http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=1b6f6267-58d0-4f12-869e-add96ec6cd0f%40sessionmgr4005&vid=0&hid=4210

Does Religion Mitigate Tunneling? Evidence from Chinese Buddhism

Du, Xingqiang¹ xqdu@xmu.edu.cn

Journal of Business Ethics. Dec2014, Vol. 125 Issue 2, p299-327. 29p. 14 Charts, 1 Map.

Abstract:

In the Chinese stock market, controlling shareholders often use inter-corporate loans to expropriate a great amount of cash from listed firms, through a process called ‘tunneling.’ Using a sample of 10,170 firm-year observations from the Chinese stock market for the period of 2001-2010, I examine whether and how Buddhism, China’s most influential religion, can mitigate tunneling. In particular, using firm-level Buddhism data, measured as the number of Buddhist monasteries within a certain radius around Chinese listed firms’ registered addresses, this study provides strong evidence that Buddhism intensity is significantly negatively associated with tunneling. This finding is consistent with the view that Buddhism has important influence on corporate behavior and can serve as a set of social norms and/or an alternative mechanism to mitigate controlling shareholders’ unethical tunneling behavior. In addition, my findings also reveal that the negative association between Buddhism intensity and tunneling is attenuated for firms that have high analyst coverage. The results are robust to various measures of Buddhism intensity and a variety of sensitivity tests.

http://eds.b.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=da8f73aa-0fdf-434f-a430-47cbcf6cafdd%40sessionmgr113&vid=0&hid=111

Substitution between Real and Accruals-Based Earnings Management after Voluntary Adoption of Compensation Clawback Provisions.

Chan, Lilian H.¹Chen, Kevin C. W.² Tai Yuan Chen² Yangxin Yu³

Accounting Review. Jan2015, Vol. 90 Issue 1, p147-174. 28p. 5 Charts.

Abstract:

To deter financial misstatements, many companies have recently adopted compensation recovery policies–commonly known as ”clawbacks”–that authorize the board to recoup compensation paid to executives based on misstated financial reports. Clawbacks have been shown to reduce financial misstatements and increase investors’ confidence on earnings information. We show that the benefits come with an unintended consequence of certain firms substituting for accruals management with real transactions management (e.g., reduce research and development [R&D] expenditures), especially firms with strong incentives to achieve short-term earnings targets, such as firms with high growth or high transient institutional ownership. As such, the total amount of earnings management does not decrease subsequent to clawback adoption. We further show that although real transactions management temporarily boosts those clawback adopters’ short-term profitability and stock performance, this trend reverses after three years. In summary, clawbacks may have unexpected effects for a subset of firms whose managers are under greater pressure to meet earnings goals.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2411412

When Heirs Become Major Shareholders: Evidence on Tunneling and Succession Through Related-Party Transactions

Sunwoo Hwang University of North Carolina (UNC) at Chapel Hill – Kenan-Flagler Business School

Woochan Kim Korea University Business School; European Corporate Governance Institute (ECGI); Asia Corporate Governance Institute (AICG)
March 19, 2014
ECGI – Finance Working Paper No. 413/2014
KDI School of Pub Policy & Management Paper No. 14-01

Abstract: 
In family firms, the succession of controlling equity stake to next generation is an issue of paramount importance. This, however, can be a major challenge in the presence of heavy inheritance or gift tax burden (high tax rate and absence of tax-saving vehicles, such as trusts or foundations) and in the absence of dual-class equity. Such regulatory environment may lead families to seek alternative ways of succession. As for families controlling business groups, one way of doing so is making use of related-party transactions among member firms. By favoring firms where the heir holds significant equity stake, the family can tunnel corporate resources to the heir. Eventually, the firm can grow large enough to acquire controlling equity stakes in other firms within the group. In this paper, we investigate this possibility using Korean chaebol firms during a sample period of 2000-2009. We identify firms where heirs become a major shareholder (treatment group) and compare them against their year-industry-size-matched firms (control group) before and after the ownership change. Difference-in-differences test with firm fixed effects reveal that treatment group firms experience greater related-party transactions, benefit from them in terms of earnings, pay out more dividends, and become more important in controlling other firms in the group.

