ABSTRACTMost studies on the impact of capital expenditure on future performance use the aggregate capital expenditure disclosed in the cash flow statement. In this study, however, we distinguish between growth capital investments (that increase production capacity) from nongrowth capital investments (that only maintain or reduce current capacity). For growth capital investments, we document a negative association with year‐ahead performance, which becomes positive in the subsequent year. For nongrowth capital investments, we observe a non‐negative association with year‐ahead performance. For nongrowth capital investments, we document a positive association, suggesting that the divestment is beneficial. That is, firms are likely disposing of nonproductive assets. Our results suggest that disclosing the nature of capital investments is important to better assess the future impact of a firm's investment decisions.

Most studies on the impact of capital expenditure on future performance use the aggregate capital expenditure disclosed in the cash flow statement. In this study, however, we distinguish between growth capital investments (that increase production capacity) from nongrowth capital investments (that only maintain or reduce current capacity). For growth capital investments, we document a negative association with year-ahead performance, which becomes positive in the subsequent year. For nongrowth capital investments, we observe a non-negative association with year-ahead performance. For nongrowth capital investments, we document a positive association, suggesting that the divestment is beneficial. That is, firms are likely disposing of nonproductive assets. Our results suggest that disclosing the nature of capital investments is important to better assess the future impact of a firm's investment decisions.

Using a sample of new bank loans, we investigate the impact of business risk on the usefulness of operating income after controlling for the proportion of independent directors. Consistent with the literature, our initial analyses reveal that the presence of independent directors on a board reduces the interest rate directly and indirectly through an increase in the usefulness of operating income. However, we further provide evidence that the indirect benefit of a high proportion of independent directors is reduced when we account for the presence of business risk. This suggests that studies examining the usefulness of operating income should take into account the effect of business risk. © 2018 ASAC. Published by John Wiley & Sons, Ltd.

We examine whether Asset Retirement Obligations (AROs) are value relevant to investors and credit market participants. Whereas prior research has examined the value relevance of environmental disclosures, we extend this line of inquiry by examining whether AROs are priced the same as other recognized liabilities that have less managerial discretion in their estimation. Using a sample of 1,076 mining and oil & gas observations for the equity market model, we provide evidence that even though AROs are value relevant, there is no distinction between AROs and other recognized liabilities. For the debt market, we find that the while AROs are priced by banks and affect companies’ credit ratings, their impact on interest rates and credit ratings is much less than that of other recognized liabilities.

This paper examines the association between elements of the financial statement and the interest rates banks charge on loans. We examine whether the volatility of earnings and the probability of bankruptcy have an impact on banks' use of accounting information in setting the interest rates. The results suggest that while these accounting variables are associated with bank interest rates, the impact of the accounting variables is stronger when the volatility is lower. We also provide evidence that the association between bank interest rates and the net book value of assets and operating income is stronger when the probability of bankruptcy is low. This relationship is opposite for the presence of a loss. When the probability of bankruptcy is high, banks appear to focus less on the income statement and more on the balance sheet. This is likely due to the fact that the balance sheet provides an estimate of the liquidation value of the firm.

Using a sample of public and private banks, we study how social capital relates to bank stability. Social capital, which reflects the level of cooperative norms in society, is likely to reduce opportunistic behavior (Jha and Chen 2015; Hasan et al., 2017) and, therefore, act as an informal monitoring mechanism. Consistent with our expectations, we find that banks in high social capital regions experienced fewer failures and less financial trouble during the 2007–2010 financial crisis than banks in low social capital regions. In addition, we find that social capital was negatively associated with abnormal risk-taking and positively associated with accounting transparency and accounting conservatism in the pre-crisis period of 2000–2006, indicating that risk-taking, accounting transparency, and accounting conservatism are possible channels through which social capital affected bank stability during the crisis.

This case has been developed for an introductory management accounting course at the undergraduate and MBA levels. Although the setting is relatively simple, it illustrates several management accounting issues that are relevant to firms of every size that produce a product or service under competitive pressures and capacity constraints. The case also integrates several topics that are often viewed as abstract by the students. Specifically, it deals with the concepts around cost-volume profit analysis in a realistic environment, the tension between short-term and long-term decisions, discounted cash flow analysis, the impact of managerial incentives and compensation on decision making and the impact of operating leverage on profitability. The case was used successfully several times in an introductory course at the MBA level. Surveys of the students reveal that the case has contributed significantly to their learning and has clarified the concepts introduced in the case.

