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By : Ridwan Islam Amanda Lafave Fion Li Greg Milosek Norek Paprocki Micky Petit Frere Magie Soliman. Dr. Gilles Hilary. Background. French Accounting Academic MBA, PhD and DESCF Professor Auditor for KPMG and Ernst & Young. - PowerPoint PPT Presentation
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By : Ridwan Islam Amanda Lafave
Fion LiGreg Milosek
Norek PaprockiMicky Petit Frere
Magie Soliman
• French Accounting Academic
• MBA, PhD and DESCF
• Professor
• Auditor for KPMG and Ernst & Young
Findings
Higher financial reporting quality (FRQ) improves investment efficiency by reducing information asymmetries
High FRQ facilitates investment for constrained firms and curbs investment for firms likely to over-invest
Firms with higher FRQ are less likely to deviate from their predicted level of investment
Research Design
Estimates whether FRQ is negatively (positively) associated with investment when firms are more likely to over-invest (under-invest)
FRQ Index (AQ, AQWi, and FOG Index) Sample size = 34,791 firm-year
observations from 1993 to 2001 Examines capital expenditures,
acquisitions, and asset sales
Relevance
Dechow and Skinner (2000) Earnings Management article
Information asymmetries give rise to adverse selection and moral hazard
Opportunistic earnings management extracted from accruals quality
Dechow cited three times in papers related to earnings, cash flows, and quality of accruals
Findings
Companies with larger auditors are more likely to issue equity as apposed to debt.
Companies audited by Big 6 firms are less likely to be affected by market conditions in the amount of equity issues and in their debt ratios.
Research Design
20 years of data for main sample Exclusion of unique business models Focus on large companies Analyzing companies switching
between differently sized audit firms
Relevance
Daniel Thornton and the “Rats” Revsine’s Selective Financial Misrepresentation Hypothesis Skinner’s mention of manager bias’ Signaling theory
Findings Higher quality accounting enhances
investment efficiency by reducing information asymmetry between managers and outside investors
This effect should be stronger in economies where financing is largely provided through arm’s-length transactions compare with countries were creditors supply more capital
Research DesignRegression of cash flow activities on
accounting quality in a cross country sample
Examining accounting quality on investment efficiency at the firm level in two selected countries (US and Japan)
Relevance
Agency TheoryGibbins, Richardson and Waterhouse
“Managing Financial Disclosures”
Findings
Accounting Firms gained clients after receiving clean opinions and lost clients after receiving modified or adverse opinions
Self-regulated audit firm reviews vs. audit firm reviews administered by PCAOB
Research Design
Examined the hiring and firing of audit firms in the 12-month period following the issuance of a peer review
Sampled 1,000 reviews of audits from 1997 to 2003 including their annual reports
Excluded new listings, going private, and audit firm resignations
Relevance
Revsine’s Selective Financial Misrepresentation Hypothesis
Richardson and McCononomy’s Three Styles of Rule
Thornton’s Agency Theory
As accounting quality, auditor quality, financial reporting quality increases, information asymmetry, earnings management, adverse selection, and moral hazard decreases.
“If managers could commit to revealing their private information, investors would not fear buying securities at an inflated price."
Does Religion Matter in Corporate Decision Making in America?
Organized Labor and Information Asymmetry in the Financial Markets
Does Past Success Lead Analysts to Become Overconfident?
Analyst Coverage and Financing Decisions