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Article
Publication date: 18 April 2017

Mingming Feng, Tony Kang and Sandeep Nabar

The purpose of this paper is to examine the association between national societal values and corporate governance in emerging markets.

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Abstract

Purpose

The purpose of this paper is to examine the association between national societal values and corporate governance in emerging markets.

Design/methodology/approach

The sample is comprised of 511 firm-year observations representing firms from 22 emerging markets. The authors regress sample firms’ corporate governance ratings, reported by Credit Lyonnais Securities Asia (CLSA), on national societal value scores (Hofstede, 1980 variables for primary analysis and Schwartz, 1994 variables for sensitivity tests) and firm-level and country-level control variables.

Findings

The authors find that national societal values are associated with corporate governance in emerging markets. Corporate governance is strong in firms from individualistic societies, and weak in firms from uncertainty avoiding and masculine cultures.

Research limitations/implications

The authors extend the stream of literature that has established the link between formal institutions and corporate governance. The authors also extend the literature that examines how societal values influence corporate practices in emerging markets.

Practical implications

The results suggest that informal institutions, in addition to formal ones, shape corporate governance in emerging markets. Corporate stakeholders need to be aware of the different societal values of each market and develop specific strategic plans that best suit both formal and informal institutions.

Originality/value

The findings suggest that national societal values need to be considered in cross-country research on corporate governance. The results should also be of interest to policy makers advocating for or against global governance standards.

Details

International Journal of Emerging Markets, vol. 12 no. 2
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 2 May 2017

Wenxia Ge, Tony Kang, Gerald J. Lobo and Byron Y. Song

The purpose of this paper is to examine how a firm’s investment behavior relates to its subsequent bank loan contracting.

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Abstract

Purpose

The purpose of this paper is to examine how a firm’s investment behavior relates to its subsequent bank loan contracting.

Design/methodology/approach

Using a sample of US firms during the period 1992-2011, the authors examine the association between overinvestment (underinvestment) and three characteristics of bank loan contracts: loan spread, collateral requirement, and loan maturity.

Findings

The authors find that overinvesting firms obtain loans with higher loan spreads. Additional tests show that the effect of overinvestment on loan spreads is generally more pronounced in firms with lower reputation, weaker shareholder rights, and lower institutional ownership. The effect of overinvestment on collateral requirement is mixed, and investment efficiency has no significant relation to loan maturity.

Research limitations/implications

The results are subject to the following caveats. First, while the study provides empirical evidence that investment efficiency affects bank loan contracting terms, especially the cost of bank loans, the underlying theory is not well-developed. The authors leave it up to future research to provide a theoretical framework to clearly distinguish the cash flow and credit risk effects of past investment behavior from those of existing agency conflicts. Second, due to data limitation, the sample size is small, especially when the authors control for corporate governance measured by G-index and institutional ownership.

Practical implications

The finding that overinvestment is costly to corporations suggests that managers should consider the potential trade-offs from such investment decisions carefully. The evidence also alerts shareholders and board members to the importance of monitoring management investment decisions. In addition, the authors find that corporate governance moderates the relationship between investment decisions and cost of bank loans, suggesting that it would be beneficial to design effective governance mechanisms to prevent management from empire building and motivate managers to pursue efficient investment strategies.

Originality/value

First, the findings enhance understanding of the potential economic consequences of overinvestment decisions in the context of a firm’s private debt contracting. The evidence suggests that lenders perceive higher credit risk from overinvestment than from underinvestment, likely because firms squander cash in the current period by investing in (negative net present value) projects that are likely to result in future cash flow problems. Second, the study contributes to the literature on the determinants of bank loans by identifying an observable empirical proxy for uncertainty in future cash flows that increases credit risk.

Details

Asian Review of Accounting, vol. 25 no. 2
Type: Research Article
ISSN: 1321-7348

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Article
Publication date: 1 July 2005

Tony Kang

Accounting accruals are at the heart of most accounting systems. A basic premise of accrual accounting is that it provides a more timely and relevant performance measure than cash…

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Abstract

Accounting accruals are at the heart of most accounting systems. A basic premise of accrual accounting is that it provides a more timely and relevant performance measure than cash flows through a better matching of revenues and expenses. While some prior studies suggest that managers use individual accrual‐related disclosure items in an opportunistic manner, hindering market participants’ ability to predict future firm performance, the market’s expectation about future firm performance will become more accurate and consistent under accrual accounting if the market properly uses such information to set expectations about future firm performance. Consistent with this idea, our evidence shows that the frequency of accrual‐related disclosure is positively (negatively) associated with analysts’ forecast accuracy (dispersion). We interpret this finding as the presence of more detailed accrual‐related disclosure requirements enhancing the market participants’ ability to predict earnings.

