01 Other Research Topics
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ItemThe Un-Faithful Representation of Financial Statements: Issues in Accounting for Financial Instruments( 2018-09-28)Both the International Financial Reporting Standard (IFRS) and accounting standards for the US GAAP categorize hedging relationships as falling into several buckets. Two of these buckets are of relevance in this paper: (a) hedging the volatility of fair values, and (b) hedging the volatility of future cash flow. In this paper, I argue that at least five accounting treatments lead to reporting information that distort the true transactions. The four treatments relate to (a) the Hypothetical Derivatives Method, (b) using CVA and DVA as valuation adjustments of the values of derivative assets and liabilities, (c) hedging unrecognized firm commitment and (d) separation of embedded derivatives and (e) failure to disclose that hedging is essential a substitution of risk exposure. To remedy these resulting violations of faithful representation of actual and true transactions, both standards-setting boards need to undertake significant revisions of accounting for financial instruments to allow for effective adherence to the principle of “faithful representation.”
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ItemOpportunity, ethnicity, gender, and CPA exam performance( 2018-09-01)Given the preeminence of the CPA certification as a measure of professional achievement and a critical element to advancement in the profession, as well as the concerns over lack of diversity in the accounting profession (AICPA 2017), a key policy question is how to improve candidates’ performance on the CPA exam. In this paper, we examine the role of educational and environmental (socioeconomic and segregation) factors representing opportunity, as well as gender and ethnicity (as defined by the National Association of State Boards of Accountancy), on the CPA exam performance. To accomplish this, we first document CPA exam performance across various demographic, educational, and environmental factors. We then develop several multivariate models to understand the influence of various educational and environmental factors representing opportunity on the CPA exam performance of these groups. Finally, we springboard from our findings to offer suggestions to educators, professional firms, and CPA societies, to implement new, or modify current, programs to meet the profession’s need for more qualified CPAs and its diversity/inclusion goals.
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ItemAn Examination of Individual Customers’ Use of Earnings Benchmarks( 2018-08-31)While an extensive body of prior empirical research documents that a firm’s ability to meet relevant earnings benchmarks is important to equity and debt investors, there is little evidence on whether meeting earnings benchmarks is important to non-investor stakeholders as theory suggests. This study examines this issue, focusing on customers. Using both levels and changes analyses on a proprietary dataset of customers’ perception scores, we find that individual customers’ perceptions are positively associated with a firm’s ability to beat the profit benchmark. This finding suggests that, just as creditors use the profit benchmark to infer a firm’s ability to meet its long-term financial obligations, customers rely on the profit benchmark to infer a firm’s ability to fulfill its implied future obligations on products or services. Consistent with this interpretation, the positive association between the profit benchmark and customer perceptions is heightened for firms in durable goods industries where such obligations are most significant. Unlike investors, customers significantly downgrade their perceptions once a firm exceeds the profit benchmark by a wide margin, suggesting that customers may question a firm’s business practices when its profits appear to be excessive. We further find that beating the profit benchmark is more important to customer perceptions of firms in the introduction or decline life cycle stages and of firms with high default risk. On the other hand, beating the profit benchmark is less important to customers when firms exhibit superior non-financial performance based on widely publicized ratings of product quality, corporate reputation, and corporate social responsibility. These findings highlight the contextual nature of customers’ reliance on the profit benchmark. This study provides the first empirical evidence on the theoretical prediction that non-investor stakeholders rely on relevant earnings benchmarks to evaluate firms.
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ItemOther Comprehensive Income and the Market's Processing of Earnings Information( 2018-08-27)This study examines whether OCI items impact the market’s ability to process earnings in the contexts of uncertainty/disagreement among market participants and value-relevance. We find that earnings and OCI gains and losses are individually associated with reduced market uncertainty/disagreement and are positively impounded into share prices by investors. However, we also find that both OCI gains and (especially) losses interact with earnings, weakening 1) the negative relation between earnings and market uncertainty/disagreement and 2) the value-relevance of earnings. Further, we find that the apparent effects of OCI gains and losses on the market’s processing of earnings information are stronger in weak information environments, as measured by analyst following. Our findings suggest that OCI conveys information to the market that is useful but also noisy, thereby potentially hindering the market’s ability to interpret earnings, particularly in weaker information environments.
