The International Journal of Accounting

Synopsis

The research problem

We measured the sensitivity of bank market values to capital and regulatory adjustments (RAs) applied to bank capital using a novel approach of measuring value relevance.

Motivation or theoretical reasoning

Regulators require banks to apply adjustments to book equity to calculate regulatory capital, where book equity is the starting point of the calculation of capital ratios. The regulators emphasize the benefits of these adjustments. Making banks hold more capital, the adjustments should contribute to the reduction of procyclical amplification of financial shocks throughout the banking system, financial markets, and the broader economy. However, RAs are underresearched: empirical research focuses on a few of them, such as the prudential filter on AFS securities, and their effects in specific circumstances. This prompts questions about the overall relevance of RAs. This paper then examines the sensitivity, expressed in elasticities, of market values to capital and RAs. Are adjustments, on their own or in aggregate, value relevant? Are market values more or less sensitive to different measures of bank capital, such as book equity, Tier 1, or total capital? Does the sensitivity evolve over time? And if so, why?

The test hypotheses

• H₁: The elasticity of bank book equity with respect to market value is 1.
• H₂: The elasticities of RAs with respect to market values are 0.

Target population

US bank holding companies over the years 2001Q1–2022Q3.

Adopted methodology

We used panel data analyses to estimate log–log models. These models transform all variables such as market values and accounting values into logs.

Analyses

We used log–log models as an alternative to traditional additive-linear models because the coefficients of the latter are sensitive to sample choice, choice of time period, and outlier treatment. The response coefficients in log–log models are scale-free elasticities that measure, with some precision, the proportional change in the dependent variable associated with a proportional change in the independent variables.

Findings

Our results show that the sensitivity of bank book equity converges to 1 when market uncertainty is low and when banks’ Tier 1 ratios reach 12% of risk-weighted assets (RWAs). Market values are more sensitive to changes in capital of highly geared banks when market uncertainty is high, with shareholders responding positively in particular to increases in Tier 1 and total capital. This is consistent with risk-shifting by shareholders. Market values are generally less sensitive to prudential filters, such as those on unrealized gains and losses on AFS securities.

We provide a detailed response to Ines () discussion of our study on the sensitivity of bank market values to regulatory adjustments (RAs) of capital. Initially, we investigated the relevance of these adjustments, motivated by ongoing changes in the definition of bank capital aimed at ensuring financial stability. Our research utilized log-log models to address the challenges of alternative methodologies that may not effectively capture the value relevance of bank capital and RAs. Our results underscore the stability and predictability of coefficients that measure value relevance.

We further explore the valuation perspective, distinguishing between a “valuation” model for a theory of the relation between market and accounting values and a statistical model that estimates the sensitivity of market values to changes in accounting variables. We advocate for the use of log-log models due to their robustness in estimating response coefficients as elasticities. This approach minimizes issues related to scale and distribution assumptions inherent in additive-linear models.

We also address minor points raised in the discussion, including the coefficient values of goodwill and Tier 2 capital. Our findings contribute to a nuanced understanding of how regulatory adjustments influence bank valuations, offering implications for both academic research and regulatory policy.

Synopsis

The research problem

This study examines the capital market consequences of the voluntary disclosure of individual auditor information. Specifically, we examined whether and how the disclosure of auditor qualification certificates is associated with information asymmetry and investors’ responses to earnings.

Motivation

Regulators have recently started to focus on disclosing auditor information beyond their names such as in China, where it is increasingly important in practice. Although prior studies have demonstrated benefits associated with the mandatory disclosure of partners’ names, there is relatively little evidence of the usefulness of additional information about individual auditors that could be provided voluntarily. This study sheds light on the economic consequences of disclosing detailed information about individual auditors and extends the voluntary disclosure literature.

The test hypotheses

We tested the following hypotheses in this study: (a) voluntary disclosure of auditor qualification certificates is associated with lower information asymmetry and (b) voluntary disclosure of auditor qualification certificates is not associated with investors’ reactions to corporate earnings announcements.

Target population

Stakeholders of listed companies and audit firms, including company managers, investors, and accounting regulators.

Adopted methodology

Ordinary least squares regressions, archival data, interviews, and machine learning methods to obtain initial data.

Analyses

We first crawled the annual audit reports of listed companies in China and used machine learning methods to capture voluntary disclosure of auditor qualification certificates. In a sample of more than 14,000 Chinese company-years from 2012 to 2018, we identified 10.5% of the observations voluntarily disclosing auditor qualification certificates. We used the bid-ask spread as the proxy of information asymmetry, and the earnings response coefficient refers to the coefficient on unexpected earnings to the cumulative abnormal returns.