Details

Accounting Research Journal, vol. 18 no. 1
Type: Research Article
ISSN: 1030-9616

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Article
Publication date: 1 November 2004

Tony Kang

In this study, we rely on the profitability of EP (earnings‐to‐price ratio) trading rules to infer the quality of earnings. Under the extrapolation hypothesis (Lakonishok…

1038

Abstract

In this study, we rely on the profitability of EP (earnings‐to‐price ratio) trading rules to infer the quality of earnings. Under the extrapolation hypothesis (Lakonishok, Shleifer, and Vishney 1994), the profitability of an EP trading rule that is based on higher quality earnings (i.e., earnings that are more representative of the fundamental profit generating power of the firm), should have higher return predictability. Among the four specifications of the EP ratio examined, i.e., the conventional earnings‐to‐price, core earnings‐to‐price, gross margin‐to‐price, and ex‐ante earnings‐to‐price, we find that core earnings‐to‐price and gross margin‐to‐price significantly outperform the other two in predicting returns. This result suggests that investors view the earnings components that reflect the fundamental operation of the firm, such as sales, to be of higher quality than the rest. Further, the evidence indicates that an EP trading rule based on gross margin‐to‐price generates an abnormal return not fully explained by the market, size, and book‐to‐market.

Details

Managerial Finance, vol. 30 no. 11
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 April 2002

Tony Kang

Anecdotal evidence suggests that emerging economy enterprises face higher uncertainty in business operations compared to their counterparts in more developed economies. However…

141

Abstract

Anecdotal evidence suggests that emerging economy enterprises face higher uncertainty in business operations compared to their counterparts in more developed economies. However, there is little empirical evidence on this issue. The objective of this study is to fill this void in the literature and examine whether there is an association between the level of development of home country economy of a multinational corporation and uncertainty about future earnings measured by dispersion in analysts' earnings forecasts. After controlling for various firm‐ and country‐level factors, I find that the forecast dispersion tends to be larger for emerging economy enterprises (i.e., non‐U.S. firms cross‐listed in the U.S. whose home country economy is better characterized as emerging) than for developed economy enterprises (i.e., non‐U.S. firms cross‐listed in the U.S. whose home country economy is better characterized as developed), despite the fact that the emerging economy enterprises tend to be more heavily followed by analysts. Overall, the evidence supports the view that business uncertainty tends to be higher in emerging economies and highlights inherent difficulties associated with predicting future firm performance of the emerging economy enterprises.

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Review of Accounting and Finance, vol. 1 no. 4
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 January 2005

Tony Kang and Yang Hoong Pang

Extending prior studies which suggest that the disclosure practice of developed economy entities tends to be more transparent than that of emerging economy entities, this study…

917

Abstract

Extending prior studies which suggest that the disclosure practice of developed economy entities tends to be more transparent than that of emerging economy entities, this study investigates whether such differences in the degree of disclosure transparency translate into different levels of value‐relevance of their accounting summary measures (i.e., book values and earnings). Consistent with theories that link disclosure quality with the impact of disclosure on investors' decisions, the evidence indicates that the accounting summary measures of developed economy entities are more value‐relevant than those of emerging economy entities in the U.S. stock market. This finding has some implications for the current policy debate in IASB regarding accounting for emerging economy entities.

Details

Review of Accounting and Finance, vol. 4 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 2 February 2015

Tony Kang, Mark Kohlbeck and Yong Yoo

The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature…

2485

Abstract

Purpose

The purpose of this paper is to investigate international variability in the pricing of accounting information using ex ante cost of equity capital estimates. Prior literature shows that financial statement amounts are relevant for investor decisions only when there is appropriate economic and legal infrastructure (Ball, 2001).

Design/methodology/approach

Accrual quality and accounting loss are focussed upon as indicators of firm risk in financial statements.

Findings

The evidence suggests that accounting information is factored into ex ante cost of equity capital in countries with strong economic and legal infrastructures but not in those with weak infrastructures. Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.

Originality/value

Findings support Ball’s notion that the role financial reporting plays in a capital market depends on the strength of economic and legal infrastructure.

