Seemingly opportunistic management earnings guidance before stock option grants: does it misrepresent firms’ underlying performance?

Lynn Rees, Texas A&M University, USA
Anup Srivastava*, Northwestern University, USA
Senyo Tse, Texas A&M University, USA

Abstract
The exercise price of stock options is typically the closing stock price on the option grant dates, so managers can potentially benefit from low stock prices on those dates. Prior studies find that on average, managers issue more pessimistic guidance before than after grant dates. They interpret this asymmetric pattern as representing managers’ opportunistic behavior. Nevertheless, it is not clear whether this pattern reflects managers’ selective timing of bad news disclosures or a deliberate misrepresentation of underlying firm performance. This paper extends the literature by examining the effects of managerial stock option incentives on the accuracy and the information content of firms’ voluntary earnings guidance. We find that pre-grant guidance significantly improves existing consensus earnings forecasts, and is similar in bias and accuracy to post-grant guidance. Moreover, investors and analysts react similarly to pre-grant vs. post-grant guidance, suggesting that the main consumers of earnings guidance view these two types of guidance to be equally informative. Our results are consistent with the notion that managers may opportunistically select the type or the timing of disclosures, but when they opt to disclose, they do not misrepresent the underlying firm performance. On the contrary, the seemingly opportunistic guidance before option grants improves overall firms’ information environment, because it is at least as truthful and informative as post-grant guidance, and is issued more frequently than by managers who do not have incentives to report bad news before earnings announcements.

Earnings quality of Taiwanese group firms

Yan-Jie Yang*, Yuan Ze University, Taiwan
Qian Long Kweh, Universiti Tenaga Nasional, Malaysia
Ruey-Ching Lin, Fu Jen Catholic University, Taiwan

Abstract
This study examines the relationship between group firms and earnings quality. For the period 2000–2010, we examine the earnings quality of Taiwanese group and non-group firms through accrual persistence, earnings management, and conservatism. We show that group firms exhibit a lower quality of accrual persistence, have greater propensity to manage earnings, and are less conservative relative to non-group firms. Furthermore, we confirm the possible effects of group vertical relatedness and deviation of control rights from voting rights on earnings quality. These findings support the information asymmetry hypothesis that controlling shareholders have greater room to manage earnings in group firms.

Keywords: earnings quality; group firms; earnings management; information asymmetry hypothesis

Effects of agency costs on the relationship of corporate governance with audit quality and accounting conservatism in the Korean audit market

Soo Young Kwon*, Korea University
Nam Ryoung Lee, Korea Aerospace University
Eunsun Ki, Korea University

Abstract
This study examines the effects of agency costs (AC) on the relationship of corporate governance with audit quality and accounting conservatism. We employ audit hours and audit fees as proxies for audit quality, and accounting conservatism as a proxy for financial reporting quality. We find that the positive relation between corporate governance and audit quality is attenuated in the presence of AC. We also document that AC tend to weaken the negative relation between corporate governance and accounting conservatism. These results demonstrate that the relationship of corporate governance with audit quality and accounting conservatism is conditional on AC.

Keywords: corporate governance; audit hours; audit fees; accounting conservatism; agency costs

Positive externality of analyst coverage upon audit services: evidence from China

Junxiong Fang, Fudan University, China
In-Mu Haw, Texas Christian University, USA
Veicheng Yu*, Asian Institute of Management, Philippines
Xu Zhang, University of Macau

Abstract
Using China’s data, we find that analyst coverage helps reduce audit fees, and such effect is more pronounced for small firms, less-educated auditors, and small auditors. Our findings reveal positive externality of analyst coverage upon audit services in China, especially for those auditors weak in professional expertise, or hard to resist the pressure from their clients. Such evidence implies that the reputation protection hypothesis seems less applicable in an emerging market where the market share of big auditors is low. Our findings also provide alternative evidence justifying exchange-sponsored analyst coverage in practice intended to improve information environment of small firms.

Keywords: analyst coverage; audit fees; audit risk; audit effort

Stock prices, foreign reserves, and regime collapse

Chi-Chur Chao*, Deakin University, Australia
Li-Ju Chen, Feng Chia University, Taiwan
Shih-Wen Hu, Feng Chia University and Ling Tung University, Taiwan
Ching-Yi Huang, Feng Chia University, Taiwan
Vey Wang, Feng Chia University, Taiwan

Abstract
Using a regime collapse model, this paper analyzes the impact of foreign financial disturbances in the foreign exchange market on the economy under the assumption of perfect foresight. When there are foreign financial disturbances and the amount of foreign exchange reserves reaches the threshold, the government contracts the domestic credit so as to prevent an additional decrease in foreign reserves. The results show that the relative scale of the threshold for foreign reserves influences the timing of the regime collapse, the extent of domestic credit contraction and the dynamic adjustment of the economy.

Keywords: foreign financial disturbances; regime collapse; dynamic adjustment