Purpose The purpose of this study is to examine how lenders alter their behavior when faced with real earnings management. Design/methodology/approach This study uses the incremental R-square approach as in Kim and Kross (2005) to examine how much lenders rely on income statement and balance sheet ratios as the degree of real earnings management increases. Findings As real earnings management affects mostly the income statement, the authors find that lenders rely less on income statement ratios in making credit decisions in the presence of real earnings management. The authors also find that lenders do not alter their reliance on balance sheet ratios when faced with real earnings management. Originality/value This paper is the first to study how lenders alter their reliance on financial statements in making credit decisions in the presence of real earnings management. The findings of this paper could help the regulators set standards to improve the usefulness of financial statements. The findings of this paper could also help practitioners (borrowers and lenders) understand how real earnings management affects credit decisions.

The value of imputation credits can only be estimated jointly with the value of cash dividends. We show that random variation across samples leads to estimates of credit value that move in the opposite direction to estimates of cash value. Derivative prices suggest a value for credits of 0.01 to 0.20 (0.01 to 0.07 if cash is worth 0.94, and 0.13 to 0.20 if cash is worth 0.87). Ex-dividend prices suggest a value for credits of 0.23 to 0.46 (0.23 to 0.36 if cash is worth 0.85, and 0.33 to 0.46 if cash is worth 0.75).

The first 100 days of a newly-elected President's administration are often a period of substantial and concentrated policy change. This paper shows that measures of uncertainty and risk aversion rise sharply during Presidential honeymoons. Consistent with theoretical models that suggest that investors demand compensation for bearing heightened political risk, we document striking spread returns to value, investment and profitability anomalies during honeymoons. For example, the book-to-market value premium averages 3.51% per month during Presidential honeymoons, yet only 0.27% per month at other times. These findings survive numerous robustness checks. Nonetheless, establishing a direct link between escalating political risk and equity returns proves challenging.

We find that a composite implied cost of capital (ICC) estimate - based on the earnings forecasts generated by cross-sectional models - is highly correlated with future realised returns in both portfolio- and regression-based tests. By contrast, we find very little evidence for an association with future realised returns for an ICC estimate based on analyst earnings forecasts. We also document the time-varying nature of expected returns and risk premia, and provide up-to-date estimates of an implied Australian market risk premium.

PurposeThis study examines how lenders modify their behavior and their use of traditional, transaction-based lending models in credit decisions when faced with low earnings quality.Design/methodology/approachTo measure the earnings quality, following Bharath, Sunder and Sunder (2008), the authors use three measures of accrual quality and combine them into a simple parsimonious measure of accrual quality. Subsequently, the authors apply the incremental R-square approach used by Kim and Kross (2005) to determine the degree to which lenders modify their reliance on financial statement ratios when faced with low accrual quality.FindingsConsistent with prior literature, this study shows that the cost of debt is higher when accrual quality is low. In addition, this study extends prior literature by showing that lenders decrease their reliance on income statement data to make credit decisions as accrual quality decreases.Originality/valueThis paper broadens existing literature on the pricing of information risk in capital markets by being the first to show that lenders modify their reliance on financial statement data when faced with low-quality accruals. In addition, this paper extends the findings of Billings and Morton (2002) and demonstrates to managers the futility of using accrual manipulations to obtain more favorable credit terms. Lastly, this paper aids regulators and standard setters who seek to improve the usefulness of financial statements by showing that creditors do not appear to be misled by reporting choices that lower the quality of accruals.

Multiple regression analysis leads to coefficient estimates that need to be jointly interpreted. This holds even if correlation amongst independent variables is at a level that researchers typically consider to be tolerable. In estimating the value of imputation credits using multiple regression, experts and regulators have typically considered estimates of the value of imputation credits in isolation. They apply the credit value estimates to pricing models under the assumption that cash is fully valued by the market. We call this problem selective interpretation. We address the challenge of selective interpretation by conducting an advanced “if-then” analysis. We ask if cash and credits are truly valued by investors at x and y, then what range of regression coefficients would occur if the regression could be repeated over and over again? This allows us to estimate confidence intervals for the value of cash dividends and imputation credits by making transparent assumptions about the independence of observations and the non-constant variance of error terms. Our paper has application to any research that relies on multiple regression analysis.The practical implication is that in the current tax regime, under which investors can receive a cash rebate for imputation credits, the market value of imputation credits lies within the range of 0.01 to 0.15. A dollar of cash is valued by the market at somewhere between 87 cents and 92 cents. But, at the lower end of the cash value (0.87), credits are worth between 0.13 and 0.15, and, at the higher end of cash value (0.92), credits are worth between 0.01 and 0.10. The value of imputation credits has moved over time in a direction consistent with the changing tax treatment. Prior to the introduction of the 45-day rule, credits had an estimated value within the range of 0.07 to 0.24, but the value decreased to a range of just 0.00 to 0.02 once the 45-day rule was introduced. Upon the introduction of the cash rebate, the value of credits has increased to a range of 0.01 to 0.15.

