Asia-Pacific Journal of Accounting & Economics

Tentative Publishing Plan for 2018

Volume 25, Issue No. 1 & 2, February and April 2018

Karim Jamal, Qiliang Liu* & Le Luo, Do Big 4 firms benefit or suffer losses when another Big 4 firm fails to detect fraud?
Ahrum Choi, Byungcherl Charlie Sohn* & Desmond Yuen, Do Auditors Care about Real Earnings Management in Their Audit Fee Decisions?
Nida Türegün*, Effects of borrowing costs, firm size, and characteristics of board of directors on earnings management types: a study at Borsa Istanbul
Mitchell Oler, Terence J. Pitre & ^chang Joon Song*, Perverse Market Rewards for Meeting or Beating Earnings Expectations
Li Bai*, Peter Koveos & Min Liu, Applying an Ontology-augmenting XBRL Model to Accounting Information System for Business Integration
Chin-Ho Lin*, Did international production/distribution networks mitigate the effect of the global financial crisis? Evidence from Taiwan machinery industry
Yao Guo & Jianan Zhou*, Experimental tests of the salience theory: disaggregated income statements under two economic states
Fangzhao Zhou, Lei Wang, Zenan Zhang & Yunbi An*, The impacts of accrual-based and real earnings management on executive compensation: Evidence from Chinese public firms in the private sector
Manuel A. Zambrano-Monserrate*, Christopher Carvajal-Lara & Roberto Urgiles-Sanchez, Is there an inverted U-shaped curve? Empirical analysis of the Environmental Kuznets Curve in Singapore
Xiaochun Li* & Yunyun Wu, Environment and economy in the modern agricultural development
Shijun Cheng, Wei Jiang & Yeqin Zeng*, Does access to capital affect cost stickiness? Evidence from China
Che-Chia Chang* & ^chia-Wei Chen, Directors’ and officers’ liability insurance and the trade-off between real and accrual-based earnings management
Joonhei Cheung, Hyunpyo Kim, Seungjun Kim & Rong Huang*, Is the asymmetric cost behavior affected by competition factors?
Hyoung-joo Lim & Dafydd Mali*, Does market risk predict credit risk? An analysis of firm risk sensitivity, evidence from South Korea
Jun Chen, Wang Dong, Shuo Li & Yu (Tony) Zhang*, Perceived audit quality, state ownership, and stock price delay: evidence from China
Fang-Chi Lin, Yu-Cheng Lin* & ^chieh-Shuo Chen, Accrual reversals and audit fees: the role of abnormal audit fees

Do Big 4 firms benefit or suffer losses when another Big 4 firm fails to detect fraud?

Karim Jamal^a, Qiliang Liu^b and Le Luo^b
^aAlberta School of Business, University of Alberta, Edmonton, Canada; ^bSchool of Management, Huazhong University of Science and Technology, Wuhan, People’s Republic of China

Abstract
This paper examines how investors and companies in China benefit or penalize other audit firms (and their clients) when one Big 4 audit firm fails to detect a fraud. Using a detailed archival study of a fraud by a manufacturing firm (Kelon), we propose that an audit failure by one Big 4 firm hurts not only itself and shareholders of its clients, but also competing Big 4 firms and their clients. Unlike results in developed countries, clients of both the failing auditor (Deloitte) and other foreign (Big 4) auditors experience more negative stock market reactions than local non-Big 4 auditors’ ^clients at the disclosure event pertaining to Kelon. Negative effects are more pronounced for companies in Kelon’s industry. Shareholder losses are moderated by government ownership. Furthermore, companies are less likely to switch to other Big 4 auditors after disclosure of the fraud case. Our results are robust to additional analyses, including controls for self-selection of Big 4 auditors.

Keywords: Contagion, auditor reputation, audit market competition, fraud

Do Auditors Care about Real Earnings Management in Their Audit Fee Decisions?

Ahrum Choi^a, Byungcherl Charlie Sohn^b and Desmond Yuen^b
^aDepartment of Accountancy and Law, School of Business, Hong Kong Baptist University, Kowloon, Hong Kong; ^bDepartment of Accounting and Information Management, Faculty of Business Administration, University of Macau, Macau, China

Abstract
This study investigates whether auditors incorporate the implications of potential litigation risk arising from their client firms’ using real earnings management (REM) to manage earnings. Using a large sample of US firms, we find that REM is positively related to audit fees and that this relation is incremental over and beyond the effects of accrual-based earnings management and other control variables. We also find that the positive relation between REM and audit fees is stronger for firms with sophisticated investors or higher stock price sensitivity to accounting earnings. Finally, we find that this positive relation is more pronounced for firms with financial constraints where REM is more likely to stem from managerial opportunism and is perceived as riskier by auditors. These findings are robust to endogeneity controls and various sensitivity tests.

