Australian Securities Exchange Research Articles

Board committees as catalysts: Divulging the impact of nomination and risk management on corporate eco‐innovation and carbon performance

AbstractDrawing on a theoretical integration perspective, this research responds to the latest calls in sustainability accounting by comprehensively exploring the moderating roles of two board sub‐committees: the nomination committee and the risk management committee, in the relationship between corporate eco‐innovation and carbon performance. This study contributes to the current literature in sustainability accounting by utilizing panel data from non‐financial listed firms on the Australian Securities Exchange (ASX) for the period spanning from 2011 to 2022. To mitigate potential endogeneity bias, various econometric techniques, including instrumental variable modeling, were employed. The robust findings confirm a positive and statistically significant relationship between eco‐innovation and carbon emissions reduction. Moreover, both the nomination committee and the risk management committee emerge as significant moderators of this relationship. These empirical findings hold valuable practical, theoretical, and policy implications for diverse stakeholders seeking a comprehensive understanding of the role of board sub‐committees as effective monitoring tools that support corporate carbon performance by encouraging firms to actively embrace eco‐innovation practices. As a result, our evidence underscores the significance of giving due attention to board sub‐committees when configuring the board's structure and setting expectations for carbon reduction performance.

Climate change disclosure performance and audit fees: evidence from Australia

Purpose This study aims to examine the relationship between climate change disclosure performance (CCDP) and audit pricing. The moderating effect of corporate governance characteristics on that relationship is also investigated. Design/methodology/approach Using a sample of top 300 Australian Securities Exchange listed non-financial firms over the period 2008–2019, this study investigates the association between CCDP and audit fees. The findings are robust to a difference-in-difference test thereby alleviating potential endogeneity concerns. Findings CCDP is found to be significantly positively related to external auditor fees. Research limitations/implications The findings show some important implications for firm management, regulators, investors and auditors. This study presents empirical evidence that climate change, as a factor of external risk, influences audit fees. Practical implications Firms with governance structures characterized by larger more independent boards, larger audit committees and audit committees with a higher level of independence significantly moderate the relationship between CCDP and audit fees. Social implications Investors’ demand for firm transparency and disclosure of information regarding the risks of climate change, effects and opportunities has increased significantly over the past decade, as these factors could have a significant effect on valuation and investment decisions. Originality/value Importantly, stakeholders need to be aware of the costs of climate change, the quantification of climate change impacts and how firms address climate change in their business risk management processes. This study quantifies the impact of CCDP on auditor risk assessments via audit fees.

Exploring the spatialisation of the performance of residential REITs investment and direct investment in the housing market

ABSTRACT Despite numerous studies about the housing sector, the connection between the performance of residential real estate investment trusts (REITs) investment and direct investment in the housing market is still under-researched. To help fill this gap, we used quarterly data of the Australian Securities Exchange (ASX) residential REITs index and direct housing returns of Australia and its major cities, spanning March 1983 to June 2021, and adopted a suite of econometric methods to document the following findings. First, publicly listed housing (residential REITs) and private housing markets are not separated, but both are closely related in terms of their investment performance. Second, the performance of direct investment in the housing market of Adelaide, Brisbane, Melbourne and Sydney could lead to positive investment performances for residential REITs over time, while no comparable evidence is found for Canberra, Darwin, Hobart and Perth. Third, further analyses revealed a one-way direction of performance, flowing from the housing market of Brisbane, Melbourne and Sydney to residential REITs, while no similar evidence of performance flow was found for Adelaide. Our study has provided new evidence that could contribute to the discussion on the expansion of residential properties in the portfolio of institutional investors.

