Emerald | Review of Accounting and Finance

Large creditors and corporate governance: the case of Chinese banks

Yiming Hu, Siqi Li, Thomas W. Lin, Shilei Xie — 2011-11-01 00:00:00.0

Abstract

Purpose – Banks are the major suppliers of external funds for companies in China. The purpose of this paper is to examine whether Chinese banks exercise effective monitoring over borrowers in two lending decisions, including loan interest rates and loan renewals. Design/methodology/approach – Using a sample of Chinese public industrial firms from 2000 to 2005, the authors perform multivariate regression analysis to investigate whether banks adjust their loan interest rates and consider loan renewal decisions in response to borrowers financial performance. The authors also examine these bank lending decisions before and after 2003, when the major banking reforms started to take place in China. Findings – A negative relation was found between the loan interest rate spread and the financial performance of borrowers. However, a negative relation was found between loan renewals and the financial performance of borrowers, consistent with firms in financial difficulties being in need of more funding and hence more likely to get its bank loans renewed. Additionally, it was found that the factors banks consider when making loan decisions vary before and after 2003. Originality/value – The authors' findings suggest that Chinese banks play a limited role in monitoring and disciplining borrowers through adjustments of loan interest rates, and that their loan renewal decisions for firms with poor financial performance highlight banks' financing, instead of monitoring role in this transition economy. These findings provide empirical evidence on bank governance in a transition economy dominated by state-owned enterprises. The paper contributes to the literature by constructing an alternative loan renewal measure using financial statement information.

Earnings management and the stock market response to the Sarbanes-Oxley Act based on a measure of competitive strategy

Kenneth J. Hunsader, Gwendolyn Pennywell — 2011-11-01 00:00:00.0

Abstract

Purpose – Conventional wisdom implies that firms manage earnings to maximize the wealth of the manager, the value of the firm and/or the amount of information in the market. The purpose of this paper is to offer an additional explanation. Design/methodology/approach – Using companies from the Standard & Poor's 500 index and an annual report disclosure ranking, the authors employ a standard t-test of means across groups to check for differences in disclosure based on a competitive strategy measure (CSM). The CSM classifies industry rivals into strategic complements or substitutes. The authors also test for differences in earnings management using discretionary accruals and using event study methodology examine how stock returns respond to the Sarbanes-Oxley Act. Findings – The authors show that earnings management is a tool used by firms based on the level of competitive strategy within the industry. It was found that firms competing as strategic substitutes are more likely to actively engage in earnings management through discretionary accruals when the informational environment permits. It was also found that substitute firms suffer greater negative wealth effects than complement firms in response to the Sarbanes-Oxley Act. Originality/value – This is one of the first empirical articles to examine how competitive strategy affects earnings management and the stock market response to the Sarbanes-Oxley Act of 2002.

Acquisition and integration of fair value information on liabilities into investors' judgments

Maik Lachmann, Arnt Wöhrmann, Andreas Wömpener — 2011-11-01 00:00:00.0

Abstract

Purpose – The International Accounting Standards Board and the Financial Accounting Standards Board allow fair value measurement of liabilities. Previous findings from the literature on recognition versus disclosure indicate that recognition of fair value information better serves investors' needs, because it is more likely to facilitate the incorporation of the information into their judgment. In cases of credit risk changes for own liabilities, however, many authors doubt that fair value measurement is beneficial due to its potential counter-intuitiveness. The purpose of this paper is to gain insight into non-professional investors' processing of fair value information for liabilities. Design/methodology/approach – A between-subjects laboratory experiment was employed. Subjects received financial information on three different companies. The authors manipulated the accounting treatment of liabilities between the three groups. Subjects ranked three companies according to their economic performance. The authors then compared these rankings to the companies' actual performance. Findings – The results of the experiment indicate that non-professional investors are less likely to acquire the information of credit risk changes when liabilities are not measured at fair value. Additionally, evidence was found that fair value measurement is to some extent counter-intuitive for non-professional investors. Research limitations/implications – A main limitation is that our experiment concentrates on liabilities and abstracts from interactions of both sides of the balance sheet. Originality/value – This is the first study to analyze in detail non-professional investors' information processing of liabilities measured at fair value.

An examination of the information content of S&P 500 index changes: Analysis of systematic risk

John M. Geppert, Stoyu I. Ivanov, Gordon V. Karels — 2011-11-01 00:00:00.0

Abstract

Purpose – The purpose of this paper is to examine the shocks to firm's beta around the event of addition or deletion from the S&P 500 index. Design/methodology/approach – The total derivative of beta and Campbell and Vuolteenaho decomposition of beta methodologies are used, on monthly and daily basis, to examine the behavior of beta around the event. Findings – Results show a significant increase in correlations of the event firms' returns and the market proxy returns and cash-flow betas, and decrease in discount-rate betas for added firms and the opposite effects for deleted firms. Robustness tests indicate that the total derivative changes effects are typical for the event firms industry but that the cash-flow correlation changes are specific to the firm. These findings suggest that addition or deletion from the S&P 500 index is not an information free event. Research limitations/implications – The Campbell and Vuolteenaho methodology has limitations – it is conditional on the selection of state variables. In future research it would be beneficial to use different state variables in the beta decomposition framework. Another relevant question for a future research is: what are the effects of the event on the Fama-French factor model loadings? Originality/value – The paper's findings contribute to the ongoing debate in the literature of the information hypothesis for addition or deletion from the S&P 500 index.

The value relevance of pension accounting information: evidence from Fortune 200 firms

Edward M. Werner — 2011-11-01 00:00:00.0

Abstract

Purpose – The purpose of this paper is to examine, in the context of movement towards a fair-value based pension accounting standard, the value relevance of both recognized and disclosed pension accounting information. Design/methodology/approach – Using hand-collected data from Fortune 200 firms, this study includes both recognized and disclosed pension accounting measures (aggregated and disaggregated) in multivariate regression models. The investigation employs tests of relative and incremental value relevance in both equity and credit rating evaluation contexts. Findings – Findings indicate that pension information recognized under a fair-value-based accounting model is no more or less value relevant than pension information recognized under the SFAS 87 model. Also, the disclosed off-balance sheet pension amount is incrementally value relevant for determining share prices. However, it is not value relevant for the credit rating decision. Research limitations/implications – This study tests the relevance and reliability of accounting information jointly. Theoretically, however, relevance and reliability affect information usefulness and, thus, valuation decisions independently. Originality/value – This paper yields a number of significant implications for standard setters. The unique evidence that investors apply off-balance sheet pension amounts in the equity valuation context implies that required recognition under a fair-value standard may not provide a significant incremental benefit over DB plan disclosures. However, such a standard may yield potential improvements in the credit rating decision context and may be much more likely to impact credit rating decisions going forward. Considering the continued shift towards fair-value-based pension accounting standards internationally, recognizing transitory elements of fair-value pension cost separately from operating income is essential for mitigating any potential loss in value relevance.