Mostafa Monzur Hasan

Risk Committee, Firm Life Cycle, and Market Risk Disclosures

Manuscript Type Empirical Research Question/Issue This study investigates whether the existence of a separate risk committee and risk committee characteristics are associated with market risk disclosures. It also tests whether the role of a risk committee in affecting market risk disclosures varies for different firm life cycle stages. Research Findings/Insights Using 677 firm-year observations of financial firms from Gulf Cooperation Council (GCC) countries during the years 2007–2011, we find that firms with a separate risk committee are associated with greater market risk disclosures, an effect that is more pronounced for mature-stage firms. Furthermore, findings suggest that risk committee qualifications and size have a significant positive impact on market risk disclosures. Theoretical/Academic Implications This study complements the corporate governance literature by incorporating agency theory, legitimacy theory, stakeholder theory, and the resource-based theory to provide more robust evidence of the impact of a separate risk committee and the firm life cycle on market risk disclosures. Our results support the monitoring effect of a separate risk committee and suggest that a separate risk committee can improve “firm-level corporate governance” in the GCC countries characterized by a poor informational environment. Practitioner/Policy Implications Findings from this study provide evidence that the existence, qualifications, and size of risk committees may be used as a channel to improve the disclosure level, suggesting a policy prescription for regulators and policymakers. Investors may also find these results useful in forming their own expectations about firm-level risk disclosures.

Does a Firm’s Life Cycle Explain Its Propensity to Engage in Corporate Tax Avoidance?

Abstract This study examines whether a firm’s life cycle explains its propensity to engage in corporate tax avoidance. Based on the Dickinson (2011) model of firm life cycle stages and a large dataset of US publicly listed firms over the 1987–2013 period, we find that tax avoidance is significantly positively associated with the introduction and decline stages and significantly negatively associated with the growth and mature stages using the shake-out stage as a benchmark. We observe a U-shaped pattern in tax avoidance outcomes across the various life cycle stages in line with the predictions of dynamic resource-based theory. Our findings are consistent using several robustness checks. Overall, our results show that a firm’s life cycle stage is a significant determinant of tax avoidance.

Auditor-Provided Tax Services and Stock Price Crash Risk

This paper examines whether auditor-provided tax services affect stock price crash risk: an important consideration for stock investors. Provision of tax services by incumbent auditors could accentuate or attenuate crash risk depending on whether such services give rise to knowledge spillover or impair auditor independence. The study investigates two channels through which tax services might affect crash risk: earnings management in tax expenses and tax avoidance. Also examined is whether the association between tax services and crash risk is moderated by the particular business strategy that organizations pursue. A two-stage model is used to control for the potential endogeneity inherent in the selection of auditors for tax services. Empirical findings reveal that auditor-provided tax services attenuate crash risk by constraining both earnings management in tax expenses and tax avoidance. Further evidence shows that auditor-provided tax services reduce crash risk for firms following innovator business strategies. Taken together, empirical findings reported in this study support knowledge spillover benefits, that is, insights gained from tax services can enhance audit effectiveness.

Money Laundering and Audit Fees

We investigate the association between state-level money laundering sentences and audit fees in the US. Money laundering measures a broad category of offenses involving financial transactions using funds or monetary instruments gained through criminal activities and tax evasion. We find that firms headquartered in US states with high rates of money laundering sentences pay more audit fees. Our results suggest that auditors incorporate, as a fee premium, the higher risks involved when clients operate in those states. Our result remains robust to alternative specifications of money laundering proxies, and to the inclusion of a number of firm-level and state-level control variables. We also conduct two-stage least squares and propensity score matching analysis to mitigate the endogeneity problem that might arise from omitted variables, reverse causality, or model misspecification problems.

Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm-year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under-investment and over-investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under-investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over-investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.

Readability of Narrative Disclosures in 10-K Reports: Does Managerial Ability Matter?

Abstract This study examines the association between managerial ability and the readability of narrative disclosures in 10-K reports. Using a large US sample from 1994 to 2015, we find that managerial ability is significantly positively associated with the readability of narrative disclosures in 10-K reports. We also find that this association is more pronounced for firms with high levels of profitability. In addition, firms’ financial performance mediates the association between managerial ability and the readability of 10-K reports. Further analysis shows that the association was more pronounced before the implementation of the plain English disclosure rules. These results are robust to alternative specifications of managerial ability, 10-K report readability, and the endogeneity concern. Overall, findings from this study suggest that managerial ability matters for improving the readability of corporate disclosures.

Firm Life Cycle and Advisory Directors

This article investigates whether the presence of advisory directors and monitoring directors varies across firm life cycle stages. We follow a parsimonious life cycle proxy based on the predicted behaviour of operating, investing and financing cash flows across the different life cycle stages that result from firm performance and the allocation of resources. Using an Australian sample, this study shows that compared to mature-stage firms, firms in the introduction, shake-out and decline stages have more advisory directors. With respect to the demand for monitoring directors, we find that compared to mature-stage firms, firms in the introduction, shake-out and decline stages have fewer monitoring directors on the board. We contribute to the literature on boards of directors by documenting that firms choose an optimal board structure based on their economic characteristics. JEL Classification: D22, G38, M14

Customer Concentration, Corporate Social Responsibility and Idiosyncratic Risk

This paper investigates the effect of customer concentration on corporate social responsibility (CSR) disclosures for a large sample of US firms. Using both corporate and government customer concentration, we find that firms with concentrated corporate customer are associated with significantly higher CSR scores, while firms with concentrated government customer are associated with significantly lower CSR scores. Our findings also suggest that corporate customer concentration is associated with significantly less CSR concern, whereas government customer concentration is associated not only with significantly less CSR strength, but also with significantly more CSR concern. Finally, we find that CSR activities mitigate the idiosyncratic risk for firms with corporate customer concentration, lending support to the arguments that firms with socially responsible practices have lower risk.