Production Network Centrality and Accounting Conservatism

In recent years, local Chinese firms have begun to join global production networks and leverage their local network to enlarge their manufacturing industry. As Chinese firms expand their production networks, their performance may improve due to their innovative use of such networks to diffuse information/knowledge. However, a survey of 171 Chinese firms found that simultaneously pursuing both central and intermediate network positions creates conflict even though both positions positively affect performance. Innovation orientation and environmental dynamics are the areas in which network position affects performance. In highly dynamic environments and for firms with innovation orientations, an intermediate position can improve performance. Conversely, central positions can improve performance for high innovation orientations in less dynamic environments. These results indicate that firms should consider the fitness of the various network positions, innovation strategies and environmental dynamics when expanding their production networks.

The concern over accounting regulation has resulted in studies of auditor independence and audit quality, as measured by auditor tenure, accounting conservatism, and the type of audit firm the client employs (Big 4 or non-Big 4).In this study, we continue the line of research on conservatism and auditor tenure by examining whether accounting conservatism is related to auditor tenure for Chinese firms. We extend the studies by Jenkins and Velury (2008) and Li (2010) in order to examine Chinese firms that have non-Big 4 auditors, and we investigate whether the association exists for the most important and least important clients of these audit firms. Our findings indicate that least important clients employ more conservative accounting techniques as auditor tenure increases. For the most important clients, there is less conservatism, compared to the least important clients, in the early years of the auditor’s tenure. Our study provides more information about the regulatory issue of mandatory audit firm rotation because our results suggest that mandatory auditor rotation may have an adverse effect on the least important clients of these Chinese audit firms.

This study explores the governance role of accounting conservatism by investigating changes in financial reporting conservatism before and after the passage of state anti-takeover laws. Passage of these laws introduced an exogenous shock to the takeover threat faced by firms and constitutes a natural experiment for investigating the relation between financial reporting and governance free of endogeneity concerns. Employing a difference-in-differences methodology, we find that conditional accounting conservatism increased significantly after the passage of state anti-takeover legislation consistent with accounting conservatism acting as a substitute internal governance mechanism for the weakened external governance environment. We further conjecture and document that the resulting increase in conservatism is greater for firms operating in less competitive industries, firms with superior managers, and firms with lower institutional ownership. This evidence sheds light on how the financial reporting system interacts with corporate governance mechanisms in alleviating potential agency problems. *Callen is at the Rotman School of Management, 105 St. George St., Toronto, M5S 3E6, Canada. Ph. 416-946-5641. e-mail :callen@rotman.utoronto.ca. Corresponding Author. **Guan is at the Faculty of Business, City University of Hong Kong, Kowloon, Hong Kong SAR, China. email:yyguan@cityu.edu.hk. ***Qiu is at the Degroote School of Business, McMaster University, and 1280 Main St., Hamilton, L8S 4L8, Canada. email: qiu@mcmaster.ca.

This study explores the governance role of accounting conservatism by investigating changes in financial reporting conservatism before and after the passage of state anti-takeover laws. Passage of these laws introduced an exogenous shock to the takeover threat faced by firms and constitutes a natural experiment for investigating the relation between financial reporting and governance free of endogeneity concerns. Employing a difference-in-differences methodology, we find that conditional accounting conservatism increased significantly after the passage of state anti-takeover legislation consistent with accounting conservatism acting as a substitute internal governance mechanism for the weakened external governance environment. We further conjecture and document that the resulting increase in conservatism is greater for firms operating in less competitive industries, firms with superior managers, and firms with lower institutional ownership. This evidence sheds light on how the financial reporting system interacts with corporate governance mechanisms in alleviating potential agency problems. *Callen is at the Rotman School of Management, 105 St. George St., Toronto, M5S 3E6, Canada. Ph. 416-946-5641. e-mail :callen@rotman.utoronto.ca. Corresponding Author. **Guan is at the Faculty of Business, City University of Hong Kong, Kowloon, Hong Kong SAR, China. email:yyguan@cityu.edu.hk. ***Qiu is at the Degroote School of Business, McMaster University, and 1280 Main St., Hamilton, L8S 4L8, Canada. email: qiu@mcmaster.ca.

This study explores the governance role of accounting conservatism by investigating changes in financial reporting conservatism before and after the passage of state anti-takeover laws. The passage of these anti-takeover laws introduced an exogenous shock to the takeover threat faced by firms and constitutes a natural experiment for investigating the relation between financial reporting and governance free of endogeneity concerns. Employing a difference-in-differences methodology, we find that conditional accounting conservatism increased significantly after the passage of state anti-takeover legislation consistent with accounting conservatism acting as a substitute internal governance mechanism for the weakened external governance environment. We further conjecture and document that the resulting increase in conservatism is greater for firms operating in less competitive industries, firms with superior managers, and firms with lower institutional ownership. This evidence sheds light on how the financial reporting system interacts with corporate governance mechanisms in alleviating potential agency problems.

Long-term impact of environmental regulations and eco-conscious customers in the chemical industry: A system dynamics approach to analyze the effect of multiple disruptions

This study aims to analyze the effect of profit persistence, book-tax differences, and capital structure on profit quality, with accounting conservatism serving as a moderating variable. Utilizing secondary data from the financial statements of service companies listed on the Indonesia Stock Exchange during the 2021-2023 period, the research employs a quantitative method with a causal design. The findings indicate that profit persistence has a positive effect on profit quality, suggesting that stable earnings are perceived as high-quality profits. Conversely, book-tax differences do not significantly impact profit quality, indicating that legal policy differences rather than manipulation may explain this relationship. Additionally, capital structure is shown to have a negative effect on profit quality, as higher debt levels may raise financial risk and lower market reactions to profits. Importantly, accounting conservatism is found to moderate the relationship between profit persistence and profit quality, as well as between book-tax differences and profit quality. Furthermore, it enhances the relationship between capital structure and profit quality, indicating that conservative accounting practices can improve the reliability of reported profits. This research provides valuable insights for investors and corporate management, highlighting the importance of profit quality and the need for effective management strategies to enhance financial reporting.

