Ning Du, Jeffrey Byrne, Robert Knisley, Dwayne Powell and James Valentine
This study aims to examine how financial analysts evaluate other comprehensive income (OCI) information with a focus on the information content and economic substance of OCI gain…
Abstract
Purpose
This study aims to examine how financial analysts evaluate other comprehensive income (OCI) information with a focus on the information content and economic substance of OCI gain and loss.
Design/methodology/approach
This study conducted a 2 × 2 between-subject experiment by manipulating profitability (net profit or net loss) and OCI (OCI gain or loss). A total of 103 equity research analysts participated in the experiment.
Findings
The results show that when the company suffers a net loss, the presence of unrealized gain in OCI appears to cause concern for analysts, in that they assigned a lower valuation to the OCI gain company than the OCI loss company. However, in the cases where the company is profitable, analysts appeared to respond to the direction of OCI (i.e. gain or loss) and incorporated the directional information in their valuation judgment.
Originality/value
The experimental results complement prior archival research on OCI valuation. This study extends prior work on OCI’s decision usefulness, improves understanding of the impact of OCI on firm valuation and contributes to the ongoing debate about whether OCI is viewed as a performance measure. The findings indicate that the effect of OCI gains or losses is most pronounced when the company experiences a loss. During such instances, analysts may interpret a combination of net loss and OCI gain as a potential indicator of earnings management opportunities. Consequently, they may perceive it as a signal of deteriorating future financial performance.
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The purpose of this paper is to investigate how managerial disclosure of imprecise information about revenue recognition affects investors’ perceptions of corporate and management…
Abstract
Purpose
The purpose of this paper is to investigate how managerial disclosure of imprecise information about revenue recognition affects investors’ perceptions of corporate and management performance. Specifically, the authors focus on how outcome and probability dimensions and their respective (im) precision interact with each other and jointly affect investors’ judgments and decision-making.
Design/methodology/approach
The authors conducted an experiment where the dimensions are manipulated (outcome vs probability) of disclosed revenue recognition information and its related precision (a point vs a range estimate).
Findings
Results from this study suggest that participants are sensitive to specific dimensions of uncertainty disclosure: participants were highly aware of the (im)precision in outcome information, were more likely to invest when both dimensions were vague and expected higher revenue when dimensional precision was consistent.
Practical implications
The results imply that dimensional precision is an important component in uncertainty disclosure and may have a significant impact on investors’ judgments and decision making. Regulators and managers should consider dimensional imprecision when they develop and implement disclosure strategy regarding revenue recognition.
Social implications
The results have practical value for regulators/managers, who are in the process of developing/implementing disclosure strategy regarding revenue recognition.
Originality/value
This is the first study to examine the interaction of dimensions of uncertainty in revenue disclosures.
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Alessandra Allini, Rosanna Spanò, Ning Du and Joshua Ronen
The current paper aims to understand whether fair value accounting (FVA) affects analysts’ loan approval decisions and default risk judgments.
Abstract
Purpose
The current paper aims to understand whether fair value accounting (FVA) affects analysts’ loan approval decisions and default risk judgments.
Design/methodology/approach
This study focusses on three issues: unrealized gain or loss resulting from FV measurement recognized in other comprehensive income (OCI), recognition of assets at FV or historical cost and the disclosure or non-disclosure of the FV of collateral assets. It uses an experiment carried out with a sample of 29 CFA analysts.
Findings
The results show that all three issues have a significant effect on analysts’ judgment and decision-making in processing FV estimates.
Originality/value
The paper extends knowledge on how financial analysts perceive FV estimates and disclosure and may help the accounting standard boards assess the challenges facing analysts when they apply professional judgments in interpreting FV measurements and disclosures. Moreover, it offers fresh views to the debate on the decision usefulness of FVA, particularly relevant in the post-implementation review of IFRS 13.
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Man has been seeking an ideal existence for a very long time. In this existence, justice, love, and peace are no longer words, but actual experiences. How ever, with the American…
Abstract
Man has been seeking an ideal existence for a very long time. In this existence, justice, love, and peace are no longer words, but actual experiences. How ever, with the American preemptive invasion and occupation of Afghanistan and Iraq and the subsequent prisoner abuse, such an existence seems to be farther and farther away from reality. The purpose of this work is to stop this dangerous trend by promoting justice, love, and peace through a change of the paradigm that is inconsistent with justice, love, and peace. The strong paradigm that created the strong nation like the U.S. and the strong man like George W. Bush have been the culprit, rather than the contributor, of the above three universal ideals. Thus, rather than justice, love, and peace, the strong paradigm resulted in in justice, hatred, and violence. In order to remove these three and related evils, what the world needs in the beginning of the third millenium is the weak paradigm. Through the acceptance of the latter paradigm, the golden mean or middle paradigm can be formulated, which is a synergy of the weak and the strong paradigm. In order to understand properly the meaning of these paradigms, however, some digression appears necessary.