Details

Pacific Accounting Review, vol. 27 no. 1
Type: Research Article
ISSN: 0114-0582

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Book part
Publication date: 9 October 2020

Chen Liu and Serena Shuo Wu

Abstract

Details

Corporate Fraud Exposed
Type: Book
ISBN: 978-1-78973-418-8

Available. Open Access. Open Access
Article
Publication date: 9 January 2025

Javad Rajabalizadeh and Hannu Schadewitz

This study investigates the impact of audit reports’ readability on informational efficiency within the Tehran Stock Exchange (TSE), emphasizing challenges in an emerging market…

282

Abstract

Purpose

This study investigates the impact of audit reports’ readability on informational efficiency within the Tehran Stock Exchange (TSE), emphasizing challenges in an emerging market context characterized by voluntary IFRS adoption and the absence of Big 4 audit firms.

Design/methodology/approach

By utilizing hand-collected data from TSE-listed companies, covering 1,097 firm-year observations from 2012 to 2023, readability is assessed using three well-established indexes (Fog, Flesch–Kincaid and Simple Measure of Gobbledygook). Informational efficiency is evaluated by analyzing how stock prices align with a random walk pattern, with additional control variables including governance factors, auditor characteristics and firm-specific indicators to enhance model robustness.

Findings

The findings indicate a positive association between audit report readability and informational efficiency, suggesting that clearer and more readable audit reports help reduce information asymmetry. Control variables such as board independence and auditor tenure showed significant impacts, supporting the conclusion that governance and auditor-specific factors enhanced informational efficiency. Agency and institutional theories are used to contextualize these findings, especially within TSE’s unique regulatory environment. The study addresses endogeneity with firm fixed effects and sample selection bias through Heckman’s two-stage procedure. The absence of Big 4 auditors in Iran prompted controls for auditor size effects, supporting our findings across different audit market segments.

Research limitations/implications

Limitations include potential omitted variable bias and challenges in generalizing findings beyond the TSE. Despite applying firm fixed effects and Heckman’s two-stage procedure to control for endogeneity, some residual biases may remain.

Practical implications

For regulators, auditors and investors, these findings underscore the value of promoting readability in audit reports to improve informational efficiency, particularly in emerging markets with evolving regulatory standards.

Originality/value

By focusing on audit report readability within an emerging market lacking Big 4 presence, this study offers unique insights into how readability can foster transparency and investor confidence in regions with distinct market dynamics.

Details

Journal of Accounting in Emerging Economies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2042-1168

Keywords

Available. Open Access. Open Access
Article
Publication date: 2 December 2024

Javad Rajabalizadeh and Hannu Schadewitz

This study aims to investigate the impact of audit partners’ narcissism on the readability of audit reports for companies listed on the Tehran Stock Exchange (TSE). It examines…

460

Abstract

Purpose

This study aims to investigate the impact of audit partners’ narcissism on the readability of audit reports for companies listed on the Tehran Stock Exchange (TSE). It examines the effects of narcissism among both lead and review audit partners on the clarity of audit reports, considering the regulatory requirements and auditing practices within the Iranian financial reporting context.

Design/methodology/approach

This paper analyzed 2,691 firm-year observations from TSE-listed companies spanning 2011–2023, using ordinary least squares regression. Readability of audit reports was assessed using the FOG index, with the size of partners’ signatures serving as a proxy for narcissism.

Findings

The findings indicate a significant negative relationship between increased narcissism and audit report readability; higher levels of narcissism correspond with elevated FOG index scores. Narcissism in lead partners notably diminishes readability more than that of review partners. This pattern holds across various robustness checks, including alternative readability metrics, variations in auditor engagement complexity, auditor specialization, subsets of qualified audit reports and considerations for endogeneity. Audit reports for economically significant clients tend to be clearer, suggesting a preference for reputation management over yielding to client pressure. Although no direct link was established between partners’ quality and readability, a positive relationship exists between audit firm rank and partners’ narcissism. Furthermore, interactions between auditor and CEO narcissism increase report complexity, especially in contentious negotiation scenarios. Despite regulatory advancements such as International Auditing Standard 701, its moderating effects were found to be inconsequential, highlighting the persistent influence of narcissism on audit report outcomes.

Originality/value

This research expands the understanding of how auditor personality traits, particularly narcissism, affect audit outcomes. By exploring the influence of narcissism on report readability within the Iranian context, this study fills a notable gap in the literature on emerging markets and non-Western reporting environments, providing valuable insights into global audit practices.

Details

Managerial Auditing Journal, vol. 40 no. 1
Type: Research Article
ISSN: 0268-6902

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