COVID-19-related announcements in a continuous disclosure environment: drivers and stock market implications

PurposeThe purpose of this research note is to investigate the drivers and market reaction to firms’ decision to release general COVID-19-related announcements and to withdraw earnings forecasts and dividends during the COVID-19 pandemic in the continuous disclosure environment of Australia.Design/methodology/approachThe authors first tracked the market reaction of all firms in the Australian Securities Exchange All Ordinaries, Top 300, Top 200 and Top 100 indices during the early period of the COVID-19 pandemic between 1 January and 21 September 2020. The authors then focus the investigation on the incidence of firms deciding to withdraw earnings forecasts and dividends and how the market responded to these incidences during that period.FindingsThe market reacted negatively during the March/April 2020 period but then bounced back to the pre-March 2020 level. The market reaction is mainly driven by three industries, including consumer discretionary, health care and utilities. Firms in industry sectors such as consumer discretionary, materials, health care and information technology contribute to the highest percentage of COVID-19 announcements. It is interesting to document that firms issuing COVID-19 announcements and withdrawing earnings forecasts and dividends tend to be larger firms with stronger financial performance and higher financial leverage. Regarding the stock market reaction, while the market generally reacted positively to COVID-19-related announcements, the decision to withdraw earnings forecasts and dividends is significantly regarded as bad news.Originality/valueThe COVID-19 pandemic has provided a unique natural event to examine firms’ disclosure behaviour in the continuous disclosure environment of Australia during this period of extreme uncertainty. The incidences of earnings forecasts and dividend withdrawals are mainly driven by larger, better performing and higher leverage firms in the consumer discretionary, health care, materials and information technology industry sectors. The market generally reacted favourably to COVID-19-related announcements, despite a significant stock price drop during the March/April 2020 period. The findings provide important regulatory and practical implications.

Does Audit Committee Busyness Affect Financial Restatement? Evidence from Audit Committee Share Ownership

We examine the association between audit committee (AC) busyness and financial restatement and determine whether AC share ownership moderates this relationship. Using logit regression analysis, we test our hypotheses on a sample of 6408 firm‐year observations from 2004 to 2015 for companies listed on the Australian Securities Exchange. The study reveals that firms with busy ACs engage more in financial restatements. We also find that AC share ownership reduces financial restatements and attenuates the association between AC busyness and financial restatement. Our results are robust to endogeneity concerns emanating from firms’ deliberate decisions to grant shares to AC members. The findings of this research have several important policy implications. For instance, shareholders can benefit from AC members’ monitoring ability by allowing for share ownership. Further, our findings suggest that principles‐based corporate governance guidelines have a beneficial effect on financial reporting quality. While prior studies offer mixed evidence, our research contributes to the auditing literature by providing evidence that AC share ownership moderates the association between AC busyness and financial restatement.

Corporate name change: the effect of the firm’s shareholder distribution

ABSTRACT This study explores the effect of corporate ownership structure on firm performance resulting from a firm’s strategic decision of corporate name change. First, the study uses the separation of ownership and control to capture the corporate ownership structure using a new shareholder distribution metric. Second, the study empirically estimates the main and interaction effects of shareholder distribution on a firm’s performance resulting from its corporate name change using data from the Australian Securities Exchange from 2017 to 2022, during which 457 unique firms changed their corporate names. The study finds shareholding distribution has contrasting effects on firm performance due to the corporate name change. The positive impact of shareholder distribution on a firm’s abnormal returns is attenuated due to the corporate name change. Thus, while a manager-controlled firm, characterized by its larger shareholder distribution, reaps more benefits, such benefits are reduced when it makes strategic decisions, such as corporate name change. The study attributes such reduction in firm benefit to owner-manager conflict emanating from a firm’s dispersed corporate ownership structure.

Exploring the Accounting Treatment of Exploration and Evaluation Activities in the Extraction Industry in South Africa and Australia

The study examines the accounting treatment of exploration and evaluation assets in the extraction industry in South Africa and Australia. This study adopted a qualitative research approach and purposive sampling techniques. Data was collected from 60 entities in the extraction industry that are listed on the Johannesburg Stock Exchange (JSE) and the Australian Securities Exchange (ASX). The study found that South African entities classify exploration and evaluation assets as tangible or intangible assets using International Financial Reporting Standard (IFRS) 6. The study also observed that Australian entities classify exploration and evaluation assets as a separate class of assets using the Australian Accounting Standard Board (AASB) 6. South African entities depreciated or amortized exploration and evaluation assets, while Australian entities did not. The study concluded that even though there is high adoption of IFRS 6 or AASB 6, comparability is compromised in the extraction industry. The study recommended that IFRS 6 not offer a choice between IAS 16 or IAS 38 for the classification of exploration and evaluation assets to improve comparability and aid effective decision-making.

