Review of Accounting and Finance

Determinants of management's preferences for an earnings threshold : Table of Contents

Sherry Fang Li — Mon Feb 22 02:05:17 GMT 2010

Abstract:
Purpose – Previous research has provided mixed evidence on the relative importance of three earnings thresholds that managers seek to achieve: avoiding losses, avoiding earnings declines and avoiding negative earnings surprises. The purpose of this paper is to investigate whether firm-specific factors influence management's preferences for an earnings threshold. Design/methodology/approach – Logit models are estimated to explore the relationships between firm-characteristics and management's perceptions of the relative importance of each threshold. Findings – This paper finds that: large firms, firms with high growth prospects and firms with high trading volume are more concerned with avoiding negative earnings surprises, while small firms, firms with low growth prospects and firms with low trading volume are more prone to avoid earnings declines and losses; for firms with high analyst forecast accuracy (relative to a random walk model forecast), avoiding negative earnings surprises is more important than avoiding earnings declines and losses; and firms with low analyst forecast dispersion focus more on avoiding negative earnings surprises and losses, while firms with high analyst forecast dispersion focus more on avoiding earnings declines. Overall, this paper shows that firm characteristics do affect management's perceptions of the relative importance of each threshold. Originality/value – This study recognizes the cross-sectional differences in the earnings threshold hierarchy. The results suggest that regulators and practitioners should focus on different thresholds for different types of firms when investigating the mechanisms used to achieve the thresholds.

Continuous auditing for web-released financial information : Table of Contents

Chi-Chun Chou, C. Janie Chang — Mon Feb 22 02:05:17 GMT 2010

Abstract:
Purpose – The increasing provision of timely financial information through web-based technology is expected to improve the quality of communication between a company and its stakeholders. However, the information asymmetry problem still exists since almost all “web-releases” usually remain unaudited. The purpose of this paper is to propose conceptual and technical frameworks of continuous auditing to provide a solution for this problem. This solution could also move the traditional auditing forward to the new e-auditing generation. Design/methodology/approach – This paper develops a conceptual framework to present why continuous auditing would dominate other auditing approaches in examining web-based financial information. Using a 3?×?2?×?2?×?1 design, this study compares the economic efficiency of three auditing approaches under the joint-combination of various disclosure types, materiality perceptions and information environments. A technical framework, the external continuous auditing machine, is derived from the conceptual framework to specify the generic procedures to perform the online control testing and the continuous substantive testing over web-releases. Findings – Continuous auditing issues are scrutinized both theoretically and technically. Two main conclusions arise. First, the behavior model simulates various information disclosing and auditing environment and argues that the continuous auditing would be the most appropriate approach for web-releasing assurance. Although the hypothesis derived from that model still needs further empirical supports, the anticipated sustaining is quite reasonable under the emergent web-release practice. Originality/value – Given the new era of online, real-time business reporting, constructing a theoretical model and applying it to develop a technical model for implementing continuous audits for web-releases provide significant contributions to the accounting/auditing professionals as well as researchers.

Can diversification degree amplify momentum and contrarian anomalies? : Table of Contents

Houda Ben Mhenni Haj Youssef, Lassad El Moubarki, Olfa Benouda Sioud — Mon Feb 22 02:05:17 GMT 2010

Abstract:
Purpose – The purpose of this paper is to analyse the impact of industrial diversification on the profitability of contrarian and momentum strategies. Design/methodology/approach – Using monthly returns, the weighted relative strength strategy (WRSS) is applied to 249 American listed stocks from January 1994 to April 2004. To study the impact of the 2000 crash on the results, the WRSS strategy during the 01/1994-03/2000 and 04/2000-04/2004 sub-periods was implemented. Then, firms are classified, according to the intensity of their industrial diversification by Ward's method of hierarchical cluster analysis, into two sub-samples: the diversified and non-diversified samples. The WRSS strategy was re-implemented on these sub-samples. Finally, the Bootstrap without replacement is used to explore the risk-based explanation of the trading strategies' profitability. Findings – Results show that the momentum strategy seems to be no more profitable in the recent years. In fact, while momentum strategies earn large positive and significant returns before the 2000 crash, these returns are negative after the crash. Moreover, before the crash, the momentum effect was more pronounced for the non-diversified sample. After the crash, a contrarian effect more important for this sample was identified. Finally, the Bootstrap without replacement results do not support the risk-based explanation. Research limitations/implications – Future research may study the impact of diversification on investor psychology. Practical implications – Diversified firms are efficiently valued. However, specialized firms are not correctly valued. Originality/value – This is the first study that shows that contrarian or momentum portfolios formed by industrial diversification did not yield significant return.

The evaluation of the Canadian BAX contract in managing short-term interest rate exposure : Table of Contents

John J. Siam, S.M. Khalid Nainar — Mon Feb 22 02:05:17 GMT 2010

Abstract:
Purpose – The purpose of this paper is to document stylized features and market behaviour of the Canadian Bankers' Acceptance Futures (BAX) contract; and outlook for the BAX contract as the dominant instrument to manage Canadian short-term interest rate exposure. Design/methodology/approach – The paper adopts GARCH methodology to model the time-varying nature of the volatility of prices in the context of hedging and presents a time-varying estimation of the hedge ratios between the BAX contract and major Canadian money market instruments. Findings – The key finding is that the growth of the BAX Market hinges on the further development of the Canadian money market and its appeal to the international investor. Originality/value – The paper demonstrates the suitability of the BAX contract as a tool in managing Canadian short-term interest rate exposure for both domestic and international investors.

The issuance of convertible bonds and earnings management: evidence from Taiwan : Table of Contents

Ruey-Dang Chang, Yee-Chy Tseng, Ching-Ping Chang — Mon Feb 22 02:05:17 GMT 2010

Abstract:
Purpose – The purpose of this paper is to examine whether companies engage in earnings management during the specific years when convertible bonds are issued and redeemed; also to determine if any differences exist in earnings management when convertible bonds are issued domestically or abroad. Design/methodology/approach – Discretionary current accruals are adopted as proxies for earnings management and the regression models are used to control the related variables. Findings – The empirical results indicate that companies conduct earnings management in the years when convertible bonds are issued, and that there is no significant difference between earnings management when convertible bonds are issued in Taiwan or abroad. However, data after 2001 indicate that companies issuing convertible bonds abroad perform less earnings management compared to those issuing convertible bonds domestically. The results show no significant difference in earnings management in the years when convertible bonds are redeemed; the reasons may be due to the relatively small sample size and that the majority of convertible bonds are still outstanding. Originality/value – This paper advances findings from previous studies, that firms conducting seasoned equity offerings manage earnings upward to increase the offering proceeds. This paper highlights the linkage between convertible bonds and earnings management. Conducting an integrated analysis of the relationship between convertible bonds and earnings management, it aims to provide a better understanding of the process.