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Monitoring or moral hazard? Evidence from real activities manipulation by venture-backed companies.

Description: Prior literature suggests two competing theories regarding the role of venture capitalists (VCs) in their portfolio companies. The VC monitoring hypothesis argues that VCs effectively resolve the managerial agency problem through close monitoring and restraining managers' earnings management behavior. The VC moral hazard hypothesis argues that VCs aggravate the private benefits agency problem by exerting influence over managers to artificially inflate exit stock price through earnings management. Using a sample of IPO firms between 1987 and 2002, after controlling for the magnitude of accruals manipulation (AM), I compare the magnitude of real activities manipulation (RM) between venture-backed and non-venture-backed companies. I find that relative to non-venture-backed companies, venture-backed companies show significantly less RM in the first post-IPO fiscal year. The results are robust after controlling for the VC selection endogeneity. The finding supports the VC monitoring hypothesis that VCs restrain managers' RM behavior. Furthermore, I document that venture-backed companies exhibit a significant difference from non-venture-backed companies only in the first post-IPO fiscal year. The difference between the two groups in either the IPO year or the second post-IPO fiscal year is not significant, or at best, is weak. This finding is consistent with the argument that VCs tighten their control during the lockup expiration period when insiders such as managers or founders have strong incentives to inflate earnings. By the end of the second post-IPO fiscal year when VCs exit the portfolio companies, their impact on portfolio companies' RM decreases dramatically which makes the difference between the two groups less significant. In addition, using a sample of venture-backed IPOs from 1987 to 2002, I find that companies backed by high-reputation VCs show significantly less RM than those backed by low-reputation VCs in the first post-IPO fiscal year. The results are robust to alternative VC reputation proxies. This finding is consistent ...
Date: December 2009
Creator: Liu, Xiang

Does the Knowledge of Unaudited Account Balances Adversely Affect the Performance of Substantive Analytical Procedures?

Description: Auditors use substantive analytical procedures to make assertions about the adequacy and appropriateness of client balances. The analytical procedure process consists of auditors creating independent account expectations and corroborating unusual fluctuations through obtaining and evaluating additional audit evidence. Prior analytical procedure research has found that knowledge of clients' unaudited account balances biases auditors' expectations towards the current year figures. However, this research has failed to examine the impact of biased expectations on the subsequent stages of analytical procedures. This dissertation assesses the full impact of biased account expectations on auditors' use of analytical procedures. I experimentally test the hypotheses of my dissertation through administering an experiment to senior level auditors. After inducing an account expectation bias that favors the client account balance in half the participants, I examine the auditors' cognitive investigation into an unusual account fluctuation. The results indicate that a biased account expectation negatively affects auditors' judgment quality. In particular, a biased expectation leads auditors to favor hypotheses and additional information that supports the proposition that the client's balance is reasonably stated. Alternatively, auditors with unbiased account expectations are more willing to consider all hypotheses and are able to identify the most pertinent additional information to the decision task. As a result of the different decision strategies employed, auditors who form unbiased account expectations are significantly more likely than auditors with biased account expectations to identify the correct relationship among the underlying data and the proposed hypotheses during a substantive analytical procedure.
Date: December 2009
Creator: Pike, Byron J.

Balanced Scorecards: An Experimental Study of the Effects of Linking the Evaluators' and Subordinates' Balanced Scorecards on Performance Evaluation.

Description: In the early 1990s, Robert Kaplan and David Norton introduced and developed a new performance measurement and management system called the balanced scorecard (BSC). Most studies have found that evaluators tend to ignore or are not willing to use nonfinancial measures. This study attempts to examine whether the explicit linkage between the evaluator's BSC and the subordinate's BSC makes the evaluators use nonfinancial measures in performance evaluation. This study used an experimental design where subjects were asked to evaluate two managers' performance under explicit linkage versus nonexplicit linkage conditions. The difference between performance evaluation scores of the two managers under the two linkage conditions captures the influence of explicit linkage between BSCs on performance evaluation. I used regression analyses to test my hypothesis. The results of the regression analyses support my hypothesis. This study attempts to explore one possible reason for evaluators' not using nonfinancial measures much in performance evaluation. It is the first one that studies the influence of the linkage between the BSCs on performance evaluation.
Date: December 2008
Creator: Kang, Gerui

An examination of the factors that influence an auditor's decision to use a decision aid in their assessment of management fraud.

