The International Journal of Accounting

Synopsis

The research problem

This paper aims to test whether an acquirer’s past earnings quality (proxied by the level of earnings management) serves as an indicator of its trustworthiness in view of the inclusion of an earnout agreement in an acquisition contract.

Motivation

Prior studies highlighted the benefits of earnout agreements, showing that they help reduce adverse selection problems and valuation risk faced by the acquirers. However, not much attention has been paid to the risks that these contracts entail. The majority of earnouts are based on accounting performance measures, which may be subject to earnings management by the acquirer to reduce, or even avoid, contingent payments. Therefore, the decision to include an earnout in an acquisition may depend on the sellers’ perceived probability that the acquirer will use opportunistic tactics to avoid the contingent payment, as indicated by the acquirer’s past behavior.

The test hypotheses

H₁: The likelihood of inclusion of earnouts in acquisition deals is negatively associated with the level of earnings management in the acquirer’s past financial statements.

H₂: The relation between earnings management and the use of earnouts is stronger when the bidder has no acquisition track record.

Target population

M&A advisors, financial analysts, stakeholders of companies engaging in M&A deals.

Adopted methodology

Logit regressions, propensity score matching analyses for robustness.

Analyses

Using a sample of 8,968 acquisition deals completed by US listed companies between 2002 and 2014, we examine the association between the use of earnouts and bidder’s earnings quality (proxied by the level of earnings management) controlling for the determinants of the use of earnouts described by previous literature. We collected acquisitions data from Thomson ONE Banker and accounting information from Compustat. Using logit models, we regress the choice to include an earnout in an M&A deal on several earnings management proxies and on the interaction between the latter variables and bidder’s acquisition track record.

Findings

We find robust evidence that the level of the acquirer’s past earnings management is negatively associated to the probability of inclusion of an earnout in acquisition contracts. This association is stronger if the bidder has no prior acquisition history and is robust to various measures of earnings management and to controls for other external monitoring mechanisms.

Synopsis

The research problem

This paper investigates how corporate social responsibility (CSR) moderates the adverse effect of product failure on promoting tweeting about a firm’s products, which subsequently affects sales growth.

Motivation or theoretical reasoning

Under the social contract theory, high-CSR-performance firms gain social approval and acceptance as they are perceived to have fulfilled their obligations and met society’s expectations. Society is more forgiving to these firms when they are involved in negative events such as product failure.

The test hypotheses

We hypothesized that firms’ CSR performance moderates the negative effect of product failure on tweet sentiment and that the increase in tweet sentiment leads to higher future sales growth.

Target population

We focused on the automotive industry due to its vast consumer base. We sampled all 16 car manufacturers that operate in the US.

Adopted methodology

Using aspect-based sentiment analysis, we identified 302,718 tweets from Twitter about the quality of cars and extracted the tweet sentiment. We used the car recall records to proxy for product failure.

Analyses

Multivariate regressions were used to test our hypotheses.

Findings

We found that firms’ CSR mitigates the negative effect of product failure on tweet sentiment about product quality and, subsequently, promotes sales growth. Our findings show that firms with strong CSR received significantly more net positive tweets than did those with weak CSR. Moreover, a 10% increase in net positive tweets was associated with a 0.43% increase in quarterly sales growth ($\mathrm{\text{median}}=1.38\%$). Of the three CSR types, governance CSR exerted the strongest effect on tweet sentiment and environmental CSR the second, while social CSR ranked the third. This paper extends the literature by investigating the effect of CSR on sales growth by altering social media tweeting.

Synopsis

The research problem

This study investigates whether the adoption of the International Financial Reporting Standard (IFRS) for small- and medium-sized entities (SMEs) is linked to national culture.

Motivation or theoretical reasoning

Little is known about the role of cultural dimensions in explaining countries’ adoption of the IFRS for SMEs. Focusing on this topic could contribute to a better understanding of the adoption of the IFRS for SMEs and would enrich the international accounting literature. Conducting a specific empirical investigation into the IFRS for SMEs is motivated by the difference between the full IFRS and the IFRS for SMEs, by the inherent characteristics of SMEs, and by differences between the number of countries that adopted the full IFRS and those that have adopted the IFRS for SMEs.

