Sharad Asthana

The effect of EDGAR on the market reaction to 10-K filings

Abstract This paper examines the impact of making accounting information available on the Internet simultaneously and almost costlessly to all market participants. More specifically, we examine if filing form 10-K on EDGAR has any effect on the information dissemination process when compared to the traditional method of filing. We examine a random sample of firms that file on EDGAR for the first time and compare the market response to their 10-K filing to that of the previous years filing which was not on EDGAR. Consistent with the preexisting literature, we do not find a market reaction to the pre-EDGAR filing. In contrast, we find both a price and volume reaction to 10-Ks filed on EDGAR. We perform a variety of univariate and multivariate tests to ensure that our results are not driven by other factors, i.e., firm characteristics and timing of 10-K filings. Overall, we find evidence that the market reacts more significantly to 10-Ks filed on EDGAR. In our multivariate tests we also examine whether the EDGAR effect is more important for certain types of firms. Consistent with our expectations, we find the EDGAR effect is smaller for faster growing firms for which we believe there are more non-EDGAR sources of information. Finally, we document that, on average, 10-Ks filed on EDGAR are filed earlier than 10-Ks filed under traditional methods.

Corporate Governance, Audit Firm Reputation, Auditor Switches, and Client Stock Price Reactions: The Andersen Experience

The financial scandal surrounding the collapse of Enron caused erosion in the reputation of its auditor, Arthur Andersen, leading to concerns about Andersens ability to continue in existence and ultimately to the firms demise. In this paper we investigate the role of corporate governance on the timing of the auditor switch by former Andersen clients. After controlling for factors associated with switching costs, we find clients with strong corporate governance were more likely to switch early. We also find that clients switching from Andersen experienced positive abnormal returns during the three-day window surrounding the announcement of the switch. We attribute this positive response to the reduction in uncertainty associated with the cost of finding a new auditor.

Earnings management, expected returns on pension assets, and resource allocation decisions

This paper empirically examines the role of expected rate of return on pension assets reported under SFAS 87 as a tool for meeting and beating earnings targets and its effect on firm value. Results suggest that managers may use this pension assumption to inflate earnings per share (eps) when they are going to miss the earnings expectations. The earnings inflation is directly related to the amount by which earnings will miss the target and to earning sensitivity to expected return on pension asset assumption. The results are robust to two different measures of earnings inflation and two of earnings expectations. The market behaves semi-efficiently and appears to adjust the firm value for large earnings inflations and in situations where firms have incentives to manipulate earnings or earnings are highly sensitive to expected rate of return on pension assets. However, this adjustment is not complete and post-announcement returns continue to depend on the inflated component of earnings, confirming that resource allocation decisions are based on managed earnings. Additional disclosure requirements to make pension assumptions more transparent are also discussed in the paper. Such disclosures could enhance the efficient use of the information by market participants.

Effect of R&D investments on persistence of abnormal earnings

Purpose – This paper sets out to test the effects of firms’ and industrys R&D intensity on persistence of abnormal earnings. Design/methodology/approach – Ohlsons valuation model is used with pooled regressions along with Fama–Macbeth methodology on yearly regressions and partitioning on Herfindahl index to conduct the tests. Findings – It was found that firms’ and industries’ R&D intensities are both positively correlated with persistence of abnormal earnings. The evidence suggests that the positive effect on earnings persistence caused by R&Ds effectiveness in mitigating competition dominates the negative effect brought by more risk from R&D projects Practical implications – The fact that the firms own R&D investment leads to incremental earnings persistence beyond that of the industry suggests the importance of incorporating both industry and firms R&D intensity in earnings persistence. While industry R&D investment leads to competition mitigation via creation of entry barriers, a firms own investment in R&D differentiates its products from those of its competitors, and thereby results in further competition mitigation by creating replacement barriers. Originality/value – Finally, since R&D intensity is correlated with earnings persistence, inclusion of R&D intensity in future earnings persistence studies may lead to better model specification by reducing the problem of correlated omitted variables.

The differential information hypothesis, firm size, and earnings information transfer: An empirical investigation

Abstract This study examines the effects of the sizes of the announcing and non-announcing firms on information transfers. Atiases [Atiase RK. Predisclosure information, firm capitalization and security price behavior around earnings announcements. J Account Res 1985;23:21–36 (Spring)] differential information hypothesis suggests that, relative to small firms, more pre-announcement information is available on large firms. An implication of the differential information hypothesis is that abnormal returns of large firms around earnings disclosures are caused by new information regarding the economy and industry. Thus, earnings disclosures by large firms may contain information that is useful for other firms in the industry. Consistent with our prediction, we find that information transfers within an industry are positively related to the announcing firms size. The differential information hypothesis also suggests that information transfer will be inversely related to the non-announcing firms size. However, our results support the null hypothesis that information transfer is not a function of the non-announcing firms size. Possible explanations of this finding are discussed in the paper.

