Ping-Sheng Koh

Accruals Quality, Information Risk and Cost of Capital: Evidence from Australia

Recent theoretical work argues that information risk is a non-diversifiable risk factor that is priced in the capital market. Using accruals quality to proxy for information risk, Francis et al. (2005) provide empirical support for this argument using a sample of US firms. This paper re-examines the interplay of accruals quality, information risk and cost of capital in Australia, where a number of important institutional and regulatory differences are hypothesized to affect the relation between accruals quality and cost of capital. The results suggest that, while accruals quality impacts on the cost of capital for Australian firms, some salient differences exist. In contrast to findings for US firms, the costs of debt and equity for Australian firms are largely influenced by accruals quality arising from economic fundamentals (i.e., innate accrual quality) but not discretionary reporting choices (i.e., discretionary accrual quality). This finding is consistent with our predictions based on the Australian institutional and regulatory environment. In addition, using both the asset pricing tests in Francis et al. (2005) and Core et al. (2008), we provide evidence consistent with accruals quality being a priced risk factor.

The Determinants of CEO Compensation: Rent Extraction or Labour Demand?

Abstract CEO compensation is topical and controversial and accordingly receiving considerable attention by various stakeholders. We investigate whether rent extraction or labour demand explains CEO compensation level in Australia. We do so by examining the determinants (economic, governance and ownership) of CEO compensation level and explore the relationship between predicted excess compensation and subsequent firm performance. Our results suggest that governance and ownership attributes, in addition to economic attributes, are significant determinants of CEO compensation. However, these attributes differentially determine the various components of CEO compensation. Our evidence is consistent with: (1) the determination of fixed salary and share-based compensation reflecting a firms demand for a high-quality CEO; and (2) the CEOs ability to extract rent through bonus and options compensation, particularly for smaller firms or firms with above average performance. However, the rent extraction is not economically significant and does not persist beyond one year. This is in sharp contrast to the US evidence where rent extraction through CEO compensation is pervasive, economically significant and persistent [Core, J., Holthausen, R., Larcker, D., 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51, 371–406].

Accountability and Value Enhancement Roles of Corporate Governance

We examine the twin roles of accountability and value enhancement of corporate governance in the context of financial reporting. We investigate the accountability role by examining the association between governance structures and abnormal accruals, and the value enhancement role by investigating the association between abnormal accruals explained by governance structures and future performance. We differentiate between governance mechanisms that have direct roles in the financial reporting process (audit related) from mechanisms that have indirect roles (board related). We find that independent and active audit committees and independent boards are important governance attributes for financial reporting. We show that both audit-related and board-related governance structures are value enhancing.

Institutional Ownership and Income Smoothing: Australian Evidence

This study examines the rarely investigated association between institutional ownership and income smoothing. The results support the predicted positive association between institutional ownership and the likelihood of firms smoothing earnings towards their earnings trend in general. However, this association is not systematic across all firms. The positive association is most evident among profit firms with pre-managed earnings above their earnings trend. No significant association is found for profit firms with pre-managed earnings below their earnings trend and loss firms in general. This study also finds that, in Australia, while institutional ownership has a non-linear association with income increasing earnings management (Koh, 2003), such association manifests itself within the income smoothing framework. The results of this study highlight the complexities in the association between institutional ownership and earnings management strategies, and future research can benefit by explicitly examining the trade-offs between alternative earnings management incentives and the factors that affect the relative strength of these incentive trade-offs.

Sincerity in Corporate Philanthropy, Stakeholder Perceptions and Firm Value

This study extends the literature on symbolic management by incorporating the role of stakeholder perceptions into the context of corporate philanthropy. In particular, we differentiate between the quantitative (generous giving) and qualitative (innovative giving) aspects of giving. We argue that although stakeholders may perceive both types of giving as being substantive rather than symbolic, innovative giving is likely to be perceived as more substantive than generous giving is and, thus, has a greater impact on firm value. Furthermore, stakeholder perceptions of corporate philanthropy as being more symbolic or substantive are influenced by firm characteristics—the type of products or services that a firm provides and the life-cycle stage that the firm is in—which provide stakeholders with a context to better assess the nature of a firm’s philanthropic actions and the substantiveness of its giving. We find support for our predictions using a sample covering U.S. firms’ philanthropic activities over a 19-year period.

Accountability and Value Creation Roles of Corporate Governance

We examine the twin roles of accountability and value creation of corporate governance in the context of financial reporting. We investigate the accountability role by examining the association between governance structures and abnormal accruals, and the value creation role by investigating the association between abnormal accruals predicted by governance structures and future performance. We differentiate between governance mechanisms that have direct roles in the financial reporting process (audit related governance structures) from mechanisms that have indirect roles (non-audit related governance structures). Our evidence suggests governance attributes important to financial reporting are the existence of independent and active audit committee and board independence. Also, we show that both audit and non-audit related governance structures are value enhancing.

CEO Confidence and Unreported R&D

We investigate whether managerial traits influence corporate decisions to provide mandatory financial disclosures. The results indicate that firms with confident chief executive officers (CEOs) are 24% more likely to report their research and development (R&D) expenditures relative to firms with cautious CEOs. Exploiting staggered, state-level regulatory shocks and changes in CEO type, we find substantial evidence that cautious CEO firms fail to report R&D expenditures. After a plausibly exogenous shock to managerial reporting liability, cautious CEO firms exhibit a 35% larger reduction in unreported R&D relative to confident CEO firms. Interestingly, confident CEO firms do not exhibit more innovation than their cautious CEO counterparts after taking into account their differing propensities to report corporate R&D. Overall, our analysis suggests that the precision or reliability of mandatory disclosures systematically varies with managerial characteristics. The Internet appendix is available at https://d...