Search results

The purpose of this paper is to develop a more comprehensive understanding of the consequences of retaliations and our evidence indicates that retaliations are beneficial for firms with supranormal earnings by making their higher earnings more persistent, but harmful for firms with subnormal earnings by slowing the recovery of their earnings.

This paper use annual Compustat files based on Fama-French 48 industry. The time-varying competitive reactions (CRs) for each firm are captured using quarterly rolling-window estimation across 41 windows with five years (i.e. 20 observations) in each window. This paper measure earnings persistence as the slope coefficient (ß1) from regressing future earnings on current earnings. The result remains qualitatively similar to the main findings when alternative measures of earnings persistence.

Abnormal earnings are expected to dissipate in the long run owing to competitive forces, but this paper show that more retaliatory CRs increase earnings persistence. This is good news for supranormal firms as they can sustain high profitability. However, it will be harder to revert subnormal earnings to the industry mean if such firms conduct more retaliatory CRs. This paper also show that these associations are stronger for less competitive industries.

First, high earnings persistence per se would not be a major consideration in the firm’s strategic decisions but a natural by-product of such decisions spanning an extended period of operations. Second, though this paper focus on the period of 2004–2018 that includes the rebound after financial crisis in 2008, an extension of the observation period over a longer economic cycle would verify our results.

CRs are regarded as an evolving portfolio of dynamic marketing decisions and tools for strategic decisions in our study. It helps how firms manage competition over time to lengthen the superior performance. Also it helps the low-profitability firms attempting to improve profitability by showing nonretaliation may be a more appropriate strategy than retaliation.

Firms in financial distress suffer from illiquidity, survival of firms is contingent on meeting their financial obligations, thus need for turnaround decisions. However, retaliations under financial distress can mitigate the effect of such turnaround decisions and thereby aggravate the situation.

Greater persistence extends the benefits of superior earnings, thus increasing the opportunities for value exploitation, but it may also restrict earnings recovery. This paper finds that the way that firms react within the competition explain the differences in earnings persistence. Although a large body of research has examined the static drivers (e.g. firm size and diversification) of the differential persistence of earnings, there has been little research on dynamic drivers that explicitly recognize the erosion process for earnings.

This study aims to examine how a firm’s strategic emphasis on value appropriation over value creation is associated with the readability of narrative disclosures in annual reports.

This study examines the effect of the strategic emphasis on annual report readability based on a total of 45,273 US firm-year (5,754 unique firms) observations for the period from 1994 to 2018. Strategic emphasis is measured as advertising expenses minus research and development expenses, scaled by sales and Bog index and various measures, such as the FOG, KINCAID and FLESCH index, are used to measure the annual report readability.

The authors find that the strategic emphasis on value appropriation over value creation is positively related to firms’ annual report readability. In addition, the positive effect of the strategic emphasis on value appropriation over value creation on annual report readability is more pronounced with high managerial ability.

With the continual effort of Securities and Exchange Commission regulation and IFRS updates to improve narrative disclosures, it is meaningful to provide evidence showing how managers shape narratives in annual reports by highlighting good news with easy-to-understand words, but also may establish a barrier to understanding by choosing to use long and complex words depending on their strategic emphasis.

The evidence suggests that a strategic emphasis between value appropriation and value creation and managerial ability is an important factor in shaping the readability of annual reports, which contributes to the management, accounting and finance literature that investigates the relationship between resource deployment (i.e. strategic emphasis) and textual properties of corporate financial disclosures (i.e. readability).

This paper aims to examine the effect of audit quality of consolidated financial statements on the accuracy of analysts’ earnings forecasts from the viewpoint of users of financial statements.

This paper investigates the effect of dependence on the work of other auditors on error in analysts’ earnings forecasts based on samples from 2011 to 2012 (the period since implementation of the International Financial Reporting Standards in Korea). In addition, this paper examines the effects of use of Big 4 auditors, use of auditors with industry expertise and the proportion of overseas subsidiaries in relation to all subsidiaries on the association between dependence on the work of other auditors and error in analysts’ earnings forecasts.

