11 Financial Accounting 4: Accounting Issues Related to Labor, Politics, and Environments
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ItemLabor leverage, financial statement comparability, and corporate employment( 2020-08-22)We examine how labor-induced operating leverage shapes managers' decision to adopt more comparable financial statement. We hypothesize that firms subject to higher labor-induced operating leverage are more likely to adopt more comparable financial statements in order to facilitate more timely employment adjustment which reduces firm risk related to labor leverage. Consistent with our hypothesis, we find that proxies for labor-induced operating leverage, such as labor unions, labor intensity, and labor share are positively related to financial statement comparability. We also find that financial statement comparability increases the sensitivity of hiring to performance change, particularly, for negative operating performance, supporting our notion that financial statement comparability helps managers' timelier labor adjustment. Last, we examine whether the improved comparability prevents massive layoffs thanks to continuously more timely employment adjustment. Consistent with our prediction, we find that comparability reduces the likelihood of large-scale layoffs.
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ItemLabor Unions and Goodwill Impairment( 2020-08-19)We explore whether managers of unionized firms tend to reduce reported earnings by reporting goodwill impairment losses for a unique group of firms experiencing mergers and acquisitions. We hypothesize that the existence and strength of labor unions are positively linked to the likelihood, frequency, and amount of goodwill impairment. We document that the likelihood of goodwill impairment is positively linked to labor unions, suggesting that managers facing strong unions are more likely to recognize goodwill impairment. Further, we document that the frequency and amount of goodwill impairment are larger for unionized firms, suggesting that strong unions promote managerial incentives to recognize goodwill impairment losses more frequently and to a larger extent.
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ItemThe usefulness of accrual-based surpluses in the Canadian public sector( 2020-08-17)This paper investigates how useful accrual-based surpluses are when predicting future cash flows and surpluses in the context of the Canadian public sector. We provide evidence that surpluses incrementally enhance the ability of operating cash flows to predict future cash flows and surpluses. Analysis of our accrual quality model illustrates that in the public sector, accruals accounting is useful in mitigating the noise in operating cash flows. We also find that decomposing surpluses into operating cash flows and accruals enhances the ability of surpluses to forecast future cash flows and surpluses. Therefore, we conclude that aggregate and disaggregated surpluses are positively related to both relevance and reliability. We also find a lack of test results to support the presence of conservatism in the Canadian public sector, and confirm that the usefulness of surpluses in making predictions is independent of selected control factors.
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ItemCEOs' Prosocial Behavior, Their Careers and Corporate Policies( 2020-08-16)This paper examines the association of CEOs' prosocial behavior with their career paths and corporate policies. Using individuals' involvement with charitable organizations as a proxy for prosocial behavior, we find that prosocial individuals are promoted to Chief Executive Officers (CEOs) faster than non-prosocial individuals. In addition, firms with prosocial CEOs tend to have lower executive subordinate turnovers, implement more employee-friendly policies, experience higher customer satisfaction, and engage in more socially responsible activities. We also find that firms with prosocial CEOs have higher firm value. These results are corroborated when we compare changes in corporate policies and firm value around different types of CEO turnovers: a prosocial CEO replacing a non-prosocial CEO vs. other types of CEO turnovers. In sum, our results suggest that prosocial CEOs are more likely to make corporate decisions that benefit a wide range of firm stakeholders.
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ItemShort Selling, Margin Trading, and Corporate Social Responsibility( 2020-08-15)We examine whether firms use CSR activities to signal information about their future prospects to investors and other stakeholders using the pilot program of short selling and margin trading introduced by the China Securities Regulatory Commission in 2010 as a quasi-natural experiment. This pilot program imposes non-fundamentally driven pressure on the stock prices of the pilot firms. We find that the pilot firms enhance their CSR performance to respond to the exogenous shock of the sudden removal of the short-selling and margin-trading bans. When the effect of short selling on CSR is disentangled from the effect of margin trading on CSR performance, we find that the pilot firms respond to the exogenous shock of short-selling pressure by enhancing their CSR performance but not to the exogenous shock of margin trading. The results suggest that CSR activities can send a positive signal about future prospects to investors and other stakeholders including short sellers.
