Lee J. Yao

The Impact of IFRS on Accounting Quality in a Regulated Market: An Empirical Study of China

As more countries consider the adoption of International Financial Reporting Standards (IFRS) that are based on practices prevalent in the English-speaking countries with free markets, it’s increasingly important to understand the impact of IFRS on countries of different institutional, economic, and political environments. This article reports a study that examines the impact of IFRS on accounting quality in a regulated market, China, where new substantially IFRS-convergent accounting standards became mandatory for listed firms in 2007. Accounting quality is examined for the period 2005 to 2008 with only firms mandated to follow the new standards. The empirical results generally indicate that accounting quality improved with decreased earnings management and increased value relevance of accounting measures in China since 2007. Firms audited by the Big Four are expected to have higher quality before the standard change evidenced quality improvement to a smaller extent. Further analysis shows that such changes are less likely to result from changes in economic conditions but from the changes of the standards. Through the analysis of China’s adoption of the new substantially IFRS-convergent standards, the study provides direct evidence on the question of whether IFRS can be relevant to markets that are still disciplined mainly by regulators rather than by market mechanisms.

Value Relevance Change Under International Accounting Standards: An Empirical Study of Peru

In face of broad adoption of International Financial Reporting Standards (IFRS), the Securities and Exchange Commission (SEC) is considering its quality and acceptability. This paper reports a study that examines changes in value relevance with a sample of Peru firms mandated to use international accounting standards between 1999 and 2007. The period under study is broken into a period of International Accounting Standards (IAS) between 1999 and 2001, a period of early IFRS between 2002 and 2004, and a more recent period of IFRS between 2005 and 2007 by major changes to accounting standards. The empirical results generally indicate that value relevance improved from the IAS period to the early IFRS period when the International Accounting Standards Board (IASB) took over the International Accounting Standards Committee (IASC), but worsened from the early IFRS period to the recent IFRS period when more accounting standards started to reflect IASBs preference for fair value measurement of assets and liabilities. Quality weakens to a greater extent for firms with more discretion for fair value estimates. Further analysis shows that such changes are less likely to result from changes in economic conditions, but from the changes of the standards. The findings are particularly alarming in face of rising IFRS adoptions and call for quality improvement to IFRS.

Not All That Glitters Is Gold The Effect of Attention and Blogs on Investors’ Investing Behaviors

This article investigates the relationship between a firm’s visibility in blogspaces, termed blog exposure, and the cross-sectional stock returns. We show that blog exposure is fundamentally different from the traditional media coverage, and securities with low blog exposure earn higher returns than stocks with high blog exposure. We further illustrate that such an effect is more prominent for stocks with low institutional ownership. Contrary to traditional media coverage, the return premium associated with blog exposure cannot be explained by either the illiquidity hypothesis or the investor recognition hypothesis based on the rational-agent framework. Instead, our results suggest that blog effect can be attributed to the limited attention theory and cannot be arbitraged due to investors’ self-attribution and short-sale constraints. Our research points out the importance of blogs in information dissemination, especially for the stocks with limited attention.

Managerial tenure and earnings management

Purpose - – The purpose of this paper is to understand the impact of tenure on earnings management. Design/methodology/approach - – Analytical model; multivariate regression analysis. Findings - – The paper predicts that managers are conservative in managing earnings when they first start to take top managerial positions, and then become aggressive in the next few years. Once they reach the maximum level of earnings management, they will become conservative again and report earnings less aggressively. This inverted U-shaped relationship between tenure and earnings management is confirmed by the data from the Chinese stock market. Research limitations/implications - – It is based on China stock market data. Generalization of the research results to other countries is limited. Practical implications - – With the knowledge of when earnings management is more likely to occur, regulators can set up policies targeting firms and managers with certain characteristics, instead of requiring observances from all firms and managers. This limited scope can greatly reduce the costs of preventing and identifying earnings management, while effectively maintaining the quality of earnings in the meantime. Social implications - – This paper examines the earnings management behavior related to CEO tenure. It is hoped that the research results can improve the overall understanding of earnings management, then social wealth spent on preventing and identifying it could be reduced. Originality/value - – It is an original work.