This case has been developed for an introductory management accounting course at the undergraduate and MBA levels. Although the setting is relatively simple, it illustrates several management accounting issues that are relevant to firms of every size that produce a product or service under competitive pressures and capacity constraints. The case also integrates several topics that are often viewed as abstract by the students. Specifically, it deals with the concepts around cost-volume profit analysis in a realistic environment, the tension between short-term and long-term decisions, discounted cash flow analysis, the impact of managerial incentives and compensation on decision making and the impact of operating leverage on profitability. The case was used successfully several times in an introductory course at the MBA level. Surveys of the students reveal that the case has contributed significantly to their learning and has clarified the concepts introduced in the case.

The objective of this paper is to investigate whether banks view the information on the off-balance sheet liabilities (specifically, operating leases) disclosed in the notes to the financial statements as more reliable when it is audited by brand name auditors (i.e., a Big 4 audit firm). To the extent that banks assess a higher likelihood that the financial statements could have material misstatements if it is not audited by a Big 4 audit firm, they should charge a higher interest rate on private loans. Our findings suggest that the impact of operating leases on the interest rate is higher if the firm is audited by non-Big 4 audit firms.

The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 was designed, among other things, to introduce risk-based deposit insurance, increase capital requirements, and improve banks’ internal controls. Of particular interest in this study are the requirements for annual audit and reporting of management’s and auditor’s assessment of the effectiveness of internal control for banks with $500 million or more in total assets (raised to $1 billion in 2005). We study the impact of these requirements on banks’ risk-taking behavior prior to the recent financial crisis and the consequent implications for bank failure and financial trouble during the crisis period. Using a sample of 1138 banks, we provide evidence that banks required to comply with the FDICIA internal control requirements have lower risk taking in the pre-crisis period. Specifically, the volatility of net interest margin, the volatility of earnings, and Z score show less risk-taking behavior. Furthermore, these banks are less likely to experience failure and financial trouble during the crisis period.

This paper investigates the relationship between CEO stock options and analysts’ earnings forecast accuracy and bias. A higher level of stock options may induce managers to undertake riskier projects, to change and/or reallocate their effort, and to possibly engage in gaming (such as opportunistic earnings and disclosure management). These managerial behaviors result in an increase in the complexity of forecasting and hence, less accurate analysts’ forecasts. Analysts’ optimistic forecast bias may also increase as the level of stock options pay increases. Because forecast complexity increases with stock options pay, analysts, needing greater access to management’s information to produce accurate forecasts, have incentives to increase the optimistic bias in their forecasts. Alternatively, a higher level of stock options pay may lead to improved disclosure because it better aligns managers’ and shareholders’ interests. The improved disclosure, in turn, may result in more accurate and less biased analysts’ forecasts. Our empirical evidence indicates that analysts’ earnings forecast accuracy decreases and forecast optimism increases as the level of CEO stock options increases. This evidence suggests that the incentive alignment effects of stock options are more than offset by the investment, effort allocation and gaming incentives induced by stock options grants to CEOs.

The coastal areas of the island of Delos, located at the centre of the Cyclades archipelago (Greece), are rich in submerged Hellenistic archaeological vestiges. This submersion can be explained by changes in relative sea-level: the recent C-14 datings of submerged beachrock occurrences of Delos and the nearby islands of Mykonos and Rhenia suggest that the sea level was at about -2.5 m ( +/- 0.5 m) around 400 BC [1, 2]. Such result has enabled to confirm and refine Negris'early-twentieth-century hypothesis that the submersion can be accounted for by the relative sea-level rise. From this result, together with bathymetric maps, archaeological studies and stratigraphic data, the Hellenistic coastal landscapes on the western side of Delos have been reconstructed. The Sacred Harbour (including the Agora of the Competaliasts) and the "Pointe des Pilastres" landscapes (located to the South) resembled those of the current Greek harbours: the paved walkways or esplanades bordering buildings or shops were separated from the sea by a beach onto which boats were drawn. The landscape of the "Maisons an flanc de la Colline" sector (located to the North) seems to have been different. These houses were located on a rocky platform, in a sector exposed to the north swell. (C) 2007 Lavoisier SAS. All rights reserved.