The test hypotheses

We used Hofstede’s dimensions of national culture (Power Distance, Individualism, Masculinity, Uncertainty Avoidance, Long-term Orientation, and Indulgence) to capture a country’s culture. We expected that these six dimensions would play a crucial role in countries’ decision to adopt the IFRS for SMEs. Based on previous relevant studies, we developed a research hypothesis for each of the mentioned cultural dimensions.

Target population

We selected the 101 countries included in Hofstede’s study. For each country, we looked at the data available on the IFRS website to identify its position in relation to the IFRS for SMEs. The final sample included 97 countries.

Adopted methodology

After classifying countries in three groups (Non-Adopters, Voluntary Adopters, and Mandatory Adopters), we performed several statistical regressions with adoption of the IFRS for SMEs as the dependent variable and the cultural dimensions as the relevant independent variables.

Analyses

Among others, we used several logistic regressions to estimate the association between national culture and the use of the IFRS for SMEs. We initially performed a statistical estimation for each of the six dimensions of national culture. Then, we included all cultural dimensions simultaneously. Finally, we performed robustness tests by applying multinomial regressions and focusing on the group of full IFRS adopters.

Findings

Empirical results revealed that the adoption of the IFRS for SMEs was less likely in countries with the highest levels of individualism. This conclusion held for both Mandatory and Voluntary Adopters. In contrast, the other dimensions of national culture were not significant in explaining the adoption of the IFRS for SMEs by national accounting regulators.

Synopsis

The research problem

I examine management earnings guidance patterns measured by the specific quarters in which a firm issues guidance each year. Using a constant sample, I document that a large and increasing percentage of firms provide guidance in consistent patterns over consecutive years, suggesting that the benchmark of their current guidance provision should be their prior guidance, not no guidance as implicitly assumed in prior empirical research that focuses on guidance levels.

Motivation and theoretical reasoning

I study changes in guidance provision to recognize firms’ prior guidance as their benchmark, which is also consistent with survey evidence (e.g., , ) and the dynamic disclosure theory (e.g., , ) that managers’ default disclosure choice is likely their prior disclosure practice rather than no disclosure at all.

The test hypotheses

Controlling for known guidance determinants, I hypothesize that firms with consistent (but not necessarily frequent) past guidance act more like regular guiders; their subsequent guidance provisions are less likely to change and are less sensitive to guidance determinants.

Adopted methodology and findings

Controlling for known guidance determinants, I find that firms with consistent (but not necessarily frequent) past guidance act more like regular guiders; their subsequent guidance provisions are less likely to change and are less sensitive to guidance determinants. These results are robust to using a sample matched on the propensity of issuing consistent guidance in the past and to using a two-stage model that explicitly models the past guidance consistency.

Furthermore, I find that the timing and the precision of guidance with a consistent pattern exhibit less temporal variability than guidance with an inconsistent pattern.

Target audience and implications

Overall, while prior studies use past guidance frequency to identify regular guiders, my findings suggest that the consistency in past guidance patterns can significantly refine this identification. Moreover, to better understand managers’ guidance decisions, researchers can recognize a firm’s past guidance as the benchmark (i.e., the default choice) of its current guidance by examining the changes in guidance patterns.

In this discussion of [(). Consistency in management earnings guidance patterns, The International Journal of Accounting, 57, p–p. https://doi.org/xxxx], I point out the research design considerations and provide some directions for future research in the area of voluntary disclosures related to management earnings guidance.

Synopsis

The research problem

In recent decades, the Chinese government has taken several measures to liberalize its stock market to attract foreign investment. In this survey, we described these liberalization measures and reviewed the research on their consequences.

Motivation

Along with the rapid development of the Chinese stock market, increasing numbers of global investors have shown interest in this market. As a result, we also witness a steady growth in the number of empirical research and review studies published in the international journals. However, no published reviews have focused on stock market liberalization, which is an important perspective requiring further investigation. Our study bridges the gap by making a thorough and in-depth review on issues associated with the stock market liberalization in China.

The discussed questions and implications

In analyzing this literature, we focused on two dimensions: (1) how liberalization impacts five corporate-level accounting and financial issues—corporate governance, information environment and financial disclosure, earnings quality, value-relevance of accounting information, and auditing, and (2) how liberalization improves the Chinese stock market as a whole and affects asset pricing in this market. Based on the issues explored in the literature, we provide suggestions for future research in our concluding remarks.