The impact of changes in firm performance and risk on director turnover

Purpose - The purpose of this paper is to show that director turnover varies in predictable and intuitive ways with director incentives. Design/methodology/approach - The paper uses a sample of 51,388 observations pertaining to 13,084 directors who served 1,065 firms during the period 1997-2004. The data are obtained from RiskMetrics, Compustat, Execu-Comp, CRSP, IBES, and the Corporate Library databases. Portfolio analysis, logit, and GLIMMIX regression analysis are used for the tests. Findings - The paper provides evidence that directors are more likely to leave when firm performance deteriorates and the firm becomes riskier. While turnover increasing as firm performance deteriorates is consistent with involuntary turnover, directors are also more likely to leave in advance of deteriorating performance. The latter is consistent with directors having inside information and acting on that information to protect their wealth and reputation. When inside and outside director turnover is contrasted, the association between turnover and performance is stronger for inside directors. Research limitations - Since data are obtained from multiple databases, the sample may be biased in favor of larger firms. The results may, therefore, not be applicable to smaller firms. To the extent that the story is unable to differentiate between voluntary and involuntary director turnover, the results should be interpreted with caution. Originality/value - Even though extant research has looked extensively at the determinants of CEO turnover, little has been written on director turnover. Director turnover is an important topic to study, since directors, especially outside directors, possess a significant oversight role in the corporation.

Abnormal audit delays, earnings quality and firm value in the USA

Purpose - – This paper aims to address three questions: Does the abnormal delay in the audit process signal poor earnings quality? Is this information about earnings quality incremental to that contained in earnings report delay? Does the market use this information about earnings quality in valuing the firm? Design/methodology/approach - – Data are obtained from four databases: Compustat, Audit Analytics, Compact-Disclosure and I/B/E/S. Complete data are available for 5,298 firms for 22,492 firm-years. The paper uses a two-stage model. In the first stage, a detailed model using determinants from extant research tries to explain the audit delay. In the second stage, the unexplained delay from the first stage is used in the association tests with earnings quality. Findings - – The paper presents evidence that abnormal delays in the audit process are inversely associated with earnings quality. When the market values a dollar of reported earnings, it appears to discount the valuation by the extent of abnormal audit delay. Originality/value - – The current paper contributes to existing research in several ways. First, it establishes a comprehensive model to explain audit delays and provides a tool to measure abnormal audit delays. Second, it provides evidence of inverse association between abnormal audit delay and seven proxies of earnings quality. Finally, the paper shows that abnormal audit delay creates skepticism among investors about earnings quality and they value the disclosed earnings after discounting for such delay.

Auditor failure and market reactions: evidence from China

Zhongtianqin, the largest Chinese auditor in 2000, collapsed in 2001 owing to its audit failure. This study examines how the market reacted to the audit scandal in the Chinese institutional setting. Chinese investors are entitled to recover their investment losses from auditors owing to audit failure. However, civil lawsuits against auditors have not succeeded in the past. Therefore, Chinese auditors do not face the real threat of shareholder litigation. They only have the threat of costly governmental penalties for violating the regulations. Even so, we demonstrate that Chinese audit still contains both assurance and insurance values. Also, the entire market reacted to the scandal. Moreover, we show that investors differentiate audit quality in stock valuation. Finally, companies audited by international auditors suffered less value losses. This study adds to the worldwide literature on auditor failure.

Client-based measure of the audit office reputation

Following the findings from marketing and management literature on corporate reputation, we develop a new proxy to measure the audit office reputation. We argue that the presence of reputable clients and their tenure with the audit office is an unbiased and strong testimony for audit office reputation. For a sample of 3,233 audit firm clients we find that our measure of audit office reputation is positively associated with audit fees and audit quality. We also show that the earnings of clients from audit offices with higher CBAR are valued higher, suggesting that the market perceives the reputation of such offices to be higher and the earnings of their clients to be more credible. This research is important since CBAR is a new and readily available measure of audit office quality that provides incremental explanatory power for audit fees and audit quality beyond previously available measures.

The rewards for publishing in accounting in the USA

Accounting faculty in the USA are rewarded for publishing, with the reward increasing with journal quality. We estimate the increase in annual salary for a top tier publication to be