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=67e19e74-c373-4af4-8bac-cce11e6a7a64%40sessionmgr4001&vid=0&hid=4103

The Impact of IFRS Adoption on Real Activities Manipulation: Evidence from China.

Chan Lyu¹ Yuen, Desmond C. Y.² Xu Zhang² Nini Zhang²

Journal of Applied Management Accounting Research. Summer2014, Vol. 12 Issue 2, p17-39. 23p. 1 Diagram, 9 Charts, 1 Graph.

Abstract:

This paper studies the relationship between IFRS adoption and real activities manipulation, and investigates whether IFRS reduces earnings management and improves the quality of accounting information. As China steps into the era of IFRS (International Financial Reporting Standard) adoption, it is important to focus on this issue and its implementation in such emerging markets. The paper finds that real earnings management is primarily driven by abnormal production costs, and that more companies manipulate earnings through operational transactions after IFRS adoption. Our findings suggest that real activities manipulation is positively related with IFRS implementation, and that such an association is stronger for real estate firms, especially in the case of abnormal cash flows of operations.

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=affa0588-3161-4ec3-a5c7-28593bf6a47a%40sessionmgr4001&vid=0&hid=4103

Does Mandatory IFRS Adoption Affect Crash Risk?

DeFond, Mark L.¹ Mingyi Hung^1,2 Siqi Li³ Yinghua Li⁴

Accounting Review. Jan2015, Vol. 90 Issue 1, p265-299. 35p. 5 Charts.

Abstract:

We test whether mandatory IFRS adoption affects firm-level ”crash risk,” defined as the frequency of extreme negative stock returns. We separately analyze nonfinancial firms and financial firms because IFRS is likely to affect their crash risk differently. We find that IFRS adoption decreases crash risk among nonfinancial firms, especially among firms in poor information environments and in countries where IFRS adoption results in larger and more credible changes to local GAAP. In contrast, IFRS adoption has no effect on crash risk for financial firms, on average, but decreases crash risk among firms less affected by IFRS’s fair value provisions, and increases crash risk among banks in countries with weak banking regulations. Overall, our results are consistent with the increased transparency from IFRS adoption broadly reducing crash risk among nonfinancial firms, but more selectively among financial firms, and with financial regulations playing a complementary role in implementing IFRS among financial firms.

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=de8c62d4-c214-47aa-aef0-380e12c01706%40sessionmgr4001&vid=1&hid=4103

The Economic Consequences of Financial Restatements: Evidence from the Market for Corporate Control.

Amel-Zadeh, Amir¹ Yuan Zhang²

Accounting Review. Jan2015, Vol. 90 Issue 1, p1-29. 29p. 1 Diagram, 7 Charts, 2 Graphs.

Abstract:

This paper investigates whether and how financial restatements affect the market for corporate control. We show that firms that recently filed financial restatements are significantly less likely to become takeover targets than a propensity score matched sample of non-restating firms. For those restating firms that do receive takeover bids, the bids are more likely to be withdrawn or take longer to complete than those made to non-restating firms. Finally, there is some evidence that deal value multiples are significantly lower for restating targets than for non-restating targets. Our analyses suggest that the information risk associated with restating firms is the main driver of these results. Overall, this study finds that financial restatements have profound consequences for the allocation of economic resources in the market for corporate control.

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=bb726ccc-4b2e-414b-8c92-c479620ca35a%40sessionmgr4003&vid=0&hid=4103

Earnings Management Using Classification Shifting: An Examination of Core Earnings and Special Items.

McVay, Sarah Elizabeth

Accounting Review. May2006, Vol. 81 Issue 3, p501-531. 31p. 11 Charts, 1 Graph.

Abstract:

This paper examines the classification of items within the income statement as an earnings management tool. Evidence is consistent with managers opportunistically shifting expenses from core expenses (cost of goods sold and selling, general, and administrative expenses) to special items. This vertical movement of expenses does not change bottom-line earnings, but overstates “core” earnings. In addition, it appears that managers use this earnings management tool to meet the analyst forecast earnings benchmark, as special items tend to be excluded from both pro forma and analyst earnings definitions.

