Empirical Accounting Research Research Articles

Bridging Theory and Empirical Research in Accounting

ABSTRACTFormal theory and empirical research are complementary in building and advancing the body of knowledge in accounting in order to understand real‐world phenomena. We offer thoughts on opportunities for empiricists and theorists to collaborate, build on each other's work, and iterate over models and data to make progress. For empiricists, we see room for more descriptive work, more experimental work on testing formal theories, and more work on quantifying theoretical parameters. For theorists, we see room for theories explicitly tied to descriptive evidence, new theories on individuals' decision making in a data‐rich world, theories focused on accounting institutions and measurement issues, and richer theories for guiding empirical work and providing practical insights. We also encourage explicitly combining formal theory and empirical models by having both in one paper and by structural estimation.

Setting Statistical Hurdles for Publishing in Accounting

Abstract Ohlson (2023) argues that researchers tacitly avoid raising statistics-related ‘elephants’ that could undermine inferences. We offer a balanced perspective, first applauding the remarkable progress made in deriving testable predictions, leveraging modern statistical techniques, and tapping alternative Big Data sources to address issues relevant to practitioners, regulators and academia. While we concur with Ohlson’s elephants, we caution against over-criticism based on statistical design choices, as it risks creating new elephants. Our key lessons: focus on meaningful hypotheses, recognize merits of descriptive studies, balance Type I and II errors in data handling and journal reviewing, employ proper context when interpreting statistical significance and consider economic significance. Overall, though empirical accounting research faces challenges, criticism should not deter innovative research (Type II error in journal reviewing).

The Elephant in the Room: p-hacking and Accounting Research

Abstract Ohlson (2023. Empirical accounting seminars: Elephants in the room. Accounting, Economics, and Law: A Convivium) draws on his experience in empirical accounting seminars to identify five “elephants in the room”. I interpret each of these elephants as either a variant or a symptom of p-hacking. I provide evidence of the prevalence of p-hacking in accounting research that complements the observations made by Ohlson (2023. Empirical accounting seminars: Elephants in the room. Accounting, Economics, and Law: A Convivium). In this paper, I identify a number of steps that could be taken to reduce p-hacking in accounting research. I conjecture that facilitating and encouraging replication alone could have profound effects on the quality and quantity of empirical accounting research.

Studi Literatur Terpilih Mengenai Perkembangan Teori Akuntansi

This research on the development of accounting theory investigates accounting theories that are widely used by accountants in various parts of the world. Information regarding the development of accounting theory is shown as an important form of financial information that will become the basis for planning and strategic decisions. This review provides a comprehensive study of the accounting theory literature. The review focuses on research on the development of accounting theory from the last 5 years, but due to the limited number of research articles on this topic, we are expanding the scope of the year from 1999-2022. The articles are generally selected from the top accounting journals. This review offers an introduction to the methodology used in this research tradition and draws on the main results from a literature study on accounting theory from various research outcomes. Furthermore, this review describes the study of the development of accounting theory over time and shows the different accounting theories that can be compared. Overall, this review provides in-depth information on the developmental literature on accounting theory to readers wishing to become familiar with this line of empirical accounting research.

Another Way Forward: Comments on Ohlson’s Critique of Empirical Accounting Research

Abstract Ohlson (2023. Empirical accounting seminars: Elephants in the room. Accounting, Economics, and Law: A Convivium) laments that the evidentiary quality of empirical accounting research is low due to inappropriate methods and practices, leaving seminar attendees and readers unpersuaded by presented or published articles. He suggests that the norms of the profession prevent a public recognition and discussion of those issues, thereby sustaining the poor state of empirical accounting research. I agree that some current empirical approaches and norms seem to hamper progress toward more convincing research. I provide a practical suggestion to possibly improve the state of empirical accounting research. I caution though that even with better methods and more honest research practices, we should not expect that any individual research article can provide conclusive answers to important accounting questions. Such progress in knowledge requires a body of high-quality and independent research.

