Terrance R. Skantz

Highly Valued Equity and Discretionary Accruals

Overvalued equity provides a strong incentive for managers to report earnings that do not disappoint the market ( Jensen, 2005 ). We find that this can be extended to highly valued equity more generally. In the year following the classification as highly valued and compared to firms with less extreme valuations, highly valued firms have significantly higher discretionary accruals and exhibit a more pronounced positive association between discretionary accruals and proxies for the likelihood of failing to meet earnings targets. These findings are consistent with the use of discretionary accruals to manage earnings in support of extreme valuation. Because highly valued equity will likely result in CEOs with valuable stock and stock option portfolios, we test whether and show that the overvalued equity incentive is incremental to a CEOs equity portfolio incentive. One implication is that directors and audit committees should be especially on guard for possible earnings management when a firm has extremely high valuation multiples and when the CEO has a lot of equity at risk. Copyright (c) 2010 The Authors Journal compilation (c) 2010 Blackwell Publishing Ltd.

Auditor tenure, auditor specialization, and information asymmetry

Purpose - The purpose of this paper is to examine the relation between a companys bid-ask spread, a proxy for information asymmetry, and auditor tenure and specialization. Design/methodology/approach - The tests use clustered regression for a sample of 31,689 company-years from 1992 to 2001 and control for factors known to impact bid-ask spread in cross-section. Findings - The findings suggest that the markets perception of disclosure quality is higher and private information search opportunities are fewer for companies engaging industry specialist auditors. In addition, the paper finds that information asymmetry has a U-shaped relation to auditor tenure. This U-shaped relation holds for both specialists and non-specialists; however, the bid-ask spread for specialists tends to fall below that of non-specialists at all tenure intervals. Research limitations/implications - The findings may directly result from auditor tenure and specialization or it may be that those auditor-related characteristics are a subset of concurrent choices made by the company that impacts disclosure quality. Practical implications - Companies have incentives to lower information asymmetry and the findings document that the choice of a specialist auditor and the length of the auditor relationship can potentially influence this objective. Originality/value - The paper provides information to academics, regulators, companies, and auditors concerning the effect of auditor-client relationships on the level of information asymmetry. In addition, it shows the importance of industry specialization and audit firm tenure on audit quality.

The Effects of Information Technology Expertise on the Market Value of a Firm

Based on 96 CIO appointments during 1987–1998, Chatterjee et al. (2001) conclude that newly created CIO positions add value to the firm. This paper reexamines that conclusion by using the markets reaction to existing position appointments to benchmark the markets reaction to newly created position appointments. Based on 461 CIO appointments to new and existing CIO positions during 1987–2002, we find no significant difference in the markets reaction to the two types of announcements over the entire sample period. This finding holds when we allow for the markets perception of the value of information technology to shift over time. We also find evidence that the market penalizes firms that fail to move quickly enough to obtain potential strategic advantages from new CIO positions, consistent with first mover advantages. Finally, consistent with Ang et al. (2003) who examine CEO appointments, we find that markets discriminate among newly appointed CIOs in that CIO quality characteristics are associated as...

Does long term performance improve following the appointment of a CIO

The chief information officer (CIO) is crucial to integrating information technology into firm strategy. While there is evidence that capital markets react favorably to CIO appointments in the days surrounding the appointment announcement, this is the first study to examine the change in firm accounting performance in the years following the appointment of a new CIO. To control for exogenous factors unrelated to CIO effectiveness, the performance of appointing firms is measured relative to industry-wide average performance for firms that did not create a new or fill an existing CIO position. Using multiple accounting return measures that are responsive to changes in efficiency and effectiveness, we find an improvement in performance that is limited largely to firms appointing to newly created positions. As expected, there are significant performance increases for “first movers” who create new CIO positions early relative to their competitors; however, firms late to appoint their first CIO also obtain similar advantages. We also find that the effect on firm performance is contingent on the economic environment of the firm and that performance improvement is most pronounced for CIO appointments occurring later in calendar time, for firms operating in industries with low sales growth, and for firms in industries with highly dynamic economic environments.

Analyst forecasts and analyst actuals in the presence of nonrecurring gains and losses: Evidence of inconsistency

Abstract Earnings are affected increasingly by “one-time” gains and losses; consequently, knowing whether analyst forecasts and actuals include or exclude nonrecurring items is important to our understanding of forecast errors. This paper uses IB/E/S and Value Line data and two types of nonrecurring items, one a gain and one a loss, to investigate the treatment of special items in both forecasts and the “actual” earnings reported by forecast services (analyst-reported earnings or analyst actuals). We find that analyst-reported earnings include (exclude) nonrecurring items in 37 percent (63 percent) and 38 percent (62 percent) of the cases for IB/E/S and Value Line, respectively, and that forecasts are formed on the same basis as analyst actuals for losses but not for gains. In other words, quarterly earnings forecasts and the associated “actual” earnings numbers reported by forecast services are not consistent in the treatment of special gains and losses, and forecasts and analysts actuals are not uniformly consistent with one another. These findings suggest that the existence of nonecurring items can make problematic the calculation of an earnings forecast error that is an unbiased measure of unexpected ordinary income.

The impact of regulation on economic bonding and auditor independence: An analysis of sox and suggestions for future research

The results of recent research suggest that certain provisions of the Sarbanes–Oxley Act of 2002 (SOX) may have been less successful than intended (e.g., Abbott, Parker, & Peters, 2009). Based on two different descriptions of economic bonding between auditors and their clients, we propose an explanation of why this might be so by showing that the effect of SOX mandates, and regulation in general, aimed at enhancing auditor independence is dependent on whether shareholders or managers monitor the auditor. The results of prior empirical studies are examined in context of the framework we describe, and suggestions for future research on this important topic are outlined.