Li-Chin Jennifer Ho

The value relevance of accounting information around the 1997 Asian financial crisis—the case of South Korea

Abstract This paper examines the value relevance of accounting earnings, book value of equity, and cash flows from operations for Korean firms during the 1995–1998 period. The results indicate that the value relevance of accounting earnings for Korean firms significantly declines from the pre-crisis (1995–1996) to the in-crisis (1997–1998) period. The declining importance of earnings, however, is not replaced by the increasing value relevance of book value of equity during the same period. There is also evidence that cash flows from operations become more value-relevant in the 1997–1998 period. Finally, the results hold after controlling for the amount of foreign exchange translation gains and losses included in earnings and book value.

To what extent does the audit committee curb downward earnings forecast guidance

Purpose - – The purpose of this paper is to examine the association between audit committee characteristics and a firm’s ability to guide analysts’ forecasts downward to meet or beat earnings benchmarks. Design/methodology/approach - – The authors expect that a more effective audit committee would be able to reduce managers’ propensity to use downward forecast guidance to avoid negative earnings surprises. Four committee characteristics are used to measure its effectiveness: independence, diligence, expertise and size. Findings - – For the pre-SOX (Sarbanes-Oxley Act) period (1996-2002), none of the four audit committee characteristics are significantly associated with managers’ propensity to use downward forecast guidance to avoid negative earnings surprises. For the post-SOX era (2003-2004), however, the likelihood of engaging in downward forecast guidance is significantly lower for firms with larger and more independent audit committees. In addition, the likelihood is significantly lower for audit committees that are more diligent and have a higher proportion of the committee members with accounting or finance-related expertise. Research limitations/implications - – Overall, the authors results suggest that, in response to the increased regulatory and listing requirements in the post-SOX era, audit committees have played a more active role in scrutinizing earnings guidance. Our results also suggest that a more effective audit committee in the post-SOX era curbs managers’ tendency to use downward forecast guidance to meet or beat quarterly earnings targets. Originality/value - – To the authors knowledge, this study is one of the first to examine the role of the audit committee in reviewing managerial earnings guidance. As earnings guidance plays an important role in the overall financial reporting process over time and given the increasing importance of downward forecast guidance in earnings surprise games in recent years, the authors believe this study addresses an important question and adds to prior literature. Also, this study contributes to their understanding of the changing nature and scope of audit committee oversight activities since the passage of SOX.

Stock option expense management after SFAS 123R

Purpose - – The purpose of this paper is to examine whether firms manage the total value of stock option grants downward after the implementation of Statement of Financial Accounting Standards (SFAS) 123R to reduce their reported option expenses. Design/methodology/approach - – All Standard & Poor’s (S&P) 1500 firms with available stock option data in 2004 and 2006 are included in the analysis. The authors analyze if the total value of options granted, the per share fair value of options granted, the number of options granted as well as each individual input assumption have changed from the pre-SFAS 123R (i.e. 2004) to the post-SFAS 123R (i.e. 2006) period. We compare post-SFAS123R option pricing assumptions and per share fair value of options granted with their respective expected values to verify the results. We also analyze whether SFAS 123R has differential effects on firms which chose to disclose option expense only in footnotes (“disclosing firms”) versus firms which voluntarily recognized option expense (“recognizing firms”) prior to SFAS 123R. Findings - – The results show that after SFAS 123R, the total fair value of stock options granted for disclosing firms declined significantly. The decrease appears to result from managerial discretion over volatility and dividend yield assumptions as well as the reduction in the number of options granted. The evidence suggests that firms engage in not only assumption-based manipulations but also real activities to lower reported stock option expenses. It was also found that disclosing firms lower the total fair value of stock options granted to a greater extent than recognizing firms. Originality/value - – This study adds to prior literature that examines the opportunistic incentives for managers to use discretion in reporting stock option expenses. This study contributes to the earnings management literature by providing another example of manipulating earnings through real activities. Finally, our study should be of interest to regulators and investors.

Option Trading and the Intervalling Effect Bias in Beta

Prior studies show that the beta coefficient of a security changes systematically as the length of measurement interval is varied. This phenomenon, which is called the intervalling effect bias in beta, has been attributed to the friction in the trading system that causes the delays in the price-adjustment process. This study shows that option listing is associated with a decline in the beta intervalling effect bias. The decline is most pronounced for small firms. We also find that our sample firms grow significantly after option listing. Since prior research indicates that market value is a major determinant of the magnitude of the intervalling effect, we re-examine our results using a subsample that controls for market value. The results indicate that the decline in the beta bias from the pre-listing to post-listing period is still prevalent after we control for the change in firm size. Overall, the evidence is consistent with the notion that option trading reduces the delays in the price-adjustment process, which in turn reduces the intervalling effect bias in beta.

An Empirical Investigation of the Parole Policy in Taiwan

In this paper, we provide evidence on the deterrence effects of severity of punishment on crime rates based on the experience of Taiwan. Specifically, we investigate whether a tougher parole policy, which was implemented in Taiwan during 1997, is associated with a dec1ine in crime rates. Our results indicate that the overall crime rate in Taiwan dec1ined significantly after the implementation of the new parole policy. This is reflected in both misdemeanor and felony crimes. We also find that both the overall recidivism rate and the parolee recidivism rate dec1ined significantly after the implementation of the new policy. These results hold after controlling for other variables that are likely to be associated with crime rates such as unemployment rate, educational level, crime conviction rate, and police outlays. We also find that the number of new prisoners admitted to correctional institutions dec1ined significantly after the passage of the new parole policy. Overall, our results suggest that the tougher parole policy has a deterrent effect on criminal behavior, which is consistent with the deterrence hypothesis. Finally, we find that correctional institution costs increased after the 1997 parole policy change.