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Comments for Shen and Huang (2008)Comments for Shen and Huang (2008)

The 2008 NTU International Conference on Finance

Masaya Ishikawa (Hitotsubashi Univ., Japan)

2008.12.11

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Abstract(1)

Main ideas:

1. EM creates information asymmetry. (EM damages the creditability of the firm’s earnings report. )

　 ↓　 H1:EM-like-movements in earnings (which are represented

as EM1 and EM2) raise the cost of capital.

2. But if firms are in good governance, the creditability of firm’s earnings report may be high even when earnings show EM-like-movements.

↓ H2:EM-like-movements in earnings have no or weak effect

on the cost of capital if firms are in good governance.

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Abstract(2)・ To test these hypotheses, this paper investigated the effect of EM on bank credit ratings.

・ This paper relates two streams of research and has the unique aspects. -As a research of the determinants of bank credit ratings: Focusing on EM as a determinants of ratings -As a research of the effect of EM on the cost of capital: Focusing on the debt cost Considering the effect of governance

Thus this paper has much implications and contributions.

・ Results are consistent with both two hypotheses.

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Comments

1. Interpretation of EM1 and EM2 in better governance:

-If CRAs consider the reported earnings trustworthy in better governance, it means that they believe the reported earnings reflect real earnings.-In that case, EM1 and EM2 may be interpreted by them as the real fundamental shocks rather than as Indexes of EM.

Are their effects considered to be neutral?

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Comments

2. EM index across years:

-If a bank has tendency to conduct EM, EM-like-movements in earnings will be observed more often.-So, measuring the each bank’s tendency of EM across years may give us more precise index of EM.

3. EM2 is the index of discretionary accruals?

-EM2 just captures the aggressiveness of LLP.-Absolute value of EM2, or volatility of EM2 may be more accurate index of discretionary accruals.