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Volume 15, Issue No. 2, August 2008
Special Issue for the 2007 APJAE Symposium on Accounting in Honor of Professor A. Rashad Abdel-Khalik
Guest Editor for the Special Issue: Shu-Hsing Li, National Taiwan University
- Shu-Hsing Li, Introduction, iii
- Daniel A. Cohen, Does Information Risk Really Matter? An Analysis of the Determinants and Economic Consequences of Financial Reporting Quality, 69-90
- Linda Allen, Hongtao Guo, and Joseph Weintrop, The Information Content of Quarterly Earnings in Syndicated Bank Loan Prices, 91-122
- Theodore J. Mock, Arnold Wright, Rajendra P. Srivastava, and Hai Lu, The Framing and Evaluation of Multiple Hypotheses, 123-140
- Chee W. Chow, Joanna L. Ho, and Sandra C. Vera-Muñoz, Exploring the Extent and Determinants of Knowledge Sharing in Audit Engagements, 141-160
- Samuel Tung, Wang Lan-Fen, Lin Chen-Chang, Lai Ching-Hui, and Audrey Hsu, The Use of Extended Credit (Channel Stuffing) to Avoid Reporting Losses, 161-182
- Announcements, 183
Does Information Risk Really Matter?
An Analysis of the Determinants and Economic Consequences
of Financial Reporting Quality
Daniel A. Cohena
aNew York University
Abstract
Controlling for firm-specific characteristics determining financial reporting quality, this paper finds evidence of a negative association between firms’ total risk and financial reporting quality. While the results imply that firms providing financial information of higher quality do not necessarily enjoy a lower cost of equity capital, a significant negative relation is documented between reporting quality and idiosyncratic risk. This suggests that the quality of accounting information is not an additional systematic priced risk factor as suggested in recent studies. The evidence reported demonstrates the importance of explicitly controlling for the determinants of financial reporting quality when investigating the associated economic consequences.
JEL Classification: D80, G12, G14, M41
Keywords: financial reporting quality, information risk, cost of capital, idiosyncratic risk
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The Information Content of Quarterly Earnings in Syndicated Bank Loan Prices
Linda Allena*, Hongtao Guob, and Joseph Weintropa
aBaruch College, CUNY
bThe Brattle Group
Abstract
This paper examines the information content of quarterly earnings announcements in the syndicated bank loan market by focusing on the private release of earnings information to loan syndicate members. In contrast to the literature on equity price reactions to earnings announcements, we find significant price movements in the secondary loan market four to five weeks prior to public earnings announcement dates, around the time of mandated covenant reports to members of the syndicate. This paper finds that the loan market reaction to private information about earnings is asymmetric, such that loan returns decline when earnings decline, but there is no significant loan market reaction to earnings increases. The results are robust to controlling other earnings pre-announcement information.
JEL Classification: G14, M41
Keywords: earnings announcements, syndicated bank loans
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The Framing and Evaluation of Multiple Hypotheses
Theodore J. Mocka, Arnold Wrightb, Rajendra P. Srivastavac* and Hai Lud
aUniversity of California-Riverside
bNortheastern University
cUniversity of Kansas
dUniversity of Toronto
Abstract
This study provides exploratory evidence on auditors’ framing and evaluation of hypotheses, identifies implications for improving audit decision-making and facilitates the interpretation of prior research. Prior studies usually assume hypotheses to be framed as mutually exclusive and exhaustive. However, both verbal protocol evidence and probability assessments reveal that in a realistic case most auditors frame the hypotheses as a non-mutually exclusive and exhaustive set of causes. Further, auditor probability assessments tend to reflect multiple causes. Finally, exploratory analyses indicate auditors have difficulty in updating assessments consistent with the perceived interrelationships between hypotheses.
JEL Classification: M41
Keywords: Audit, judgment, framing, multiple hypothesis, evidence
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Exploring the Extent and Determinants of
Knowledge Sharing in Audit Engagements
Chee W. Chowa, Joanna L. Hob*, and Sandra C. Vera-Muñozc
aSan Diego State University
bUniversity of California, Irvine
cUniversity of Notre Dame
Abstract
Audit firms are faced with increasing demands for audit efficiency and effectiveness. Increasing knowledge sharing in audit engagements can help them respond to this challenge, and this study seeks to advance understanding of the extent and determinants of such sharing. Data collected from auditors of two Big Four audit firms suggest that both firms have high, but far from complete, levels of knowledge sharing. The factors identified as affecting such sharing range from characteristics of the client to attributes of the audit firm, audit team and individual auditors. A framework is proposed for organizing these factors and relationships.
JEL Classification: M42
Keywords: Audit efficiency, audit effectiveness, knowledge sharing
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The Use of Extended Credit (Channel Stuffing) to Avoid Reporting Losses
Samuel Tunga*, Wang Lan-Fenb, Lin Chen-Changc, Lai Ching-Huid, and Audrey Hsua
aNational Taiwan University
bPWC Taiwan
cDeloitte Taiwan
dTakming University, Taiwan
Abstract
This study investigates whether managers grant extended credit at the end of the fiscal year to accelerate customer purchases and thus avoid reporting losses. This study also considers whether this kind of earnings management affects the information content of reported earnings, and whether the unexpected accounts receivable (UAR)—a relatively reliable measure of management’s exercise of channel stuffing over earnings—can provide incremental information about this phenomenon. Consistent with our hypotheses, we find that managers are likely to grant extended credit at the end of the fiscal year to meet their annual financial reporting targets.
JEL Classification: C21, G14, M41
Keywords: capital markets, management choice, earnings management, accruals, discretionary accruals
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