Raynolde Pereira

The role of accounting and auditing in corporate governance and the development of financial markets around the world

Abstract For a sample of 31 countries, we document that financial disclosures are more transparent and national accounting standards require timelier (accrual based) reporting in countries with stronger investor protection. These countries also spend more on auditing enforcement and the Big Five accounting firms audit proportionately more companies in these countries. These results indicate that higher quality accounting standards and the enforcement of such standards through higher quality auditing are more likely to exist in corporate governance in countries with strong investor protection. Higher quality accounting and auditing are also positively associated with financial market development in countries whose legal systems are conducive to the protection of investors. However, we are unable to find systematic evidence that higher quality accounting and auditing alone—independent of a countrys underlying investor protection regime—affects the development of financial markets.

Firm Growth and Disclosure: An Empirical Analysis

Extant theoretical research posits that information asymmetry and agency issues affect the cost of external financing and hence impact the ability of firms to finance their growth opportunities. In contrast, the literature on disclosure policy posits that expanded and credible disclosure lowers the cost of external financing and improves a firms ability to pursue potentially profitable projects. An empirical implication is that disclosure can help firms grow by relaxing external financing constraints, thereby allowing capital to flow to positive net present value projects. This paper empirically evaluates this prediction using firm-level data over an 11-year period. As anticipated by theory, we find a positive relation between firm disclosure policy and the externally financed growth rate, after controlling for other influences.

The Role of Firm-Specific Incentives and Country Factors in Explaining Voluntary IAS Adoptions: Evidence from Private Firms

Abstract This paper investigates voluntary adoptions of International Accounting Standards (IAS) by private enterprises, and builds on prior research which posits that higher quality financial reports through IAS adoption can reduce information asymmetry and facilitate contracting with external parties. Specifically, we pursue the following questions. First, do firm-specific incentives matter in the IAS adoption decision after controlling for country-level institutional factors? Second, does the relative importance of firm vs. country factors vary across institutional settings? Using a sample of 3,722 small and medium-sized private enterprises from 56 countries, we report two primary findings. First, both firm and country factors matter in the voluntary IAS adoption decision. Second, when we focus on sub-samples of countries partitioned by the level of economic development, we find that firm factors dominate country factors in more developed countries, while in less developed countries, country factors dominate firm factors in explaining IAS adoptions. This result is consistent with the argument in Doidge et al. (Journal of Financial Economics, 86(1), pp. 1–39, 2007) that firm incentives are more important in explaining governance choices (including accounting) in more developed countries where the benefits from better governance are more likely to exceed the attendant costs. Collectively, our results suggest that less developed countries can enhance the benefits from IAS adoptions by developing institutions which facilitate private contracting.

Does Corporate Transparency Contribute to Efficient Resource Allocation

This paper examines whether a countrys corporate transparency environment, which includes the quality of accounting information, contributes to efficient resource allocation. Based on a cross-country study of 37 manufacturing industries in 37 countries, we provide three pieces of related evidence. First, we find the contemporaneous correlations in industry growth rates across country pairs are higher when there is a greater level of corporate transparency in the country pairs, after controlling for country-level economic and financial development. Second, we find the influence of transparency on these correlations is stronger when country pairs are at similar levels of economic development (GDP). Finally, when we control for the level of transparency explained by a countrys institutions in place, we find that residual transparency (unexplained by country-level factors) is associated with industry-specific growth rates. Taken together, the results are consistent with corporate transparency facilitating the allocation of resources across industry sectors.

The Determinants and Consequences of Heterogeneous IFRS Compliance Levels Following Mandatory IFRS Adoption: Evidence from a Developing Country

