Financial fraud detection using vocal, linguistic and financial cues.
Throckmorton, Chandra S.1 firstname.lastname@example.org
Mayew, William J.2 email@example.com
Venkatachalam, Mohan2 firstname.lastname@example.org
Collins, Leslie M.1 email@example.com
Decision Support Systems. Jun2015, Vol. 74, p78-87. 10p.
Abstract: Corporate financial fraud has a severe negative impact on investors and the capital market in general. The current resources committed to financial fraud detection (FFD), however, are insufficient to identify all occurrences in a timely fashion. Methods for automating FFD have mainly relied on financial statistics, although some recent research has suggested that linguistic or vocal cues may also be useful indicators of deception. Tools based on financial numbers, linguistic behavior, and non-verbal vocal cues have each demonstrated the potential for detecting financial fraud. However, the performance of these tools continues to be poorer than desired, limiting their use on a stand-alone basis to help identify companies for further investigation. The hypothesis investigated in this study is that an improved tool could be developed if specific attributes from these feature categories were analyzed concurrently. Combining features across categories provided better fraud detection than was achieved by any of the feature categories alone. However, performance improvements were only observed if feature selection was used suggesting that it is important to discard non-informative features.
Political Incentives to Suppress Negative Information: Evidence from Chinese Listed Firms
JOSEPH D. PIOTROSKI1, T. J. WONG2and TIANYU ZHANG2
Journal of Accounting Research
Volume 53, Issue 2, pages 405–459, May 2015
This paper tests the proposition that politicians and their affiliated firms (i.e., firms operating in their province) temporarily suppress negative information in response to political incentives. We examine the stock price behavior of Chinese listed firms around two visible political events—meetings of the National Congress of the Chinese Communist Party and promotions of high-level provincial politicians—that are expected to asymmetrically increase the costs of releasing bad news. The costs create an incentive for local politicians and their affiliated firms to temporarily restrict the flow of negative information about the companies. The result will be fewer stock price crashes for the affiliated firms during these event windows, followed by an increase in crashes after the event. Consistent with these predictions, we find that the affiliated firms experience a reduction (an increase) in negative stock return skewness before (after) the event. These effects are strongest in the three-month period directly preceding the event, among firms that are more politically connected, and when the province is dominated by faction politics and cronyism. Additional tests document a significant reduction in published newspaper articles about affected firms in advance of these political events, suggestive of a link between our observed stock price behavior and temporary shifts in the listed firms’ information environment.
Rev. Financ. Stud. (2015) 28 (6):1701-1736.
The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?
Massimo Massa, Bohui Zhang, Hong Zhang
We hypothesize that short selling has a disciplining role vis-à-vis firm managers that forces them to reduce earnings management. Using firm-level short-selling data for thirty-three countries collected over a sample period from 2002 to 2009, we document a significantly negative relationship between the threat of short selling and earnings management. Tests based on instrumental variable and exogenous regulatory experiments offer evidence of a causal link between short selling and earnings management. Our findings suggest that short selling functions as an external governance mechanism to discipline managers.
Olstein Funds: Accounting Alerts Help Avert Trouble
An astute investor should be aware of the types of accounting smokescreens that companies use to disguise problems and to misrepresent the company’s economic reality. The following alerts are sometimes clear indicators of future earnings surprises and have proved valuable to investors:
- Sizable negative divergences between cash flow and net income;
- Questionable accounting for transactions with unconsolidated affiliates or joint ventures;
- Prematurely realizing revenue that may not be sustainable;
- Reversal of past reserves to artificially inflate earnings;
- Realizing nonrecurring gains, and netting these gains to hide past mistakes;
- Lowering discretionary expenditures to meet earnings targets;
- Continual characterization of material expenses as nonrecurring;
- Unrealistic depreciation schedules;
- Capitalizing expenses based on unjustified optimism;
- Serial acquisitions under purchase accounting that overstate internal earnings growth;
- Lower inventory turns or negative inventory divergences;
- Accounts receivable rising faster than sales; and
- Unrealistic pension assumptions.
Journal of Corporate Finance Volume 31, April 2015, Pages 220–245
Family control and corporate cash holdings: Evidence from China
Qigui Liu , Tianpei Luo , Gary Gang Tian,
- We examine effect of family control on cash holding in China.
- High cash holding are tunneled other than being invested or paid to shareholders.
- Multiple large shareholders tend to collude with controlling family.
- NTS reform helps to alleviate the issue of family firms’ high cash holding.
- Founders with one child, politically connected and involved in management hold more cash.
This study examines the effect of family control on the cash holding policy in China. We find that family firms with excess control rights tend to have high cash holdings that are tunneled rather than being invested or paid to shareholders. We further show that the incentive for controlling families to hold cash and for tunneling is exacerbated by the agency conflict between controlling and minority shareholders, i.e., it is weakened after the Chinese Non-tradable share (NTS) reform and strengthened by the presence of multiple large shareholders who probably play no monitoring role in Chinese family firms. Furthermore, family firms’ incentive to hold cash for tunneling is influenced by the unique characteristics of Chinese firms in the following ways: the incentive is stronger when the family founder has one child and face family succession problem, and when the founder has political connections and directly involves in firm’s management; while it is weakened by family founder’s social interpersonal trust with other entrepreneurs through their membership of Chambers of Commerce. Overall, we argue that family firms in China tend to hold high levels of cash for tunneling, which harms firm value, while the severe controlling-minority shareholder agency conflicts and unique Chinese family characteristics only make this situation worse.