Audit partners’ gender and time variances of key audit matters

PurposeThis study aims to examine whether audit partners’ gender affects the year-to-year changes (year-to-year additions and drops) of key audit matters (KAMs) identified in the audit report. This study also examines whether female audit partners’ audit experiences, accounting education and narcissism reduce the difference in time variances of KAMs reporting between female and male audit partners. This study defines the year-to-year additions and drops of KAMs as the time variance of KAMs.Design/methodology/approachData of this study includes the audit reports of Australian Securities Exchange 300 companies for the period from 2017 to 2021. This study also applies the theory of female auditors’ preference for anchoring and availability heuristics. This study uses multivariate regression with robust standard errors clustered by the firms. This study also uses several robustness tests.FindingsThe findings suggest that female audit partners disclose fewer time variant KAMs in that they have a lower tendency both to add new KAMs and to drop old KAMs. Further analysis suggests that the differences between female and male audit partners decrease as the female audit partners’ experience increases or if the female audit partner possesses a bachelor’s degree in accounting. Female audit partners’ narcissism also reduces the gender gap in the time variances of KAMs.Practical implicationsThe fact that female audit partners report more stable KAMs implies that there are differences between female and male audit partners in the way audit risk assessments are conducted, audits are planned and professional judgement is applied by female and male audit partners.Social implicationsThe findings imply that female audit partners’ experience, accounting education and narcissistic personality can play a significant role in explaining the differences in audit outcomes produced by male and female audit partners.Originality/valueThis study is novel in showing that female audit partners report more stable and less time-variant KAMs. The findings of this study may inform audit firms and regulators that female audit partners’ experience, tertiary qualifications in accounting and narcissistic personality traits may be effective means of reducing the gender gap in auditing. The findings also imply that auditors’ observable and unobservable personality traits affect audit outcomes.

CEO tenure, board monitoring and competitive corporate culture: how do they influence integrated reporting?

PurposeThis study aims to explore the association between chief executive officer (CEO) tenure and the quality of information disclosed through integrated reporting quality (IRQ), which combines financial and non-financial data. The authors also investigate how formal (e.g. board independence and gender diversity) and informal (e.g. corporate culture) governance mechanisms influence this association. By analysing these factors, the authors expect to provide valuable insights on the impact of CEO tenure and governance structures on the comprehensive nature of integrated reporting.Design/methodology/approachThis study uses a sample of the top 200 Australian Securities Exchange (ASX)-listed companies from 2015 to 2019. IRQ is measured through levels of compliance with the integrated reporting (IR) framework proposed by the International Integrated Reporting Council (IIRC). The hypotheses are tested using multiple regression analyses.FindingsThe authors find that CEO tenure is negatively associated with IRQ. Furthermore, CEO tenure has a more positive influence on IRQ in the early CEO tenure years than later ones. The authors' study finds that the association between CEO tenure and IRQ is insignificant when firms have a high level of monitoring, as measured by board independence and gender diversity. The authors also document that competitive corporate culture moderates the negative association between CEO tenure and IRQ.Originality/valueThe authors' study highlights the significant impact of internal formal and informal governance mechanisms on disclosure practices in Australia's voluntary IR environment. By shedding light on these factors, the authors' research enhances understanding of Australian companies' IR practices and offers valuable insights for scholars, policymakers and practitioners in the field.

CSR Restatements: Mischief or Mistake?

ABSTRACT Using a sample of Australian Securities Exchange Ltd. (ASX) 500 firms over the 2004–2020 period, we find that contracting on corporate social responsibility (CSR) increases the likelihood of CSR restatements and that these restatements are biased toward showing improvements in CSR performance for the current period. This is especially the case when firms contract on social CSR performance measures. We also find that CEOs’ short-term incentive compensation is significantly greater when restatements result in improved comparative performance, but only for firms that contract on CSR. Overall, our results suggest that contracting on CSR is another explanation for the increasing prevalence of CSR restatements and that standard setters should address metrics and measures when formulating policies with respect to CSR reporting. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M12; M14; M52.

