The International Journal of Accounting

This study examines the relationship between board composition and voluntary risk disclosure during uncertainty for a sample of United Kingdom-listed companies. A strand of the disclosure literature focusing on the impact of the board on corporate disclosure argues that board composition influences the extent and quality of corporate disclosure, but such literature has largely used data from stable periods and rarely on risk disclosure. Instead, using agency theory, we examine the impact of board composition on risk disclosure during corporate uncertainty for a sample of UK-listed companies for the period 2006–2015. We used content analysis to derive our measure of risk disclosure and measure board composition based on its size, independence, meeting frequency, and gender diversity. Our regression analyses controlled for the extent of firms’ agency costs, firm risk level, and the impact of mandatory risk disclosure regulation, among other control variables. Consistent with our hypotheses, we find that board size and board independence are positively associated with firms’ risk disclosure during uncertainty, but board meeting frequency and gender diversity seem inconsequential for risk disclosure. Firms’ risk disclosure is positively associated with risk level and mandatory risk disclosure. Our results are robust to alternative model specifications and endogeneity concerns. We highlight the implications of our findings for management practice and regulations.

This paper investigates the economic consequences of the mandatory adoption of International Financial Reporting Standard 2 (hereafter, “IFRS 2”) on firms’ choices between alternative executive compensation instruments. With a unique, hand-collected dataset that contains design elements of stock option plans, we find that the adoption of IFRS 2 affects both the decision to keep or to give up stock options and the choice of alternative equity compensation instruments. In contrast to recent evidence from the United States, we find that the majority of firms replacing stock options by other equity instruments switched to performance shares, not to restricted stock. Our dataset allows us to relate firms’ reactions to IFRS 2 to the three major rationales explaining stock option compensation practice, namely, optimal contracting, managerial rent extraction, and perceived cost. Our results suggest that all three rationales contribute to explaining changes in compensation design because firms with sophisticated option plans tend to keep their options, whereas design decisions by firms abandoning options are related to a lack of shareholder power.

This study examines whether better environmental performance of a firm facilitates its access to bank loans in China and how state ownership and regional environmental pollution moderate this relationship. Using a sample of Chinese firms listed on the Shanghai or Shenzhen stock exchanges from 2007 to 2015, we find that better environmental performance is associated with greater access to bank loans, which is consistent with the predictions of risk-management theory. Furthermore, we find that the relationship between environmental performance and access to bank loans is weakened for state-owned firms and strengthened for firms operating in the regions with higher environmental pollution, suggesting that institutional factors play an important role when banks make lending decisions. Our results have implications for managers, policymakers, and banks in the transition to a green economy.

Risk disclosures are among the most important types of non-financial information valued by the investors. Risk disclosures are mostly narrative and proprietary in nature; consequently, their accuracy and assurance are highly important to prevent disclosures from becoming boilerplate and losing their relevance. By exploiting the unique features of a setting where risk disclosure is mandatory and under a positive assurance requirement, we investigate whether the quality of audited risk disclosures is associated with the type of audit firm (Big-4 versus non-Big-4), the characteristics of the audit firm, and the attributes of the audit partner. Our results show an association between risk disclosure quality and auditors, but not in the expected ways. After the enforcement of a regulation requiring a detailed description of risks in the Operating and Financial Review (OFR) and a positive assurance of external audit over these disclosures, we do not document any significant Big-4 effect. The quality of risk disclosures is associated with the attributes of the audit partner, namely, familiarity with different client risk disclosures, industry expertise, and gender, independently of an affiliation with a Big-4 audit firm. Along these lines, we extend recent evidence on the audit partner effects in the assurance of non-financial narrative information.

The paper on mandatory nonfinancial risk disclosures and the effect of auditor characteristics examines a topical issue and finds unexpected results. It finds that there is no overall Big 4 effect, but that some of the Big 4 audit firms are associated with a higher quality of risk disclosure. Audit partners with wider experience, and female auditors, are associated with better risk disclosure. I review the paper, applying a predictive validity model. I suggest areas where research on this issue could be further developed.

We examine the impact of national culture on earnings. Specifically, we examine managers’ likelihood of using accrual or real earnings management (REM) and the role of culture on various attributes of earnings (accruals quality, persistence, smoothing, and predictability). We measure national culture using Hofstede’s six dimensions of culture (1984, 2001, 2010). Using data from 36 countries during 1997–2018, we find that managers are likely to use both accruals and REM in high power distance (PDI) countries. In long-term-oriented countries, managers are more likely to use REM. In uncertainty avoidance (UAI) countries, in high individualist countries, and in higher indulgent versus restraint countries, managers are less likely to use either type of earnings management. In masculine countries, managers tend to use lower accruals management and rely on production cost REM. We also find the use of accruals management and the use of REM are substitutes for each other. In addition, we are able to classify countries into four earnings quality groups based on the culture impact on the earnings attributes (primarily driven by accruals quality, predictability, and smoothing). Persistence is generally not significant in classifying countries by earnings attributes. Our findings indicate that a universal set of accounting standards is a challenging goal to achieve given the cultural diversity across countries. To improve the existing corporate governance framework and to ensure high quality and uniform financial statements, the enforcement of standards should be tailored to specific cultures, or at a minimum, corporate boards need to be more culturally diversified.

We provide a framework that builds upon the findings of Chaney, Lodh and Nandy (2021) for future research to examine the mechanism through which national culture is related to earnings management. In particular, the framework can be used to examine how specific contexts, reference points, corporate culture and economic institutions affect the relation between national culture and earnings management.