has examined the effects of pressure to respond on increasing response rates; however, efforts to achieve a high response rate may produce unreliable data. The analysis presented in this paper examines the effects of increased pressure to respond to mail surveys on the reliability of survey responses. Our findings suggest that increased pressure to respond, decreased the reliability of information obtained. In addition, we show that personalization of the survey increases the reliability of responses. However, the conclusions concerning information suppression are not clear. The type of auditor change was a significant determinate of response reliability, but companies with greater financial distress were no more likely to give unreliable responses concerning the independent auditor changes.

Audit firm characteristics and Type II errors in the going concern opinion

Abstract According to SAS No. 59 (AICPA, 1988), auditors must modify their audit reports for uncertainties that may affect a companys ability to continue in existence. Using both auditor and company characteristics in a logistic regression model, we examine whether Big Six (now Big Five) (industry specialist) auditors are more likely to issue a going concern opinion on the financial statements immediately preceding bankruptcy than non-Big Six (non-specialist) auditors. We further partition the sample of bankrupt firms into groups based on probability of bankruptcy, default status, and events occurring after the date of the audit report. These partitions allow us to examine whether Big Six (industry specialist) auditors systematically outperform non-Big Six (non-specialist) auditors in issuing a going concern opinion in situations in which going concern assessment is more difficult. Our findings provide no evidence that Big Six (industry specialist) auditors outperform non-Big Six (non-specialist) auditors in the overall sample or in the sample partitions.

Future Profitability, Operating Cash Flows, and Market Valuations Associated with Offshoring Arrangements of Technology Jobs

ABSTRACT: We investigate profitability, operating cash flows, and value relevance associated with offshoring arrangements of technology‐oriented jobs. Offshoring is the business practice of moving substantial portions of a firms business operations (and jobs) to another country usually to take advantage of lower labor costs or other production factors in developing countries. Offshoring carries social costs as local jobs are lost which may limit realization of benefits. We find that firms that offshore technology‐oriented jobs report greater earnings and operating cash flows following an offshoring event as the relative size of the offshoring arrangement increases. Consistent with these results, the market only values offshoring beyond the impact recognized in the financial statements for larger offshoring arrangements. A valuation discount actually exists for smaller offshoring arrangements suggesting either (1) costs exceed potential benefits or (2) the perception that benefits are only realized throug...

Bargain Purchase Gains in the Acquisitions of Failed Banks

Effective for years beginning on or after December 15, 2008, bargain purchase gains (BPGs) are recorded within income from continuing operations when the fair value of the net assets acquired exceeds the acquisition cost. Although the Financial Accounting Standards Board (FASB) argues that the BPG treatment more faithfully represents the economics of the transaction, they also acknowledge that it creates an opportunity for inappropriate gain recognition. We examine management opportunism and investor valuations regarding the recognition of a BPG using a sample of 142 acquirers that made Federal Deposit Insurance Corporation (FDIC)-assisted bank acquisitions in 2009 and 2010. We find that acquirer banks with relatively strong incentives to boost earnings are more likely to record a BPG, suggesting that firms use the BPG treatment opportunistically. Despite this finding, we observe that the market values the BPGs, albeit with less persistence than the other major components of operating income, and reacts positively to acquisition announcements with BPGs. We explore these seemingly contradictory findings further and find that more suspicious BPGs receive lower valuation multiples. Overall, we provide evidence consistent with managers opportunistically exercising discretion within acquisition accounting and the market differentially pricing BPGs based on underlying incentives to boost earnings.

The Impact of Market Structure on Audit Price and Quality

We examine the association between U.S. audit market structure and both audit price and quality. The significant consolidation of the largest audit firms and its effect on market structure has raised international concern among policy makers. We address this concern by examining the association between equality of Big4 market shares at the U.S. national-industry level and both audit fees and audit quality. Our results suggest that greater national-industry Big4 market equality is associated with lower audit fees and higher audit quality measured by client restatements. We extend the analysis to the city level and find equality associated with higher fees but little association with quality. We incorporate market concentration as another measure of market structure and find equality better captures the association between market structure and audit fees. National-industry equality also continues to be positively associated with quality despite a significant association between city level concentration and quality. Our results suggest that the equality of audit firm market shares is associated with important market outcomes even in the highly concentrated audit market, and that alternative levels of market aggregation such as the national-industry and city levels provide different insights into the effects of market structure.

Diversified Companies and Analysts’ Earnings Forecasts

This article demonstrates that a company’s industry diversification has a detrimental effect on financial analysts’ ability to forecast earnings. The results also show that a company’s unrelated and related industry diversification have differential impacts on analysts’ earnings forecast difficulty. These results have implications for investors in the stocks of highly diversified firms (e.g., General Electric). They should be wary of using analysts’ earnings forecasts in their investment decisions, because the forecasts for diversified firms tend to be less accurate and there tends to be greater disagreement among the analysts who follow these firms.