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Massoud Metghalchi, Jianjun Du and Yixi Ning
This paper tests two moving average technical trading rules for four Asian markets. Our results indicate that moving average rules do indeed have predictive power and can discern…
Abstract
This paper tests two moving average technical trading rules for four Asian markets. Our results indicate that moving average rules do indeed have predictive power and can discern recurring price patterns for profitable trading. Moreover, our results support the hypothesis that technical trading rules can outperform the buy‐and‐hold strategy. Break‐even one‐way trading costs are estimated to be high for all four markets. To confirm the test outcome, robust tests based on bootstrap and the related t‐tests among the markets are also carried out. We conclude from the statistical results that moving average rules are valid and indeed have predictive power. It is implied that the trading rules may be used to design a trading strategy that will beat the buy‐and‐hold strategy in the Hong Kong, Singapore, South Korea, and Taiwan markets. The contribution of the current study is that this is the first validation test of trading rules using four markets at a similar development stage and culture tradition; and in the tests, we use most current and longer periods than the periods used in previous literature. Our robust tests are unique and considered distribution‐free.
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Ning Du, Kevin Stevens and John McEnroe
This paper aims to understand the effects of different presentation formats on nonprofessional investors’ judgments. Both International Financial Reporting Standards and US…
Abstract
Purpose
This paper aims to understand the effects of different presentation formats on nonprofessional investors’ judgments. Both International Financial Reporting Standards and US Generally Accepted Accounting Principles require an entity to present items of net income and other comprehensive income (OCI) either in one continuous or in two separate, but consecutive, statements but limited understanding exists about their differential effects on evaluation of company performance.
Design/methodology/approach
To investigate this research question, we used a two (Financial Position) x two (Format) randomized between-subjects experiment. Ninety-four graduate students assumed the role of investor and participated in this study.
Findings
Results of the experiment suggest that participants are more likely to incorporate OCI information presented in the one-statement format than in the two-statement format. Further analysis suggests that participants both assign more weight to OCI and perceive OCI to be relatively more important in the one-statement format than in the two-statement format, especially when the entity suffers an economic loss.
Originality/value
Results from this study provide evidence to the Financial Accounting Standards Board and International Accounting Standards Board that should be useful in evaluating the effectiveness of alternative comprehensive income reporting formats and should be of interest to accounting rule-making bodies, investors, publicly traded entities and financial analysts, among others.
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Ning Du, John E. McEnroe and Kevin Stevens
The purpose of this paper was to examine whether a less precise (or imprecise) estimate may increase investors’ confidence and improve investors’ perceptions of fair value…
Abstract
Purpose
The purpose of this paper was to examine whether a less precise (or imprecise) estimate may increase investors’ confidence and improve investors’ perceptions of fair value reliability. The main criticism of fair value accounting has been its lack of reliability perceived by investors.
Design/methodology/approach
A 2 × 3 randomized experiment was used where management incentive and information precision are manipulated.
Findings
The results from this study indicate that perceived reliability is jointly affected by management’s incentives and information precision. Reliability rating is the highest for fair value stated as a point estimate with a specified confidence level attached to it. Further analysis indicates that higher perceived reliability is related to its representational faithfulness because participants perceive that a point estimate with a specified confidence level better matches uncertainty in measuring future cash flows.
Originality/value
This is the first study to examine whether a less precise (or imprecise) estimate may increase investors’ confidence and improve investors’ perceptions of fair value reliability. Because of the subjectivity and uncertainty in fair value estimates, less precise fair value estimates may not be viewed as less reliable. In fact, using a precise format to represent fair value estimates may not be appropriate (neither reliable nor credible), because a precise point estimate fails to capture its underlying uncertainty in future cash flows. A less precise format could represent a credible choice for fair value because it reflects uncertainty and subjectivity and effectively communicates management’s assessments of variability in future cash flows.
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Ning Du and Kevin Stevens
The purpose of this paper is to investigate how accountants interpret verbal uncertainty expressions with a focus on numeric‐to‐verbal translation.
Abstract
Purpose
The purpose of this paper is to investigate how accountants interpret verbal uncertainty expressions with a focus on numeric‐to‐verbal translation.
Design/methodology/approach
Accounting for loss contingencies (SFAS 5) were chosen as a setting to study this research question. The approach used was a behavioral experiment where participants choose probability phrases for 11 numeric probabilities for two default conditions.
