Vivek Mande

Managerial ownership and firm valuation: Evidence from Japanese firms

Abstract We study the relation between managerial ownership and Tobins q ( Q ) for 123 Japanese firms from 1987 to 1995. Managers in Japanese firms own a smaller stake in their firms relative to their US counterparts. Our initial analyses using an Ordinary Least Squares (OLS) regression model show a negative (positive) relation between Q and managerial ownership at low (high) levels of ownership. However, we argue that this finding is most likely a statistical artifact. When we control for firm fixed effects, suggested by recent literature, we reach a different conclusion. Specifically, we find that Q increases monotonically with managerial ownership. Our findings, therefore, suggest that as ownership increases, there is a greater alignment of managerial interests with those of stockholders. This conclusion remains when both managerial ownership and Q are treated as endogenous variables in a simultaneous equation system.

A Comparison of Reporting Lags of Multinational and Domestic Firms

This study examines whether multinational firms report earnings sooner than domestic firms. When compared with domestic firms, the reporting environment and business operations of multinational firms are significantly more complex. There is a greater amount of information asymmetry between managers and shareholders of multinational firms. Therefore, multinational firms potentially face higher monitoring and external financing costs. To reduce these costs, we conjecture that managers of multinational firms take steps to reduce the information asymmetry between shareholders and management by increasing the timeliness (a proxy for relevance) of their earnings reports. Specifically, we expect multinational firms to announce earnings earlier than domestic firms. We separate earnings reporting delay into auditor-related delay and managements discretionary delay. While test results weakly support the hypothesis that auditors take longer to audit multinational firms, there is strong evidence that managers of multinational firms release their earnings reports sooner than domestic firms.

Do audit delays affect client retention

Purpose - The purpose of this study is to examine whether lengthy audit delays lead to auditor changes in the subsequent year. The paper hypothesizes that a lengthy interaction between clients and their auditors reflects high audit risk factors relating to management integrity, internal controls, and the financial reporting process. It argues that auditors are more likely to drop clients with long audit delays because they would like to avoid these types of audit risks. Design/methodology/approach - Using logistic regressions, the paper first tests whether a lengthy audit delay leads to an auditor change. It then examines whether as audit delays increase, auditor changes are more likely to be downward than lateral. Findings - The results support the hypothesis that Big N auditor-client realignments occur following long audit delays. Further, as the length of the delay increases, the paper finds that there are more downward changes. Research limitations/implications - An implication of our study is that a long audit delay represents a publicly observed proxy for the presence of audit risk factors that lead to an auditor change. Practical implications - This study suggests that all else constant, investors should consider a lengthy audit delay as indicating that there has been deterioration in the quality of the client-auditor interaction. An audit delay also presents an observable proxy for successor auditors to consider while evaluating risks associated with a new client. Originality/value - The results of our study increase our understanding of how Big N auditors manage their client portfolios to mitigate their exposure to risk factors.

Institutional Ownership and Income Smoothing by Japanese Banks Through Loan Loss Provisions

This paper examines the association between institutional ownership and income smoothing through bank loan loss provisions for a sample of Japanese banks during the period 1991–1999. We find that as the percentage of institutional ownership of banks increases, income smoothing via loan loss provisions increases. Additional tests show that there is a significant positive relationship between the extent of income smoothing and the percentage ownership of banks by domestic financial institutions and affiliated (keiretsu) institutions. Consistent with the idea that foreign institutional holders do not play an important role in the corporate governance of Japanese banks, we do not find a significant association between foreign institutional ownership and the extent of income smoothing. Our results imply that institutional owners may play a different role in monitoring income smoothing during the recessionary period in Japan from the normal economic periods studied in most prior studies.

An Investigation of Asymmetric Earnings Forecasts of Japanese Financial Analysts

A number of U.S. studies have documented an optimistic bias in analysts’ forecasts of earnings. This study investigates whether the optimistic bias and asymmetric behavior of forecast errors found in most U.S. studies exists in Japan. We find that for firms reporting profits, Japanese analysts’ forecasts have much greater accuracy and exhibit a small pessimistic bias in comparison to firms reporting losses, where analysts’ forecasts exhibit extremely poor accuracy and an extremely significant optimistic bias. The lack of ability to forecast losses is due to their transitory nature and not due to earnings management. Forecast accuracy and bias are not related to firm size, but are related to the magnitude of reported lossess and profits.

Factors influencing non-compliance with ASU 2010-06 in the banking industry

Purpose - – This study aims to examine whether banks are compliant with the Financial Accounting Standards Board’s standard Accounting Standards Update (ASU) 2010-06 requiring disaggregated fair value hierarchy information. It also identifies institutional and firm-specific factors that are associated with compliance or non-compliance. Design/methodology/approach - – Using quarterly reports of banks for the first quarters of 2009 (pre- ASU 2010-06) and 2010 (post- ASU 2010-06), we hand-collect information on disclosures about fair values from the footnotes. Using a logistic regression with compliance/non-compliance as the dependent variable, we examine factors associated with compliance/non-compliance. Findings - – Results show that 23 per cent of banks do not comply with ASU 2010-06 and that the non-compliant banks tend to be small, lack effective internal controls and are more likely to be audited by non-specialist auditors. Research limitations/implications - – This study only considers one type of non-compliance with ASU 2010-06, i.e. whether or not firms provide disaggregated fair value hierarchy information. There may be other forms of non-compliance that the authors do not examine because of the difficulties involved in objectively defining non-compliance. Practical implications - – The findings suggest firms may need to increase training for internal personnel and hire high-quality auditors for ensuring compliance with fair value accounting rules. The authors also suggest that smaller firms may find compliance to be onerous and recommend additional research to examine whether smaller firms should be exempted from some or all of the fair value rules. Originality/value - – This study provides some of the first evidence on the level of compliance with mandated fair value disclosures.