Seung Hee Choi, Samuel H. Szewczyk and Maneesh Chhabria
When major reallocations of the firm’s assets are strategically necessary, the corporation’s decision system is perhaps put to its severest test. This paper aims to argue that a…
Abstract
Purpose
When major reallocations of the firm’s assets are strategically necessary, the corporation’s decision system is perhaps put to its severest test. This paper aims to argue that a relevant balance in the corporate governance structure is highly important to assure those strategic decisions taken are successful and economically beneficial to shareholders’ wealth.
Design/methodology/approach
This study examines US firms making major acquisitions resulting in large losses or large gains and identify weaknesses and strengths in their respective governance structures.
Findings
Firms making large loss acquisitions demonstrate a balance in the corporate governance structure that heavily favors the CEO. Firms making large gain acquisitions present a more efficient balance in the configuration their corporate governance dynamics. Finally, the authors present evidence that making a major acquisition triggers rebalancing of the corporate governance dynamics to increase the effectiveness of monitoring the implementation of the acquisition. The authors find firms making large loss acquisitions make more extensive changes in the professional expertise on their boards.
Originality/value
This study provides a broad understanding of the role of corporate governance by examining overall governance dynamics and offers how one corporate governance structure does not fit all firms, at all times, in all circumstances. Instead, timely imbalances within the configurations of corporate governance dynamics over the major strategic acquisition process can be consistent with the goal of increasing shareholders’ wealth.
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Seung Hee Choi and Samuel H. Szewczyk
When major reallocations of the firm’s assets are necessary, a balance in the corporate governance structure favoring the CEO can be a necessary condition for planning and…
Abstract
Purpose
When major reallocations of the firm’s assets are necessary, a balance in the corporate governance structure favoring the CEO can be a necessary condition for planning and initiating major strategic moves. The purpose of this paper is to examine firms making major acquisitions to identify corporate governance elements that are particular to undertaking major strategic initiatives.
Design/methodology/approach
The authors test the proposition that firms making major strategic acquisitions will exhibit a corporate governance structure that is different in a number of its governance elements from firms making other acquisition decisions. The authors categorize the elements of corporate governance structures into CEO characteristics, internal monitoring, external monitoring and CEO compensation.
Findings
The authors find the propensity of acquiring firms to make major strategic acquisitions is abetted by the CEO’s attributes and compensation, by the structure of the audit committee and compensation committee, and by the firm’s prior financial performance.
Originality/value
The analysis of firms making major acquisitions presents the corporate governance dynamics of an environment that is conducive to strategic risk taking.
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Seung Hee Choi and Maneesh Chhabria
Congress and the Securities and Exchange Commission (SEC) have mandated mutual fund disclosure regimes to help investors make better investment decisions to strike an optimal…
Abstract
Purpose
Congress and the Securities and Exchange Commission (SEC) have mandated mutual fund disclosure regimes to help investors make better investment decisions to strike an optimal balance between the investors' interest in more timely and accurate portfolio holdings disclosure and the cost associated with making and disclosing the holdings information available to investors. Many academics and practitioners point out that, despite all the regulations on portfolio disclosure, fund managers can still engage in practices that go against the spirit of the rules without violating the letter of the law. The purpose of this paper is to address the empirical question of whether the practice exists, using holdings data for more than 3,000 equity mutual funds during the time period from 1995 to 2004.
Design/methodology/approach
In this paper, the authors examine window dressing by mutual fund portfolio managers, using holdings data covering more than 3,000 equity mutual funds from 1995 to 2004. The authors first investigate whether the fund holdings are materially different from universe holdings across performance quintiles based on holdings in the month of disclosure and in the following month. The second part of the analysis examines funds' patterns of buying and selling. Finally, the measure of “Buying Intensity” and “Selling Intensity” is examined, with a specific focus on the holdings data for the fourth quarter.
Findings
An examination of fund holdings finds no statistically significant evidence of systematic window dressing, either at the aggregate level or within subsamples of funds based on size or past performance. Rather, it was found that fund managers tend to chase momentum. A combination of investor sophistication and market oversight may serve to be effective in dissuading fund managers from engaging in the practice.
Originality/value
The authors' data are at the individual fund level, based on equity mutual funds holdings data provided to Morningstar on a quarterly or monthly basis (according to Elton et al., the Morningstar database provides timely and accurate mutual fund holdings information). These data allow us to infer better the investment manager intent vis‐à‐vis using 13F data, which is aggregate data across various fund families and separate accounts, or aggregate pension fund equity holdings data that includes aggregate holdings of multiple portfolio managers. In addition, the authors comment on the significance of the regulatory checks and balances that are designed to restrict fund managers' ability to window‐dress their portfolios. In summary, the combination of quantitative evidence from empirical tests and an examination of the legal framework under which mutual fund portfolio managers operate, lead to the conclusion that window dressing is not prevalent in the industry.
