Firm Quality Research Articles

Reverse innovation and firm value in emerging markets: Evidence from China

AbstractReverse innovation (RI) patents, which apply to intellectual property that is created in an emerging country but patented in a developed country, are better representatives of innovation value than domestic patents in emerging economies. We argue that RI patents contribute to firm value by proxying for the private value of innovation, generating product market value, and signalling firms’ capabilities. Using a sample of Chinese‐listed companies, we find RI patents positively relate to firms’ short‐ and long‐term market value. This effect is stronger for firms with high innovative intensity and managerial ability. We also explore the mechanisms behind the relationship between RI and firm value. We demonstrate that, in addition to the domestic patent functions of creating value and capturing innovation rent, RI patents can further leverage firm value by signalling firm quality to customers and investors in developed markets, a function that is unique to RI patents.

Assessing the Empirical Linkage Among Access to Finance, Firm Quality, and Firm Performance: New Insight From Bangladeshi SMEs'.

Access to finance plays a central pillar on the sustainable firm growth of developing and developed nations. This study depicts the linkage between access to external finance, firm quality, and firms’ performance as measured by labor productivity for sustainable small- and medium-sized enterprises (SMEs’) development by employing the ordinary least squares (OLS) regression and propensity score matching (PSM) techniques to alleviate the selection bias and endogeneity issue on Word bank enterprise survey (WBES) cross-sectional firm-level data of 3,196 Bangladeshi SMEs for 2007–2013 period. Empirical evidence linking access to external finance and labor productivity has been positive and significant. However, our finding explores a negative but significant relationship between exports and SME labor productivity. A further look into the results also exhibits no statistical significance in the interaction effect between firm quality and access to finance on labor productivity. Moreover, the study anticipates novel empirical support that, the disintegration effect of export sales between direct and indirect exports with labor productivity for credit-accessed firms, is also found statistically insignificant. Then, several policies are drawn from the results to gain international competitiveness, and to ensure more external finance channels for enhancing SMEs’ performance and sustainable firm growth.

GDP manipulation and environmental information disclosure: evidence from China

ABSTRACT We investigate the relation between gross domestic product (GDP) manipulation at the government level and the quality of firms’ environmental information disclosures. Using a sample of Chinese firms, we find that firms in the cities where GDP is manipulated by local leaders are more likely to disclose environmental information by using soft and unverifiable information. We also find that the results are stronger for state-owned companies, for high-polluting firms, and for firms with low-quality internal control. We further find that GDP manipulation is negatively associated with the level of trust in local government, which could potentially explain the relation between GDP manipulation and soft disclosures. This is the first study to investigate the influence of local politicians, who have incentives to inflate GDP growth, on a firm’s disclosure quality.

Aggregate credit supply and debt structure

AbstractHow do fluctuations in aggregate credit supply impact debt structure? In order to capture credit supply, I use six proxies to gauge how debt structure changes under different lending conditions. My results show that periods of expansionary credit are associated with debt concentration, a decrease in the number of bank loan lenders, an increase in the probability of repeat lenders, and an increase in the probability of repeat lead arrangers for firms. However, I argue that this phenomenon is dependent on the riskiness of the firm. Better quality firms choose to concentrate debt structure when supply is abundant whereas low‐quality firms may have little or no choice. I hypothesize that firms concentrate debt structure as a way to enhance negotiating leverage over creditors and increase the value of their strategic default option.

Are analysts' cash flow forecasts associated with improved earnings quality? Australian evidence

We investigate the extent to which the provision by sell side analysts of cash flow forecasts incremental to earnings forecasts has an impact on the quality of Australian firms' financial reporting. Using three separate and distinct indicators of earnings quality, we consistently fail to find evidence of any improvement in the quality of financial reporting following analysts' provision of cash flow forecasts. There is some evidence that the impact on earnings quality is driven by the proportion of mining firms on the Australian Securities Exchange. Our results contrast with the argument by Healy and Palepu (2001) that sell side analysts play an important role in monitoring the quality of financial reporting but are consistent with the claim that sell side analysts' cash flow forecasts lack sophistication (Givoly et al., 2009).