Analysis of the Australian Stock Market: Organization, Players, Challenges, and Opportunities

The Australian stock market is discussed in this report because of its importance as a financial hub. In Australia, the primary market operator is the Australian Securities Exchange Ltd (ASX), which is increasingly utilizing technology to develop novel approaches to maximizing shareholder value. Several aspects of the Australian stock market and its participants are discussed using the existing literature as a basis for this paper. The report provides context for ASX's technology deployment. Secondly, it draws attention to the ASX's significant participants. The article's third section discusses the opportunities and threats that participants in the Australian stock market face. Problems have arisen in the regulation and operations of the Australian stock market due to recent changes, such as the transfer of regulatory authority to ASIC, the introduction of new rules regarding the disclosure of information regarding securities lending and short sales, and the introduction of novel market integrity rules. Investing in Australia's financial markets makes sense for several reasons, including the country's rapidly growing domestic market, sophisticated corporate infrastructure, pension-friendly government, and highly educated, multilingual workforce.

Disclosure index development for sustainable procurement: An Australian perspective

In recent years, there is a growing demand for corporations to demonstrate their commitment for and performance in sustainable sourcing of their goods and services. This has led to the promulgation of several sustainable procurement indicators (SPIs) and disclosure indexes (DIs) to guide businesses in meeting ‘responsible’ or ‘ethical’ business operations. However, extant SPIs and guidelines have reliability challenges due to inconsistencies and varying focuses as most DIs are skewed towards non-discriminatory practices and equity in wealth and income distribution. This study proposes a methodological framework and uses 33 indicators of globally accepted ethical norms and standards for business conduct to develop an index for disclosure of sustainable procurement practices. Based on the proposed framework, we conducted a proof-of-concept study using a sample of 60 companies in four industries listed in the Australian Securities Exchange. The findings reveal significant variations in disclosure, with less than 20% of the investigated companies reporting 80% or more of the 33 indicators that constitute the disclosure index. It is observed that companies tend to disclose more in the governance and the environmental dimensions, but less in the economic and the social domains. These results indicate that the disclosure index developed using the proposed framework can be a useful tool for assessing transparency in reporting sustainable procurement practices and can help improve sustainability performance across the supply chain. The index thus provides stakeholders and the public with a lens to examine and monitor a company's sustainable sourcing practices.

Trade credit supply and financial distress outcomes: evidence from Australian voluntary administrations

PurposeThe objective of this study is to investigate the relationship between trade credit supply and financial distress outcomes, considering the role that trade credit plays as a substantial source of liquidity for distressed companies. Specifically, it examines whether there is an association between trade credit supply and the outcomes experienced by companies that undergo the voluntary administration (VA) insolvency procedure under Australian corporate law.Design/methodology/approachThe study examines a sample of companies that were listed on the Australian Securities Exchange and entered VA between 2002 and 2019. Ordered logistic regression is used to determine the relation between trade credit and VA outcomes. The VA outcomes considered are as follows: (1) company liquidation, (2) orderly dissolution through an agreement with creditors, or (3) an agreement with creditors for reorganization of all or part of the company's business.FindingsThe findings show that trade creditors' willingness to supply credit is influenced by their rational expectations about the future prospects of financially distressed customers. Higher levels of trade credit and an increase in trade credit supply prior to VA are associated with a greater probability of achieving a reorganization versus a liquidation or dissolution outcome.Originality/valueThere is no apparent prior study investigating the connection between trade credit supply and outcomes for distressed companies entering insolvency administration. Therefore, this study provides novel evidence on the role of trade credit in the context of financial distress. Understanding the relationship between trade credit supply and outcomes is particularly significant considering that many jurisdictions offer distressed companies the opportunity to pursue reorganization under their insolvency laws. Examining financial distress and trade credit in the Australian creditor-friendly context expands on existing research. Prior research has predominantly relied on data from the United States, which has debtor-friendly bankruptcy law. Consequently, these studies may lack generalizability to jurisdictions with creditor-friendly law such as Australia.

