Financial Information Environment Research Articles

Water risk and financial analysts' information environment: Empirical evidence from China

AbstractWe examined the relationship between water risk and the information environment of financial analysts using data from Chinese listed companies from 2010 to 2020. We theorized that corporate water risk deteriorates analysts' information environment by affecting operational and financial uncertainty and corporate legitimacy. Specifically, we found that corporate water risk is associated with higher analyst forecast errors and analyst forecast dispersion and lower analyst following. This relationship weakens with corporate water information disclosure and strengthens with the environmental attention of local governments. Furthermore, we explored the impact of corporate water risk on financial risk and future financial performance and discovered that water risk increases corporate financial risk and reduces future earnings. This suggests that corporate nonfinancial risk may also include subtle financial risk, and current water risk has a certain predictive effect on future earnings, which is an interesting finding. Our results are robust to a range of tests, including instrumental variable, generalized method of moments estimates, propensity score matching, and alternative measures of analysts' information environment. Generally, our study provides insights into the complementary role of nonfinancial risks represented by water risk in understanding financial risk and has important implications for academia and practitioners in understanding the economic consequences of corporate water risk.

ФІНАНСОВА ПОВЕДІНКА ДОМОГОСПОДАРСТВ РЕГІОНІВ УКРАЇНИ ЯК ПІДГРУНТЯ ЗАБЕЗПЕЧЕННЯ ЇХ СТІЙКОСТІ В УМОВАХ ЕКОНОМІЧНОЇ НЕСТАБІЛЬНОСТІ

The financial stability of households is an important component among other conditions for maintaining the stability of the entire financial system in general and the public finance system in particular. Adoption/implementation of erroneous, ill-considered decisions by households regarding the formation and use of funds in conditions of instability of the economic environment can with a high probability significantly worsen their financial condition. Therefore, researching trends in the financial behavior of households to avoid/neutralize the risks of disrupting their financial well-being (financial stability) and realizing the tasks of preserving public welfare in today’s complex crisis conditions is an urgent issue. The article evaluates the main modern aspects of the manifestation of financial behavior of households in the regions of Ukraine in the context of the impact on their financial stability and outlines directions for its regulation. As a result of the conducted research, it is taken into account that in conditions of instability, the movement of capital slows down, cash flows decrease, so households are limited in making many financial decisions. High risks of loss of sources of permanent income, real estate and property additionally change the financial behavior of households, transferring it to the plane of physical survival – minimal current consumption. Therefore, the range of determination/acceptance of possible financial decisions by households and their implementation in war conditions is significantly narrowed, and in the regions of Ukraine near the front zone, it practically freezes. Significant migration flows of the internally displaced population to regions of Ukraine that are less affected by the war require significant additional budget funds for social assistance to households. The «six whales» that form the basis of the financial behavior of households (and on which their financial activity/passivity is based) and ultimately contribute to the improvement/deterioration of the financial condition and the strengthening/undermining of stability are identified: financial literacy, information, motivation, financial resources, economic and institutional environment, objects (subjects) of investment/consumption. It is emphasized that important conditions for maintaining the financial stability of households are the state of their monetary income, the amount of expenses and, after neutralizing the effects of negative factors, the actual development of financial and other markets, balanced financial decisions based on knowledge and reliable information, and the financial policy of the state aimed at adequate realities of regulation of financial relations.

Narrative forward-looking information disclosure, do ownership concentration, boardroom gender diversity and cultural values matter? A cross country study

