Picheng Lee

Bankruptcy prediction of financially stressed firms: an examination of the predictive accuracy of artificial neural networks

This is an extension of prior studies that have used artificial neural networks to predict bankruptcy. The incremental contribution of this study is threefold. First, we use only financially stressed firms in our control sample. This enables the models to more closely approximate the actual decision processes of auditors and other interested parties. Second, we develop a more parsimonious model using qualitative ‘bad news’ variables that prior research indicates measure financial distress. Past research has focused on the ‘usefulness’ of accounting numbers and therefore often ignored non-accounting variables that may contribute to the classification accuracy of the distress prediction models. In addition, rather than use multiple financial ratios, we include a single variable of financial distress using the Zmijewski distress score that incorporates ratios measuring profitability, liquidity, and solvency. Finally, we develop and test a genetic algorithm neural network model. We examine its predictive ability to that of a backpropagation neural network and a model using multiple discriminant analysis. The results indicate that the misclassification cost of the genetic algorithm-based neural network was the lowest among the models. Copyright

Does Innovation Matter to Conference Calls

The main purpose of this study is to investigate whether the likelihood, frequency, and information content of conference calls are positively associated with innovation. The study is based on 534 conference calls conducted in 340 firm-years from 1997 to 2001 in Taiwan. Our findings indicate that more innovative firms are more likely to conduct conference calls and conduct them more frequently than less innovative firms. Consistent with prior research, high-growth firms and larger firms are more likely to hold conference calls, and hold them more frequently, than other firms. Low price-earnings firms are, nonetheless, more likely and frequent to host conference calls when their stock price has been undervalued. We also find supporting evidence that cumulative abnormal returns surrounding the event dates of conference calls are positively associated with the level of and change in innovation investments. In addition, our empirical results of market reaction driven by conference calls are still robust after controlling the effect of selection bias, market expectation, and timing of conducting conference calls. Finally, we also find that firms that are more innovative are more likely to discuss innovation activities during conference calls.

Why did management and auditors fail to identify ineffective internal controls in their initial SOX 404 reviews

Purpose - The purpose of this paper is to investigate the rationale for the failure of management and auditors to identify material internal control weaknesses (ICWs) in their initial Sarbanes-Oxley Act of 2002 (SOX) 404 reviews, resulting in subsequent restatement of their opinions. Design/methodology/approach - The paper focuses on the factors associated with the failure of management and auditor to identify material internal controls weaknesses in their initial SOX 404 reports. Logistic regression is run on a sample of 56 firms that reported material internal controls weaknesses in their amended internal control reports and a control group of 344 firms that reported material internal controls weaknesses (i.e. ineffective internal controls) in their initial internal control reports for 2004. Findings - The results show that firm size, the use of a Big 4 auditor, the ratio of non-audit to total fees, and the need for accounting restatements are positively associated with the probability to file an amended internal control report. The number of ICWs and the number of audit committee meetings are negatively associated with the probability to file an amended internal control report. Practical implications - The papers findings suggest that regulators and corporate boards should consider providing more guidelines on audit committee practices in addition to the audit committee structure. For example, more guidance by the board is needed to ensure that the audit committee is active in overseeing the companys auditor–client relationship and its internal audit function. Originality/value - Empirical findings on factors associated with the failure of management and auditor to identify material ICWs in their SOX 404 review can contribute to an understanding of factors affecting the efficiency of the SOX 404 review by attributing such failure to either inherent factors such as operational complexity and industry membership or to managerial choices in auditor-client relationship and corporate governance issues. An understanding of these factors can help companies and the Public Company Accounting Oversight Board and the Securities and Exchange Commission in their efforts to improve the effectiveness and the efficiency of the current SOX 404 process.