Interesting commentary by Nureen CHAN Wan Wei (Year 4 accounting undergrad at SMU): https://asianextractor.com/2015/01/13/tunneling-through-intercorporate-loans-the-china-experience/comment-page-1/#comment-94

KB: So investors will not invest in firms with poor corporate governance (e.g. asymmetric information) that are more susceptible to accounting fraud and expropriation risk?

– Quick comments on Gianetti and Simonov (2006, JF): Individuals connected with company insiders are more likely to invest in weak corporate governance companies as they are able to extract private benefits or access private information to earn higher returns. Investors’ preferences for stocks are not driven only by conventional proxies for risk!

– Quick comments on Morck et al (2005): In emerging markets, investors invest in family-controlled firms, even if they knew that there are adverse selection costs and that there are potential expropriation of assets, because they perceive that it is far better to earn some returns with these dominant family firms when few alternatives are available

http://onlinelibrary.wiley.com.libproxy.smu.edu.sg/doi/10.1111/j.1540-6261.2006.00879.x/abstract

Which Investors Fear Expropriation? Evidence from Investors’ Portfolio Choices

MARIASSUNTA GIANNETTI and ANDREI SIMONOV^*

The Journal of Finance

Volume 61, Issue 3, pages 1507–1547, June 2006

ABSTRACT

Using a data set that provides unprecedented detail on investors’ stockholdings, we analyze whether investors take the quality of corporate governance into account when selecting stocks. We find that all categories of investors (domestic and foreign, institutional and small individual) who generally enjoy only security benefits are reluctant to invest in companies with weak corporate governance. In contrast, individuals connected with company insiders are more likely to invest in weak corporate governance companies. These findings suggest that it is important to distinguish between investors who enjoy private benefits or access private information, and investors who enjoy only security benefits.

http://onlinelibrary.wiley.com.libproxy.smu.edu.sg/doi/10.1111/j.1540-6261.2006.01062.x/abstract

Business Groups and Tunneling: Evidence from Private Securities Offerings by Korean Chaebols

JAE-SEUNG BAEK, JUN-KOO KANG and INMOO LEE^*

The Journal of Finance

Volume 61, Issue 5, pages 2415–2449, October 2006

ABSTRACT

We examine whether equity-linked private securities offerings are used as a mechanism for tunneling among firms that belong to a Korean chaebol. We find that chaebol issuers involved in intragroup deals set the offering prices to benefit their controlling shareholders. We also find that chaebol issuers (member acquirers) realize an 8.8% (5.8%) higher (lower) announcement return than do other types of issuers (acquirers) if they sell private securities at a premium to other member firms, and if the controlling shareholders receive positive net gains from equity ownership in issuers and acquirers. These results are consistent with tunneling within business groups.

http://rfs.oxfordjournals.org.libproxy.smu.edu.sg/content/21/5/2015.abstract?sid=5b0ee01d-15e5-466f-999e-18651558a530

Intragroup Propping: Evidence from the Stock-Price Effects of Earnings Announcements by Korean Business Groups

Gil S. Bae Korea University

Youngsoon S. Cheon Chungang University

Jun-Koo Kang Nanyang Technological University and Michigan State University

Address correspondence to Jun-Koo Kang, Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798; telephone:(517) 353-3065; fax: (517) 432-1080; e-mail: kangju@bus.msu.edu.

Abstract

Using earnings announcement events made by firms belonging to Korean chaebols, we examine propping within a chaebol. Consistent with the market’s ex ante valuation of intragroup propping, we find that the announcement of increased (decreased) earnings by a chaebol-affiliated firm has a positive (negative) effect on the market value of other nonannouncing affiliates. The sensitivity of the change in the market value of nonannouncing affiliates to abnormal returns for the announcing firms is higher if the cash flow right of the announcing firm’s controlling shareholder is higher. The sensitivity is also higher if the announcing firm is larger, performs well, and has a higher debt guarantee ratio.