PurposeThis study aims to identify the main factors that drive the differences in the levels of forward-looking information disclosure (FLID) across four countries. This study goes beyond the firm-specific characteristics to the countries-specific factors to explain the observable differences in the level of FLID among the UK, Italian, Hong Kong and Chinese American Depositary Receipts (ADRs) firms trading in US Exchanges.Design/methodology/approachTo validate the levels of FLID, corporate financial information environment (CFIE)-final reports structure extractor (FRSE) was conducted on the annual reports of a sample of 353 listed firm observations in 2020 across four different countries. Also, the ordinary least square regression model was used to examine the proposed relationships.FindingsThe empirical results indicate that the level of FLID is highest among the Chinese ADRs firms trading in US Exchanges and UK listed firms. Also, ownership concentration and gender diversity have a positive correlation with the level of FLID. Additionally, long-term orientation positively influences the level of FLID. Considering the moderation effect of power distance and masculinity dimensions, countries with larger power distance tend to have a lower impact of ownership concentration on the level of FLID, whereas countries with higher masculinity tend to have a lesser positive relationship between gender diversity and the level of FLID.Originality/valueNotwithstanding, this study provides novel and persuasive evidence regarding the effects of firm- and country-specific characteristics as possible determinants of forward-looking disclosures, drawing on evidence from international companies with free floats, boards with female quotas and cultural values including masculinity and long-term orientation. This work offers unique insights from the upper echelons lens, which implies that firms need to obtain a critical mass of gender diversity to achieve a more balanced forward-looking perspective on their annual reports.

Measuring Accounting Conservatism in Financial Reports: A Comparison Between France and the United Kingdom

Abstract Accounting conservatism is necessary for more reliability and verifiability in financial reports. Studies have reported mixed results concerning the comparative level of conservatism across countries, especially the celebrated comparison between the common law and code law countries. Therefore, this study is an attempt to reinvestigate accounting conservatism in French and UK companies, using 110 French companies and 105 UK companies during the period 2011-2019. Accounting conservatism was measured depending on the asymmetric accruals-to-cash flows because it does not rely on market information and its fluctuations. The results document a greater level of conservatism in UK companies compared to French companies, which confirms the findings of several previous studies concluding that companies in common law countries are more conservative than those from code law countries. The results of this study have many implications for different parties affecting the financial information environment, especially auditors who must continuously monitor conservatism practices in financial reports to maintain an adequate level.

Environmental and social transparency and investment efficiency: The mediating effect of analysts’ monitoring

We evaluate how financial analysts' information environment mediates the influence of a firm's environmental and social transparency on its investment efficiency. We argue that via their information intermediary and monitoring capabilities, analysts both react to and act upon transparency in such a way as to affect a firm's investment efficiency. Consistent with prior research, investment efficiency represents a firm's increase in net tangible assets relative to its sales growth. Transparency is based upon comprehensive ratings constructed by Bloomberg. Analysts' information environment is proxied by earnings forecast errors and dispersion. Our sample comprises S&P 500 index firms over 2012–2018. Results show that environmental and social transparencies each positively relate to investment efficiency, with analysts' information environment partially mediating this relationship. Moreover, environmental and social transparencies each relate to smaller forecast errors as well as less forecast dispersion. Furthermore, enhanced analyst forecasts imply less firm-level investment inefficiency. These results suggest that greater environmental and social transparency enhances financial analysts' information environment and, thus, their information intermediary and monitoring capabilities. Consequently, firms are more likely to attain investment efficiency.

CFO Effort and Public Firms' Financial Information Environment*

ABSTRACTWe test the association between CFO effort and the quality of public firms' financial information environments. We evaluate this relation using a measure of CFO leisure consumption—specifically, the amount of golf played—as an inverse proxy for effort. We find a negative relation between CFOs' compensation incentives and golf play, suggesting they exert more effort when they have greater incentives to increase firm value. High CFO leisure consumption is associated with lower earnings quality, less accurate earnings guidance, and reduced CFO conference call participation. Additionally, CFO leisure appears to affect external monitors, as it is associated with greater analyst forecast dispersion and increased audit fees. We do not find similar relations when evaluating the amount of golf played by CEOs, suggesting the unique importance of CFO effort in the financial reporting process.