Findings

We found that the voluntary disclosure of auditor qualification certificates is associated with lower information asymmetry and stronger market reaction to earnings announcements. The main results hold through various robustness tests. Cross-sectional analyses show that this association is less pronounced when a company employs a larger audit firm or has higher analyst coverage. Further, the specific information conveyed by the auditor qualification certificate, such as the auditor’s facial trustworthiness, helps explain the economic consequences associated with voluntary auditor qualification certificate disclosure. Moreover, an initial disclosure of auditor qualification certificates is associated with greater effects.

Synopsis

The research problem

This study examines the association between corruption culture and corporate social responsibility (CSR) decoupling.

Motivation

Only a handful of studies have examined the effect of local culture on organizational outcomes. Recent studies shed light on the factors contributing to CSR decoupling, highlighting the value of understanding this disparity; however, few studies have documented the role of societal factors that contribute to this gap. Our study seeks to fill this gap by documenting that corruption culture increases dishonest behavior, reduces social stigma and the likelihood of punishment, promotes managerial rent-seeking, and ultimately affects CSR decoupling.

The hypothesis

Corruption culture is associated with higher CSR decoupling.

Target population

We used a sample of Chinese A-listed firms from 2010 to 2020.

Adopted methodology

We used ordinary least squares, path analysis, two-stage least square (2SLS) regression, generalized method of moment (GMM), and multiperiod difference in difference.

Analyses

By using 5,428 firm–year observations, this study examined the association between corruption culture and CSR decoupling. We employed robustness and mechanism tests to corroborate the findings and proposed mechanisms. Finally, we conducted heterogeneity tests to assess the varied impact of corporate governance, state ownership, and CEO attributes on the relationship between corruption culture and CSR decoupling.

Findings

We documented a positive relationship between corruption culture and CSR decoupling. We also found a less pronounced effect of corruption on CSR decoupling among firms with extensive media coverage and investments from qualified foreign institutional investors. Furthermore, the effect of corruption on CSR decoupling was particularly pronounced for private firms. We also observed that the effect of a corruption culture was especially weak for firms with chief executive officers who have international experience, are nonpolitically connected, and are female.

Synopsis

Research problem

According to the World Economic Forum, terrorism is one of the main managerial concerns for companies worldwide. However, there is surprisingly scant research on how terrorist attacks impact managerial decision-making. To fill this gap, we investigate how terrorist attacks influence firms’ socially oriented activities, as measured by their investments in corporate social responsibility (CSR).

Motivation or theoretical reasoning

In light of the crucial role of CSR in financial markets and the growing apprehension regarding terrorism risk, this study explores whether and to what extent firms’ CSR investments contribute to the resilience to terrorism risk. The motivation for our research question is grounded in the idea that terrorist attacks create a unique set of circumstances that prompt firms to reconsider their socially oriented initiatives. We argue that firms impacted by such events tend to recognize the importance of demonstrating commitment to social responsibility in the aftermath of a crisis. Overall, the theoretical underpinnings of this study revolve around the notion that CSR becomes a strategic response for firms affected by terrorism, through which they address various stakeholder concerns, maintain legitimacy, and strategically manage their public image in the aftermath of a crisis.

The test hypotheses

We empirically examine two key research questions in this study. First, we examine the effect of terrorist attacks on the CSR investments of publicly traded firms. Second, we examine whether and how the increase in CSR investments of publicly traded firms after terrorist attacks affects firm value.

Target population

Our study extends the limited research on the impact of terrorism on capital markets, which is an area of great concern to various stakeholders, including shareholders and corporate managers. The findings will also help researchers understand the determinants of CSR and the potential channels through which CSR creates value for shareholders.

Adopted methodology

Using a multivariate regression model and controlling for all other determinants of corporate CSR investment documented by prior studies, we test the effect of terrorist events on firms’ CSR investment. To reduce the concern that a growing awareness of the importance of CSR may explain the changes in firms’ investment in CSR over time, we use a difference-in-differences research design.

Analyses

Using a sample of 53 major terrorist attacks occurring in the U.S. between 1994 and 2015, this study examines the causal effect of terrorist attacks on firms’ CSR activities.

Findings

Our findings indicate that public firms located in close proximity to terrorist attacks (i.e., the impact firms) substantially increase their investment in CSR following those terrorist events, and that the increase in CSR investment is positively associated with firm value. We further observe a strengthened association between increased CSR and firm value when the CSR efforts of the impact firms attract greater media attention. In conclusion, our findings substantiate the hypothesis that firms exposed to higher levels of terrorism risk are more inclined to enhance their CSR investments. This inclination is driven by the dual impact of CSR efforts: not only do they contribute to bolstering stakeholders’ confidence in firms’ future performance, but they are also linked to increased returns in the aftermath of a terrorist attack.