Since dividend imputation was introduced to Australia 32 years ago, researchers and corporate finance practitioners have debated the extent to which imputation credits are incorporated into share prices. One reason for divergence of opinions is the selective interpretation of coefficient estimates from regression. Sample observations exhibit little dispersion of corporate tax rates and franking percentages. This means that if noise in a sample leads to the value of cash being understated, the same noise is likely to lead to the value of credits being overstated. Using simulation analysis we show that there is an inverse relationship between estimates of credit value and cash value due to random variation in samples. This problem is exacerbated by a lack of independence across observations.Regression analysis has merit, provided inference accounts for the inverse relationship between estimates of cash dividend value and imputation credit value. We consider five studies which reported estimates of 0.34 to 0.57 for imputation credit value and 0.73 to 0.88 for cash dividend value. The implication of our simulation analysis is that it would be incorrect to claim that cash is fully valued, but that imputation credit value lies within the range of 0.34 to 0.57. This would represent selective interpretation. A researcher cannot claim to have a reliable sample and research method which allows interpretation of one coefficient, but at the same time ignore the implications of other coefficients from the same sample and research method. The evidence suggests that, if cash is in fact fully valued by the market, then sampling error leads to the coefficient on cash (0.73 to 0.88) being understated and therefore the coefficient on credits (0.34 to 0.57) being overstated.

We find that a composite implied cost of capital (ICC) estimate - based on the earnings forecasts generated by cross-sectional models is highly correlated with future realised returns in both portfolio- and regression-based tests. By contrast, we find very little evidence for an association with future realised returns for an ICC estimate based on analyst earnings forecasts. We also document the time-varying nature of expected returns and risk premia, and provide up-to-date estimates of an implied Australian market risk premium. Additionally, we provide industry-level estimates; highlighting differences in expected returns and risk perceptions across sectors.

Purpose This paper examines whether increased director workloads are benefiting firms or are causing directors to become too busy, resulting in lower director attendance and weaker firm performance. Design/methodology/approach This paper conducts empirical analysis of the relationships between meeting frequency, director attendance rates and firm performance using archival data from Australia. Findings Attendance rates for both outside and inside directors decrease as they are required to attend more meetings. The benefits firms obtain from holding additional meetings are significantly eroded by lower director attendance. Originality/value This study brings together the literatures on meeting frequency, director busyness and firm performance to show that increased director workloads are only beneficial to firms if directors do not become too busy to fulfill their obligations to shareholders.

This study provides further evidence on the cross-listing valuation premium using a sample of Asian firms from 2000 to 2010. First, following Doidge etal. (2004), we document a premium, but it disappears when we incorporate firm fixed effects. Second, consistent with Gozzi etal. (2008), we find that the premium arises immediately preceding the cross-listing year and disappears shortly thereafter. Of central interest, consistent with our proposition that the listing is strategically timed like an SEO, we document a similar pattern in operating performance, and increased financing activity in the listing year and the following 2years.

ABSTRACT Three major director characteristics have been associated with board performance – independence, gender/gender diversity mix and multiple directorships. This study investigates the attendance practices of directors as a fourth director characteristic associated with director and board performance. It does so by investigating director attendance of listed companies where there is a full meeting attendance ‘roll-call’ disclosure regime, relative to a ‘brightline’ disclosure of attendance below 75%. Attendance data from Australia and the US are compared over the period 2001–2015. A comparison shows that Australian directors, on average, are 6 times more likely to attend fewer than 75% of their required board and committee meetings. This study provides previously undocumented analysis on the attendance practices of directors. The results have implications for the reporting framework of director attendance and suggest that in line with current regulatory thinking, a brightline approach has several policy advantages over a roll-call approach.