Description: In recent years, the accounting profession has faced increased scrutiny because of scandals involving management fraud (e.g., Enron, WorldCom). In response, Statement on Auditing Standards (SAS) #99 has expanded auditors' responsibility for detecting fraud, requiring auditors to gather significantly more information in their assessment of fraud. In addition, the Public Company Accounting Oversight Board (PCAOB) will focus on fraud detection through their inspections of registered accounting firms. In light of the increased emphasis on auditors' responsibility for detecting fraud, public accounting firms face the challenge of improving their fraud detection process, including their assessment of management fraud risk. Decision aids are one way for auditors to improve their assessment of management fraud risk. In fact, several studies from the decision aid literature suggest that aids are useful tools for a variety of tasks, including fraud risk assessment. At the same time, another stream of the decision aid reliance literature, which looks at people's willingness to rely on decision aids, suggests that individuals tend to be reluctant to accept the output given by an aid. Thus, the primary focus of this paper is on uncovering factors that would encourage one to voluntarily use and rely upon a decision aid. Toward that end, 132 senior-level auditors participated in an experiment that examined how several factors (confidence, perceived usefulness, client size, and conformity pressure) affect decision aid usage and reliance. The results show that perceived usefulness and decision aid reliance are significantly related. Further, the results suggest that perceived usefulness affects reliance more than variables examined in prior studies (e.g., confidence). Finally, the results suggest that decision aid usage mediates the relationship between perceived usefulness and reliance. The results of the current study have important implications for research in both the information systems and decision aid reliance areas. First, the study shows that ...
Date: May 2006
Creator: Hayes, Thomas Patrick

Investment decisions: Influence of an Internet stock message board.

Description: The Internet provides many sources of financial information that investors can use to help with investment decisions and in interpreting companies' accounting information. One source of information is Internet stock message boards such as those at Yahoo! Finance. This source allows for anonymous postings and information exchange. Despite the possibility of the information being incorrect many individuals visit these message boards. The purpose of this study is to investigate Internet stock message boards and address the primary question: From an individual investor perspective, do message boards, which contain accounting information, influence investment decisions? The question is addressed using psychology rumor literature and attitude theories. Message board postings are a type of rumor, since not all the information is verified and is usually intended to persuade a belief or influence a decision. Further, the messages may influence an investor by causing a change in attitude about the investment. Using an experiment, message board influence on an investment decision and attitude was tested. The results indicated that individuals that received negative message board postings did have a significantly higher change in investment amount as compared to a control group that did not receive any message postings. The positive message board group and the control group were not significantly different in their amount of investment change. The results of the study also show that message board postings influenced attitude, those that received negative (positive) postings had a negative (positive) attitude about the investment. It was further found that those with a negative (positive) attitude decreased (increased) their investment. Finally, contrary to expectations, investment experience did not lead to an individual being less influenced by message board postings. This study contributes to the accounting literature by investigating an additional source of Internet financial reporting that may or may not contain correct information. The SEC ...
Date: December 2007
Creator: Pleis, Letitia Meier

The Effect of SFAS No. 141 and SFAS No. 142 on the Accuracy of Financial Analysts' Earnings Forecasts after Mergers

Description: This study examines the impact of Statements of Financial Accounting Standards No. 141 and No. 142 (hereafter SFAS 141, 142) on the characteristics of financial analysts' earnings forecasts after mergers. Specifically, I predict lower forecast errors for firms that experienced mergers after the enactment of SFAS 141, 142 than for firms that went through business combinations before those accounting changes. Study results present strong evidence that earnings forecast errors for companies involved in merging and acquisition activity decreased after the adoption of SFAS 141, 142. Test results also suggest that lower earnings forecast errors are attributable to factors specific to merging companies such as SFAS 141, 142 but not common to merging and non-merging companies. In addition, evidence implies that information in corporate annual reports of merging companies plays the critical role in this decrease of earnings forecast error. Summarily, I report that SFAS 141, 142 were effective in achieving greater transparency of financial reporting after mergers. In my complementary analysis, I also document the structure of corporate analysts' coverage in "leaders/followers" terms and conduct tests for differences in this structure: (1) across post-SFAS 141,142/pre-SFAS 141, 142 environments, and (2) between merging and non-merging firms. Although I do not identify any significant differences in coverage structure across environments, my findings suggest that lead analysts are not as accurate as followers when predicting earnings for firms actively involved in mergers. I also detect a significant interaction between the SFAS-environment code and leader/follower classification, which indicates greater improvement of lead analyst forecast accuracy in the post-SFAS 141, 142 environment relative to their followers. This interesting discovery demands future investigation and confirms the importance of financial reporting transparency for the accounting treatment of business combinations.
Date: May 2005
Creator: Mintchik, Natalia Maksimovna