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ItemStock Price Reactions to ESG News: The Role of ESG Ratings and Disagreement( 2020-08-15)We investigate whether ESG ratings predict future ESG news and the associated market reactions. We find that the consensus rating predicts future news, but its predictive ability diminishes for firms with large disagreement between raters. Relation between news and market reaction is moderated by the consensus rating. In the presence of high disagreement between raters, the relation between news and market reactions weakens while the rating with most predictive power predicts future stock returns. Overall, while rating disagreement hinders the incorporation of value relevant ESG news into prices, ratings predict future news and proxy for market expectations of future news.
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ItemCorporate Sustainability and Stock Returns: Evidence from Employee Buy-in to Senior Management( 2020-08-15)Corporate commitment to ESG, often established by senior managers, has increased dramatically in recent years. We examine the relationship between firm ESG performance and shareholder value under various levels of employee ratings of senior management. Using calendar-time portfolio stock returns and firm-level panel regressions, we find that firms with high ratings on both ESG and employee opinions of senior management provide significantly higher future stock returns than those with low ratings on both. These firms also outperform the firms with high ESG or high employee opinions alone. We note that ESG (or social) rating and employee opinions of senior management have little correlation, which suggests that the two are not related signals. Overall, our results suggest that ESG enhances firm value when there is employee buy-in to senior managers and have implications for asset managers who integrate ESG factors and firm managers who make ESG investments and manage human capital.
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ItemPolitically Connected Boards and Corporate Investment Under Policy Uncertainty( 2020-08-05)Motivated by recent increases in political uncertainty, this paper considers how politically connected (PC) board members affect how firms respond to policy uncertainty. Prior research shows policy uncertainty results in a decline of corporate investment. We find these declines attenuate 71 to 73 percent when companies have PC board members. Cross-sectional tests indicate the strongest results when boards have more PC directors, when boards have a greater expected involvement in investment decisions, and when boards have political connections at the highest executive level (i.e. presidential committees). Using the creation of the President's Management Advisory Board (PMAB) to conduct a quasi-natural experiment, we find firms with boards that become PC due to the creation of the PMAB are less likely to reduce corporate investment in response to political uncertainty. Our findings contribute to the literature on corporate governance, political networks, and policy uncertainty.
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ItemCorporate Board Diversity and Performance: Nonlinear Dynamics( 2020-07-26)In 2018, California became the first state in the US to require gender diversity on public corporate boards in the state, and since then board gender diversity is a hot debate in the US. To provide timely evidence on this issue, we investigate the relation between corporate board diversity and financial performance and how shareholders' board gender diversity proposal impacts firm performance in the US. Consistent with the resource dependence theory and social identity theory, our findings show that the overall relation between board gender diversity and firm performance presents an inverted U-shaped nonlinear form. That is, when the corporate board becomes more gender-diverse, the gender-diverse board could incorporate different knowledge and non-redundant information in the decision-making process and gain a competitive advantage due to a better firm image of diversity. This indicates a positive effect of board diversity on corporate performance. However, while board diversity level reaches a turning point, the dysfunctional group processes (conflicts, miscommunication, and loss of trust caused by distinctiveness among different gender groups) outweigh the positive influences from gender diversity on firm performance through the deterioration of the quality of board decisions, showing that a negative relation between board diversity and firm performance emerges and becomes dominant. In addition, investors' active engagements through proxy proposals enhance the positive effect of diversity and alleviate the negative effect of diversity. Our study provides a different conceptual lens to evaluate the impact of board gender diversity on firm performance and provides insights for regulators to make proper decisions in increasing board diversity in the US.