Mahmud Hossain

Corporate Governance and Earnings Management in the Pre– and Post–Sarbanes-Oxley Act Regimes Evidence from Implicated Option Backdating Firms

Backdating stock options, a practice that retroactively adjusts stock option grant dates to lower the exercise price, has raised governance, legal, accounting, tax, and auditing concerns. The practice of backdating options generally is believed to be a result of both ineffective corporate governance and management opportunism. Both of these factors have been linked to a higher level of discretionary accruals adjustments. This study examines the accruals-based earnings management patterns for a group of firms that were implicated by the Securities and Exchange Commission (SEC) for backdating stock options with a matched control group of nonimplicated firms for a time period surrounding the enactment of the Sarbanes-Oxley Act (SOX) of 2002. Both the univariate and multivariate analyses show that in the pre-SOX years, the sample of implicated firms managed abnormal accruals at a significantly greater level than the matched group of nonimplicated firms. The differential pattern of accruals management across these two groups becomes insignificant in the post-SOX period. Our result also suggests that the effect of SOX on mitigating the level of accruals management is substantially greater for the implicated companies than for the nonimplicated companies. The difference in the effect of SOX on the two groups of firms persists even after controlling for the differences in their governance and internal control effectiveness. We, therefore, suggest that SOX had effects on management’s reporting choices beyond those resulting from improvements in governance and internal control over financial reporting.

Internal control weaknesses and accounting conservatism: Evidence from the post-Sarbanes-Oxley period

This study examines the relationship between accounting conservatism and internal control weaknesses (ICW) in the post–Sarbanes–Oxley Act of 2002 (SOX) period when the U.S. firms have been subject to higher regulations and enhanced corporate oversight and scrutiny. Our multivariate analyses show that the firms having ICW, especially the firms with company-level ICW, have significantly changed their conservative reporting practice from the pre- to the post-SOX period. The analyses further show that the ICW firms exhibit greater accounting conservatism in the post-SOX period compared with the firms with effective internal controls (non-ICW). The result is mostly driven by increased conditional conservatism by the firms having company-level ICW that are more pervasive in effect, less auditable, and more difficult to detect and prevent. Furthermore, we find that the difference in conservatism between ICW and non-ICW firms is more prominent in the first 3 post-SOX years than in the last 3 post-SOX years of the sample period. These findings suggest that enhanced corporate oversight and scrutiny have induced the ICW firms to use more accounting conservatism in an effort to reduce reporting uncertainty, enhance information reliability, and promote contracting efficiency. Our findings are consistent with prior studies that demonstrate a shift in the U.S. firms’ financial reporting strategies in response to stringent regulations and governance in the post-SOX period.

Firm characteristics and voluntary disclosure of geographic segment data by US multinational companies

This study examines the role of firm specific factors such as size, leverage and assets-in-place in determining the level of voluntary disclosure of interim data on foreign operations made by US multinational companies. While prior studies test the impact of firm characteristics on the level of voluntary disclosure of segment data of Australian and New Zealand companies, no research to date has conducted such investigation with respect to the US multinational companies. The results of this study indicate that firm size, leverage and assets-in-place systematically influence the level of voluntary disclosure of geographic segment data of US multinational companies in interim periods. Thus, the study extends the existing disclosure literature by demonstrating that, among other things, certain firm-specific attributes significantly impact a US multinational companys decision to voluntarily disclose interim geographic segment data.

Incremental information content of option-related excess tax benefit under FASB Statement No. 123R: A research note

Purpose - This study aims to examine the incremental valuation implication of excess realized tax benefit under Statement of Financial Accounting Standard (SFAS) No. 123R: share-based payment (123R excess tax benefit), which is required to be reported as a component of financing cash flows by the publicly traded corporations. Design/methodology/approach - The sample comprises of Standard and Poors (SP large-, mid- and small-cap firms who adopted SFAS No. 123(R) on January 1, 2006. The study covers a time period of the first and second quarters of 2006. Findings - The multivariate regression analyses indicate that the capital market evaluates the SFAS 123R excess tax benefit in presence of accruals, and operating, investing and other financing cash-flow components at different rates in pricing equity securities. Research limitations/implications - The primary results, however, are mostly restricted to large- and mid-cap S&P firms. No incremental valuation consequence of SFAS 123R excess tax benefits for small-cap S&P firms is observed. Originality/value - The findings suggest that the 123R excess tax benefit reported as a financing cash-flow component is incrementally informative in equity valuation but the timing and extent of its market valuation is impacted by firm size, its visibility and information environment, and the magnitude of the excess realized tax benefit in dollar terms.