The impact of financial forecasts regulation on IPO anomalies: Evidence from Taiwan

This study examines whether a regulation on mandatory disclosure of financial forecasts since June 1991 and further sanction imposition since March 1998 contribute to lower IPO firms’ initial and aftermarket returns, and shorten honeymoon periods. The study is based on 423 IPO firms after the regulation required them to disclose their forecasts and 53 IPO firms prior to the regulation. The findings report that initial and aftermarket returns are lower, and honeymoon periods are shorter in the post‐regulation period than those in the pre‐regulation. The findings also report that initial and aftermarket returns are relatively smaller, and the honeymoon periods are shorter after the March 1998 regulatory sanction was imposed after controlling other variables. These results document that the financial forecasts disclosure regulation evidently contributes to mitigating information asymmetry.

Corporate governance and innovative success: An examination of the moderating influence of a firm's life cycle stage

Abstract In this study we examine whether corporate governance influences a firm’s innovative success and if so, how this association is moderated by the life cycle stage of the firm. Innovative success is a broad term and is difficult to measure. Based on Mansfield (1981) we trichotomize ‘innovative success’ into three components, namely, technical (measured by number of patents received), commercial (measured by sales growth) and economic success (measured by Tobin’s Q as based on Mansfield (1981)). We use a sample of electronic firms in Taiwan which invested in research and development covering the years 2001–2009. We find that higher levels of corporate governance have a significant effect on two components of innovative success, namely, patent productivity and a fir m’s value but not on commercial success as measured by sales growth. We also find that the influence of corporate governance on the three components of innovative activity is most pronounced when the firm is in the stagnant stage of its respective life cycle and least pronounced when the firm is in the growth stage. Our study adds to the discussion on the importance of corporate governance by showing that while it has a positive influence on innovative activity, its impact is contingent on the stage of the firm in its respective life cycle.

The effect of R&D tax credit on innovation: A life cycle analysis

Abstract The purpose of this study is to explore how tax credits for research and development influence innovative activity (as measured by investment in R&D) with emphasis on the moderating role of the firms stage in its respective life cycle. Our sample comprised all electronics firms listed on the Taiwan Stock Exchange and Taiwan’s Over-the-Counter Market fom 2002–2007. Our final sample comprised 943 firm-year observations. We ran regressions and our findings indicate that the R&D tax credit has the greatest impact on innovative activity when the firm is in the stagnant stage and the least impact when the firm is in the growth stage. Our contribution to the extant literature in innovation is severalfold. First, in prior studies, the R&D tax credit is measured as a dummy variable. In this study we use actual R&D tax credit data. Second, prior research examining the association between the R&D tax credit and innovative activity has shown mixed results. We provide an explanation for the inconclusive results by showing that the association is contingent on the stage of the firm in its life cycle. This was not addressed in prior studies. From the public policy standpoint, our findings imply that governments should provide companies with increased tax incentives to stimulate innovative activity, especially when companies are in the stagnant stage in their respective life cycle.

The Effect of Innovative Activity on Firm Performance: The Experience of Taiwan

Abstract Firm performance is, among other factors, a function of tangible and intangible assets that the firm possesses and utilizes to maximize value. While research has examined the impact of advertising and R&D on firm performance, in this chapter we, in addition, examine the extent of innovation as measured by patents granted on firm performance. Our findings indicate that overall, innovative activity as measured by number of patents granted, significantly influences firm performance as measured by Tobins q. Hence patenting activity is value relevant to investors. Further, this relationship is more pronounced when the patents are granted in the United States. We conclude that markets tend to give greater credence to innovative activity when patents are granted to foreign firms by the U.S. Patenting Office. Finally, the stage of the product in the industry chain moderates the influence of patenting activity on firm performance. When patents are granted in the design stage the impact on firm performance is stronger relative to when patents are granted in the manufacturing and packaging and testing stages. The evidence indicates that patents by companies in the manufacturing end of the chain have a more pronounced impact on firm performance relative to patents granted in the packaging and testing stage.