The impact of ownership structure, board attributes and XBRL mandate on timeliness of financial reporting: evidence from Turkey

PurposeThe purpose of this study is to investigate the effects of ownership structure, board attributes and eXtensible Business Reporting Language (XBRL) on annual financial reporting timeliness of non-financial companies listed on Borsa Istanbul (BIST).Design/methodology/approachTo conduct the analyses, the authors used two samples. The main sample consists of 187 companies, while the subsample includes 54 companies in the BIST 100 index. The data set covers the 2010–2018 period. To investigate the influence of ownership structure, board attributes and XBRL on timeliness, panel regression and univariate analyses were used. To explore the factors associated with the likelihood of late filing, panel logistic regression analyses were employed.FindingsThe findings provide evidence that companies that have a high level of institutional ownership and women board membership file earlier. In line with prior studies, profitable companies file their accounts faster. Highly leveraged companies are late reporters. Further, XBRL has a positive influence on the filing of financial reports for the BIST 100 companies due to technological agility. Finally, companies that have less institutional ownership and that get qualified audit opinions are more subject to late filing.Research limitations/implicationsThe authors acknowledge that this study has certain limitations. First, the results may not be generalized to the entire BIST population due to the exclusion of financial companies from the samples. Future research may explore the financial reporting timeliness of these companies. Second, the study did not investigate the relationship between timeliness and the information content in financial statements and the market reactions they arouse. Third, this study is trying to find out early evidence on the mandatory adoption of XBRL filings, which cover only three-year period due to the recent implementation of this regulatory practice. Thus, it needs further elaboration after the accumulation of data in the forthcoming years by the expansion of the sample beyond the 2016–2018 period. As companies would have more time to become familiar with XBRL, a more reliable conclusion may be drawn. Further, the study particularly focuses on the effect of XBRL adoption on the timeliness among filers. XBRL could also influence investors, auditors and other stakeholders. Future research could investigate the influence of XBRL on different stakeholders to produce more insightful implications.Practical implicationsThis study offers several implications for managers, regulators and policy makers. First, companies that do not make timely financial reporting may find it more difficult to attract long-term capital by means of institutional investors. Since these investors view timely reporting as an ideal ingredient in corporate governance, it may have a positive impact on company reputation and corporate sustainability. The results also provide insights for regulatory authorities, policy makers and auditors on the causes of the reporting lag, thereby increasing their awareness and helping them in their decision-making process since improvements in timely availability and accessibility of financial information reduce information asymmetry for users and increase market efficiency. Additionally, companies that reduce their filing timeframe will be able to compare their results with other companies. However, the XBRL mandate could be much more burdensome to smaller firms. This may stem from the fact that larger firms may tend to use the in-house approach for XBRL and can afford more advanced financial reporting systems with automated coding algorithms attached to streamline their XBRL filings, whereas smaller firms are more likely to use the outsourcing approach due to the difference in the level of resources available for XBRL preparation. This finding also lends support to recent concerns that new technology creates an unleveled benefit in reporting efficiency for large companies, but not for small ones (e.g. Blankespooret al., 2014). This benefit may change the dynamics of the financial market and information environment, leading to further segmentation of the capital markets. The positive effects of XBRL adoption may accrue over time due to the potential benefits of learning curve experience since the XBRL mandate will help companies automate their reporting process and information processing, thereby strengthening internal control over financial reporting (Deloitte, 2013; Duet al., 2013; Li, 2017). Companies may also efficiently incorporate auditor-proposed adjustments by cross-referencing impacted accounts and prepare revised versions of the financial reports, which are automatically rendered in various formats for auditors to assess (Wu and Vasarhelyi, 2004). Finally, investors and other users of financial information benefit from having quicker access to data, since this allows them to make more timely and reliable decisions, leading to greater benefits.Originality/valueThis paper contributes to the literature on the impact of adopting XBRL on the timeliness of financial reporting in emerging markets. Second, this study extends the literature and provides evidence on determinants of timeliness, covering both ownership structure and board attributes besides firm-specific characteristics. Hence, it provides valuable insights for companies, investors, auditing firms and policy makers.

Governance Vis-à-Vis Investment Efficiency: Substitutes or Complementary in Their Effects on Disclosure Practice

Prior studies provide evidence that both corporate governance and corporate investment efficiency affect corporate disclosure practice. In this paper, we examine their joint effect on disclosure. In particular, we examine whether corporate governance quality and corporate investment efficiency act as substitutes or complements in their impact on narrative disclosure. We collect disclosure scores from Lancaster University’s Corporate Financial Information Environment (CFIE) website for a sample of non-financial UK companies for the period 2007–2014. We regress measures of corporate governance and corporate investment efficiency on two different proxies of disclosure practice (performance commentaries disclosure and the tone of narrative disclosure). Consistent with prior studies, we find that both governance and investment efficiency affect disclosure. We contribute to narrative disclosure studies in two crucial respects. First, we provide empirical evidence that governance and investment efficiency has a complementary effect on performance commentaries disclosure. Second, we contribute to the disclosure tone literature by providing empirical evidence that both governance and investment efficiency have a substitution effect on the tone of narrative disclosure.

