Discretionary Accounting Research Articles

Spillover Effects of the SEC's Regulatory Oversight on Private Debt Contracting: Evidence from Cross‐listed Foreign Firms

ABSTRACTWe examine the effect of the Securities and Exchange Commission's (SEC) regulatory oversight on private debt contracting outcomes, using the signing of the multilateral memorandum of understanding (MMoU) as a natural experiment. The MMoU enables the SEC to take stricter punitive actions against wealth expropriation by cross‐listed firms’ insiders and enforce better compliance with applicable rules and regulations. We find that enhanced SEC oversight in the post‐MMoU regime lowers loan spreads by 36 basis points, thus saving an average cross‐listed firm approximately $9 million in direct loan costs over the life of a bank loan. Cross‐sectional analyses show that the effect is more pronounced for borrowers from countries with weaker institutions, borrowers with greater accounting discretion, and for loans arranged by top lenders or loans not secured by collateral. Conversely, the effect is less pronounced for borrowers who use IFRS or when the SEC faces greater budgetary constraints. Enhanced SEC oversight also leads to an increase in loan maturity and a decrease in financial covenants. Our evidence suggests that while the SEC's primary mandate is to protect public equity and bond investors, its supervision yields substantial borrowing cost savings and more lenient nonprice loan terms in the private debt markets as well.

Former Executives as Supervisors: Conflicts of Interest and Accounting Discretion

Former Executives as Supervisors: Conflicts of Interest and Accounting Discretion

Valuation and underpricing of initial public offerings: The role of discretionary accounting accruals

This study examines the role of pre-IPO (pre-initial public offering) discretionary accruals in the valuation and underpricing of IPOs. We find that the underwriter offer price is unaffected while the market closing price is positively associated with the levels of pre-IPO discretionary accruals for issuers with aggressively reported earnings. We also find that this relative over-valuation of managed earnings by the markets explains a portion of the initial return that is not explained by other known determinants. For issuers with conservatively reported pre-IPO earnings, there is no relation between discretionary accruals and the offer price or the market price, and the discretionary accruals do not explain any IPO underpricing. Our subsequent analysis shows that lower stock retention is a screen and a signal of entrepreneurs’ credibility to the markets. There seems to be a higher degree of earnings scrutiny by both the markets and the underwriters for IPOs with low insider retention. However, markets tend to assign a higher weight to aggressively reported earnings of issuers with higher insider retention, presumably because of perceived incentive alignment. Underwriters, with relatively lesser information asymmetry than the markets, tend to see through the distortions caused by earnings manipulations in the valuation of IPOs, regardless of the levels of issuers’ stock retention.

National culture and the revenue‐expense matching

AbstractPrior studies on the link between country‐level cultural aspects and firms' arbitrary accounting practices are scant, and they show mixed results. To gain more insight about the impact of national culture on earnings characteristics, we exploit the matching concept between revenues and expenses, which well reflects managerial estimation and discretion in earnings quality. Using a large sample of 57 countries over the period 1989–2012, we find that (1) the economic association between revenues and expenses becomes stronger in firms from collectivistic and high uncertainty‐avoidant countries, (2) the impact of these dimensions of national culture on the matching is more salient for firms from countries characterized by a higher level of accrual accounting, a greater proportion of special‐items, and limited openness, and (3) the cultural impact on matching is mainly driven by the correlation between revenue and discretionary expense (i.e., selling, general, and administrative expense). These findings are consistent with the view that national culture plays an informal governance role to influence firms' discretionary accounting choices.

상호출자제한기업집단 소속 여부와 분기 이익조정

This study aims to analyze the effect of a mutual shareholding limited business group system which is designated and managed by the Korean Fair-Trade Commission on corporate discretionary accounting choices. According to Watts and Zimmerman (1986), accounting numbers are often used to overcome political circumstances when companies are exposed due to government regulations. As a result of analyzing the listed companies from 2015 to 2021, it was confirmed that the size of quarterly earnings management measured by quarter-year-industry based on Kothari, Leone, and Wasley (2005)’s management performance-controlled model was statistically significantly larger for companies belonging to a mutual shareholding limited business group than those not belonging to a business group. In addition, it was found that earnings management was more aggressive in the fourth quarter than in other quarters. And these results were found to be supported regardless of the largest shareholder’s share. This study has academic significance in that it provides a deep understanding of the impact of accounting practice following the designation of a mutual shareholding limited business group system, a representative business group in Korea.

