Abstract:
Purpose The purpose of this paper is to examine the association between pervasiveness, severity, and remediation of internal control material weakness (ICMW) reported by the SEC registrants pursuant to SOX Section 404 and audit fees. Design/methodology/approach The paper employs multivariate regression models for a sample of 854 firms that disclosed ICMW for the first time in 2004, 2005, or 2006, to investigate the empirical relationship of pervasiveness and severity of ICMW and its subsequent remediation with audit fees. Findings The analyses demonstrate that audit fees are significantly positively related to the severity (and pervasiveness) of ICMW in the years of ICMW disclosures and are significantly negatively related to the remediation of internal control weaknesses in the years when ICMW remediation took place. The test results further demonstrate that the remediation of systematic control weaknesses has a greater effect on reduction of audit fees compared to the remediation of nonsystematic (transaction/account related) control weaknesses, though the remediation of both systematic and nonsystematic control weaknesses is accompanied by audit fee declines. Research limitations/implications The study produces evidence on pricing audit services by incumbent auditors in response to the severity of internal material control weaknesses and their remediation in subsequent fiscal periods. Its results shed light on certain new aspects of audit fee determinants in the post-SOX period by virtue of their implications that the pervasiveness and severity of internal control problems induce auditors to make an upward fee adjustment while their remediation has a moderating effect on pricing audit services. Originality/value The study's finding is a useful addition to the existing fee literature and is relevant for the post-SOX world which experienced a structural change in financial accounting and auditing environment.
Abstract:
Purpose The purpose of this paper is to examine the effects of institutional factors and the European Union (EU) accounting harmonization on the value-relevance and comparability of dirty surplus accounting flows (DSFs) in the member countries throughout the period 1993 to 2002. Design/methodology/approach The returns-earnings models and fixed-effect operating income growth models are used to examine the differences in the incremental and relative relevance of DSFs between countries which have a piecemeal system of regulation with significant input from the profession and/or market participants, and the code law countries with the government being the most important institution with regard to accounting regulation. Moreover, the relevance of DSFs in the three sub-periods is compared, each reflecting quite distinct attitudes in the EU towards international accounting harmonization. Findings DSFs are incrementally relevant in Denmark, Finland, Ireland, Sweden and the UK, where equity market plays an important role in the country's financing system; and in comparison to comprehensive income, reported income is a dominant measure of performance in most European countries, with the exception of the five afore-mentioned countries. There is also evidence that cross country differences in the value-relevance and predictability of DSFs decrease in the later years of this sample period. Research limitations/implications Future research focusing upon the specific accounting changes made by companies in the EU is needed for a better understanding of the relative importance of stock market integration and standard setting changes in explaining the characteristics of DSFs. Practical implications The results indicate that the convergence in the reporting of DSFs over time is driven by global capital market integration, and more importantly, the accounting harmonization activities carried out via self-regulation with significant input from the profession and/or market participants at national level. Originality/value The paper seeks to explore, firstly, the extent to which differences in the reporting of DSFs across the EU may be explained by institutional differences. Secondly, it explores whether or not differences across the countries have decreased in three phases of the EU harmonization process.
Abstract:
Purpose The purpose of this paper is to examine the ways in which stock market valuation and managerial incentives jointly affect merger and acquisition (M&A) decisions and post-M&A performance, and to provide new evidence on the agency implications where such acquisitions are driven by the stock market. Design/methodology/approach Utilizing all publicly-traded US firms in the NYSE, AMEX and NASDAQ during the period from 1992 to 2005 (excluding financial and utility firms), obtained from COMPUSTAT, CRSP, I/B/E/S, and the M&A database provided by SDC Platinum, this paper adopts a two-stage approach: the first stage, predicts the probability of an M&A based on the market valuation variables; the second stage, regresses the post-M&A firm performance on the predicted probability of a merger or acquisition from the first stage and other control variables. Findings Market valuation has a significant influence on corporate acquisition decisions, particularly for those firms whose compensation packages include less managerial equity ownership, more executive stock options and no long-term incentive plans, and in those firms where CEOs are serving on the board of directors. The value-destroying acquisitions made by these types of managers are likely to be financed using the firms' stocks, executed with high premiums and undertaken during periods of high market valuation. Originality/value The main finding suggests that market-driven acquisitions could be value destroying when managers engage in opportunistic acquisitions for reasons of self-interest. Managerial myopia, overconfidence, misaligned incentives, empire-building motives and poor corporate governance can all exacerbate the agency problem of market-driven acquisitions.
Abstract:
Purpose The aim of this paper is to investigate differences in capital structures across industries in Egypt paying particular attention to: corporate characteristics, such as liquidity, asset structure, growth, and size; fiscal characteristics, namely, the application of differential corporate tax rates; and stock market activity. Design/methodology/approach Comparisons are made between the four main industrial sectors: food, heavy industries, contracting and services. For each industry four aspects of capital structure are assessed. Firms are also classified according to whether their shares are actively traded on the Egyptian stock market. Multiple regressions are run to test a range of hypotheses. ANOVA and multiple comparison procedures are also employed. Findings Across Egyptian firms, higher business risks do not generally result in lower levels of long-term capital structure. The contracting sector is significantly different from food, heavy industries and services in its determinants of its short-term financing and interest ratios. The sector also has a higher level of debt, and so a hypothesised tax-induced higher debt level for the services sector, which has the highest corporate tax rate, is rejected. Asset-backing is particularly important in heavy industries, and in non-actively traded firms. Size and growth are positively related to short-term financing in heavy industries and services. Originality/value The value lies in the comprehensiveness of the study, covering both short- and long-term capital structures across industries, both income measures and capital indebtedness, and distinctions according to whether the shares are actively traded or not.
Abstract:
Purpose The aim of this paper is to consider the short-run performance of UK firms acquiring foreign target firms over a period of 1994-2003 and to explore the impact of deal size and other firm-specific factors on performance. Cross-border mergers and acquisitions have witnessed a substantial growth worldwide, with the UK being one of the top acquiring nations in the global market for corporate control. Design/methodology/approach The paper first uses event study methodology to analyse short-run share price performance. Then a univariate analysis to examine the factors influencing the short-run performance based on a sample of 373 acquisitions over the period of 1994 to 2003. Findings The study finds that the UK acquirers do not earn statistically significant positive abnormal returns in the short-run. Univariate analysis shows that short-run performance of UK acquirers is influenced by the form of target, acquisition strategy, geographical origin of target firm and the payment methods. However, the study finds no support for size of acquisition deal as a determinant of performance of acquiring firm. Originality/value The paper attempts to shed more light and extend existing research in cross-border mergers and acquisitions by examining short-run performance and factors influencing performance.