Thematic Area, Accounting and Taxation Relationship between Audit Committee Independence and Earnings Quality of Non-Financial Firms Listed at the Nairobi Stock Exchange, Kenya

Specifically, the study sought to determine the relationship between audit committee independence and the earnings quality of non-financial companies listed on the Nairobi Stock Exchange (NSE), as well as the effect of audit committee independence on earnings quality when ownership concentration is taken into consideration as a moderator of the relationship. The study followed a positivist research philosophy and employed a quantitative research design. The study's target population was the 39 non-financial companies listed on the NSE as of December 31, 2020. The study made extensive use of secondary data. For 13 years, information was gathered via a disclosure index (2008-2020). After running diagnostic and specification tests on the model under test, a panel regression model was used to analyze the data. The audit committee independence of non-financial enterprises listed on the NSE had a significant impact on the earnings quality of the companies in both the presence and absence of ownership concentration as a moderator, according to the findings. Additionally, the results revealed that the model that included a moderator outperformed the model that did not include a moderator (ownership concentration). The study comes to the conclusion that the independence of the audit committees of non-financial companies listed on the NSE has a significant impact on the quality of their earnings. Non-financial companies listed on the NSE, according to the findings, should evaluate the criteria used to determine the composition of their audit committees in order to ensure that they are more independent and diverse. This will eliminate earnings manipulations while also making directors more accountable to shareholders, thereby increasing investor confidence in the company.

Business strategy and classification shifting: Indian evidence

PurposeThis study aims to investigate the impact of business strategy on the classification shifting practices of Indian firms.Design/methodology/approachThe study considered cost leadership and differentiation strategy. Two forms of classification shifting, namely, expense misclassification and revenue misclassification have been examined in this study. Panel data regression models are used to analyze the data for this study.FindingsThe results show that managers of cost leadership strategy firms are more likely to be engaged in expense misclassification, whereas firms following differentiation strategy are likely to be engaged in revenue misclassification. Subsequent tests of this study suggest that firms following a hybrid strategy (mix of cost leadership and differentiation) prefer revenue misclassification over expense misclassification for reporting inflated operating performance. These results imply that firms prefer the shifting tool based on the ease and need of each shifting strategy. These results are consistent with several robustness measures.Practical implicationsThe results suggest that investors should understand business strategy before developing insights about the accounting quality of firms. Investors should conduct a comprehensive review of income statement items before using items for portfolio evaluation.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the association between business strategy and classification shifting.

Gradual Acquisition of Professional Knowledge, Audit Quality and Audit Fees.

The acquisition of professional knowledge is a core issue in the formation of auditor industry expertise; however, previous literature has neglected the time required for auditors to acquire professional knowledge. We examine the audit quality and fees of audit firms in different stages of an auditor acquiring professional knowledge and find that, in the initial stage of the process of knowledge acquisition, audit quality and audit fees decrease. However, in the long run, knowledge learning has a more obvious effect on the improvement of audit quality and audit fees. Specifically, knowledge learning has a positive effect on the development of audit firms.

Effect of Board Diversity on Earnings quality of Non-Financial Firms Listed at the Nairobi Securities Exchange

Abstract The study's main objective was to examine the relationship between board diversity and earnings quality of non-financial firms listed on the Nairobi Securities Exchange (NSE) and how ownership concentration acted as a moderator. As of December 31, 2020, the NSE had 39 non-financial firms listed. The secondary data was collected over a 13-year period (2008-2020). The study used a quantitative research design and positivist research philosophy. The data were analyzed using panel regression. It was put through diagnostic and specification tests. The study found that board diversity had a significant impact on non-financial firms' earnings quality, both with and without ownership concentration as a moderator. The moderator model outperformed the one without (ownership concentration). The study concludes that board diversity has a significant impact on non-financial firms traded on the NSE. The findings suggest that non-financial companies listed on the NSE should carefully examine the criteria used to define board diversity and its characteristics. Thus, boards will be more accountable to shareholders, reducing earnings manipulation. Keywords: Board diversity, Earnings quality, Non-financial firms.

Is cross-listing a panacea for improving earnings quality? The case of H- and B-share firms in China

This study examines whether cross-listed Chinese H- and B-share firms exhibit higher earnings quality relative to non-cross-listed A-share firms based on seven accounting- and market-based earnings quality attributes, including accrual quality, persistence, predictability, smoothness, conservatism, timeliness and value relevance. We find that earnings quality does not differ between cross-listed and non-cross listed firms in terms of accrual quality, timeliness and value relevance, and that H- and B-share firms report earnings with lower quality in terms of persistence and predictability. We also find that the B-firms report smoother earnings, while the H-firms report more conservative earnings. The results of a battery of cross-sectional, endogeneity and sensitivity analyses either confirm our primary findings of no earnings quality difference or reveal lower earnings quality for cross-listed firms than for non-cross-listed firms. Considering that cross-listing in China is primarily driven by government decisions, our findings suggest that, without proper incentives, cross-listing is not likely to be a panacea for higher quality financial reporting.