Keywords: Real earnings management; accrual-based earnings management; audit fees

Effects of borrowing costs, firm size, and characteristics of board of directors on earnings management types: a study at Borsa Istanbul

Nida Türegün, School of Applied Sciences, Ozyegin University, Istanbul, Turkey

Abstract
Using data for firms at Borsa Istanbul in Turkey, this study determines how borrowing costs, firm size, and board size and independency affect choice of earnings management (EM) type (efficient or opportunistic), in an attempt to expand the somewhat limited EM literature. The results of the ordinary least squares hypothesis testing show that the firms practice efficient EM, and that highly leveraged firms and those with a high proportion of independent non-executive board members use EM less than those with a low proportion, while large firms and those with large boards use EM more than those with small boards do.
Keywords: Earnings management, positive accounting theory, borrowing costs, firm size, corporate governance

Perverse Market Rewards for Meeting or Beating Earnings Expectations

Mitchell Oler^a, Terence J. Pitre^b and Chang Joon Song^c
^aDepartment of Accounting, University of Wyoming, Laramie, WY, USA; ^bDepartment of Accounting, California State University, Sacramento, CA, USA; ^cDepartment of Accounting, Hanyang University, Seoul, Korea

Abstract
Approximately 47 (43) percent of the observations in our sample receive negative (positive) market rewards when they meet (miss) earnings expectations. We define these phenomena as perverse market rewards (PMR). We find that the likelihood of PMR is increased when (i) firms use earnings and/or expectations management; (ii) earnings growth is negative (positive) when earnings expectations are met (missed); and (iii) ownership by transient (dedicated) institutional investors is high when earnings expectations are met (missed). In addition, we find that, when earnings expectations are met (missed), PMR appears to be an indicator of bad (good) future stock performance. Our study demonstrates that gratuitous participation in the ‘numbers game’ does not always result in the desired market rewards.

Keywords: Earnings expectations; earnings management; earnings growth; expectations management; institutional investors

Applying an Ontology-augmenting XBRL Model to Accounting Information System for Business Integration

Li Bai^a, Peter Koveos^b and Min Liu^c
^aLixin Accounting Research institute & School of Accounting and Finance, Shanghai Lixin University of Commerce,Shanghai, China; ^bKiebach Center for International Business, Whitman School of Management, Syracuse University, Syracuse, NY, USA; ^cDepartment of Control Science & Engineering, School of Electronics and Information Engineering, Tongji University, Shanghai, China

Abstract
The field of accounting information analysis and computing is a conceptually rich domain. The eXtensible Business Reporting Language is an XML vocabulary designed to simplify the automation of exchanging financial information, there exist some important limitations in the current version, more insightful semantics and a sharper level of representation are required to describe and exploit complex information. We design an ontology-augmenting XBRL extension model and a financial service matching framework for accounting information integration by adopting Semantic Web technologies, and compute a fuzzy-based semantic similarity to integrate two financial concepts. The model can provide more insightful semantics for financial analysis.

Keywords: XBRL, financial ontology, accounting information system, semantic similarity, business integration based on internet and value chain integration

Did international production/distribution networks mitigate the effect of the global financial crisis? Evidence from Taiwan machinery industry

Chin-Ho Lin
Graduate School of Economics, Keio University, Tokyo, Japan

Abstract
This study employs survival analysis to investigate how the trade relationships of international production/distribution networks mitigated the negative effects on exports during the global financial crisis of 2008–2009. Using monthly trade data at the most disaggregated level, this study employs January 2009 as the base, which was the worst month of the crisis, to identify whether there were active or inactive trade relationships. We reveal that even in the worst month of the crisis, the country-product pairs had high survival rates for active trade relationships, implying they were major drivers of the recovery of trade values after the crisis.

Keywords: Survival analysis, East Asia, financial crisis, international production networks

Experimental tests of the salience theory: disaggregated income statements under two economic states

Yao Guo and Jianan Zhou
Department of Accounting, School of Economics and Management, Southwest Jiaotong University, Chengdu, China

Abstract
We present experimental evidence that unsophisticated investors are better able to make judgments when operating expenses are disaggregated by nature. Disaggregated expenses on the face of income statements increase the salience of information about cost structures and operating leverages that usually disclosed in several parts of the financial statements and notes. The judgments are also affected by economic states. We infer that disaggregation contributes more on making judgments in economic expansion rather than in economic recession. Our results bring empirical evidence to joint FASB/IASB financial statement presentation project and standard setters to encourage consistent principles for the presentation format in financial statements between Chinese GAAP and IFRS.