Harmonization of Accounting Practices Among IAS Firms Listed in the U.S. and Its Capital Market Implications

Description: The focus of the study is on financial reporting for non-U.S. firms registered with the Securities Exchange Commission (SEC) but using International Accounting Standards (IAS). This study addresses two issues, (1) whether the comparability of financial reporting among firms using IAS in credit and equity financing jurisdictions increases over time and (2) the associated capital market implications. The motivation for the study is the SEC's ongoing assessment of IAS for possible use by non-U.S. registrants for listing and capital raising in the U.S. Previous research on variations in financial reporting practices has revealed distinctly different types of financial reporting depending on country of origin. Moreover, some research suggests that such differences in financial reporting tend to persist in spite of harmonization efforts of accounting standards. This study suggests that there may be a systematic difference between credit and equity firms' financial reporting that is manifested by the fact that credit firms' adjustments to U.S. GAAP are greater than the adjustments made by equity firms. This systematic difference has had the following capital market consequences for credit firms, (1) a decreasing strength of association between accounting earnings and share prices post-1994, (2) an increased bid-ask spread post-1994, and (3) a decreased trading volume post-1994. This may be an indication that on the average firms reporting under IAS fail to meet an important part of the SEC's second assessment criterion with respect to high quality and full disclosure, namely comparability. In addition, it seems that the revisions made by International Accounting Standards Board (IASB) have not resulted in more congruent financial reporting among firms reporting under IAS over time.
Date: December 2003
Creator: Paananen, Mari

Team performance: Using financial measures to evaluate the effect of support systems on team performance.

Description: Organizations invest in team-based systems in order to generate innovative practices that will give them a competitive edge. High-performing teams require training and other support systems to gain the skills they need as well as to create and maintain an environment conducive to their success. The challenge for managers is to make resource allocation decisions among investment alternatives to maximize team effectiveness and still ensure a financial return for company investors. This study has three objectives. The first objective is to investigate whether there is a positive relationship among organizational environment, team potency (the team's collective belief it will succeed) and team performance. Results indicate that the presence of four organizational support systems influences team potency and performance. These support systems are the Design and Measurement, Rewards, Training and Communications Systems. In addition, results indicate that team potency is a mediating variable between the Design and Measurement and Communications Systems and team performance. These results suggest that companies are able to influence team performance by investing in environmental support systems. The second objective is to examine whether team members and managers view the organizational environment differently. Results indicate that managers view the Training and Communications Systems as more important, while teams perceive the Design and Measurement System and the Rewards System to be more important to their success. Since the systems that team managers view as important may influence their investment decisions, these differences may suggest a resource alignment issue. Third, a measure of team effectiveness based on financial measures is introduced. Published literature emphasizes attitudinal, behavioral and operational measures of performance. A financial measure offers a method of evaluating performance that is similar to methods used in capital budgeting and may be consistently applied across different types of teams with different purposes. The data collection process was performed by ...
Date: May 2002
Creator: Kennedy, Frances Anne

Accounting for Human Resources: Implications for Theory and Practice.