Bankruptcy Prediction Using Neural Networks

This study is an extension of prior studies that have used artificial neural networks to predict bankruptcy. The incremental contribution of this study is threefold. First, we use only financially stressed firms in our control sample. This sampling enables the models to more closely approximate the actual decision processes of auditors and other interested parties. Second, we develop a more parsimonious model using qualitative “bad news” variables that prior research indicates measure financial distress. Past research has focused on the “usefulness” of accounting numbers and therefore often ignored non-accounting variables that may contribute to the classification accuracy of the distress prediction models. In addition, rather than use multiple financial ratios, we include a single variable of financial distress using the Zmijewski distress score that incorporates ratios measuring profitability, liquidity, and solvency. Finally, we develop and test a genetic algorithm neural network model. We compare its predictive ability to that of a backpropagation neural network and a model using multiple discriminant analysis.

Do non-staggered board elections matter to earnings quality and the value relevance of earnings and book value?

Purpose - The purpose of this paper is to examine the impact of non-staggered voting for members of the board of directors on earnings quality and the value relevance of earnings and book value. Design/methodology/approach - The authors used a sample of Taiwanese firms whose board was elected as a whole every three years from 2003 to 2013. The authors used multiple regression analysis to test whether board of directors elections and corporate governance affected earnings quality and the value relevance of earnings and book value. Findings - The authors found that elections led to lower earnings quality, but better corporate governance led to greater earnings quality. In the presence of board elections, earnings have reduced value relevance but book value had increased value relevance. Finally, given board elections, the relative value relevance of earnings and book value on stock price was not fully moderated by strong corporate governance. Research limitations/implications - The results presented here indicate the importance of better corporate governance in diffusing suspicions of management occasioned by the use of discretionary accruals in years in which board elections take place. Better corporate governance regimes led to a more positive relationship of discretionary accruals to earnings persistence, even in the presence of directorial elections. Similarly, better corporate governance regimes led to a more positive relationship between earnings per share and stock prices. Limitations include the restriction of the testing locale to Taiwan. That said, many companies around the globe use non-staggered board elections. Accordingly, these results suggest issues of importance to corporate governance advocates beyond Taiwan as well. Originality/value - This study deepens the field’s understanding of the impact of corporate governance arrangements and schedules for electing board of directors’ members on issues of interest to stockholders.

Compliance and determinants of US-listed foreign firms’ 20-F filings under the new Securities and Exchange Commission accelerated deadline

Purpose - – The purpose of this paper is to investigate the impact of the US Securities and Exchange Commission (SEC) accelerated deadline on foreign firms, and the 20-F filing practices and factors relating to the filing lags. Design/methodology/approach - – The authors identified 338 firms that file 20-F reports with the SEC during the period of 2010 and 2011. The authors then used multivariate regressions to examine the effects of the shortened deadline on foreign firms’ filing practices and the factors associated with these practices. In the regression models, the authors also control for other firm characteristics that have shown to affect the filing lags of US firms such as firm performance, size, mergers and restructures, audit firm, compliance with internal control requirements under Sarbanes Oxley Act, internal control weaknesses, going concern audit opinion and operating complexity. Findings - – Based on a sample of 338 US-listed foreign firms, the results indicate that there is a significant reduction in the filing lags and a change in their distribution for fiscal year 2011, as compared to the preceding year, and as intended by the SEC. The authors also find that 20-F filing lags are negatively related to the use of International Financial Reporting Standards (IFRS) or US-GAAP in 20-F reports and use of the English language in foreign firms’ home countries. Practical implications - – The findings of this paper are of interest to accounting regulatory bodies including the SEC, US Financial Accounting Standards Board and the International Accounting Standards Board by showing that registrants respond positively to regulations intending to promote timeliness of accounting disclosures and reporting, although many firms may oppose them in the due process stage. Originality/value - – The authors contribute to the extant literature by providing new evidence that 20-F filing lags are negatively related to the use of IFRS or US-GAAP in 20-F reports, and the use of English language in foreign firms’ home countries.