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Seung Hee Choi and Maneesh Chhabria
The timeliness of portfolio holdings information disclosure has been of interest among regulators, academics and practitioners since the Investment Company Act of 1940. The…
Abstract
Purpose
The timeliness of portfolio holdings information disclosure has been of interest among regulators, academics and practitioners since the Investment Company Act of 1940. The Securities Exchange Commission has been trying to strike a balance between investors' interest in timely disclosure and the potential costs associated with revealing the strategies of investment managers. The purpose of this paper is to investigate whether current rules regarding the delay in disclosure adequately protect investors, and prevent the formation of copycat portfolios that can profit from the research of the original portfolio manager.
Design/methodology/approach
The paper examine the effectiveness of different delays (30, 60 or 90 days) in disclosure of holdings for a sample of large‐cap, actively‐managed mutual funds. Copycat portfolios are constructed based on the holdings of the original portfolios, and their returns compared against the returns (net of expenses) of the original portfolios over the corresponding time frames.
Findings
The results indicate that the current delay of 60 days is sufficient to prevent such free‐riding; however, shortening the delay to 30 days would adversely affect mutual fund investors.
Originality/value
The paper aims to provide an answer to those debates on the effective delays in portfolio disclosure among academics and practitioners based on quantitative evidence. It also contributes to leave a guideline for regulators since the patterns of over‐ or under‐performance of the original portfolio returns vis‐à‐vis the copycat portfolio returns over varying delays provide important insights about possible effects of changes in disclosure regulations.
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Seung Uk Choi, Woo Jae Lee and Nak Hwan Choi
This study aims to investigate the impact of coronavirus disease 2019 (COVID-19) on the relationship between buyer firms' corporate social responsibility (CSR) activities toward…
Abstract
Purpose
This study aims to investigate the impact of coronavirus disease 2019 (COVID-19) on the relationship between buyer firms' corporate social responsibility (CSR) activities toward business partners, such as suppliers, and firm value. The study further explores the role of ownership structure in shaping this relationship.
Design/methodology/approach
The authors employ a difference-in-differences (DID) regression method to distinguish between the periods before and during the COVID-19 crisis. The authors utilize data from firms listed on the Korean stock market between 2013 and 2020.
Findings
The results show that CSR activities for suppliers have a positive impact on the value of buyer firms. Furthermore, this positive relationship is amplified during the COVID-19 period. In addition, the study finds that the positive relationship is more prominent in samples with higher ownership by controlling shareholders or foreign investors.
Originality/value
Overall, this study makes a valuable contribution to the existing literature by examining the positive effects of CSR activities on firm value and by shedding light on the role of ownership structure in influencing these effects. Additionally, the study emphasizes the significance of CSR activities for business partners in mitigating supply chain disruptions during the COVID-19 pandemic.
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Seung Uk Choi, Kun Chang Lee and Hyung Jong Na
The paper aims to estimate abnormal audit fees more precisely than the traditional audit fee model by applying an artificial intelligence (AI) method.
Abstract
Purpose
The paper aims to estimate abnormal audit fees more precisely than the traditional audit fee model by applying an artificial intelligence (AI) method.
Design/methodology/approach
The AI technique employed in this paper is the deep neural network (DNN) model, which has been successfully applied to a wide variety of decision-making tasks. The authors examine the ability of the classic ordinary least squares (OLS) and the DNN models to describe the effects of abnormal audit fees on accounting quality based on recent research that demonstrates a systematic link between accruals-based earnings management and abnormal audit fees. Thus, the authors seek to imply that their new method provides a more precise estimate of abnormal audit fees.
Findings
The findings indicate that abnormal audit fees projected using the DNN model are substantially more accurate than those estimated using the classic OLS model in terms of their association with earnings management. Specifically, when abnormal audit fees predicted using the DNN rather than the OLS are incorporated in the accruals-based earnings management model, the adjusted R2s are larger. Additionally, the DNN-estimated coefficient of abnormal audit fees is more favorably associated to earnings management than the classic OLS-estimated coefficient. Additionally, the authors demonstrate that the DNN outperforms OLS in terms of explanatory power in a negative discretionary accruals subsample and a Big 4 auditor subsample. Finally, abnormal audit fees projected using the DNN method provide a better explanation for audit hours than those estimated using the OLS model.
Originality/value
This is the first approach that utilized a machine learning technology to estimate abnormal audit fees. Because more precise measurement yields more credible research results, the findings of this study imply a significant advancement in calculating unusually higher audit fees.
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June-Hyuk Kwon, Seung-Hye Jung, Hyun-Ju Choi and Joonho Kim
This study aims to empirically analyze the effects of marketing communications, such as advertisement/promotion and social network service (SNS) content, on consumer engagement…
Abstract
Purpose
This study aims to empirically analyze the effects of marketing communications, such as advertisement/promotion and social network service (SNS) content, on consumer engagement (CE), brand trust and brand loyalty.
Design/methodology/approach
The study’s participants were 230 US and 376 Korean consumers who have used (i.e. contacted) a food service establishment (i.e. family restaurant) at least once before and who continue to use an SNS (e.g. Facebook and Instagram). This study conducted a hypothesis test using structural equation modeling analysis. In addition, hierarchical analysis was performed to further generalize and support the statistical analysis results.