Keywords: Disaggregated expenses, presentation format, unsophisticated investors, economic states

The impacts of accrual-based and real earnings management on executive compensation: Evidence from Chinese public firms in the private sector

Fangzhao Zhou^a, Lei Wanga, Zenan Zhanga and Yunbi An^b
^aSchool of Business, Jiangnan University, Wuxi, China; ^bOdette School of Business, University of Windsor, Windsor, Canada

Abstract
This paper investigates whether high CFO or CEO compensation follows earnings management practices in Chinese public firms in the private sector. We find that while accrual-based earnings management does not impact executive compensation, real earnings management leads to high executive compensation. In addition, the effect of real earnings management is particularly strong for CEO pay, consistent with the notion that CEO pressure is the key driver of earnings management. Moreover, we find that this association is more pronounced for firms with a powerful CEO as well as for firms with a large wedge between control and cash flow rights.

Keywords: Earnings management, CFO compensation, CEO compensation

Is there an inverted U-shaped curve? Empirical analysis of the Environmental Kuznets Curve in Singapore

Manuel A. Zambrano-Monserrate, Christopher Carvajal-Lara and Roberto Urgiles-Sanchez
Escuela Superior Politécnica del Litoral, ESPOL, Facultad de Ciencias Sociales y Humanísticas, Campus Gustavo Galindo, Guayaquil, Ecuador

Abstract
This paper provides empirical information based on the existence of the Environmental Kuznets Curve (EKC) hypothesis for Singapore by applying the autoregressive distributed lag bounds testing approach for the period of 1971–2011. Singapore is a country that has experienced an incredible economic development in the last decades and its contamination has been low in recent years. This hypothesis was tested, obtaining positive results that support it, along with this the Granger causality test showed that the causal variables of CO2 emissions are the GDP per capita, energy consumption, population density, financial development and trade openness. Empirical results confirm the evidence of EKC hypothesis in both the short-run and long-run. The results suggest that the financial development and trade openness help to reduce the CO2 emissions. This study hopes to sustain that the existing environmental regulations in the country should continue applying to keep reducing environmental degradation.

Keywords: EKC, Singapore, financial development, trade openness

Environment and economy in the modern agricultural development

Xiaochun Li and Yunyun Wu
School of Economics, Nanjing University, Nanjing, China

Abstract
This paper establishes a three-sector general equilibrium model to investigate the environmental and economic effects of policies intended to promote modern agriculture. In the model, two situations are considered: In the first situation, the perfect mobility of capital between the capital-consuming sectors is assumed, and in the second situation, there is perfect mobility of land between the land-using sectors, keeping perfect mobility of capital assumption unchanged. The main conclusion is that the environmental effect of interest subsidization for modern agricultural sector is superior to other subsiding policies of factor prices.

Keywords: Environment, labor migration, modern agriculture

Does access to capital affect cost stickiness? Evidence from China

Shijun Cheng^a, Wei Jiang^b and Yeqin Zeng^c
^aRobert H. Smith School of Business, University of Maryland, College Park, MD, USA; ^bDepartment of Accounting, Center for Management Accounting Research, Jinan University, Guangzhou, China; ^cICMA Centre, Henley Business School, University of Reading, Reading, UK
Sheng Zhang*, Zhongnan University of Economics and Law

Abstract
We study the effect of limited access to capital on firm cost stickiness, using data from a large sample of Chinese private firms over 1998–2007. Our results show that on average SG&A costs are anti-sticky. For firms in regions with lower levels of financial development, SG&A costs have lower sensitivity to sales increases and exhibit lower stickiness. Overall our findings suggest access to capital as an important determinant of cost stickiness.

Keywords: Cost stickiness, access to capital, adjustment costs, financial development

Directors’ and officers’ liability insurance and the trade-off between real and accrual-based earnings management

Che-Chia Chang and Chia-Wei Chen
Department of Finance, Tunghai University, Taichung City, Taiwan

Abstract
In this study, we examine whether directors’ and officers’ legal liabilities affect their choices of different means of earnings management. We focus on listed firms in Taiwan, where information on directors’ and officers’ liability insurance is publicly available. Consistent with prior studies, we find that insured firms are more likely to use accrual-based earnings management. However, we demonstrate that the level of overall earnings management is marginally lower for insured firms because they rely less on costly real earnings management. Our findings suggest that carrying directors’ and officers’ liability insurance may, to some extent, mitigate costs resulting from earnings management.