Studi Literatur Kualitas Audit Kantor Akuntan Publik Dalam Perspektif Homo Islamicus

This study reviews the literature related to the analysis of the audit quality of public accounting firms in the perspective of Homo Islamicus. This study aims to analyze the role of audit quality in moderating the effects of principal-principal agency conflict and to analyze auditor competence and independence on audit quality. This type of research is descriptive qualitative research with a literature study approach that comes from books, literature, and library materials related to the purpose of this research. This literature research was conducted during the 2015-2020 period on 44 published fulltext literature. The results of this study indicate that in relation to the audit quality of public accounting firms in a homo Islamic perspective, it shows that auditors from different countries tend to have different attitudes and cultures, such as incentives, perceptions, and behaviors of auditors, clients, and users of financial statements in different countries. there is a difference. This shows that the reports presented are more varied over time. In addition, this study finds that there is some evidence of a relationship between individualism and litigation, and the auditor's consideration of doing additional audit work.

The Quality and Efficiency of Public and Private Firms: Evidence from Ambulance Services

Abstract Economic theory predicts that outsourcing public services to private firms reduces costs, but the effect on quality is ambiguous. We explore quality differences between publicly and privately owned ambulances in Stockholm County, Sweden, a setting where patients are as good as randomly assigned to ambulances with different ownership status. We find that private ambulances reduce costs and perform better on contracted measures such as response time, but perform worse on noncontracted measures such as mortality. In fact, a patient has a 1.4% higher risk of death within three years if a private ambulance is dispatched (in aggregate, 420 more deaths each year). We also present evidence of the mechanism at work, suggesting that private firms cut costs at the expense of ambulance staff quality.

Transfer of corporate governance practices into weak emerging market environments by foreign institutional investors

We advance the practice transfer theorising of corporate governance (CG) by developing a framework that uncovers how foreign institutional investors (FIIs) improve on CG practices of firms in weak institutional environments. Using hand-collected data for 85 listed Nigerian firms covering the 2011–2016 period, we show that FIIs bypass the weak regulatory environment in emerging markets by transferring good CG standards to host countries. Furthermore, FIIs’ ability to enhance the CG quality of firms in such environments is moderated by their home country’s legal system, with FIIs from countries with strong legal enforcement having an enhanced ability to improve CG practices of firms in weak institutional environments. However, cultural differences between the FIIs’ home and host countries negatively moderate this relationship. Our results are robust to the choice of estimation technique and various sources of endogeneity.

Does individual auditor quality contribute to firm value? Evidence from the market valuation on corporate cash holdings

Our study investigates whether individual auditor quality contributes to firm value through enhancing the market valuation on corporate cash holdings. Specifically, high audit quality improves financial reporting quality that facilitates external monitoring, which deters managerial misuse and thus enhances the value of cash holdings. By exploring Chinese listed companies, we find that industry expertise at the individual auditor-level enhances the value of cash holdings, while such effect presents after controlling for audit firm-level industry expertise. Moreover, the effect of individual auditor-level industry expertise is mediated via financial reporting quality, and its effect is more pronounced when media coverage is high, when the engagement auditor is a partner, and when the economic importance of the audited client is low. Overall, our results suggest that investors recognize that expertise knowledge gained at individual auditor-level is not fully transferable among audit firms so individual auditor quality provides incremental informational value than does audit firm quality. Our study contributes to auditing literature and the policy debates about mandatory name disclosure of engagement auditors.

Risk-based approach and quality of independent audit using structure equation modeling – Evidence from Vietnam

This study considers factors affecting to audit performance by risk-based approach (RBA) as well as audit quality in Vietnam. In addition, the study also examines the relationship between RBA and quality of independent audit firms. A descriptive survey research was adopted using both quantitative and qualitative methods. Qualitative research was conducted to consider the characteristics of RBA, and to identify items affecting to RBA application. A purposeful sampling method was used to select intentionally a target audience of 18 qualified experts. To examine influent factors, the study targeted 500 professional auditors but 355 returned the survey questionnaire. Performing data analysis by using structure equation modeling (SEM), the research findings revealed positive relationships between capacity of auditors, job pressure on auditors, the support of information technology, competitive ability of audit firms, audit fees, client's risks and the application of RBA, as well as quality of independent audits in Vietnam. Of which as supported by many previous studies, client's risks and information technology have the strongest relationship. On the other hand, RBA also positively and significantly affect to quality of independent audit firms. Finally, some recommendations were proposed based on the results of influent factors.

Do financially trained managers make better deals? Evidence from mergers and acquisitions

We examine whether the proportion of financially trained managers (FTMs) in the top management team affects firms’ merger and acquisition (M&A) decisions. We find that firms with a higher proportion of FTMs are more likely to pursue acquisitions in unrelated industries. In addition, these firms report poorer accounting profitability and stock returns during the 3-year period following the acquisition. These findings indicate that in addition to the firm and deal-specific characteristics focused on in prior studies, characteristics of the top management team also play an important role in determining the type and quality of firms’ acquisition decisions.

