The International Journal of Accounting

Synopsis

The research problem

This study analyzes the relationship between product market competition (PMC) and stock price crash risk in China, especially for firms with weak corporate governance and a lower-quality information environment.

Motivation

Emerging capital markets like China have less-developed financial systems and institutions compared to developed capital markets like Europe and the United States, making them more susceptible to stock price crash risk. The impact of product market competition (PMC) on corporate decision-making has attracted considerable attention from scholars, especially given the increasingly intense and complex strategic competition in global markets and uncertainty in the world today. However, the effect of PMC on a firm’s stock price crash risk has not been thoroughly explored. Therefore, this study investigated how PMC affects managers’ tendency to hoard bad news and how this behavior contributes to the risk of stock price crashes.

The test hypotheses

We tested two competing hypotheses: PMC is negatively correlated with crash risk, and PMC is positively correlated with crash risk.

Target population

This study should be of interest to stakeholders, including firm managers, practitioners, regulatory authorities, policymakers, and investors.

Adopted methodology

This study employed ordinary least squares (OLS), difference-in-differences analysis (DID), and path analysis.

Analysis

Using a sample of Chinese A-share listed manufacturing firms from 2000 to 2021, this study found that competitive pressure from the product market encouraged managers to hide bad news, thereby increasing future stock price crash risk. Moreover, we performed additional tests to examine how PMC affected stock price crash risk.

Findings

We found robust evidence that PMC significantly increases stock price crash risk. Further tests showed that the effect of PMC on crash risk is more pronounced for firms with weak corporate governance and a lower-quality information environment. We also provide evidence that firms in highly competitive industries tend to disclose fewer negative words in the management discussion and analysis section of the annual report and fewer risk factors in the internal control report. Moreover, we show that operational risk is the underlying driver through which PMC affects crash risk.

Synopsis

The research problem

This study examines whether international trade friction has an impact on firm disclosure tone.

Motivation

The past two decades have witnessed a large amount of trade friction worldwide. Under this background, the impact of trade friction on microenterprises is of great concern to researchers. Previous studies have shown that trade friction is related to firm operating or financial activities such as performance, investment, stock prices, loan financing, and employment. However, there are no published papers about how trade friction impacts the disclosure behaviors of firms subject to the friction. This study attempts to fill this void by investigating whether firms manage disclosure tone when they are subject to trade friction.

The test hypotheses

We test two competing hypotheses in this study. Our first hypothesis is that firms impacted by trade friction increase the positive tone of their information disclosure. Second, firms impacted by trade friction decrease the positive tone of their information disclosure.

Target population

This study should be of interest to firm managers, investors, creditors, and policy makers.

Adopted methodology

Ordinary least squares regressions and archival data.

Analyses

We conducted this study by using a sample of listed firms in China. Over the past two decades, China has been the world’s largest country subject to trade frictions. In addition, China’s weak institutional environment and language habit provide an ideal setting for this study. Firm disclosure tone is measured as the frequency difference between the positive and negative words scaled by total words in an annual report. We tested whether there is a positive/negative association between trade friction and firm disclosure tone.

Findings

We find that firms strategically increase their positive tone in annual reports when they are subject to trade friction. Further analyses reveal that the impact of trade friction on disclosure tone is more pronounced for smaller firms, firms with more financial constraints, and firms with less analyst following. In addition, this impact is attenuated when firms have stronger corporate governance. Finally, we show that using more positive tones help firms subject to trade friction improve short-term market valuation, obtain more bank loans, and have lower cost of debt.

Synopsis

The research problem

This study investigates whether the debt structure of a firm — that is, how a firm organizes its debt contracts — depends on the extent to which fair value measurement is applied to the balance sheet.

Motivation

Most public firms have a nontrivial percentage of balance sheet items measured at fair value under the mixed attribute accounting, and there is a lack of understanding of its effect on the reporting entity’s debt structure. This study focuses on two aspects of the debt structure that have both practical and theoretical relevance, namely the priority structure and the financial flexibility. A priority structure involves the simultaneous use of different priorities of debt and is common among risky borrowers. Survey results show that financial flexibility is of first-order importance regarding the debt policy of firms. Here, financial flexibility refers to a firm’s ability to pursue new investment opportunities via debt issuance.

The test hypotheses

The first hypothesis states that a borrower with a higher percentage of balance sheet items measured at fair value is less likely to have a priority structure. The second hypothesis states that a borrower with a higher portion of balance sheet items measured at fair value likely has a debt structure that is more financially flexible. The third hypothesis states that the fair value of liabilities and the fair value of assets are equally relevant to debt structure decisions.

Target population

This study focuses on nonfinancial firms in North America that are subject to the mixed attribute accounting, which measures a certain percentage of assets and liabilities at fair value.

Adopted methodology

The main tests use multivariate analysis that includes both logistic regressions and OLS regressions. Additional tests include cross-sectional analyses and the Granger causality test.

Analysis

Using a sample constructed from Compustat North America and Capital IQ (6,220 firms and 36,487 firm-year observations), the main tests regress dependent variables, namely the priority structure measures and financial flexibility, on the exposure to fair value measurement.

Findings

Results show that fair value measurement reduces information asymmetry and has favorable effects on the debt structure. A high exposure to fair value measurement reduces the need for a priority structure. A high exposure to fair value measurement also enhances financial flexibility. Additional analyses reveal that the favorable effect mainly comes from assets measured at fair value. The effect becomes weaker with respect to liabilities measured at fair value.

Synopsis

The research problem

We examine whether small audit firms adopt niche strategies to compete in the public company audit market. To that end, we focus on auditors servicing clients from one industry only (which we label as a nationwide single-industry focus) and test its association with audit quality and pricing.

Motivation

Prior research on auditor competition has mainly focused on the large (mainly Big Four) audit firms. While large and small audit firm markets are two distinct markets, little is known about competitive strategies of small audit firms in the public company audit market.

The test hypotheses

Our first hypothesis is that small audit firms adopting a single-industry focused strategy supply higher audit quality compared with audit firms that do not adopt a single-industry focused strategy or a simple industry specialization strategy, ceteris paribus. Our second hypothesis is that small audit firms adopting a single-industry focused strategy engage in discount pricing compared with audit firms that do not adopt a single-industry focused strategy or a simple industry specialization strategy, ceteris paribus.

Target population

The U.S. commercial banking sector covering the period 2004–2020.

Adopted methodology

Multivariate analyses adopting linear and probit models.

Analyses

To test our first hypothesis, we run a bank audit quality model using loan loss provisions as the dependent variable for our main analyses. Subsequent analyses adopt restatement, going concern, and internal control weaknesses models. To test our second hypothesis, we rely on a bank audit fee model. All models include relevant controls established in previous research and those for self-selection.

Findings

The evidence suggests that small audit firms adopting a nationwide single-industry focus are able to provide higher audit quality (compared with other rivals, even industry specialists) while at the same time charging lower audit fees implying cost efficiencies that are passed on to the client due to their focused expertise.