Description: Knowledge workers are an important resource for the typical modern business firm, yet financial reporting ignores such resources. Some researchers contend that the accounting profession has stressed reliability in order to make the accounting appear objective. Others concur, noting that accounting is an insecure profession and adopts strict rules when faced with uncertainty. Accountants have promulgated a strict rule to expense human resource costs, although many know that such resources have future benefits. Some researchers suggest that any discipline must modify its language in order to initiate change toward providing useful social ameliorations. If accounting theorists extend this idea to the accounting lexicon.s description of investments in human resources, investors and other accounting user groups might gain greater insight into how a firm fosters and nourishes human capital. I tested three hypotheses related to this issue by administering an experiment designed to assess financial analysts. perceptions about alternative financial statement treatments of human resources in an investment recommendation task. I predicted that (1) analysts' perceptions of the reliability (relevance) of the information they received would decrease (increase) as the treatment of human resources increasingly violated GAAP (became more current-oriented), (2) analysts exposed to alternative accounting treatments would report a lower likelihood of recommending that their clients invest in the company in the task, and (3) financial analysts who ranked reliability (relevance) as a more important information quality would be less (more) likely to recommend that their clients buy the stock represented in the case because the treatment of human resources on the financial statements violated GAAP (was more current-oriented) as compared to analysts who ranked reliability (relevance) as being lower (higher) in importance. Analysts receiving financial statements with accounting treatments of human resource costs that violated GAAP judged such information as less reliable and were also less likely to recommend ...
Date: December 2001
Creator: Stovall, Olin Scott

An investigation of the effects of SFAS No.121 on asset impairment reporting and stock returns

Description: Prior to Statement of Financial Accounting Standards No.121 (SFAS No.121): Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, managers had substantial discretion concerning the amount and timing of reporting writedowns of long-lived assets. Moreover, the frequency and dollar amount of asset writedown announcements that led to a large “surprise” caused the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) to consider the need for a new standard to guide the recording of impairment of long-lived assets. This study has two primary objectives. First, it investigates the effects of SFAS No.121 on asset impairment reporting, examining whether SFAS No.121 reduces the magnitude and restricts the timing of reporting asset writedowns. Second, the study compares the information content (surprise element) of the asset impairment loss announcement as measured by cumulative abnormal returns (CAR) before and after the issuance of SFAS No.121. The findings provide support for the hypothesis that the FASB's new accounting standard does not affect the magnitude of asset writedown losses. The findings also provide support for the hypothesis that SFAS No. 121 does not affect the management choice of the timing for reporting asset writedowns. In addition, the findings suggest that the market evaluates the asset writedown losses after the issuance of SFAS No. 121 as good news for “big bath” firms, while, for “income smoothing” firms, the market does not respond to the announcements of asset writedown losses either before or after the issuance of SFAS No. 121. The findings also suggest that, for “big bath” firms, the market perceives the announcement of asset impairment losses after the adoption of SFAS No. 121 as more credible relative to that before its issuance. This could be because the practice of reporting asset writedowns after the issuance of SFAS No. ...
Date: December 2001
Creator: Alshabani, Waleed Mohammad

Market valuation of the translation process under SFAS No. 52: Further evidence

Description: This research investigates the information content of the translation information resulting from exchange rate fluctuations. Two hypotheses are examined. The dollar movement hypotheses investigate whether there is a positive relationship between security valuation and the translation information and whether the market assigns different weights to translation gains and losses in both the depreciating and appreciating exchange rate environments. The geographic concentration hypothesis tests whether the market's response to the translation information is geographically sensitive. Prior research on SFAS No. 8 and SFAS No. 52 has concentrated on the price and trading volume responses to the deliberations and issuance of these two accounting statements. Soo and Soo (1994) examine the long-term effect of the disclosure requirement under SFAS No. 52 on MNEs' security prices from 1981 to 1987. However, they fail to address two important issues pertinent to the MNE research--the effects of exchange rate changes and the geographic concentration. The dollar movement hypotheses provide strong evidence that under both the appreciating and depreciating exchange rate environments, a positive relationship exists between security returns and the translation information when MNEs disclose translation losses in stockholders' equity. The findings also provide evidence for a positive or at least non-negative relationship between security returns and the translation information when MNEs disclose translation gains. The findings provide evidence that the positive relationship is greater in appreciating than in depreciating exchange rate environment for losses, but no evidence of such a difference exists for gains. The evidence also indicates that the market reacts more to the translation information when translation losses are reported than when translation gains are reported in both exchange rate environments. The examination of the impact of the geographic concentration of MNEs' foreign operations provides limited evidence to support the geographic concentration hypothesis. One possible explanation for the weak findings is that ...
Date: May 2000
Creator: Lin, Henghsiu