Nomination committees in Australia, outcomes for influence of a powerful CEO and diversity

PurposeThe authors investigate the adoption of nomination committees in Australia and identify the managerial power perspective as one explanation for firms not establishing nomination committees. A positive outcome of establishing a nomination committee from the perspective of board diversity is also examined.Design/methodology/approachThe authors adopt an archival approach by collecting data for firms listed on the Australian Securities Exchange (ASX) during the period 2010 to 2018. The authors establish the prevalence of nomination committees for small medium and large Australian firms. Regression analyses are used to determine whether the power of the chief executive officer (CEO) influences the adoption of a nomination committee. The association between having nomination committee and board diversity is also analyzed using regression analyses.FindingsLess than half of firms adopt a nomination committee. Larger firms are more likely to adopt a nomination committee than medium and smaller sized firms. Firms with less powerful CEOs are more likely to adopt a nomination committee. Adoption of a nomination committee is also associated with greater board tenure dispersion and board gender diversity in medium and smaller sized firms.Originality/valueEvidence on nomination committees provides original research that extends previous research focusing on the audit, risk and remuneration committees and samples restricted to large firms. The nomination committee has an important role to play in the appointment of directors yet limited evidence exists of the adoption rate, explanation for non-adoption and benefits of adoption. The authors add to this evidence.

Gender diversity of directors and financial performance: is there a business case?

Purpose Do women contribute to performance of companies on which they serve as board of directors? Many prior studies examine this issue, but no consensus is reached on the benefits of women taking on leadership positions. The present study considers this thorny issue from a slightly different perspective. Does the association between gender diversity and business performance vary across sectors and economic cycles?Design/methodology/approach The sample for this study was derived from the firms included in the S&P Australian Securities Exchange (ASX) 300 Index, and the study period of 2004–2016 allowed authors to consider the effects of different sectors as well as different economic cycles on the relationship between gender diversity of boards and business performance. The authors consider the Australian context, which is somewhat unique from the other Western countries, as quotas on boards of directors are not made mandatory and the corporate governance practices are principle-based rather than rule-based.Findings Employing panel data models, at the aggregate level, the authors find no evidence of board gender diversity impacting business performance. Consideration of sectoral differences and economic cycles in the empirical analyses yielded additional insights. In particular, gender diversity has a beneficial association with performance for businesses in the services and financial sectors after the changes to corporate governance guidelines relating to diversity in 2010. These economic benefits, however, are not evidenced in the resources sector.Research limitations/implications These findings offer support for critical mass and resource dependence theories.Practical implications The findings of this study have implications for inclusion and diversity policies of businesses and the society. Specifically, the findings offer support for gender diversity of corporate boards of directors.Originality/value This study highlights that women bring their unique skills and experiences to create economic value in sectors where they traditionally have more experience and opportunities.

Does the Prohibition of Trade-Through Hurt Liquidity Demanders?

The Impact of the Prohibition of Trade-through In the paper titled “Does the Prohibition of Trade-Through Hurt Liquidity Demanders?” the authors explore the effects of the order protect rule (OPR) in the United States, which prohibits any trade-through in the stock market that does not execute at the best possible price among fast trading venues. The study found that, whereas trade-throughs may offer flexible trading strategies that can benefit liquidity demanders, the benefits are insignificant for most cases, especially for small trades and stocks with fast resilience. The paper suggests that the current separate regulations for fast and slow venues may be extended to differentiate stocks with fast and slow resilience speeds. The results are supported by a case study using the data from the Australian Securities Exchange. Overall, this study supports the regulation of the OPR.