Corporate social responsibility disclosure and financial information environment

This study aims to explore whether or not social responsibility disclosure contributes to improve the financial information environment, through examining the impact of quantity and quality of corporate social responsibility (CSR) disclosure on the accuracy of analysts' forecasts and audit fees. Content analysis technique has been used to measure quantity and quality of CSR disclosure in annual reports of Saudi registered companies. OLS regression model is used to examine the relationship between the quantity and quality of CSR disclosure in the annual reports and the quality of the analysts' forecasts, and the audit fees. The results indicated that CSR disclosure provides useful information for outsiders, where it is associated with more accurate analysts’ expectations and reduced audit fees. These results suggest that CSR disclosure is associated with high quality financial information environment. This paper provides comprehensive analysis for financial information environment in Saudi companies. The findings of paper provide useful insights concerning the importance of social responsibility disclosure in Saudi business environment.

The Effects of Mandatory ESG Disclosure around the World

We examine the effects of mandatory ESG disclosure around the world using a novel dataset. Mandatory ESG disclosure increases the availability and quality of ESG reporting, especially among firms with low ESG performance. Mandatory ESG reporting helps to improve a firm’s financial information environment: analysts’ earnings forecasts become more accurate and less dispersed after ESG disclosure becomes mandatory. On the real side, negative ESG incidents become less likely, and stock price crash risk declines, after mandatory ESG disclosure is enacted. These findings suggest that mandatory ESG disclosure has beneficial informational and real effects.

Political Patronage, Audit Quality, and the Properties of Analysts' Earnings Forecasts in Malaysia

ABSTRACTBased on a sample of 2,034 Malaysian listed firm-year observations for the period 2007–2014, this study shows a negative relationship between dimensions of political patronage (i.e., politically connected firms and the percentage of Bumiputera directors) and analysts' earnings forecast accuracy. Furthermore, the study documents a positive relationship between Bumiputera directors and earnings forecast dispersion. These results suggest that the political patronage of firms is associated with low-quality earnings. We also find that measures of high audit quality are associated with high financial reporting quality and that this is evident in firms with high audit quality showing a weaker negative (positive) relationship between forecast accuracy (dispersion) and political connections and high levels of Bumiputera directors. Overall, the findings suggest that high audit quality plays an important role in mitigating agency costs of information asymmetry by improving the financial information environment.JEL Classifications: G24; G34; G38.

Does corporate investment efficiency affect corporate disclosure practices?

PurposeThe authors examine the impact of corporate investment efficiency on corporate voluntary disclosure for a sample of UK non-financial companies.Design/methodology/approachThe authors use a sample of FTSE All-Share firms for the period of 2007–2014. Disclosure scores are collected from Corporate Financial Information Environment (CFIE). They follow Biddle et al. (2009) and Chen et al. (2011) in measuring corporate investment efficiency.FindingsThe authors find that high level of performance-related disclosure is associated with high level of corporate investment efficiency, while high level of good news information is associated with low level of corporate investment efficiency. They also find evidence on a bidirectional relation between disclosure and corporate investment efficiency.Research limitations/implicationsThe authors’ findings would be of importance to stakeholders and corporations. Stakeholders' investment decisions could be facilitated by understanding the disclosures provided by their firms and how these firms' performance is presented. Corporations become aware of the language which must be used to signal their performance.Practical implicationsCorporations become aware of the language which must be used in their disclosures. As firms may reflect their efficient investments but not in the form of good news in order to avoid revealing their competitive advantage to competitors.Originality/valueThis paper adds to disclosure studies by introducing a new variable, corporate investment efficiency, as a determinant of corporate disclosure practice.