This paper finds a positive relation between dependence on the work of other auditors and error in analysts’ earnings forecasts, suggesting that more dependence on the work of other auditors decreases the quality of the audit of consolidated financial statements; thus, to the extent that low-quality audits decrease reporting reliability, analysts’ forecasts are less likely to be accurate. This paper also finds that the positive relationship between dependence on the work of other auditors and error in analysts’ earnings forecasts is weakened when the principal auditor is a Big 4 auditor or one with industry expertise, because such auditors provide higher-quality audit services. However, the positive relationship between dependence on the work of other auditors and error in analysts’ earnings forecasts is further strengthened in cases where the proportion of overseas subsidiaries to all subsidiaries is higher. These results suggest that the complexity of the consolidation process increases as the proportion of overseas subsidiaries increases.

The findings are useful in analyzing the effects of adoption of the New ISA, implemented in 2014, which does not allow the division of audit responsibilities between principal auditors and other auditors. This paper also provides insights for regulators and practitioners to improve the auditor appointment system in the future.

This study aims to examine the effect of state culture on the readability of narrative disclosures in annual reports based on firms located in all 50 states of the USA.

The author uses the cultural tightness and looseness (Harrington and Gelfand 2014) index at the state level and the BOG index (Bonsall and Miller, 2017) as the primary measures of annual report readability.

Using US data from 1994 to 2019, this study finds that the state level of cultural tightness in which firms are located positively affects firms’ annual report readability. In addition, the study finds that the positive effect of cultural tightness on annual report readability is pronounced in subgroups with high litigation risk while the result does not hold with subgroups that have low litigation risk. The results are robust when alternative proxies for annual report readability are used and historical location and the states in which firms are incorporated are considered.

This study contributes to the growing literature on the determinants of readability in annual report because firms’ narrative disclosure in annual report varies depending on the information environment, litigation risk, embedded in each state culture where firms are located.

This paper aims to provide evidence of an unintended observable consequence of International Financial Reporting Standards (IFRS) adoption by examining opportunistic use of earnings management through revenue as well as expense items classification shifting in the year of transition.

To document classification shifting, the authors take advantage of the Korean mandatory IFRS adoption in 2011, when broad discretion was given to publicly traded companies’ managers to present operating profits.

It is found that companies strategically use both revenues and expenses to manage core earnings at the time of transition by shifting other income as a common tactic to improve their operating performance and special expenses just to meet or beat earnings targets.

Given the concerns of the Securities and Exchange Commission (SEC) about classification shifting behavior and the debate over whether the SEC should mandate the use of IFRS for US companies, the findings of this study are timely and contribute to authors’ understanding of the unintended consequences of mandatory IFRS adoption.

The authors examine how a firm's strategic emphasis (SE) on value appropriation (VA) over value creation (VC) is associated with accounting conservatism.

To examine the effect of SE on a firm's adoption of conservative accounting practice, the authors measure SE as advertising expenses minus research and development (R&D) expenses scaled by total assets. The authors rely on the asymmetric timeliness of earnings from Basu (1997) to measure conditional conservatism and investigate how the incremental sensitivity of earnings to negative stock returns varies with the SE.

SE on VA over VC is found to be positively related to accounting conservatism since they want to deter entrants (i.e. competition adjustment) and to accommodate the tighter monitoring over the financial reporting system from stakeholders (i.e. risk adjustment). This argument is also supported by the additional cross-sectional tests based on the different level of market competition and external monitoring environment. In addition, the positive association between SE on VA over VC and accounting conservatism is less pronounced when managerial overconfidence is high.

Implication is that two important decisions (i.e. SE and accounting conservatism) are related with each other since both are to create competitive advantage and to maintain financial stability for a firm, and the relation differs by managerial characteristics.

This study highlights the differential roles of SE in shaping the conservatism in financial reporting and the importance of overconfidence in driving conservative accounting.