The explanatory power of explanatory variables

AbstractThis paper examines the current empirical accounting research paradigm. We ask: In general, do the estimated regressions support the promoted narratives? We focus on a regression model’s main variable of interest and consider the extent to which it contributes to the explanation of the dependent variable. We replicate 10 recently published accounting studies, all of which rely on significant t-statistics, per conventional levels, to claim rejection of the null hypothesis. Our examination shows that in eight studies, the incremental explanatory power contributed by the main variable of interest is effectively zero. For the remaining two, the incremental contribution is at best marginal. These findings highlight the apparent overreliance on t-statistics as the primary evaluation metric. A closer examination of the data shows that the t-statistics produced reject the null hypothesis primarily due to a large number of observations (N). Empirical accounting studies often require N > 10,000 to reject the null hypothesis. To avoid the drawback of t-statistics’ connection with N, we consider the implications of using Standardized Regressions (SR). The magnitude of SR coefficients indicates variables’ relevance directly. Empirical analyses establish a strong correlation between a variable’s estimated SR coefficient magnitude and its incremental explanatory power, without reference to N or t-statistics.

The Estimation and Power of Alternative Discretionary Accruals Models

Discretionary accruals remain decade’s long measures to detect earnings management in empirical accounting research. The correctness of the specifications and test power of the information content for the models remains unexplored based on samples of most emerging market firms. Yet, country’s-based researchers have increasingly used different Jones-based discretionary accruals to proxy earnings management. The paper aims to evaluate four discretionary accruals models and to decide the most appropriate one for the detection of earnings management. For the aim, we apply regression methods to estimate and evaluate four Jones-type discretionary accruals models – simple Jones, modified Jones, extended Jones cash flow model and working capital accruals – based on evidence of a final sample of 1,852 firm-year of 102 firms in Nigeria during 2001–2020. The results disclose that all models are well-specified such that the likelihood of Type I errors is minimum and below the significance level of 5%. In order to demonstrate the power of the test, the simulations completed identify that the modified Jones model exhibits the highest power capability. The implication of this finding is that the modified Jones model is the most appropriate model to detect earnings management based on the Nigerian sample.

Illustrating the First Half-Century of Empirical Capital Markets Research in Accounting in Pictures

Illustrating the First Half-Century of Empirical Capital Markets Research in Accounting in Pictures

Quantitative Empirical Research in Management Accounting: A Proposed Typology and Implications for Internal versus External Validity

Purpose: The purpose of this study is twofold. First, we propose a typology of quantitative empirical research in management accounting based on two design features: presence of control group and sample representativeness. Second, we discuss implications of the methods for trade-offs between internal and external validity.
 Method: Based on previous methodological studies we develop a typology with eight quantitative empirical methods.
 Results: Based on the two design features, we propose eight quantitative empirical methods for management accounting studies: (1) laboratory experiment, (2) crowdsourcing experiment, (3) field experiment, (4) natural experiment, (5) single entity survey, (6) proprietary archival study, (7) large-scale survey and (8) pre-structured archival study. In addition, we critically compare the trade-offs and discuss the implications of these methods for internal and external validity.
 Contributions: The contribution is twofold. First, the proposed typology can help junior management accounting researchers increase the familiarity with the available empirical methods, some of which are still incipient in Brazil. Second, this study states that the choice of an empirical method typically implies benefits in terms of a validity type (e.g. internal validity) at the expense of other validity type (e.g., external validity). Claims of causality and results generalizability depend on which validity type is prioritized and remedies adopted to increase the overall validity of a study’s results.

Determining the drivers of earnings management among municipal enterprises: Evidence from Germany

IMPACT Financial statements should provide useful information for stakeholders to assess the profitability and financial stability of both private and public enterprises. However, using the discretionary scope within accounting rules in a strategic sense is common among managers of private corporations and stakeholders are well aware of that. The article analyses indicators of earnings management in the financial statements of municipally-owned enterprises in Germany between 1998 and 2014. With regard to the results, stakeholders of public enterprises might take a more critical perspective on the financial statements of municipal enterprises, especially when these are highly indebted and ownership is dispersed. ABSTRACT Although earnings management is one of the most extensively covered topics in empirical accounting research, there are few studies of publicly-owned enterprises in Europe to date. This article aims closes this gap by using annual financial statement data from 11,721 German municipal enterprises from 1998–2014 to investigate various structural determinants of earnings management. Firm size and leverage were found to be positively related to earnings management. Concerning corporate governance, public enterprises with a more fragmented ownership structure were found to be more likely to manipulate their financial statements, while such practices are less prevalent in enterprises operating under German commercial law. Finally, the inclusion of private investors did not seem to have a significant effect on earnings management.