Studies of water flow parameters in the pipeline of wide-reach sprinklers

Optimization of the pipeline design of wide-span sprinklers and the parameters of the water flow in it can significantly reduce the material consumption and cost of the entire machine, save water and electricity. The purpose of the research is to simulate the flow of water in the pipeline of wide-reach sprinklers, to develop a methodology for optimizing the design parameters of the pipeline and the placement of drainage pipes for sprinklers. As a result of the research, dependences of flow rate changes along the pipeline were obtained, taking into account discreteness, pressure loss. The condition for obtaining identical jets from all taps for sprinklers is presented. A comparison of the results of theoretical and experimental studies confirms the reliability and validity of the use of the theory with uniform disconnection of the flow rate for the calculations of the pipeline of sprinklers, taking into account the introduced discreteness parameter, taking into account the number and location of taps for sprinklers. The presented technique was used in the design of sprinkler machines "Kuban-LK1M" (CASCADE) and CASCADE (Saratov, LLC "Reclamation machines").

Does Financial Statement Comparability Facilitate SEC Oversight?*

ABSTRACTThis study examines the impact of cross‐firm financial statement comparability on regulatory oversight of accounting quality. Required to review each firm's periodic filings at least once every three years, the SEC learns about the degree to which a firm's accounting system is comparable to those of its peers. We posit that the SEC's ex ante knowledge about financial statement comparability, gleaned from prior‐year filing reviews, facilitates its evaluation of firms' accounting quality during the current‐year filing review. Consistent with the notion that comparable accounting systems enhance regulators' ability to identify discretionary accounting deviations, we find that the likelihood of the SEC issuing a comment letter for higher abnormal accruals increases with financial statement comparability. Further analysis reveals that the regulatory benefits from higher financial statement comparability are more salient when the SEC faces higher monitoring constraints in filing reviews. Moreover, our finding shows that comparable accounting numbers across firms help the SEC detect severe accounting violations that necessitate restatements. Overall, we provide novel evidence suggesting that higher financial statement comparability improves the efficacy of the SEC's oversight of accounting quality by reducing the information costs associated with cross‐firm comparisons.

Economic policy uncertainty and incentive to smooth earnings

We examine how economic policy-induced uncertainty influences managers' discretionary accounting choices to achieve a smoother earnings stream. We find that managers offset the partial risk of policy uncertainty on reported earnings by using discretionary accruals. We mainly observe that firms report more negative discretionary accruals when managers are less certain about their prospects. We further show that managers' engagement in income-decreasing earnings management is more significant when firms’ current period pre-managed earnings are higher. To complete the story, we also find that the propensity of reversal of discretionary accruals is positively associated with levels of policy uncertainty. Our results imply that managers opportunistically use discretionary accruals around an uncertain exogenous environment to smooth earnings.

Managerial labor mobility and banks’ financial reporting quality

This paper explores the relationship between managers’ labor mobility and the financial reporting quality of banks. Using the state-level adoption of the Inevitable Disclosure Doctrine (IDD) as an exogenous shock discouraging labor mobility, we show that adoption of the IDD is associated with a decline in financial reporting quality, as measured by discretionary loan loss provisions. The effect is larger for banks with managers who have limited outside job opportunities and smaller for banks with tight regulatory oversight. Our results support the view from the career concern hypothesis that bank managers facing restrictions on mobility have greater incentives to engage in discretionary accounting.

Discretionary Accounting Choices and Financial Statement Comparability: Evidence from Extractive Industries Pre- and Post-IFRS Adoption

Discretionary Accounting Choices and Financial Statement Comparability: Evidence from Extractive Industries Pre- and Post-IFRS Adoption

Discretionary Accounting Narratives in Contemporary Corporate Reporting: Review and Framework

This paper reviews prior research on discretionary accounting narratives, adopting a preparer perspective. We develop an analytical framework to organize our review which classifies prior research according to three components: antecedents, characteristics, and consequences of disclosures. We first overview our framework. We then discuss each framework component. Antecedents comprise the external context and internal environment. The paper addresses multiple discretionary accounting narrative characteristics. Consequences comprise share price reaction studies, experimental studies of users’ responses to discretionary accounting narratives, and firm consequences such as corporate reputation, image, legitimacy and trust. We conclude the paper with an extensive agenda for future research.