Perceptions of non-accounting business majors about the managerial accounting course

This study examines the perception of non-accounting business major students about the managerial accounting course. The knowledge of these perceptions will help determine whether educators need to be concerned about inspiring certain groups of students to be more aggressive in learning the material. We found that all non-accounting majors, regardless of their major field of study think the managerial accounting course is interesting and has real-world application. The finance and management major students think that the course is related to their field of study and it should be made a required course, but not the MIS and marketing major students. The higher the academic skills and the more the work experience, the greater is the students perception that managerial accounting should be a required course and has real-world application. Based on the results, we suggest that development of teaching materials aimed at reinforcing the importance of managerial accounting topics to all business majors, particularly MIS and marketing majors may overcome some barriers to learning the subject. This research also has implications for Pacific Basin business schools as our findings indicate that Pacific Basin business schools that do not require non-accounting majors to take managerial accounting course should make it a required course for all undergraduate non-accounting majors.

Stock Ownership Structure and Voluntary Disclosure of Quarterly Foreign Sales Data of U.S. Multinational Corporations

The ownership structure of a corporation can alleviate the agency problem that arises between shareholders and managers of a corporation, which implies that the ownership composition of a firm may infl uence the level of voluntary disclosure. This study investigates whether the ownership structure of U. S. based multinational corporations affects the managerial decision to voluntarily disclose quarterly foreign segment data. The empirical results show that the three ownership variables of interest, institutional stock ownership, managerial stock ownership and outside blockholder stock ownership are inversely related to the level of voluntary disclosure of quarterly foreign segment data. Therefore, it is inferred that an increase in the proportion of outstanding common stock held by these ownership groups is accompanied by a decrease in the probability that a U.S. multinational firm voluntarily discloses quarterly foreign segment data.

The Value Relevance of Components of Other Comprehensive Income When Net Income Is Disaggregated

The purpose of this study is to examine the equity pricing of other comprehensive income when earnings are disaggregated into several components. Our findings indicate that other comprehensive income can better explain variation in stock returns when net income is reported in a disaggregated form. Additionally, we find that disaggregating both net income and other comprehensive income can explain more of the variation in the stock returns than the two summary components of comprehensive income. Our results survive a series of robustness checks.

Capital Punishment And Financial Reporting Fraud: Implications For Secular Countries

ABSTRACT:Several papers investigate of the impact of the death penalty on the occurrence of FRF in an Islamic society. However, no study examines such a relationship in a secular society. This study examines whether imposing the death penalty can protect an Anglo-Saxon secular society from the diverse consequences of FRF. This paper addresses the research question in two ways. First, we extrapolate the rationale for capital punishment for committing FRF in Islamic countries to the Anglo-Saxon society, whose penal system embraces a non-Islamic view of death penalty. We conduct detailed exploratory analysis of the existing theoretical as well as empirical research that either advocates or opposes the role of capital punishment to prevent white color crime. Second, we establish an extended fraud pentagon model, which in our opinion could better lay out fraud preventing mechanism. Our fraud pentagon model consists of five components–pressure/incentives, opportunity, capability, rationalization/religious beliefs, and accountability. Our analysis of the current Anglo-Saxon penal system indicates that the secular society is imposing stricter punishment than ever, for committing white color crimes as FRF. However, given that the existing Anglo-Saxon regulations and penal system could not effectively deter the occurrence of FRF, we argue that the Anglo-Saxon society should not widely discard the notion of imposing the capital punishment for committing FRF, especially, if a financial crime is found to cause major damage to the society. This assertion particularly becomes logical, in light of the utilitarian view of punishment–which argues that death penalty can effectively curtail the incidence of major crimes in the society. Finally, we show that it is important to add a fifth element–accountability to the existing fraud model. The findings of this study are important given that (1) both policymakers are continually trying to form new regulation and laws to stop FRF, and (2) the academic community broadly disagrees on the efficacy of death sentence to combat crime. The findings imply that the impact of the death penalty in curbing FRF apply to Anglo-Saxon societies and, therefore, lawmakers and regulators should not simply disallow the notion of imposing capital punishment to FRF fraudsters.

Regulations, Bailouts and Bank Shareholders’ Wealth: An International Analysis

This paper examines the effectiveness of worldwide banking regulations and supervisions in providing a balanced risk-reward trade-off to bank shareholders. Our comprehensive global analysis of 2,467 banks across the world identifies the regulatory frameworks that are associated with favorable risk-return profile trade-off during normal growth as well as financial crisis periods. Ownership structure and restrictions on types of business activities both stand out as the most effective regulatory mechanisms as they increase return and reduce risk. Auditing and disclosures are good regulations and enhance stock valuations in growth periods but ironically these measures bring problems to light more quickly in crisis environment and result in greater stock holder losses. Entry restrictions or blanket depositor insurance mechanisms are the worst forms of regulation from stock investor perspective because they lower return in growth periods and increase risk in the crisis periods. German legal origins and mandatory provisioning regulations signify conservative policies as they lower the return in times of growth but also lower the risk in crisis periods. Finally, we investigate whether recent regulatory interventions could effectively curtail bank shareholder wealth loss. We infer based on our findings that direct capital injection by government, or tax breaks did not boost stock valuations as much as government guarantees, infrastructure spending and initiatives to buy toxic assets did.