Managerial Accounting for Decision-Making and Planning

Managerial Accounting for Decision-Making and Planning

CORPORATE GOVERNANCE AND CORPORATE FAILURE IN THE OIL INDUSTRY: HISTORICAL ANALYSIS OF ANGLO IRANIAN OIL COMPANY (AIOC) 1908-1951

There has been much written about the nationalization of the AIOC in 1951. Many accounts have, perhaps unfairly, painted the directors of the AIOC as Imperialist stooges seeking to plunder the natural resources of another sovereign state to cement the United Kingdom’s geopolitical position in the Middle East. The main aim of this research is to employ historical analysis to address and scrutinize the corporate governance and corporate failure of AIOC, which led to the company’s nationalization. Analysis of archival material illustrates that the AIOC had not honored their commitments to various agreements for over 30 years preceding nationalization. Furthermore, from a range of evidence arising from the AIOC annual reports and historical sources including the British press, it can be clearly seen that the management regarded the shareholders’ interests to be superior and taking preference over the interests of Iranian and other stakeholder groups. Historical analysis should feature prominently in empirical accounting research, which is a major motivation behind this analysis. Longitudinal analysis of confidential documents and internal memos illustrates that the company was aware of various Iranians concerns as early as the 1910s, but through various strategies, management was able to deflect these concerns, the scale of which was often not well understood, ultimately leading to nationalization in 1951.

Spurious Correlation Due to Scaling

Scaling is common in empirical accounting research. It is often done to mitigate heteroscedasticity or the influence of firm size on parameter estimates. However, Barth and Clinch conclude that common diagnostic tools are ineffective in detecting various scale effects. Using analytic results and Monte Carlo simulations, we show that common forms of scaling, when misapplied, induce substantial spurious correlation via biased parameter estimates. Researchers, when uncertain about the exact functional form of scale effect, are typically better off dealing with both heteroscedasticity and the influence of larger firms using techniques other than scaling.

Accounting for uncertainty: an application of Bayesian methods to accruals models

We provide an applied introduction to Bayesian estimation methods for empirical accounting research. To showcase the methods, we compare and contrast the estimation of accruals models via a Bayesian approach with the literature’s standard approach. The standard approach takes a given model of normal accruals for granted and neglects any uncertainty about the model and its parameters. By contrast, our Bayesian approach allows incorporating parameter and model uncertainty into the estimation of normal accruals. This approach can increase power and reduce false positives in tests for opportunistic earnings management as a result of better estimates of normal accruals and more robust inferences. We advocate the greater use of Bayesian methods in accounting research, especially since they can now be easily implemented in popular statistical software packages.

Prof. Yoshida - Empirical research in management accounting

Tension in the form of dilemmas, contradictions and conflicts exists in organisations. It can be managed through management controls, including management accounting, thereby optimising organisational performance. Management accounting uses all quantitative and qualitative information in addition to accounting information in assisting managerial decisions, ultimately helping a business to achieve its goals. As part of this, tension management, which is a relatively new research topic, can not only enable long-term business goals to be achieved, but can also help attain the individual wellbeing of employees. This is the premise of the research of Professor Eisuke Yoshida. The research themes of Yoshida, who is based in the Faculty of Business and Commerce, Keio University, Japan, encompass management accounting, business structure and organisation design and management. This interest stems from a desire to optimise the working environment and ensure that work doesn't come at the expense of other, outside interests. Yoshida says this is because often achieving operational efficiency is associated with negative consequences. Using management accounting, with incorporated tension management, he believes it is possible to avoid these. For example, in Japan targets tend to be difficult to achieve, and failure to achieve targets has become the norm. 'This creates a state of tension, which is not necessarily a negative thing. It will be a trigger for creating new ideas and collaborating with others,' outlines Yoshida. From his perspective, creating a theoretical framework for tension management is an important part of addressing this.

Event study methodology – what for, how and for whom?