Board interlock networks and the use of relative performance evaluation

Purpose - – The purpose of this paper is to explore how networks of boards of directors affect relative performance evaluation (RPE) in chief executive officer (CEO) compensation. Design/methodology/approach - – In this study, the authors propose that an interlocking network is an important inter-corporate setting, which has a bearing on whether boards decide to use RPE in CEO compensation. They adopt four typical graph measures to depict the centrality/position of each board in the interlock network: degree, betweenness, eigenvector and closeness, and study their impacts on RPE use. Findings - – The authors find that firms that have more connected board members and whose board members are connected to better connected firms are more likely to reward their CEOs contingent on their peers’ performance, indicating that information transmission along the board interlock network facilitates the adoption of RPE. This result is robust to alternative measures for board interlock networks and various types of CEO compensation. It highlights the role of interlocking directorates in disseminating information and practice of RPE use along board network. Originality/value - – The authors use social network analysis to measure the relationships and flows between the connected nodes and study the impact on executive compensation design.

The impact of ultimate ownerships on audit fees: evidence from Chinese listed companies

This paper investigates the relationships between ultimate ownerships and audit fees (ADFEE). Using the data of 1428 Chinese listed companies in 2008, our empirical results show ADFEE are lowest for companies controlled by central government, followed by companies controlled by local government. In addition, we reveal that the longer the control chain from the listed company to its ultimate owner, the higher the ADFEE that company will pay. We also find that there is a negative relationship between the discrepancy and ADFEE when we pool our sample together. However, when we divide our samples into large firms and small firms, we find that such a negative relationship only holds for big-size firms while for small-size firms, ADFEE are positively correlated. This discrepancy being due to small firms’ lack of bargain power and the increase in auditing risk. In addition, we find that company size moderates the effect of such discrepancies on ADFEE in a nonlinear fashion.

Firm characteristics and balanced scorecard usage in Singaporean manufacturing firms

Purpose - – This study aims to examine the effects of balanced scorecard (BSC) usage on performances in the context of four contingent variables in Singaporean manufacturing firms. The results show that firms are more likely to adopt BSC if they are large in size, have products at an early product lifecycle (PLC) stage, operate in highly uncertain environments or adopt differentiation strategies. However, the adoption of BSC improves performance only in firms that are large or have products at an early PLC stage. The results suggest that contingent factors in which a firm operates can exert significant effects on the results of adopting BSC. Design/methodology/approach - – Survey data are collected, then the authors check data correlations, principle components analysis, run regression analysis and ANOVA. Findings - – BSC use is positively and significantly correlated with PLC stage, external environment and performance. Size and strategy are positively correlated with BSC usage, but are not statistically significant. Higher BSC use is found in large firms with products at an early PLC stage or operating in a highly uncertain environment. Companies with a cost leadership strategy are significantly associated with BSC use. Research limitations/implications - – This study has small sample size and uses survey research method. The measurements to capture all aspects of BSC usage are non-exhausting. Future research can use different methodologies, such as field studies, case studies and lab experiments, to examine other industries than manufacturing. Practical implications - – The authors results show the positive association between BSC use and certain firm characteristics. Firms with those characteristics should get insights about the benefit of using BSC and extract the maximum benefit from their investment on the BSC use and those firms which don’t have BSC in implication may think of implementing the BSC use. Social implications - – Firms’ contingent factors affect the value of adopting BSC. With the authors research result, firms will be aware of how to extract the most value out of BSC and improve the social wealth of the manufacturing industries. Originality/value - – The authors paper is the first paper to use survey method to examine the association between BSC and firms’ contingent factors in the Singaporean manufacturing firms setting.

CEO compensation and accruals management

This paper aims to investigate whether the boards curb earnings management by revising the compensation contract with CEOs. Using a sample of CEO compensation from 1993 to 2009, we find that the boards decrease cash payment sensitivity to accruals in the presence of the horizon problem. However, in the mean time, the boards heighten equity payment sensitivity to accruals and keep the total pay for performance sensitivity unchanged. We argue this temporary equity rewards for discretionary accruals will disappear as the value of equity claims will be realised over time and any market overpricing will evaporate by then. Overall, our results suggest that the boards can curb earnings management by revising pay-for-performance sensitivity in the terminal year.