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ItemEthics Training Approaches in Accountants’ Continuing Professional Education( 2018-08-27)Accountants perform a critical social function of engendering public trust in corporate reporting. As such, ethical misconduct committed by accountants tends to have a broader impact and be viewed as damaging to society as a whole. Mandated continuing ethics training by professional and industry regulators underscores the import of accountants’ ethical behavior; however, there exists uncertainty as to how best to conduct ethics training so that it achieves its goal of enhancing ethical capability. Our research evaluates the effectiveness of two ethics training approaches adopted in accounting continuing professional education ethics workshops. In one set of workshops, instructors employ a traditional accounting ethics training approach, whereas in the other set, instructors incorporate an action-oriented training approach. Our results indicate participants who underwent the action-oriented training are significantly more likely to refuse to concede to the client in a questionable and pressured setting than individuals who participated in the traditional ethics training. As far as we are aware, this is the first study that compares two pedagogical approaches to ethics training in the continuing professional education setting, the primary positive mechanism the profession uses to enhance ethical action by professional accountants.
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ItemAccounting Enforcement’s Determinants—A Global Study( 2018-08-22)The purpose of this study is to investigate whether the national characteristics of culture, religion and political factionalization are associated with the strength of accounting enforcement. The study uses data on percentages of religious adherents in a sample nation, the Hofstede cultural dimensions and political factionalization as key independent variables. This study also controls for national legal code (e.g., Common Law or Civic Code) and market liquidity. It uses factor analysis to generate factor scores from the data. These factor scores are then used as the independent variables. The dependent variable, accounting enforcement, is drawn from Brown, Preiato and Tarca (2014). The findings demonstrate that these national characteristics are strongly associated with national accounting regulatory enforcement. The implications of this research are that national characteristics should be taken into account in considering the impact of accounting standards on accounting comparability across nations. The limitation of this study is that, like much international research, the sample size is limited, here to 42 nations. This study provides an important contribution to the literature by helping establish that national characteristics do affect accounting enforcement efforts cross-nationally. This helps researchers and regulators better understand whether international standards can provide the link in comparability across nations that proponents are seeking. It does so by focusing on the variation in enforcement across nations rather than on the standards themselves.
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ItemThe Democratization of Investment Research: Implications for Retail Investor Profitability and Firm Liquidity( 2018-08-12)We find evidence that crowdsourced investment research facilitates informed trading by retail investors and improves firm liquidity. Specifically, retail order imbalances are strongly correlated with the sentiment of Seeking Alpha articles, and the ability of retail order imbalances to predict returns is roughly twice as large on research article days. In addition, firms with exogenous reductions in Seeking Alpha coverage experience increases in bid-ask spreads and price impact, with the effect being stronger for firms with high retail ownership. Our findings suggest that technological innovations have helped democratize access to investment research with important implications for firm liquidity.
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ItemAccounting for Combinations of Nonprofit Hospitals After SFAS 164: Has the FASB Achieved its Objectives?( 2018-08-12)In 2009 and 2010, the Financial Accounting Standards Board (FASB) adopted new accounting standards for nonprofit mergers and acquisitions. The FASB’s goals included reducing “pooling” accounting, providing more fair value information, recognizing more acquired identifiable intangible assets, and better reflecting the inherent contributions contained in many combinations. FASB expected that many combinations would involve little or no consideration paid. It expressed concern that some organizations would undervalue assets acquired, especially intangible assets. This study examines a sample of 2012-2017 nonprofit hospital acquisitions to compare practice with the FASB’s expectations. In our sample, almost all nonprofit combinations were accounted for as acquisitions, not mergers. Frequently, no consideration was paid. More acquirers recorded inherent contributions than goodwill. Finally, a lower level of intangible assets was recognized in nonprofit business combinations, relative to total non-goodwill assets acquired, than in acquisitions by public companies.
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ItemIs there a confidence interval for that? A critical examination of null outcome reporting in accounting research( 2018-08-02)This study evaluates how null outcomes are analyzed and reported by accounting researchers based on an examination of two years of publications in The Accounting Review. As null outcomes reflect an inability to reject a null they, unlike rejections, do not lend themselves to specifically conclusive interpretations. Rather, substantive descriptive analyses are needed to draw useful inferences from such outcomes. In the 35 articles we identify as presenting substantive null outcomes, however, inappropriately conclusive interpretations of these outcomes border on monolithic while scant attention is given to providing the descriptive analyses needed to draw useful insights from them. Moreover, these deficiencies span articles published across all of the major accounting research areas (i.e., financial, managerial, audit, and tax) and encompass both archival and experimental designs. The analysis also proposes the use of descriptive techniques, particularly interval based analyses (e.g., Dyckman and Zeff, 2014; Dyckman, 2016)), as a desriable alternative for interpreting null outcomes.