Findings
Advertisement/promotion and SNS content have a statistically significant positive effect on CE. Advertisement/promotion has a statistically significant positive effect on brand trust, and SNS content has a statistically significant negative effect on brand trust. CE has a statistically significant positive effect on brand trust, and CE and brand trust have a statistically significant positive effect on brand loyalty. No statistically significant differences were shown between the US and Korean consumer groups (critical ratios for difference of path coefficient < ± 1.96). The hypothesis test results of the structural equation model analysis and hierarchical analysis were the same for the entire group.
Originality/value
The findings indicate that the overall mediating role of CE is important. To the best of the authors’ knowledge, this is the first study to investigate which marketing communication channels are most effective in the restaurant sector.
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Sang Ho Lee, Seung Uk Choi and Ji Yeon Ryu
The purpose of this study is to examine the association between additional audit efforts and clients’ future equity value. The study hypothesizes that auditors’ additional audit…
Abstract
Purpose
The purpose of this study is to examine the association between additional audit efforts and clients’ future equity value. The study hypothesizes that auditors’ additional audit efforts directly increase clients’ stock return performance. Additionally, this study expects that the additional audit effort lowers the likelihood of audit failure and improves accounting information quality, thereby indirectly increasing clients’ future equity return performance.
Design/methodology/approach
The regression and portfolio return tests are conducted using observations from 2003 to 2016. This study uses the abnormal audit hours as a proxy for additional audit effort using mandatorily disclosed audit hour data from Korean listed firms. The study also conducts mediation analyses to examine the causal intermediate steps that link audit effort to client equity return performance.
Findings
The paper documents a significant and positive association between abnormal audit hours and clients’ subsequent years’ stock return performance and Tobin’s Q. This finding is accentuated for clients audited by Big N auditors or with greater demand for superior audit service. This finding is robust after controlling for various proxies of accounting quality. The portfolio return tests also find evidence that investors cannot fully perceive the value of audit efforts. A battery of additional tests does not alter the main findings.
Practical implications
The results provide implications for investors and policymakers by emphasizing the importance of audit efforts in value-creation. Moreover, this study’s findings suggest that auditors’ assurance, insurance and information roles are all the important drivers of this value-creation.
Originality/value
This study highlights a prominent feature of audit effort that enhances the value of auditees.
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Seung Hyun Han, Eunjung Oh, Sung Pil Kang, Sumi Lee and Shin Hee Park
The purpose of this study is to investigate the link between informal learning and employees’ in-role performance and whether the mechanism through informal learning mediates the…
Abstract
Purpose
The purpose of this study is to investigate the link between informal learning and employees’ in-role performance and whether the mechanism through informal learning mediates the relationships between self-efficacy, job characteristics, trust and in-role performance.
Design/methodology/approach
Based on data (n = 294) obtained from the firms with the Work–Learning Dual System in South Korea, a structural equation modeling (SEM) analysis was conducted.
Findings
The findings indicated that trust and job characteristics affected informal learning and informal learning mediates the relationships of trust and job characteristics with job performance.
Originality/value
The significant contributions of this study to the extant literature on informal learning are as follows: first, the present study investigates a mechanism and a mediating role of informal learning using SEM, while most previous studies in literature have employed qualitative research in informal learning. Second, this study explores the mediating role of informal learning between personal/job-related determinants of informal learning and in-role performance, which has not yet been examined in existing literature. Finally, this study provides practical implications regarding how organizations can facilitate more informal learning among employees to enhance their performance.
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Seung Uk Choi, Hyung Jong Na and Kun Chang Lee
The purpose of this study is to examine the relationship between explanatory language, audit fees and audit hours to demonstrate that auditors use explanatory language in audit…
Abstract
Purpose
The purpose of this study is to examine the relationship between explanatory language, audit fees and audit hours to demonstrate that auditors use explanatory language in audit reports to explain perceived audit risk.
Design/methodology/approach
The authors construct the sentiment value, a novel audit risk proxy derived from audit reports, using big data analysis. The relationship between sentiment value and explanatory language is then investigated. The authors present the validity of their new metric by examining the relationship between sentiment value and accounting quality, taking audit fees and hours into account.
Findings
The authors first find that reporting explanatory language is positively related to audit fees. More importantly, the authors provide an evidence that explanatory language in audit reports is indicative of increased audit risk as it is negatively correlated with sentiment value. As a positive (negative) sentimental value means that the audit risk is low (high), the results indicate that auditors describe explanatory language in a negative manner to convey the inherent audit risk and receive higher audit fees from the risky clients. Furthermore, the relationship is strengthened when the explanatory language is more severe, such as reporting the multiple numbers of explanatory language or going-concern opinion. Finally, the sentiment value is correlated with accounting quality, as measured by the absolute value of discretionary accruals.
Originality/value
Contrary to previous research, the authors’ findings suggest that auditors disclose audit risks of client firms by including explanatory language in audit reports. In addition, the authors demonstrate that their new metric effectively identifies the audit risk outlined qualitatively in audit report. To the best of the authors’ knowledge, this is the first study that establishes a connection between sentiment analysis and audit-related textual data.