http://www.sciencedirect.com.libproxy.smu.edu.sg/science/article/pii/S0304405X10001145

Journal of Financial Economics

Volume 98, Issue 1, October 2010, Pages 1–20

Tunneling through intercorporate loans: The China experience ^☆

Guohua Jiang^a, Charles M.C. Lee^b, , , Heng Yue^a

Abstract

This study investigates a particularly brazen form of corporate abuse, in which controlling shareholders use intercorporate loans to siphon billions of RMB from hundreds of Chinese listed companies during the 1996–2006 period. We document the nature and extent of these transactions, evaluate their economic consequences, examine factors that affect their cross-sectional severity, and report on the mitigating roles of auditors, institutional investors, and regulators. Collectively, our findings shed light on the severity of the minority shareholder expropriation problem in China, as well as the relative efficacy of various legal and extra-legal governance mechanisms in that country.

http://www.sciencedirect.com.libproxy.smu.edu.sg/science/article/pii/S0378426607003408

Journal of Banking & Finance

Volume 33, Issue 1, January 2009, Pages 141–156

Expropriation through loan guarantees to related parties: Evidence from China ^☆

Henk Berkman^a, , Rebel A. Cole^b, , , Lawrence J. Fu^c, 

Abstract

We identify and analyze a sample of publicly traded Chinese firms that issued loan guarantees to their related parties (usually the controlling block holders), thereby expropriating wealth from minority shareholders. Our results show that the issuance of related guarantees is less likely at smaller firms, at more profitable firms and at firms with higher growth prospects. We also find that the identity and ownership of block holders affect the likelihood of expropriation. In addition, we use this sample to provide new evidence on the relation between tunneling and proxies for firm value and financial performance. We find that Tobin’s Q, ROA and dividend yield are significantly lower, and that leverage is significantly higher, at firms that issued related guarantees.

http://onlinelibrary.wiley.com.libproxy.smu.edu.sg/doi/10.1111/jbfa.12078/abstract

Journal of Business Finance & Accounting

Volume 41, Issue 7-8, pages 831–866, September/October 2014

Relationship Networks and Earnings Informativeness: Evidence from Corruption Cases

Joseph P.H. Fan, Feng Guan, Zengquan Li and Yong George Yang^†,*

Abstract

The measurement difficulties arising from relationship-based business transactions can result in accounting opacity. We test this hypothesis by exploiting a natural experiment. Using a sample of firms that were networked with 45 high-level Chinese bureaucrats involved in corruption scandals between 1996 and 2007, we examine the patterns in the earnings informativeness of these firms before and after the exogenous break of the networks. We predict that the costs and benefits of business-politics relationships, which are not measurable by the current accounting systems, diminish the ability of accounting earnings to track a firm’s economic performance. In turn, a break in a political relationship due to anti-corruption enforcement reduces the measurement noise and improves the earnings informativeness. We find that, relative to the matched control firms, there is indeed a significant increase in the earnings informativeness of the networked firms following the public exposure of a scandal. Robustness tests fail to show that the documented improvement in the earnings informativeness is primarily due to systematic changes in the firms’ earnings management behavior or disclosure policies.

http://eds.a.ebscohost.com.libproxy.smu.edu.sg/ehost/pdfviewer/pdfviewer?sid=931db4eb-27a9-43fa-8853-4fe219e9ee30%40sessionmgr4003&vid=0&hid=4113

Journal of Business Ethics

January 2015, Volume 126, Issue 1, pp 3-19

Is Tone at the Top Associated with Financial Reporting Aggressiveness?

Lorenzo Patelli, Matteo Pedrini

Abstract

The discussion about the relationship between tone at the top and financial reporting practices has been primarily focused on the oversight role played by the board of directors and other structural elements of corporate governance. Another relevant determinant of tone at the top is the corporate narrative language, since it is a fundamental way in which the chief executive officer (CEO) enacts leadership. In this study, we empirically explore the association between financial reporting aggressiveness and five thematic indicators capturing different traits of ethical leadership from 535 annual letters to shareholders. We find that aggressive financial reporting is positively associated with CEO letters using a language which is resolute, complex, and not engaging. Our empirical findings highlight the importance of examining discretionary corporate narratives for the auditing process and the role of tone at the top in influencing accounting practices.

http://onlinelibrary.wiley.com/doi/10.1111/joms.12093/abstract

http://ejournals.ebsco.com.libproxy.smu.edu.sg/Direct.asp?AccessToken=8UPPPPOV0FU430OFJY0WUTX41J0FV0YO9P&Show=Object

Looking Attractive until You Sell: Earnings Management, Lockup Expiration, and Venture Capitalists

Dae-il Nam^1,*, Haemin Dennis Park²and Jonathan D. Arthurs³

Journal of Management Studies

Volume 51, Issue 8, pages 1286–1310, December 2014

Abstract

Earnings management occurs when managerial discretion allows managers to influence reported earnings and thus mislead some investors about the underlying economic performance and quality of the firm. This study considers how potential investors may guard against earnings management by observing negative stock price reaction at the lockup expiration period of initial public offering (IPO) firms as a negative signal. Findings from a sample of 160 newly public firms show that earnings management behaviour is stronger in IPO firms backed by venture capitalists (VCs). Moreover, VC reputation negatively moderates this relationship such that IPO firms backed by reputable VCs are less likely to manage earnings, suggesting that reputable VCs serve an auditing function following an IPO. Overall, we provide insights into signalling theory by examining negative signals arising from the behaviour of multiple agents in an IPO firm.

http://www.sciencedirect.com.libproxy.smu.edu.sg/science/article/pii/S1042444X14000474#

Journal of Multinational Financial Management

Volume 28, December 2014, Pages 62–78

Mutual funds’ holdings and listed firms’ earnings management: Evidence from China ^☆

Jing Chi^a, , , Jingjing Yang^b, 1, , Martin Young^a, c, 2, 

Highlights

• Chinese long-term mutual funds’ holdings have an insignificant impact on accruals.
• Chinese short-term funds’ holdings encourage an increase in earnings management.
• Long- or short-term funds impact different earnings management measures differently.
• Funds’ impact on earnings management is stronger in non-state-controlled firms.

