Research in Accounting & Finance. Alfred Deakin Professor Ferdinand A. Gul 06 November 2018

Transcription

1 Research in Accounting & Finance Alfred Deakin Professor Ferdinand A. Gul 06 November 2018

2 Overview The Scope of Accounting and Finance Research Topics in Accounting and Finance Research Examples of studies

3 The Scope of Accounting and Finance Research Financial Accounting Management Accounting Auditing Taxation Corporate Finance Earnings management Management earnings forecasts Managerial compensations Organisational structure Audit fee Audit quality Rotation Independence Tax avoidance Corporate governance Dividend Debt maturity choices

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6 Objectives to explore how the human brain processes earnings news by looking at the cognitive neuroscience and functional magnetic resonance imaging (fmri) measure brain activation indirectly using blood oxygen level-dependent signals (BOLD), which capture spatial changes in oxygenation around neurons processing and transmitting information.

7 Objectives

8 Hypotheses Consistent to theories of reinforcement learning, neuroscientific evidence shows that dopamine neurons deep in the human brain, particularly in the ventral striatum encode reward prediction errors. When events are better (worse) than expected- Neurons in this region become more (less) active positive (negative) earnings surprises -increased (reduced) activity in the ventral striatum. Meeting expectation convey no new information- no activity on the ventral striatum.

9 Method

10 Findings 35 adult investors forecast the EPS of 60 firms traded on the NYSE or NASDAQ exchange that take either long or short positions in the firms stocks Earnings beating the consensus analyst forecast are associated with increased striatal BOLD activity Earnings missing the consensus forecast lead to decreased activity. Earnings meeting expectations, as expected, have no effect on the baseline hemodynamic level in the striatum.

11 Findings

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13 Definition of Social Capital Social capital as the norms and the networks that facilitate collective action. High social capital facilitate collective action/ cooperation. High social-capital region has individuals with a greater propensity to honor an obligation and a greater mutual trust within a much denser network

14 Definition of Social Capital At county level constructed by using the first component from a PCA that uses four different measures (Rupasingha and Goetz, 2008): sum of the religious organizations, civic and social associations, business associations, political organizations, professional organizations, labor organizations, bowling centers, physical fitness facilities, public golf courses, sport clubs, managers and promoters, membership sports and recreation clubs, and membership organizations not elsewhere classified in total number of nongovernment organizations, excluding the ones with an international focus, in 1997 divided by the population multiplied by 10,000 the number of votes cast divided by the population above 18 times 100 census response rate

15 Findings Note: Control variables removed for simplicity purpose

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18 Definition of Male CEO Facial Masculinity measure a given CEO s facial width-to-height ratio (fwhr) as the distance between the two zygions (bizygomatic width) relative to the distance between the upper lip and the highest point of the eyelid (height of upper face).

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20 Findings Note: Control variables removed for simplicity purpose

21 CEO Facial Masculinity, CEO Discretion, and Audit Fees Ferdinand A. Gul, Wen Hua Sharpe, and Zhifeng Yang ABSTRACT Prior research suggests that facial masculinity is associated with masculine behaviors such as aggression, risk seeking, and financial misreporting. This study examines whether CEO s level of masculine behavior is associated with audit fees. We use the CEO s facial width-to-height ratios (facial masculinity) as our proxy for CEO masculinity and show that CEO facial masculinity, on average, is associated with higher audit fees. We also find that the relationship is stronger for firms whose CEOs are likely to have more discretion (proxied by longer-tenured and more powerful CEOs). Collectively, our findings are consistent with the notion that firms with CEOs who have masculine faces are likely to make more aggressive accounting choices, which results in higher audit risks, particularly if they have more discretion. Keywords: CEO facial masculinity; CEO behavior; financial misreporting; audit fees. JEL Codes: M12; M41; M42.

22 Figure 1: Direct and indirect effect of CEO fwhr on audit fees Financial Misreporting Red Flags Path b Path c CEO fwhr Path a Audit Fees Path a is the direct effect of CEO fwhr on audit fees. Part b is the direct effect of CEO fwhr on financial misreporting red flags. Path c is the direct effect of financial misreporting red flags on audit fees. Path b x path c is the indirect (mediated) effect of CEO fwhr on audit fees via misreporting red flags.

23 Findings Table 3: Association between CEO fwhr and audit fees Measurable pictures Dependent Variable = LAFEE Good quality Measurable pictures pictures Good quality pictures Note: Control variables removed for simplicity purpose Predict sign (1) (2) (3) (4) D(fWHR>median)? 0.092*** 0.111** 0.092*** 0.111** (3.02) (2.10) (3.01) (2.10) Constant 8.166*** 8.234*** 8.182*** 8.232*** (42.24) (26.94) (42.54) (27.39) Year fixed effects Included Included Included Included Industry fixed effects Included Included Included Included Clustered standard errors CEO level CEO level CEO level CEO level Adjusted R Observations 5,123 2,306 5,123 2,306

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25 Definition EPA an indicator variable= 1 if the firm operates in an industry that will be required by the U.S. Environmental Protection Agency s carbon or greenhouse gas (GHG) Mandatory Reporting Rule to report its GHG emissions, and 0 otherwise DISC_CDP an indicator variable=1 if the firm discloses its carbon emissions to the Carbon Disclosure Project (CDP) and to the public, and 0 otherwise

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28 Definition Audit Quality Measures Audit Reporting Aggressiveness (ARAgg) Abnormal Accruals (AbAcc) Below-the-Line Items (BL) Small Profits (SP) Determinants of Individual Effects Education Gender Big N Experience Birth Cohort Rank Political Affiliation

29 Findings

30 Findings This suggests that the level of abnormal accruals reported by clients of an auditor at the 75th percentile of this variable s distribution would be 2.6 % higher than that reported by clients of the auditor at the 25th percentile.

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33 Findings Note: Control variables removed for simplicity purpose

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36 Findings Note: Control variables removed for simplicity purpose

37 Findings Note: Control variables removed for simplicity purpose

38 Does high quality auditing substitute for stock price informativeness in the sensitivity of CAPEX/SG&A investments to stock prices ABSTRACT In this study we show that managers of firms with high quality auditors (proxied by industry specialist auditors and auditors with longer tenure) rely less on the informativeness of stock prices (SPI) in the sensitivity of investment in capital expenditure (CAPEX) and selling and administrative expenditure (SG&A) to stock prices. These results suggest that managers rely less on SPI in their investment decision making when they can obtain informational advantages/resources from high quality auditors. We show that the channel through which high quality auditors provide knowledge/resources is through the provision of ad-hoc consultancy services to the client.

39 Findings

40 Findings

41 Examples of Studies Remuneration committee and pay performance relationship Director turnover and pay performance relationship Gender of partners, non-audit fees and auditor independence Audit partner testosterone and audit quality