Search results

The purpose of this paper is to examine the relationship between the intensity of accruals and auditor industry specialization. It investigates whether a client firm’s accruals intensity is a factor associated with the firm being audited by an industry specialist auditor.

This paper employs an empirical archival methodology using publicly available data. The sample consists of client firms that switched auditors from 2004 to 2014.

The results show that accruals intensity is positively associated with the choice of an industry specialist auditor, measured both at the national and the city levels. These findings imply that companies with high levels of accruals choose an industry specialist auditor to signal the quality of their accruals and to gain more credibility for their financial reporting.

This paper provides original empirical evidence of the association between accruals intensity and the choice of an industry specialist auditor. This link is new to the literature. Extant literature shows that firms with high levels of accruals are regarded as risky and suffer from reduced credibility in financial markets. This study contributes to the literature by showing that these firms choose an industry specialist auditor to alleviate investors’ credibility concerns about the high levels of accruals. These findings provide insightful information to audit firms, to managers of firms that inherently display high levels of accruals and to the capital markets participants in general.

This paper aims to examine whether high equity incentives motivate executives to avoid issuing convertible debt and/or to design convertible debt issues as anti-dilutive to earnings-per-share (EPS).

Tests are conducted using the Heckman two-step probit model to control for potential self-selection bias between firms that issue straight debt and those that issue convertible debt. Further, analyses are conducted separately and jointly for the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) to assess the differential impact of CEOs’ and CFOs’ equity incentives on convertible debt issuance and design decisions.

Firms are more likely to design convertible debt issues as anti-dilutive to EPS when CFOs have high levels of equity incentives, but only when the firm stock price is sensitive to diluted EPS. High CEOs’ equity incentives have limited impact of convertible debt issuance and design decisions.

The main limitation of this study is the generalizability of the findings and implications of this study due to the smaller sample size of convertible debt issues.

Prior research has shown that bonus incentives influence CEOs with disincentive for EPS dilution and motivate them to make anti-dilutive financing decisions. Further, there is evidence that high equity incentives motivate CEOs to manage earnings to boost short-term prices. This study extends prior literature by showing that high equity incentives provide executives with disincentive for EPS dilution and motivate CFOs to design convertible debt issues as anti-dilutive to EPS possibly to avoid reduced stock prices. Further, this study shows that CFOs have greater influence over convertible debt design choices than CEOs do.