Findings
The results indicate a clear pattern, where thresholds for accrual and disclosure decisions can be easily identified in the numeric‐to‐verbal translation. Also, the base rate appears to affect the assessment of the uncertainty related to potential default, but does not affect mapping of numeric values to verbal terms.
Research limitations/implications
The use of 11 probabilities does not cover all regions of the [0, 1] probability line and may leave regions of the probability interval not mapping to any SFAS 5 phrase. Also, this study uses upper‐level undergraduate accounting students, whose judgments are similar to novice auditors but may differ from experienced auditors.
Practical implications
The evidence suggests that unlike verbal‐to‐numeric translation, which is unstable and context dependent, numeric‐to‐verbal translation is quite consistent among individuals, and is unlikely to be affected by the contextual information. The results complement prior findings in auditors' judgment, and suggest that interpreting uncertainty expressions can be improved if auditors are encouraged to use numeric‐to‐verbal translation when they apply accounting and auditing standards in forming an opinion on the financial report.
Originality/value
This is the first paper to examine the mapping of numeric probabilities to verbal probability terms.
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Ning Du, John McEnroe and Mary Mindak
In 1954, the American Institute of Certified Public Accountants (AICPA) Committee on Accounting Procedure released an auditing book, which listed under the heading “Material”…
Abstract
In 1954, the American Institute of Certified Public Accountants (AICPA) Committee on Accounting Procedure released an auditing book, which listed under the heading “Material” certain items of which it cautioned “material errors” could occur (AICPA, 1954, p. 1). From this date until the present, the accounting profession has struggled in its endeavors to find both a suitable definition and associated guidance to determine the materiality of information provided to financial statement users. Accordingly, in September 2015, the Financial Accounting Standards Board (FASB) issued two exposure drafts that address the concept and interpretation (our emphasis) of materiality. The releases are Proposed Amendments to Statement of Financial Accounting Concepts, Conceptual Framework for Financial Reporting; Chapter 3: Qualitative Characteristics of Useful Financial Information (Financial Accounting Standards Board (FASB), 2015a) and Proposed Accounting Standards Update, Notes to Financial Statements (Topic 235) Assessing Whether Disclosures Are Material (FASB, 2015b). In this article, the authors focus on the Chapter 3 amendments (FASB, 2015a), which proposes a new definition whose genesis is based on the US Supreme Court definition of the concept. Accordingly, the authors examined the views of two stakeholders in the US financial reporting system, auditors in large public accounting firms, and Chief Financial Officers of the Fortune 1000 companies, regarding their perceptions of the proposed definition. The authors developed the research instrument to evaluate their perceptions of the proposed definition’s potential impact on various aspects of the audit and financial reports. The authors found that both populations have negative perceptions of the materiality definition in the exposure draft and an interpretation of the responses did not indicate an addition of any benefits from its adoption. Subsequent to our solicitation for our subjects’ opinions, the FASB voted unanimously in November 2017 to remove the reference to materiality as a legal concept (FASB, 2017) and in August 2018 (FASB, 2018) amended FASB Concept Statement No. 8 to replace the materiality definition with language similar to the previously superseded FASB Concept Statement No. 2. However, as the authors will explain in this article, the fact that three authoritative definitions exist, which continue to present problems for financial statement preparers and auditors. In this analysis, the authors find evidence that auditors and investors continue to see a significant difference between the terminology of “users” and “reasonable resource provider” within the various materiality definitions.
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Tunisian tourism plays a significant role in the economical balance of the country, providing an important source of entry to foreign currency, thanks to its privileged…
Abstract
Tunisian tourism plays a significant role in the economical balance of the country, providing an important source of entry to foreign currency, thanks to its privileged geographical situation, proximate to Europe, and as well to its protected and preserved cultural, physical and environmental resources and heritage. This steadily developing tourism is the result of socio‐political stability, a prerequisite for a harmonious development of the tourism sector, known to be precarious. Investment in hotels and related services devoted to tourists is progressing. However, within the framework of diversifying tourism products, cultural and natural sites tend to offer further potential economic opportunities. The former choice made with regard to developing tourism zones focusing on the coast has caused a lack of balance in the economical development of the different regions of the country, thus instilling a feeling of frustration among many inhabitants in the remaining inland areas. A benefit from equivalent attention allowing them to better their socio‐economic conditions is desired by many. National programs in matter of developing the tourism sector, as well as setting priority zones in such a framework, and incentives for cultural and ecological tourism, have been repeatedly publicized. Yet, the administrations in charge of the execution of these programs do not seem to keep pace with the decision‐makers. Where is the problem? Why is there such a misunderstanding causing dialogue to be difficult and somehow despairing vis‐à‐vis a local population intending to be enabled to realize appropriate projects based on a sustainable development of their patrimonial wealth?