Event studies make it possible to quantify the market reaction to releases of various types of information. An event study is one of the few tools that may be used to determine a causal effect. The aim of this paper is to present and explain an algorithm for conducting an event study that academics and practition- ers who represent the accounting discipline may apply to investigate the market reaction to various events, such as releases of accounting information. The algorithm comprises six steps: 1) identifying the event that is going to be examined, 2) selecting companies, 3) identifying when information about the event was released and identifying the event window, 4) choosing an estimation window, 5) choosing and estimating a model of normal investor behavior, and calculating the abnormal level of investor behavior, 6)verifying statistical hypotheses with the use of parametric and non-parametric tests. The paper fills the research gap by presenting the kernel of an event study and the usefulness of event studies in empirical accounting research. Analysis and critique of the literature are used as the research method.

Machine learning improves accounting: discussion, implementation and research opportunities

Machine learning has been growing in importance in empirical accounting research. In this opinion piece, I review the unique challenges of going beyond prediction and leveraging these tools into generalizable conceptual insights. Taking as springboard “Machine learning improves accounting estimates” presented at the 2019 Conference of the Review of Accounting Studies, I propose a conceptual framework with various testable implications. I also develop implementation considerations panels with accounting data, such as colinearities between accounting numbers or suitable choices of validation and test samples to mitigate between-sample correlations. Lastly, I offer a personal viewpoint toward embracing the many low-hanging opportunities to bring the methodology into major unanswered accounting questions.

The Explanatory Power of Explanatory Variables

This paper concerns potential disparities between narratives and statistical evidence in empirical accounting research. We focus on the extent to which a regression model’s main variable of interest contributes incrementally to the explanation of the dependent variable. We replicate ten recently published accounting studies, all of which base their conclusions on t-statistics and statistical significance. In eight of the replicated studies, we find that the incremental explanatory power contributed by the main variable of interest is effectively zero. For the remaining two, the incremental contribution is at best marginal. These findings highlight the apparent overreliance on t-statistics as the primary evaluation metric. T-statistics tend to reject the null hypothesis primarily due to a large numbers of observations (N), a point we examine in detail. As a potential remedy, we evaluate the use of Standardized Regressions (SR). The magnitudes of estimated SR coefficients indicate variables’ relevance directly. Empirical analyses establish a strong correlation between a variable’s estimated SR coefficient magnitude and its incremental explanatory power, without reference to N or t-statistics.

Value Creation Principles: PowerPoint Presentation

This PowerPoint summarizes key ideas in my book, Value Creation Principles: The Pragmatic Theory of the Firm Begins with Purpose and Ends with Sustainable Capitalism. The primary focus is the pragmatic theory of the firm, which enables a comprehensive understanding of how a firm's long-term prosperity depends on its knowledge-building proficiency. A knowledge-building loop is discussed that emphasizes the components to building knowledge, and especially, the critical role of one's worldview, assumptions, and language. Attention to how we build knowledge offers insights into how we can improve business performance. Management's fundamental task is to nurture and sustain a knowledge-building culture in order to continually adapt to a changing world. When knowledge building becomes an integral part of every employee's job, both job satisfaction and retention of key employees improve. Such a culture unleashes creativity and motivates employees to solve problems (and create new opportunities) through discovering obsolete assumptions and unraveling root causes. The pragmatic theory treats the firm as a system of connected activities and uses a life-cycle framework that provides a visual and intuitive way to display track records which explain shareholder returns over time and help analyze intangible assets. Fourteen key points are reviewed, some of which provide new angles of thinking for empirical research in finance and accounting.

Ownership concentration and board features as determinants of related party transactions - evidence from GCC countries

This study examines the impact of ownership concentration, board features and external audit on related party transactions (RPTs) of listed firms in four Gulf Cooperation Council (GCC) countries, namely Bahrain, KSA, Kuwait and UAE. A sample of 460 firm-year observations was investigated during 2016-2018. Six models of hierarchical multiple regression (HMR) were performed to regress five independent variables (ownership concentration, board size, role duality, board independence, audit quality) on RPTs which include three transactions (key management compensation, due from RP and due to RP). HMR results indicate that ownership concentration, board size and board independence are associated with only one type of RPTs, which is key management compensation by listed firms in GCC countries. However, other types of RPTs are not explained by most of independent variables. Providing practical evidence on listed firms in GCC may provide a new dimension on this part of empirical accounting research and may help in improving governance practices. This research is the first attempt in the Gulf region to investigate the impact of CG mechanisms on RPTs. It makes a unique contribution and enrichment to this area of the accounting research in emerging markets in general and in GCC countries in particular.