The recent banking crisis has led market participants to focus on the adequacy and quality of banks' balance sheet items such as the allowance for loan losses. Beaver and Engel (1996) document that the capital market prices the nondiscretionary component of loan loss allowance negatively and the discretionary component less negatively. Using data from the pre-crisis period and three measures of audit quality, auditor type (i.e., Big 5 versus non-Big 5), auditor industry specialization/expertise, and audit and nonaudit fees paid to auditors, we examine the effect of audit quality on the market valuation of the discretionary component of the allowance for loan losses. We find that, relative to the nondiscretionary component, the market valuation of the discretionary component of loan loss allowance is higher for banks audited by Big 5 auditors than for banks audited by non-Big 5 auditors. We also find that the relative market valuation of the discretionary component of loan loss allowance is increasing in auditor expertise. Regarding the impact of fees paid to auditors, we find that banks paying higher audit fees have higher relative market valuation of the discretionary component of the allowance for loan losses, but banks that pay higher nonaudit fees do not.

The recent banking crisis has led market participants to focus on the adequacy and quality of banks’ balance sheet items such as the allowance for loan losses. Beaver and Engel (1996) document that the capital market prices the nondiscretionary component of loan loss allowance negatively and the discretionary component less negatively. Using data from the pre-crisis period and three measures of audit quality, auditor type (i.e., Big 5 versus non–Big 5), auditor industry specialization/expertise, and audit and nonaudit fees paid to auditors, we examine the effect of audit quality on the market valuation of the discretionary component of the allowance for loan losses. We find that, relative to the nondiscretionary component, the market valuation of the discretionary component of loan loss allowance is higher for banks audited by Big 5 auditors than for banks audited by non–Big 5 auditors. We also find that the relative market valuation of the discretionary component of loan loss allowance is increasing in auditor expertise. Regarding the impact of fees paid to auditors, we find that banks paying higher audit fees have higher relative market valuation of the discretionary component of the allowance for loan losses, but banks that pay higher nonaudit fees do not.

ABSTRACT: We examine whether the market assesses a lower level of information asymmetry to firms that are perceived to be monitored more intensely by members of the board of directors. We use changes in bid-ask spreads as proxies for changes in information asymmetry between the firm and the market around the time earnings are announced. Our study is innovative in its association of director monitoring with levels of information asymmetry as reflected in quoted spreads. Our sample includes 145 firms included in the Toronto Stock Exchange 300 Index (TSX-300). The TSX’s hybrid market structure provides a unique international setting in which to examine the effects of governance on information asymmetry. Results indicate that the market attributes a lower level of information asymmetry to firms with a larger proportion of outside directors on the board. Contrary to our predictions, we find the larger the proportion of voting rights held by directors, the higher the level of information asymmetry attributed to the firm. We provide some evidence that a separate CEO/Chair leadership structure is associated with reduced information asymmetry. From a practice perspective, we are able to provide some preliminary insight into the potential value attributed by market participants to the imposition of regulation surrounding certain director monitoring activities.

The objective of this paper is to examine whether banks discriminate between firms on the basis of their financial condition when assessing the credit default risk, and to what extent corporate governance and auditor quality mitigate such risks in the pricing of new bank loans. The results indicate that, depending on the probability of bankruptcy, banks rely on different monitoring devices. For firms with a low probability of bankruptcy, banks do not rely on the quality of corporate governance or the auditor's industry specialization. However, auditor tenure and a change in auditor affect the spread. For firms with a high probability of bankruptcy, the spread is adjusted for the quality of corporate governance and the auditor's specialization. These results are robust to alternative specifications and measures.