Remuneration committees, CEO compensation, skills and retention

PurposeThe purpose of this study is threefold: to examine the impact of a remuneration committee (RC) on the level of chief executive officer (CEO) remuneration; whether firms with a RC, pay a premium to CEOs with different skill sets (general or specific); and whether a pay premium mitigates the potential for CEO turnover.Design/methodology/approachThis study uses a sample of 5,305 firm-year observations on a data set drawn from companies listed on the Australian Securities Exchange for the period 2007 to 2014. The authors use ordinary least squares as well as logit regression techniques to test the formulated hypotheses. Difference in difference and propensity score matching techniques were undertaken to address the endogeneity concerns.FindingsThe findings show that firms with a RC pay a higher total remuneration to CEOs compared to firms without a RC. Furthermore, firms with a RC, value and reward CEOs with general skills by paying a premium not offered to CEOs with industry-specific skills. Paying a premium, in turn, mitigates CEO turnover by strengthening the CEO’s commitment to the organisation.Originality/valueThe study helps us to understand the critical role played by the RC in the remuneration of CEOs. The findings show that RCs act as an effective governance mechanism to deal with issues of executive remuneration and to retain skilled CEOs. Additionally, CEOs who acquire and develop general managerial skills will be able to extract higher pay from improved bargaining power. The findings will be of relevance to shareholders, regulators and company management who have an interest in executive pay and performance.

Enterprise risk management and investment efficiency: Australian evidence from risk management committees

This study investigates whether and how effective risk management committees (RMCs) improve corporate investment efficiency. Using a sample of listed companies included in the Australian Securities Exchange (ASX) 300 index, we document that effective RMCs improve investments’ sensitivity to growth opportunities and profitability. The results also reveal that effective RMCs enhance corporate investment efficiency by restricting not only over- but also underinvestment. Subsequent analyses demonstrate that the positive effect of RMCs on investment efficiency is due to the reduced information asymmetry and free cash flow problems. Furthermore, we find a more pronounced effect of RMCs on investment efficiency when companies experience a high level of economic policy uncertainty (EPU) and financial constraint. JEL Classifications: G14, G34, M41

Climate change performance and financial distress

AbstractGiven the crucial role that environmental accounting plays in sustainable development, this study investigates the relationship between climate change disclosure performance (CCDP) and financial distress as well as the moderating impact of litigation, the existence of a risk committee, the employment of Big4 auditing firms and the level of audit fees. Utilising a sample of the top 300 Australian Securities Exchange (ASX)‐listed non‐financial firms over the period 2008–2019 and ordinary least squares (OLS) regression analysis with fixed effects, it is found that higher levels of CCDP are related to lower levels of financial distress. Additionally, the significant association between CCDP and financial distress is manifested in firms with low litigation risk, firms with a risk committee, firms that employ Big4 auditing firms and firms that incur a higher level of audit fees. Additional tests that mitigate self‐selection and endogeneity, such as propensity score matching (PSM) and the system generalised method of moments (GMM), show that our findings are robust. Finally, our findings shed light on managers' strategic behaviour in relation to the consideration of, and transparency around, climate change risks.

Women on boards, CSR and risk-taking: An investigation of the interaction effects of gender diversity and CSR on business risk

Corporate risk has implications for investors, employees and other stakeholders. Previous studies from economics and psychology contend that women take fewer risks than men; therefore, the attempts to increase female representation in corporate boardrooms and improve the corporate social responsibility (CSR) activities of firms across the world for the last two decades raise questions about risk-taking in corporate firms as women start to influence board functioning and help to shape corporate strategy. However, the previous literature provides conflicting evidence on the association between business risk and gender diversity. Similarly, the results of previous investigations of the impact of investments in CSR on business risk are not conclusive. Given the lack of clarity of the outcomes of the interactions between gender diversity, CSR and business risk, the objectives of this article are to scrutinise the effects of diversity and CSR on business risk-taking and to specifically consider the effects of the interaction of CSR and gender diversity on business risk. The unique contribution of this study is to investigate the interaction effects of gender diversity and CSR on business risk-taking. Given the gender diversity initiatives over the last two decades and the increased attention on CSR, this study focuses on the constituent firms from the Australian Securities Exchange (ASX) 300 Index for the study period 2005 to 2019. Empirical investigations that employ the Generalised Method of Moments (GMM) find that gender has a significant negative association and CSR has a significant positive association with business risk. Further, the interaction effect of gender diversity and CSR is negative for business risk, specifically for businesses in the services sector. Similarly, the interaction effect of gender diversity and CSR was negative during the GFC and post-GFC periods. These findings support the view that when performing their roles, women on corporate boards take actions that reduce risk-taking in firms.