The adoption of international accounting standards, namely the IFRS, at the country level has sparked two contrasting, but not mutually exclusive, viewpoints. One view is that IFRS engenders better reporting standards and uniform adoption allows for greater comparability. The upshot is that IFRS adoption will improve a firm’s information environment and hence contribute towards a lower cost of capital. The alternative view is that accounting quality is shaped by political and economic forces and hence higher quality accounting standards will not necessarily translate into higher quality reporting. We empirically evaluate these arguments on IFRS adoption using both private and publicly traded firm observations from Kenya, a developing country with relatively open capital markets but limited enforcement resources. Our analysis takes advantage of a unique dataset involving firm-specific measurements of IFRS compliance. We find that while both private and public firms are required to adhere to IFRS, public, rather than private firms, exhibit greater IFRS compliance. Highlighting the influence of capital market openness, we find that foreign ownership is positively and significantly correlated with IFRS compliance. Probing the underlying causal relationship, additional analysis suggests that greater foreign ownership leads to greater IFRS compliance. Examining the effects of IFRS compliance, higher compliance is positively associated with share turnover. Overall, our evidence illustrates both the importance of economic incentives in shaping IFRS compliance and the capital market benefits to being compliant with IFRS in a low enforcement country.

Legal Inforcement, Short Maturity Debt, and the Incentive to Manage Earnings

Prior research contends that weak legal regimes discourage lender enforcement of contracts by making it either costly or ineffective. However, Diamond observes that this lender passivity can be overcome by structuring debt as a short‐term loan. His argument is that an arrival of bad news in the presence of short‐term debt can result in externalities that will trigger a run on the firm and that this in turn creates ex ante incentives for lenders to enforce their contracts. We examine whether short‐term debt creates an incentive for borrowers to delay the recognition of bad news through earnings management. Using a sample of firm‐level data from 33 countries over a 10‐year period, we find that short‐term debt induces greater earnings management. This impact of short‐term debt is especially greater in countries with weak legal regimes. This evidence is consistent with the hypothesis that borrowers will manage earnings to circumvent lender enforcement.

Global Evidence on Incentives for Voluntary Accounting Disclosures and the Effect on Cost of Capital

This study provides international evidence that external financing dependence creates incentives for firms to undertake a higher level of voluntary accounting disclosure. For a sample of 856 observations from 34 countries and 18 different manufacturing industry sectors, we document that firms in industries that are more dependent on external financing also have higher average levels of accounting disclosure. This result holds after controlling for country-level differences in legal and financial systems, and firm-specific controls for firm size and performance. We then show that firms with higher disclose levels also have a lower cost of capital, which is evidence that voluntary accounting disclosures reduce information asymmetry and lower the firms cost of external financing. These results are robust across a wide range of legal and financial systems around the world, and underscore the importance of accounting disclosures in firm financing decisions.

Analyst Coverage and the Likelihood of Meeting or Beating Analyst Earnings Forecasts

This paper examines the relation between analyst coverage and whether firms meet or beat analyst earnings forecasts. We distinguish between whether a firms reported quarterly earnings meet (i.e., equal or exceed by one cent) or beat (i.e., exceed by more than one cent) its consensus analyst earnings forecasts. We find a positive relation between analyst coverage and whether a firm meets or beats analyst forecasts. However, the more pronounced relation is that between analyst coverage and meeting analyst forecasts. Also, when we consider exogenous shocks to analyst coverage due to brokerage mergers or closures and conglomerate spinoffs, we continue to find a robust positive relation only between analyst coverage and meeting analyst forecasts. To shed light on the causal relation involved, we examine and find that greater analyst coverage is associated with a significantly larger market reaction to negative earnings surprises. We also document that firms with greater analyst coverage are more likely to guide analyst earnings forecasts downwards. Taken together, our evidence suggests that greater analyst coverage raises the pressure on managers to meet analyst earnings forecasts. This article is protected by copyright. All rights reserved.

Does The Firm Information Environment Influence Financing Decisions? A Test Using Disclosure Regulation

Extant theory claims a firm’s information environment impacts the choice between debt and equity financing. However, empirical evidence supporting this contention is limited. We evaluate this relation within the context of Regulation Fair Disclosure (Reg FD), which prohibited the use of selective disclosure. We find that firms with high proprietary costs of public disclosure are more likely to resort to debt financing following the passage of Reg FD. This relation is not sensitive to whether a firm has relied on selective disclosure in the pre-Reg FD regime. We also evaluate changes in firm disclosure policy and find that firms that adopted an expansive public disclosure policy are more likely to turn to equity financing. Overall, our evidence is consistent with the pecking order theory: firms with deteriorated firm information environments increase their use of less information-sensitive debt, whereas firms with improved information environments favor the use of equity financing. This paper was accepted ...