A Comparative Analysis of Effect of Environmental Accounting Cost on Productivity of Oil and Gas & Industrial Goods Firms in Nigeria

This study examined comparative analysis of effect of environmental accounting cost on productivity of oil and gas and industrial goods firms in Nigeria. The specific objective of this study was to determine effect of environmental accounting cost on the productivity of oil & gas and industrial goods firms in Nigeria for the period 2009 – 2018. The study adopted three specific objectives: to ascertain effect of economic accounting cost on firm productivity; to determine effect of discretionary accounting cost on firm productivity; and to examine effect of ethical accounting cost on firm productivity. The study employed the ex-post facto research design and data were collected on the annual reports and financial statements of six sampled firms in the two sectors. The 3 Oil and Gas firms that were purposively sampled include Mobil Nig. Plc, MRS and Total Nig. Plc, while the 3 industrial goods firms are Berger Paints PLC, Dangote Cement PLC and First Aluminum Nig. PLC. Data were analyzed using SPSS V. 20.0 and findings revealed that economic cost and ethical cost had significant effect on productivity while discretionary accounting cost had no significant effect on productivity of oil and gas firms in Nigeria. It was also found that economic, discretional and ethical accounting costs had no significant effect on productivity of the industrial goods firms in Nigeria. The study recommended that management should consolidate effort on economic and ethical accounting costs in order to enhance productivity of the economy and to stabilize the communities where oil and gas as well as industries operate in Nigeria. Keywords: Comparative Analysis, Environmental Accounting Cost, Oil & Gas, Industrial Goods firms, Nigeria. DOI: 10.7176/RJFA/13-20-04 Publication date: October 31 st 2022

Can we trust the accounting discretion of firms with political money contributions? Evidence from U.S. IPOs

Using hand-collected data from the U.S., we examine the influence of political money contributions (PMC) onIPO financial reporting. Unraveling the conflicting managerial incentives, we develop and test three distinct hypotheses whereby accounting discretion is utilized to downplay, embellish, or truthfully impart the PMC firm’s prospects. Consistent with the last two hypotheses, we document income-increasing reporting. The effects are strongest for firms sensitive to policy outcomes, and least affected by contemporaneous political events. Post-issue analysis shows that at-issue discretionary accruals systematically predict future accounting performance but are unrelated to stock returns. Survival analysis indicates a lower probability of IPO failure. Robust to a battery of checks, our results support the value-relevance of financial information and a novel use of accounting discretion as a means of signaling expected political gains.

Unifying Weak and Strong Charge Correlations within the Random Phase Approximation: Polyampholytes of Various Sequences

We consider the problem of charge correlations in self-coacervate phases of polyampholytes and disordered proteins with different monomer sequences. An analytical approach consistently describing both weak and strong correlations is proposed, which is based on the improvement of the random phase approximation (RPA) by taking into account (i) discreteness of charges in polymer chains and (ii) a finite number of wave modes of the charge density fluctuations. These modifications are an essential element of the particle-to-field transformation. For strong Coulomb interactions, the generalized RPA reproduces the free energy of the strongly correlated Wigner liquid of disjointed charges. The developed theory is applied to describe coil-to-globule transitions in single-chain polyampholytes as a function of the monomer sequence. Comparison with results of molecular simulations confirms that the theory reproduces the observed scaling laws for globule size at weak charge correlations, and in addition, it provides a quantitative description of electrostatic interactions when correlations are strong.

Relative, local and global dimension in complex networks

Dimension is a fundamental property of objects and the space in which they are embedded. Yet ideal notions of dimension, as in Euclidean spaces, do not always translate to physical spaces, which can be constrained by boundaries and distorted by inhomogeneities, or to intrinsically discrete systems such as networks. To take into account locality, finiteness and discreteness, dynamical processes can be used to probe the space geometry and define its dimension. Here we show that each point in space can be assigned a relative dimension with respect to the source of a diffusive process, a concept that provides a scale-dependent definition for local and global dimension also applicable to networks. To showcase its application to physical systems, we demonstrate that the local dimension of structural protein graphs correlates with structural flexibility, and the relative dimension with respect to the active site uncovers regions involved in allosteric communication. In simple models of epidemics on networks, the relative dimension is predictive of the spreading capability of nodes, and identifies scales at which the graph structure is predictive of infectivity. We further apply our dimension measures to neuronal networks, economic trade, social networks, ocean flows, and to the comparison of random graphs.

