Mark J. Kohlbeck

Investor Valuations and Measuring Bank Intangible Assets

This paper examines the value-relevance and reliability of bank intangible asset measures. The majority of bank intangible assets are not recognized and few banks voluntarily disclose estimates or provide other information about these assets. Investors therefore have limited direct information about this important component of bank value. I incorporate publicly available financial and market information to estimate four customer-based intangible assets: mortgage servicing rights, credit card intangible, core deposit intangible, and trust operations intangible. I find my estimates are value-relevant, increase the explanatory power of a valuation model compared to one containing balance sheet amounts; and, with the exception of the mortgage servicing rights, are more reliable than balance-sheet amounts and estimates derived from simple algorithms used in prior research. Intangible assets that are not separately reported (core deposit and trust operations intangibles) or that are reported by few banks (credit card intangible) drive the results. These intangible assets are also not subject to separate accounting recognition standards such as SFAS 122 for mortgage servicing rights, where I find weaker results. The evidence of value-relevance and reliability of intangible asset estimates based on current disclosures (and recorded mortgage servicing rights) suggests the existing financial reporting requirements provide useful information about intangible assets and change may not be necessary.

Have Earnings Announcements Lost Information Content

We investigate the potential historic decline in the information content of earnings announcements. Like Beaver (1968) we focus on the incremental information content of accounting earnings announcements—whether the announcements convey “new news” to the market as evidenced by unusual price movements. We investigate the price reaction to earnings announcements of a broad range of firms over a 23-year time period (1975 through 1997). We find that, on average, the price reaction to earnings announcements has increased over time. However, the robustness of this finding is called into question based on two factors. First, we find that the change in price reaction to earnings varies depending on the size of firms analyzed. Specifically, we find some evidence that small firms exhibit a decreasing price reaction to earnings announcements over time, while larger firms consistently exhibit an increasing price reaction to earnings announcements. Second, we find that a minority of firms drives the observed increase in price reaction indicating that a cross-sectional mean reaction does not imply such a reaction is typical for individual earnings announcements.

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.

The Relation between Accounting Information-Based Firm Risk Proxies and Cost of Equity Capital Across Countries

Purpose – The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature shows that financial statement amounts are relevant for investor decisions only when there is appropriate economic and legal infrastructure (Ball, 2001). Design/methodology/approach – Accrual quality and accounting loss are focussed upon as indicators of firm risk in financial statements. Findings – The evidence suggests that accounting information is factored into ex ante cost of equity capital in countries with strong economic and legal infrastructures but not in those with weak infrastructures. Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure. Originality/value – Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.

The influence of family firm dynamics on voluntary disclosures

We examine the voluntary disclosure practices of family firms. Family firms have longer investment horizons and lower agency conflicts between owners and managers. However, they also exhibit higher agency conflicts between controlling and non-controlling shareholders, and greater concerns about their own reputations. We therefore hypothesize that the previously documented association between stock-based incentives and voluntary disclosures is dampened for family firms. In comparison to non-family firms, we find that family firms are less likely to provide management earnings forecasts when their CEOs wealth (linked to the firm) is higher. We note this influence only in larger firms, which is consistent with the finding that larger firms have a significantly higher number of stock-based incentives than smaller firms. Additionally, the main result continues to hold when a family member serves as CEO or on the board of directors. We contribute to the literature by extending the research on stock-based incentives and voluntary disclosure, linking this research to family firms, and providing insight on the conflicting results found in prior family firm research.

CEO Turnover and Major Business Restructurings

Originality/Value – Overall, our results highlight the key economic role played by top corporate managers in major business restructurings, suggesting that CEO turnover leads to both real changes in managerial actions and altered reporting incentives.

Are earnings strings restrained after SOX

Purpose This study examines whether external monitors (auditors and analysts) constrain earnings strings, an indicator of earnings management, and whether this monitoring is more effective after the implementation of the Sarbanes-Oxley Act of 2002 (SOX), given the emphasis of SOX on improving auditing, financial reporting and the information environment. Design/methodology/approach Agency theory establishes the premise between external monitoring and earnings strings. Auditor tenure and number of analysts following provide measures for external monitoring quality. Using prior research, empirical models explaining the presence of an earnings strings and earnings strings trend are developed to test the hypotheses. Findings Pre-SOX, extreme auditor tenure, indicating lower quality external monitoring, is associated with greater earnings strings trend, and analyst coverage is associated with increased likelihood of earnings strings and greater earnings strings trend consistent with analyst pressure on managem...

The Unintended Effects of Financial Accounting Standard 123R on Stock Repurchase and Dividend Activity

We investigate whether Financial Accounting Standard (FAS) 123R, which requires a firm to recognize its stock-based compensation at fair value, affects the firm’s stock repurchase activity. Specifically, we examine the effect of the standard on the incentive to substitute stock repurchases for dividends. As stock-option holdings increase, firms alter their payout composition; rather than offering dividends, they increase their stock repurchases to return cash to their shareholders. Prior research also indicates that stock repurchases are used to manage earnings per share (EPS). Managers are likely concerned that FAS 123R negatively impacts earnings, as firms must now record stock-based compensation at fair value. Overall, we find that FAS 123R is associated with an increase in stock repurchases and that this effect is greater the higher the level of management stock options; the impact on dividend yields, however, is less pronounced. Our study reveals the unintended economic consequences of a change in accounting by demonstrating its effects on how firms return cash to their shareholders.