Keywords: Directors’ and officers’ liability insurance, real earnings management, accrual-based earnings management

Is the asymmetric cost behavior affected by competition factors?

Joonhei Cheung^a, Hyunpyo Kim^b, Seungjun Kim^c and Rong Huang^d
^aCollege of Economics and Business Administration, Daegu University, Gyeongsan, Korea; ^bSchool of Business, Sungkyunkwan University, Seoul, Korea; ^cCollege of Business and Economics, Chung-Ang University, Seoul, Korea; ^dBaruch College, City University of New York, New York, USA

Abstract
Prior studies on the asymmetric cost behavior mainly focus on internal factors. However, managers consider both internal and external factors when making strategic cost decisions. In this paper, we investigate the relation between the asymmetric cost behavior and external competition factors. We find that Selling, General, and Administrative costs are more sticky for firms in different competition environments, proxied by higher product differentiation, higher entry costs, and larger market size. Overall, these findings suggest that the asymmetric cost behavior is affected by external factors as well as internal factors.

Keywords: Cost stickiness, competition factors, product differentiation, entry costs, market size

Does market risk predict credit risk? An analysis of firm risk sensitivity, evidence from South Korea

Hyoung-joo Lim^a and Dafydd Mali^b
^aSchool of Global Business Administration, Far East University, Eumseong-gun, South Korea; ^bSchool of Accounting, Kyungsung University, Busan, South Korea

Abstract
We empirically test the relation between stock volatility (market risk) and credit ratings (credit risk) using KRX listed firms. We find a negative relation between stock volatility and credit ratings. The results suggest that as stock price volatility increases, a firm is more likely to experience a credit rating decrease. After dividing our sample into investment and non-investment grade groups, we find the relation between volatility and a credit rating decrease diminishes in the investment grade sample compared to the non-investment grade sample. Overall, we find investment grade firms are more likely to absorb shocks associated with speculative investment/divestment compared to price sensitive non-investment grade firms.

Keywords: Market risk, stock return volatility, credit risk, credit ratings, investment grade

Perceived audit quality, state ownership, and stock price delay: evidence from China

Jun Chen^a, Wang Dong^a, Shuo Li^b and Yu (Tony) Zhang^c
^aSchool of Management, Department of Accounting and Finance, Zhejiang University, Hangzhou, China; ^bSchool of Accounting and Finance, The Hong Kong Polytechnic University, Kowloon, Hong Kong; ^cLawrence Technological University, Southfield, MI, USA

Abstract
We examine the effect of audit quality on stock price delay and whether the effect differs between two groups of Chinese firms: state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs). Using a sample of 15,019 firm-year observations for Chinese listed firms over the period 2001–2011, we find that firms with Big 4 auditors are associated with less stock price delay and this negative association is weaker for SOEs than for NSOEs. Our findings suggest that high-quality auditors play an important role in the price formation process, in that there is less stock price delay, and this role varies across firms with different ownership structures. Additional analyses show that the audit quality of international Big 4 auditors is perceived to be different from that of domestic Big 4 auditors. The effect of the perceived audit quality on price delay is different for SOEs controlled by the central government compared to those controlled by the local governments. Our study contributes to extant research by focusing on the economic consequences of auditor choices and by emphasizing the importance of recognizing ownership type when conducting audit research.

Keywords: Perceived audit quality, state-owned enterprises, stock price delay

Accrual reversals and audit fees: the role of abnormal audit fees

Fang-Chi Lin^a , Yu-Cheng Lin^b and Chieh-Shuo Chen^c
^aDepartment of Accounting, TamKang University, New Taipei City, Taiwan; ^bDepartment of Accounting, National Kaohsiung University of Applied Sciences, Kaohsiung, Taiwan; ^cDepartment of Accounting, National Changhua University of Education, Changhua City, Taiwan

Abstract
This study examines whether abnormal audit fees impair auditor independence or reflect auditors’ efforts by using accruals reversal. All accruals must ultimately reverse, but those reversals have different effects on earnings persistence. Management may communicate the private information by different kinds of accruals. Therefore, auditors that have inside information should be able to identify managers who use their reporting discretion accruals to signal private information to investors. Our results suggest that normal audit fees reflect audit effort to identify different kinds of accruals reversal, but positive abnormal audit fees impair audit quality.

Keywords Accruals reversal, abnormal audit fees, internal control, earnings persistence, audit fees