Earnings Management and Company Characteristics: Empirical Evidence from Algerian Companies

Abstract This paper attempts to analyze the impact of some Algerian companies’ characteristics (size, activity sector, property, listing, and nature of financial statements) on the level of earnings management. The research employed 117 observations for 26 Algerian companies from 2016 to 2020 and used a multiple linear regression model and discretionary accounting accruals to measure earnings management. According to the findings, earnings management in Algeria is explained by the companies’ sizes, activity sectors, and stock market listing. However, the nature of financial statements and the ownership of the companies do not affect earnings management. These results are beneficial for regulators and auditors since they provide empirical evidence about the characteristics of companies that manipulate earnings. Consequently, they can enable them to take appropriate actions to enhance the quality of financial reports, whether when developing and reviewing accounting standards by regulators or when examining financial information by auditors.

A two-step quantile regression method for discretionary accounting

A two-step quantile regression method for discretionary accounting

A Defense on Accounting Discretion: An Empirical Inquiry based on Users’ Awareness

Corporate performance is a key in corporate accounting. One of the earliest accounting measures of corporate performance is accounting income. Accrual accounting enables the measurement of changes in net assets of an entity. Accounting income is neither scientifically determined nor proven. Accounting information often results from approximation and estimation when choice among alternatives is professionally judged, rather than exact measures and perceptions. Divergence in application of accounting policies in corporations under similar conditions may present different results. Some criticize corporate accounting, particularly after scandals related to financial statement fraud, for choices among procedures that accounting standards permit. However, choices in the application of accounting permitted procedures that accounting standards allow are based on professional judgment. Professional judgment enables accounting as a profession and allows accounting professionals to claim status in their respective communities. Exploring users’ awareness of corporate reports in Saudi Arabia in terms of flexibility in using accounting methods when preparing corporate reports and analyzing their understanding of corporate reports, this study surveyed 72 financial statement users. Research has found that sufficient efforts must be made to obtain information when making investment decisions. As accounting income is a result of applied accounting procedures and methods, users perceive information published in the financial reports, including notes, as understandable. Flexibility in applying accounting standards is imperative for adapting to changes in the entity’s business environment. Potential capital market investors must maintain a minimum level of knowledge; otherwise, they might be gambling their wealth or savings against the odds.

Discretization of Learned NETT Regularization for Solving Inverse Problems.

Deep learning based reconstruction methods deliver outstanding results for solving inverse problems and are therefore becoming increasingly important. A recently invented class of learning-based reconstruction methods is the so-called NETT (for Network Tikhonov Regularization), which contains a trained neural network as regularizer in generalized Tikhonov regularization. The existing analysis of NETT considers fixed operators and fixed regularizers and analyzes the convergence as the noise level in the data approaches zero. In this paper, we extend the frameworks and analysis considerably to reflect various practical aspects and take into account discretization of the data space, the solution space, the forward operator and the neural network defining the regularizer. We show the asymptotic convergence of the discretized NETT approach for decreasing noise levels and discretization errors. Additionally, we derive convergence rates and present numerical results for a limited data problem in photoacoustic tomography.

Moving toward the expected credit loss model under IFRS 9: capital transitional arrangement and bank systematic risk

This paper examines banks’ option to adopt the capital transitional arrangement (CTA) set out by the Basel Committee on Banking Supervision, in response to the introduction of the International Financial Reporting Standard 9 (IFRS 9), which requires the use of an expected credit loss model instead of an incurred loss model to estimate the impairment of financial assets. Using a sample of publicly listed European banks from 2016 to 2019, we find that bank CTA adoption choice is associated with neutral factors captured by bank-specific fundamental characteristics, and potential opportunistic factors related to regulatory constraints implied by the application of IFRS 9. We further find that banks that adopted the CTA (CTA adopters) decrease their exposure to systematic risk during the transitional period. However, this relationship is only significant in countries with powerful banking authorities. In those with less powerful banking authorities, CTA adopters tend to exercise more aggressively their accounting discretion. Our study is the first to address banks’ voluntary choice to adopt the CTA policy under the mandatory application of IFRS 9.