We examine a potential negative consequence of stock option grants to the Chief Executive Officer (CEO). Using a large sample of public firms spanning the period 1992-2001, we classify firm-year observations into three groups based on the stock option proportion of total compensation to the CEO. We empirically document a negative relation between stock option proportion and contemporaneous operating performance. We provide evidence of earnings deferral manifested by significantly negative abnormal accruals for the group with high proportion of stock options. 1. Introduction Executive pay packages contain four basic components: a base salary, an annual bonus tied to accounting performance, stock options, and long-term incentive plans (including restricted stock plans and multi-year accounting based performance plans). The most pronounced trend in executive compensation has been the explosion in stock option grants, which on a Black-Scholes valuation basis, now constitutes the single largest component of managerial pay (Murphy, 1999). In this paper, we examine some implications of awarding large amounts of stock options. Specifically, we investigate the association between the proportion of total compensation to the Chief Executive Officer (CEO) from stock option grants and contemporaneous operating performance. For firms with a low proportion of stock options, there is a reasonable payoff to improved current performance, since a higher proportion of compensation depends on short-term performance. Therefore, these managers may exert a higher level of effort to improve current operating performance to maximize their compensation. However, when the proportion of stock options is high, managers have incentives to either re-allocate effort from short-term to long term or to delay recognition of earnings to increase the future expected compensation from stock options. Both these arguments are consistent with negative association between ROA and proportion of stock options. While we cannot directly test the re-allocation of effort by managers, we can investigate managers' incentives to defer earnings. Manipulation of earnings is one way managers can improve long-term operating performance, given the potential limits on long-term performance of other effort. This issue is important since it examines the incentive of CEOs to defer earnings and consequent deterioration of earnings quality that is driven by high proportion of stock options in their pay. Our results are consistent with the notion mat firms with a high level of stock options experience a negative contemporaneous operating performance. With a large sample of public firms spanning the period 1992-2001, we classify firm-year observations in to three groups based on the stock option proportion of total compensation to the CEO. Our results indicate a significantly negative association between contemporaneous operating performance and proportion of stock option compensation for the firms with a high proportion of stock options, even after controlling for known variables associated with the grant of stock options. This group is associated with large negative abnormal accruals and this is consistent with the notion of deferring earnings to future periods. This result is robust to the use of either a balance sheet or a cash flow approach to estimating abnormal accruals. For firms with a low proportion of stock options, we observe a positive relationship between contemporaneous operating performance and stock options and smaller abnormal accruals compared to the group of firms with high proportion of stock options. 2. Research Design and Empirical Model 2.1 Research Design In order to examine whether me granting of CEO stock options is associated with a firm' s current operating performance, we classify firm-year observations into three groups based on the proportion of stock options. We first rank firms based on their SOPROP by year and by industry. …

In January 2005 the Canadian Accounting Standards Board (AcSB) issued three new accounting standards that require Canadian firms to mark-to-market certain financial assets and liabilities and recognize the holding gains and losses related to these items as other comprehensive income or as part of net income. The Board's objectives for issuing the new standards are (i) to harmonize Canadian GAAP with US and International GAAP, (ii) to enhance the transparency and usefulness of financial statements, and (iii) to keep pace with changes in accounting standards in other countries that are moving towards fair value accounting. This paper investigates empirically whether requiring Canadian companies to report comprehensive income and its components provides the securities market with incremental value-relevant information over the traditional historical-cost earnings approach.Previous empirical studies provide mixed evidence oil the value relevance of other comprehensive income and its components. This mixed evidence may be attributed partially to the use of as if methodology to construct an ex-ante measure of other comprehensive income prior to the implementation of SFAS 130, which introduces measurement error. In contrast, this study uses actual data on other comprehensive income for a sample of Canadian firms cross-listed in the US in the period 1998-2003. We find evidence that available-for-sale and cash flow hedges components are significantly associated with price and market returns. We also find that aggregate comprehensive income is more strongly associated (in terms of explanatory power) with both stock price and returns compared to net income. However, we find that net income is a better predictor of future net income relative to comprehensive income. Our findings suggest that mandating all Canadian firms to adopt the new accounting standards is expected to enhance the usefulness of financial statements. Our findings, therefore, should be of interest to Canadian accounting policy makers as they provide ex-ante evidence on the potential usefulness of mandating firms to report comprehensive income and the components of other comprehensive income in their financial statements. (C) 2009 Elsevier Inc. All rights reserved.

The objective of this paper is to examine whether banks discriminate between firms on the basis of their financial condition when assessing the credit default risk, and to what extent corporate governance and auditor quality mitigate such risks in the pricing of new bank loans. The results indicate that, depending on the probability of bankruptcy, banks rely on different monitoring devices. For firms with a low probability of bankruptcy, banks do not rely on the quality of corporate governance or the auditor's industry specialization. However, auditor tenure and a change in auditor affect the spread. For firms with a high probability of bankruptcy, the spread is adjusted for the quality of corporate governance and the auditor's specialization. These results are robust to alternative specifications and measures.