The effect of information shocks on dividend payout and dividend value relevance

We exploit the mandatory adoption of International Financial Reporting Standards (IFRS) as a source of exogenous shock to the corporate financial information environment to study the potential effect that this information shock might have on the dividend payout policy and dividend value relevance in the UK and France. We employ a difference-in-differences research design, in which our choice of the control and treatment groups is mainly based on the divergence between domestic accounting standards and IFRS, while holding institutional factors constant. The UK domestic accounting standards slightly diverge from IFRS (low-divergence firms), whereas French domestic accounting standards substantially diverge from IFRS (high-divergence firms). Nevertheless, both countries have similar institutional factors that might confound the effect of IFRS adoption. Our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason for the free cash flow problem (Jensen, 1986) and cash over-retention (Myers & Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among high-divergence firms via reduction of asymmetric information. Moreover, improving the information environment helps investors become more confident about using accounting numbers to assess firm financial performance, which causes a significant reduction in dividend value relevance among high-divergence firms.

Initial Effects of Mandatory XBRL Adoption across the Indonesia Stock Exchange`s Financial Information Environment

This research aims to investigate the initial effects of mandatory eXtensible Business Reporting Language (XBRL) across the Indonesia Stock Exchange`s financial information environment. Financial information environment is measured by event return volatility, absolute cumulative abnormal return, change in standard deviation of returns, abnormal bid-ask spread, and abnormal trading volume. Comparing the effects of pre- and post- XBRL period, we provide evidence that there is no significant implication in the first year of XBRL adoption. It is showed that event return volatility, changes in the standard deviation of returns, and abnormal bid-ask spread was not reduced in the post- XBRL period. On the other hand, it was able to intensify the stock trading volume which noted by the increased abnormal trading volume after mandatory XBRL policy was enacted. JEL Classification: G31 ; G32 ; G34 DOI: https://doi.org/10.26905/jkdp.v22i2.2092

Impact of Extensions in XBRL Disclosure on Analysts' Forecast Behavior

SYNOPSISThis paper examines the impact of abnormal extensions in eXtensible Business Reporting Language (XBRL) on analysts' forecasting behavior in the U.S. In this analysis, abnormal extensions reflect XBRL extensions that exceed the expected level for industry peers. In 2009 the Securities and Exchange Commission (SEC) permitted U.S. registrants to use the extensions to provide greater details about transactions and events unique to their reporting circumstances. Critics argue that the reporting discretion permitted under the mandate will complicate and impede financial analysis. The SEC and proponents contend that the extensions improve registrants' financial information environment and facilitate financial analysis. Our findings are that abnormal extensions are positively associated with the number of analysts who follow the firm and forecast accuracy, but negatively associated with forecast dispersion. The results are weaker during the first year and stronger during later years of the XBRL-based reporting. Moreover, the effect of the abnormal extensions on the forecasting variables is greater for filers with many business segments and/or harder-to-read financial statements. Our findings provide strong support for the SEC's policy that allows registrants to create extensions as a means of enhancing the quality and interpretation of financial disclosures.

Can XBRL detailed tagging of footnotes improve financial analysts' information environment?

In 2010 the SEC began requiring registered firms to provide detail-tagged footnote information in XBRL (eXtensible Business Reporting Language). As expected, the number of total tags soared due to this requirement. This study investigates whether financial analysts' information environment improved after this rule went into effect. It is possible that having footnote information detail-tagged reduces the cost to process footnote information. Our findings show that analysts' forecast error and dispersion for the next quarter earnings estimates decreased after the SEC requirement went into effect. We also find that the number of analysts following firms increased after mandatory detailed tagging was adopted. This is consistent with the notion that detailed tagging of footnote information reduces financial analysts' information processing costs. However, when firms use customized (as opposed to standardized) footnote tags, forecast error and dispersion are less likely to decrease. This suggests that regulators may need to limit firms' ability to use customized tags. Last, our results suggest that the benefits of detail-tagged footnotes increases over time as analysts become more comfortable with the information.

Are earnings strings restrained after SOX?

