17 Other accounting issues (OTHER)

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    A Principle of Classification
    ( 2021) Konvalinka, Matjaz ; Penno, Mark ; Stecher, Jack
    We study a firm's decision to classify transactions as recurring or nonrecurring in a setting with no fixed classification scheme, but with the following principle: transactions classified as recurring must be more persistent than those classified as nonrecurring. This principle corresponds to existing classification standards. We find that the firm’s optimal classification strategy has a simple form: maximize the product of the (absolute) total of income-reducing nonrecurring and the total income-increasing recurring items. We characterize the possible firm values consistent with a report, and provide a measure of how opaque a firm’s valuation is given its classification choice.
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    It’s Not Who You Know—It’s Who Knows You: Employee Social Capital and Firm Performance
    ( 2021) Choi, Lyungmae ; Cho, Duckki ; Hertzel, Michael ; Wang, Jessie Jiaxu
    We show that the social capital embedded in employees’ networks contributes to firm value and provide evidence on the mechanisms. Using novel, individual-level network data, we measure a firm’s social capital derived from employees’ connections with external stakeholders. The directed nature of connections allows for identifying whether one party in a connection is a more valued contact. Results show that firms with more employee social capital perform better; the positive effect stems primarily from employees being valued by others. We provide causal evidence exploiting the enactment of a government regulation that imparted a negative shock to networking with specific sectors.
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    Long-run Performance of Debt Renegotiations: Large-Sample Evidence
    ( 2021) Xiang, Zhongnan ; Wang, Wei ; Basu, Sudipta
    We examine the long-run performance of over 17,000 debt renegotiations. We find that, compared with non-renegotiating firms matched on size, book-to-market, profitability, and investment, renegotiating firms, on average, deliver 11 (19) percent higher stock returns over the three (five) years after the renegotiation. This renegotiation effect occurs regardless of the market’s initial reaction, is strongest for lender consents/waivers, decreases with the borrower’s bargaining power, and is causal. Renegotiations lead to immediate increases in capital expenditures and working capital, but lagged improvements in earnings and cash flow from operations. Renegotiations followed by larger improvements in accounting fundamentals have better long-run stock returns.
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    Accounting comparability and managers’ discretionary disclosures over conference calls
    ( 2021) Park, Jung Eun ; Wang, Yiding ; Wei, Sijing ; Zhang, Jiarui
    This study examines how accounting comparability affects managers’ disclosure linguistic choices during the conference call. We find that managers use less complex language during the conference when their prepared financial information exhibit greater comparability with industry peer firms. More importantly, the further analyses document a negative relation between financial information comparability and the informativeness of managerial linguistic complexity of the conference call by decomposing linguistic complexity into its latent information and obfuscation components, suggesting that managers strategically use the optimal level of mandatory and voluntary disclosure channels to convey information. We also find the strategic disclosure behavior when management disclosure inceptives or market competition are high. Our additional tests indicate that while managers reduce information language, analysts tend to be more active during the conference for firms with higher financial information comparability. Overall, the findings advance our understanding of management disclosure incentives regarding voluntary information, concurrently with mandatory primary reporting.
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    Equity Market Fragmentation and Capital Investment Efficiency
    ( 2021) Pan, Jing ; Landsman, Wayne ; Stubben, Stephen
    This study examines how equity market fragmentation affects firms’ capital investment decisions. Recent empirical research finds that market fragmentation lowers trading costs and thus improves market quality. We examine whether this increase in market quality translates into greater revelatory price efficiency, where stock prices reveal with greater precision information to managers and/or creditors about firms’ investment opportunities. Consistent with this notion, our findings reveal that the association between capital investment and investment opportunities is increasing in market fragmentation. Additional findings suggest that (a) market fragmentation increases revelatory price efficiency at least in part by encouraging information acquisition by equity investors and (b) the more efficient stock prices inform both managers and creditors about firms’ investment opportunities. Inferences based on difference-in-differences and instrumental variable tests are consistent with those based on our primary findings.