The value of dividend imputation tax credits is the product of two components: the proportion of credits that are distributed to shareholders and the market value of those distributed credits. We employ a large sample and improved econometric techniques to estimate the value of both cash dividends and distributed imputation credits using dividend drop-off analysis. Our sample period begins in July 2000 to coincide with an important amendment to the dividend imputation legislation that allows residents to claim a cash rebate for excess credits, ends in June 2016, and covers 4690 ex-dividend events. Our results indicate that the market values distributed imputation credits at approximately 35% of the face amount.

Expertise diversity is expected to enhance the monitoring and advising functions of boards of directors. Yet, little is known about the expertise that actually exists on corporate boards. In this study, we examine the diversity of professional expertise on corporate boards in Australia and implications for shareholder value. We categorise directors by 11 types of professional expertise and find the most common types of expertise are business executives, accountants, bankers, scientists, lawyers and engineers. We find that expertise diversity is primarily related to board size, industry and location. Our analysis also suggests that shareholders benefit when boards diversify their expertise within a subset of specialist business expertise (lawyers, accountants, consultants, bankers and outside CEOs). Further diversity beyond this subset of expertise is associated with lower firm value and performance.

A limitation of prior research on imputation credit value is researchers’ selective interpretation of the regression coefficient used to estimate credit value. This ignores the in-sample evidence on the value of cash dividends and the value of a fully-franked dividend. This is a problem because a sample of security prices, unfranked dividends and franked dividends necessarily leads to the simultaneous estimation of the value of a cash dividend and an imputation credit. We measure the value of imputation credits under three tax regimes, accounting for the joint estimation of the value of cash and credits. The practical implication is that in the cash rebate regime, the market value of imputation credits lies within the range of -0.12 to 0.17. A dollar of cash is valued by the market at somewhere between 88 cents and 98 cents. At the lower end of the cash value (0.88), credits are worth between 0.04 and 0.17; and at the higher end of cash value (0.98), credits are worth between -0.12. and 0.00. The value of imputation credits has, in our view, moved over time in a direction consistent with changing tax treatment. But it is plausible that the value of imputation credits has remained within the range of -0.04 to 0.06 across all three tax regimes.

This article uses a survey of Australian corporate treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the global financial crisis (GFC) to examine the effect of liquidity shocks on a firm’s capital structure choices. We then compare our Australian survey results with results from a comprehensive US survey conducted by Graham and Harvey. Our survey shows that the board of directors plays the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of chief executive officer (CEO) in both capital structure and cash holding decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the US empirical studies. Finally, we juxtapose the theory–practice perspective, with a review of the most recent 5 years (2011–2015) of corporate finance research published in the leading Asia Pacific Basin finance journals.

While prior studies document the benefits of political connections in emerging markets, their value in developed markets is less certain. In this study, we examine the types of firms that have directors with political and government connections on their boards and the value of these connections to shareholders in Australia, a developed market with low levels of corruption and lobbying, and public funding of election campaigns. We find that directors with political and government connections hold 2.1% of listed company directorships (in 7.7% of listed companies) in Australia. After controlling for director and firm characteristics, we find the market reaction to the appointment of directors with political and government connections is significantly lower than other directors. This is particularly the case for former politicians whose political parties are not in power and who have less political experience. In summary, we find no evidence that political and government connections on corporate boards are particularly abundant or valuable to shareholders in Australia.

We examine how firm characteristics, particularly the degree of firm complexity and the firm’s need for specialty knowledge, affect the relationship between corporate governance and the risk of bankruptcy. We find that having larger boards reduces the risk of bankruptcy only for complex firms. Our results also suggest that the proportion of inside directors on the board is inversely associated with the risk of bankruptcy in firms that require more specialist knowledge and that the reverse is true in technically unsophisticated firms. The results further reveal that the additional explanatory power from corporate governance variables becomes stronger as the time to bankruptcy is increased, implying that although corporate governance variables are important predictors, governance changes are likely to be too late to save a firm on the verge of bankruptcy.

The contentious debate about how to best estimate the value of imputation credits has been heightened in the regulatory setting. While an accurate estimate of the cost of capital is important for every firm, it is particularly important for regulated infrastructure firms where a regulator sets the allowed revenue each year in accordance with its estimate of the cost of capital. This paper explains how the regulatory allowance depends on the estimated value of imputation credits and summarises the debate that has occurred, over many years, in this setting.