Purpose This paper aims to examine whether external monitors (auditors and analysts) constrain earnings strings, an indicator of earnings management, and whether this monitoring is more effective after the implementation of the Sarbanes-Oxley Act of 2002 (SOX), given the emphasis of SOX on improving auditing, financial reporting and the information environment. Design/methodology/approach Agency theory establishes the premise between external monitoring and earnings strings. Auditor tenure and number of analysts following provide measures for external monitoring quality. Using prior research, empirical models explaining the presence of an earnings strings and earnings strings trend are developed to test the hypotheses. Findings Pre-SOX, extreme auditor tenure, indicating lower quality external monitoring, is associated with greater earnings strings trend, and analyst coverage is associated with increased likelihood of earnings strings and greater earnings strings trend consistent with analyst pressure on management. More effective auditor and analyst monitoring occurs post-SOX in terms of reduced likelihood of earnings strings and earnings strings trend. Originality/value The authors provide evidence on how elements of external monitoring are associated with increased earnings strings pre-SOX. Further, they contribute to the debate on the impact of SOX on external firm monitoring and the overall financial information environment. By focusing on earnings strings, the outcome of earnings management, the authors provide a unique understanding of external monitoring that also provides insight on the overvaluation of equity and ultimate destruction of firm value. The evidence demonstrates how regulation has contributed to an improved financial reporting environment and external monitoring.

Credit Default Swaps and Earnings Management

In this study, we examine the association between the initiation of credit default swaps (CDS) trading and firms’ earnings management behavior. Since CDS contracts help creditors transfer credit risk, creditors tend to be tough in debt renegotiations. Anticipating tough creditors, CDS firms may be forced to manage earnings upward to avoid debt renegotiations rather than deflate earnings to extract covenant claim concessions from creditors. Consistent with our expectation, we find that the introduction of CDS trading is positively associated with firms’ income-increasing discretionary accruals. Our findings remain robust after we control for the endogeneity of CDS trading using the propensity-score matching method, the placebo test, and the two-stage instrumental variable approach. Furthermore, we find that the positive association between CDS initiation and discretionary accruals is more pronounced for firms with tighter financial constraints and poorer information environment. We also find that CDS initiation is negatively associated with firms’ real earnings management activities, suggesting that firms substitute the less costly accrual-based earnings management for the more costly real earnings management after CDS-initiation. Overall our study suggests that firms respond to the “empty creditor problem” created by CDS trading through earnings management tools.

Does Changing Accounting Standards Affect Dividend Policy?

This study explores the impact of International Financial Reporting Standards (IFRS) mandatory adoption on aspects of dividend policy in Western Europe. We select the United Kingdom as a representative of common-law countries and France as a representative of code-law countries. These two countries are highly comparable economically, which allows us to implement a difference-in-differences methodology. The genesis of our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason behind corporate underinvestment and cash over-retention (Myers & Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among code-law firms through enhancing the corporate financial information environment and reducing asymmetric information. Improvements to the information environment reduce firms’ concerns about their ability to raise external funds and this in turn makes them more willing to pay dividends. The reduction in information asymmetry helps investors become more confident about using accounting measures in assessing firm financial performance, which causes a significant reduction in dividend value relevance with respect to the market valuation of code-law firms. On the other hand, common-law firms witness no significant change in dividend payouts and a lower reduction in dividend value relevance relative to code-law firms. We contribute to the financial reporting literature through showing some of the effects of an exogenous information shock on dividend policy and dividend value relevance. The main implication from this study is that the introduction of higher quality accounting standards serve to mitigate information asymmetry between managers and investors and, consequently, reduces the frictions affecting corporate financial decisions.

Mandatory IFRS Adoption And Financial Analysts' Information Environment: Evidence From Korean Market

The paper examines the effects of the mandatory adoption of International Financial Reporting Standards (IFRS) on financial analysts’ information environment, specifically on analysts forecast accuracy in the Korean market. We find that financial analysts’ forecast accuracy improves after the mandatory IFRS adoption. We further investigate the source of observed accuracy enhancements and find that the improved forecast accuracy is attributable to the increased precision in analysts’ information sets for KOSPI firms and increased opportunity for earnings management for KOSDAQ firms. We also find that the analyst coverage in Korean market is reduced after mandatory IFRS adoption.