Environmental regulation and firm product quality improvement: How does the greenwashing response?

With the growing requirements for green development, a firm's product quality matters greatly for targeting sustainable growth and industry improvements, thus it is vital to clarify the subtle relationship between environmental regulation and how firms improve product quality. This paper discusses the internal mechanisms of environmental regulation to improve the product quality during this green transformation period by enhancing the greenwashing capabilities of firms. Through matching and constructing a unique database including firm-level fundamental variables, product quality, and ESG information, we obtained a firm-level unbalanced dataset for the years 2013 and 2015. From this, we drew several findings. First, environmental regulations can help improve the quality of products. Specifically, environmental regulations cannot significantly and directly improve the product quality for heavy-pollution firms, and there is a positive and significant relationship between environmental regulation and product quality for low-pollution firms. Second, for heavy-pollution firms, environmental regulation has a negative and significant impact on product quality, which illustrates that greenwashing strongly motivates heavy-pollution firms and results in decreasing product quality. Third, financial constraints motivate the heavy-pollution firms to significantly decrease their product quality rather than improve it. Finally, there is a negative and significant effect on SOEs toward product quality improvement caused by environmental regulation for heavy-pollution industries. In the contrast, for low-pollution firms, SOEs are more incentivized to increase product quality.

The innovation of family firms in China: New evidence from the China employer-employee survey

Drawing on China Employer-Employee Survey data collected in 2018, this study examines the effects of family ownership on firm innovation in China. Baseline regressions suggest that Chinese family firms have significantly lower R&D investment and number of patents than non-family firms, and the results are not sensitive to response quality, unobserved characteristics, and non-random assignment of family ownership. Furthermore, this gap can be effectively explained by the lower management quality of family firms. Heterogeneous analyses indicate that the low innovation of family firms appears only in more competitive environments. To improve innovation, we suggest that Chinese family firms should make increased efforts to upgrade their management.

An Assessment of the Impact of Quality Assessment System on Building Projects in Lagos State, Nigeria

Quality practices focus on producing quality buildings in terms of aesthetics, durability, functionality, reduced cost and time completion of project. The aim of this study is to assess the impact of quality assessment system on building projects in Lagos state. In order to realize this aim, the study examined the impacts of quality assessment system on building project in the study area. The study employed a descriptive case study design where data was collected from senior managers, project managers, engineers, architects, quantity surveyors, and technical managers working with building construction companies in the Lagos Metropolitan Area using the mixed method approach. Quantitative data was collected using questionnaire from 109 randomly selected participants and analysed using descriptive and inferential statistics. Qualitative data was collected through interviews with 9 purposively selected respondents and analysed using the thematic analysis technique. The study shows that quality assessment help us timely completion of construction projects within planned budget, improvement of the image of the firm Quality assessment as well as reduced project delivery time. The study concludes that the most visible impact of implementing quality assessment was an increase in customer satisfaction as conducting quality assessment reduces the number of customer complaints and helps the companies to reduce material wastage, increase confidence and team spirit among project workers, improve safety records, and enhance the image of the company. The quality assessment has a significant positive impact on project delivery in Lagos Nigeria.

The Impact of Different Length of Operating Cycle on Saudi Cement Corporations’ Performance: An Applied Study: أثر اختلاف طول الدورة التشغيلية على أداء شركات الإسمنت المساهمة السعودية: دراسة تطبيقية

This study examined the impact of different length of operating cycle (the sum of the average inventory period and average collection period) on the profitability and earnings quality of Saudi Cement corporations listed in Saudi Arabia Stock exchange during five years from 2016 to 2020. In addition, current ratio, net profit, and company age were used as control variables. The study used Return on Asset (ROA) and Return on Assets from Operating Cash Flow (ROAFOCF) as proxies to measure profitability and earnings quality. To achieve the aims of the study, data were obtained from the annual financial reports published in the “Tadawul”, for a purposive sample of fourteen (14) companies. Descriptive statistics, Two Way Anova, Pearson’s Linear Correlation and Simple regression analysis were used to test the hypotheses of the study. The results indicated that ROA and ROAFOCF have been explained at 61%, and 56% respectively. Furthermore, the results found that the length of operating cycle and current ratio have a negative and statistically significant effect on ROA. However, while the results found that the length of operating cycle has a negative and statistically significant effect on ROAFOCF, it did not find any significant effect of current ratio on ROAFOCF. Based on the results, we recommend that corporations need to pay attention to shorten the length of operating cycle in more efficient ways, especially through increasing the level of sales, which in turn lead to improve firm profitability and earnings quality.