Abstract

This study examines the impact of long-term and short-term mutual funds’ ownership on various types of earnings management in China. We find that both long-term and short-term funds’ holdings can lead to reduced non-core income. However, long-term mutual funds’ holdings have an insignificant impact on accrual items, while short-term funds’ holdings encourage an increase in accruals. The positive influence of short-term funds’ holdings on accruals is much stronger than their negative impact on non-core income. Finally, we find the impact of mutual funds’ holdings on earnings management is much stronger in non-state-controlled listed firms than that in state-controlled ones.

http://www.sciencedirect.com.libproxy.smu.edu.sg/science/article/pii/S0165410114000767#

Journal of Accounting and Economics

Volume 59, Issue 1, February 2015, Pages 60–79

CEO tenure and earnings management ^☆

Ashiq Ali^a, , , Weining Zhang^b, 

Highlights

• Earnings overstatement is greater in the early than in later years of CEOs׳ service.
• This association is less pronounced for firms with greater monitoring.
• Market is uncertain about CEOs׳ ability in their early years of service.
• CEOs try to influence market׳s perception of their ability by overstating earnings.

Abstract

This study examines changes in CEOs׳ incentive to manage their firms׳ reported earnings during their tenure. Earnings overstatement is greater in the early years than in the later years of CEOs׳ service, and this relation is less pronounced for firms with greater external and internal monitoring. These results suggest that new CEOs try to favorably influence the market׳s perception of their ability in their early years of service, when the market is more uncertain. Also, consistent with the horizon problem, earnings overstatement is greater in the CEOs׳ final year, but this result obtains only after controlling for earnings overstatement in their early years of service.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2184413

Pork Bellies and Public Company Audits: Have Audits Once Again Become Just Another Commodity?

Brant E. Christensen Texas A&M University – Department of Accounting

Thomas C. Omer University of Nebraska at Lincoln – School of Accountancy

Nathan Y. Sharp Texas A&M University – Department of Accounting

Marjorie K. Shelley University of Nebraska at Lincoln – School of Accountancy

September 5, 2014

Abstract: 
Prior research has established that from 2000 to 2007, auditors incorporated clients’ financial reporting risk in their pricing of audit engagements (Charles et al. 2010; Doogar et al. 2010, 2013). However, regulators have expressed concern that the economic downturn and pressure from clients to reduce audit fees has had a negative impact on auditor effort. Our evidence suggests a marked decline in the pricing of financial reporting risk during the 2006-2010 period, further suggesting a reduced focus on the risk of misreporting during that period. This decline is particularly evident among non-industry expert auditors. Connecting these findings to audit quality, we observe a higher likelihood of subsequent accounting restatements among clients whose financial reporting risk appears to be insufficiently incorporated in audit fees, particularly among clients of small audit firm offices. Our results are consistent with a return to the commoditization of financial statement audits and its negative impact on audit quality.

http://knowledge.wharton.upenn.edu/article/for-ceos-equity-and-press-releases-timing-is-everything/

When It Comes to CEOs, Equity and Press Releases, Timing Is Everything

Dec 23, 2014

Transparency is the cornerstone of corporate governance in the United States. Public companies must stick to a rigid schedule for reporting profits, losses and other financial data. And they must quickly disclose unscheduled events that current and potential shareholders will need to know about in order to assess the firm’s health and prospects.

It all seems quite simple.

But in practice, chief executives have some wiggle room: the power to choose just when to release certain types of information. New research by Wharton finance professor Alex Edmans and three colleagues shows that executives tend to use this flexibility to their advantage, releasing some types of information when it will boost the value of their own equity.

“When they expect to sell equity, they want the price to be high,” Twitter  says Edmans, who is also a finance professor at the London Business School. Continue reading →

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2407659

An Analysis of ‘Little r’ Restatements

Christine E. L. Tan Fordham University Schools of Business

Susan M. Young Fordham University

November 1, 2014
Fordham University Schools of Business Research Paper No. 2407659

Abstract: 
“Little r” restatements occur when a firm’s immaterial errors accumulate to a material error in a given year. Unlike “Big R” restatements, which must be reported through an SEC 8-K material event filing, little r restatements do not require an 8-K form or a withdrawal of the auditor opinion. This paper documents this previously unexamined form of restatement and analyzes the characteristics of the firms who have used this method of correcting accounting errors over the period 2009 through 2012. We find that approximately 12 percent of the companies in our total sample have little r restatements. Contrary to concerns voiced by regulators and research agencies, we find in univariate tests, that little r firms are generally more profitable, have lower leverage and stronger corporate governance than Big R firms and do not significantly differ from non-revising firms. We also find that the majority of these firms do not include any discussion of why these little r’s occurred. Policy implications related to disclosure are discussed.