This study examines the effects of presidential elections (PEs) on firms’ accounting conservatism in Korea. The Korean president exerts great influence on the government's financial, monetary, subsidiary, and regulatory policies. At the same time, however, the Korean constitution prohibits the re‐election of the incumbent president. This simultaneously strong and fragile presidential system creates unique political uncertainty, which deteriorates the information gap between firms’ insiders and outsiders. According to the efficient contracting channel, accounting conservatism is expected to relieve information asymmetry by recognizing the economic losses faster than economic gains. But we posit that the effectiveness of accounting conservatism depends on the information environment within which they operate. If the information environment facilitates a compensation system for an increase in accounting conservatism under high uncertainty, managers may prefer to expand conservative accounting practices. However, if there is no such incentive mechanism, managers may opt to suspend accounting conservatism because the cost of revealing bad news increases during periods of uncertainty. Test results show that PEs encourage managers to delay rather than expedite the timely recognition of economic losses. This negative effect becomes more pronounced in firms with higher reliance on government contracts than firms with lower such reliance. We also find that Korean chaebol‐affiliated firms are likely to increase accounting conservatism during PEs. In general, US‐based studies support the positive relationship between information asymmetry and accounting conservatism, while this study demonstrates that this relationship can be reverse depending on the institutional environment.

This study examines the impact from the COVID‐19 pandemic on the association between Chinese firms' SEO announcements and market reaction afterwards. Our findings indicate that market investors would respond more negatively to the SEO announcements and undergo more SEO underpricing for firms from regions significantly affected by the pandemic than those from the less‐affected regions. Furthermore, higher CSR scores and more involvements in accounting conservatism could mitigate these effects. The main mechanism of the moderating effect from CSR performance and accounting conservatism is that CSR investment and accounting conservatism could lessen information asymmetry between the SEO announced firms and outside investors. Finally, we document that the main motivation of SEO issuance during the pandemic is market timing.

The present study tests the pecking order of firms at varying debt levels. The findings indicate that deficit firms at low debt levels raise significant amounts of debt, thus indicating the adherence to the pecking order theory. Deficit firms (from both countries) at exceptionally high debt levels do not adjust their capital structure by issuing less debt. In a surplus situation, Chinese firms at very high level redeem the substantial debt because of the dominance of short-term debt in their capital structure. In contrast, Indian surplus firms hesitate to redeem more debt if their existing debt levels are extremely high. JEL Classification: Q14, G32

Conservative accounting can help creditors to lower their risk because conservatism will affect the reported net income and retain earnings to put more restrictions on cash dividend payouts. Based on data from Chinese firms, this study shows that firms with conservative accounting have more agency problems and higher agency costs which lead to a higher demand for conservative accounting reports. The reporting policy can significantly influence the cash dividend policy. Our results indicate that firms with aggressive accounting reports are more likely to pay more cash dividends. It is implied that accounting conservatism may lower the probability of paying cash dividends and the amount of cash dividend payouts. The evidence supports the governance role of conservative accounting on the dividend policy to reduce agency costs and to protect the interest of creditors.

Using actors' perceptions of network roles and positions to understand network dynamics

Purpose This paper examines the mediating effect of the firm’s tax-avoidance strategies on the relationship between a firm’s conservative practices and its firm value. Design/methodology/approach This study employs the Difference Generalized Method of Moments (GMM) to address endogeneity issues when testing empirical models. C-Score measures accounting conservatism, while cash effective tax rate (Cash-ETR) assesses tax avoidance practices. Additionally, Tobin’s Q (TQ), return on equity (ROE), and return on assets (ROA) serve as proxies for the firm’s value. To strengthen the results of the three mediating GMM regression models, alternative deferred tax and current effective tax rate measures are utilized for tax avoidance. The study sample comprises 64 non-financial firms listed on the Egyptian Stock Exchange (EGX 100) from 2014 to 2023. Findings The results show a positive direct effect of conservative firm practices on the firm value, partially mediated by the indirect effect of tax avoidance techniques. Research limitations/implications Policymakers should strengthen the enforcement of International Financial Reporting Standards to reduce earnings manipulation while allowing lawful taxation without imposing excessive burdens on businesses, thus decreasing their tendency toward tax evasion. Originality/value This study is the first to explore empirically the mediating function of tax avoidance practices in the association between conditional accounting conservatism (proxied by C-Score) and firm value (proxied by TQ, ROA, ROE). Further, this study distinctly enhances knowledge by providing new insights to managers and policymakers into the interplay between conservative accounting practices and tax avoidance strategies within the tax regulations in the Egyptian context.

At low and moderate levels of government debt, there appears to be little relation between the level of debt and its maturity. But at high levels of debt, a strong inverse relation emerges. We start the paper by documenting this inverse relation for those OECD Countries which have reached very high levels of debt. We then provide a theory of the joint movements of debt and maturity which can explain both sets of facts. It is based on the idea that, at high levels of debt, the government may need to decrease the maturity of the debt as debt increases, in order to maintain the credibility of its anti-inflation stance.

Short sales, institutional investors and the cross-section of stock returns