Firm Quality Research Articles

“Just BEAT it” do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA?

This study empirically examines whether firms reclassify related-party payments to avoid the base erosion and anti-abuse tax (BEAT) of the Tax Cuts and Jobs Act (TCJA). We leverage the BEAT filing threshold and use both a difference-in-differences design among U.S. firms and a triple-difference design utilizing the parent company's location to provide evidence that firms reclassify related-party payments to avoid the BEAT. This effect is stronger in firms with greater pre-TCJA income shifting incentives. We estimate a $6 billion aggregate reduction in U.S. taxes for our sample firms in 2018. We also examine the consequences of reclassifying related-party payments and find some evidence of an increase in tax reserves and a reduction in internal information quality for firms that engage in cost reclassification to avoid the BEAT. These findings help explain observed BEAT collection shortfalls, contribute to the current policy debate about international tax reform, and document spillover effects of tax policy.

Optimal collective reputation

ABSTRACT Collective reputation, such as watches “made in Switzerland”, affects the whole industry all over the world. This article highlights the relationship between competition and collective reputation. First, collective quality level depends on firms objectives. Second, the collectively determined quality of profit incentive firms reaches social optimal level. Finally, quality restriction is more efficient than subsidies to promote collective quality. The policy implication is that antitrust policy should not care about jointly determined quality for profit incentive firms. Further, cooperative innovation is encouraged to promote the collective reputation or cooperative innovation promotes the values of patents by collective reputation.

Smaller Slices of a Growing Pie: The Effects of Entry in Platform Markets

Entry of new firms onto a platform has an ambivalent effect on the incumbent firms operating on the platform: the main tension lies between the negative effects of increased competitive pressure and positive indirect network effects. This paper empirically studies the net effect of these countervailing forces and its dependence on firm quality, using a quasi-exogenous shock on a large online platform. On average, market expansion favors incumbents, though the average effect masks substantial heterogeneity: high-quality incumbents experience significant increases in sales and revenue, whereas low-quality firms perform unambiguously worse. Lastly, the paper explores the main mechanisms and firms’ responses. (JEL D22, D85, L14, L15, L84)

Effects of Board Diversity on the Earning Quality of Non-Financial Firms Listed on the Ghana Stock Exchange

To maximize wealth, corporate finance must carefully balance cash flows and the cost of capital for a corporation, which results in corporate governance. Corporate governance guarantees openness, responsibility, equity, the organization’s long-term financial health, investor credibility, and the optimization of investor wealth. The study aimed to determine how board diversity affected the profitability of non-financial listed companies on the Ghana Stock Exchange with a specific focus on the effects of gender diversity, age diversity, and nationality diversity on earnings quality. The study used a descriptive design and a quantitative research methodology. The data were examined and reviewed using SPSS version 23, STATA 14, and Excel. The study used secondary data that was collected for a period of 11 years (2011-2021) from the financial accounts of the five (5) non-financial institutions that were listed on the GSE. From the perspective of non-financial listed firms on the Ghana Stock Exchange, the study found that gender diversity and nationality diversity significantly influence earnings quality but age diversity does not have a significant impact on the earnings quality of non-financial listed companies on the Ghana Stock Exchange. The study also recommended that management of publicly traded companies consciously adopt more diverse boards, especially in terms of gender diversity because it is associated with an increase in earnings quality.

Brand capital on debt maturity structure

This study examines whether brand capital is associated with debt maturity choice. For listed firms in the U.S. over the period from 1975 to 2019, we find that investment in brand capital through ongoing advertising outlays is positively related to the use of short-term debt. The result is consistent with the hypothesis that high brand capital firms use short-term debt because of beneficial signaling effects. We also find the positive effect of brand capital on the use of short-term debt is more pronounced for higher quality firms and firms with lower financial constraints, which provides further support for the signaling explanation. Finally, we show that brand capital decreases the extent to which investments are financed by using long-term debt and increases the extent to which investments are financed by using short-term debt and equity.

Does XBRL Tagging Indicate Disclosure Quality? The Relationship Between XBRL Standard and Extension Tags and Stock Return Synchronicity

ABSTRACT We propose new measures of financial disclosure quality based on XBRL standard and extension tag counts. XBRL is designed to allow users to analyze more financial statement detail, thereby increasing reporting transparency. Thus, firms that use more XBRL standard tags should produce more detailed and comparable financial reports. To test this assertion, we examine the association between XBRL tag counts and stock return synchronicity, which measures the market’s reaction to the quality of firms’ disclosures. We find that firms that use more standard taxonomy tags in their 10-K reports have higher stock return synchronicity after the 10-K filing. However, we find that stock return synchronicity decreases as XBRL extension tag counts increase, suggesting that the use of extension tags reduces disclosure quality. Our findings contribute to the growing body of research on XBRL disclosure. Data Availability: Data are available from the public sources cited in the text.

Changes in accounting estimates during the COVID-19 pandemic in the USA

PurposeThe authors investigate how managers adapt their financial reporting and disclosure practices in response to the COVID-19 pandemic through changes in accounting estimates (CAEs).Design/methodology/approachThe authors define the pandemic period as starting on March 1, 2020. The sample consists of 9,575 CAEs disclosed in quarterly (10-Qs) and annual (10-Ks) financial reports by US firms between January 1, 2004 and May 31, 2022. The authors perform multivariate analyses of the impact of the COVID-19 pandemic on the incidence of CAEs and on whether the impact of CAEs on firms' financial performance and reporting quality changes during the pandemic.FindingsIn the examination of the CAE footnote disclosures in the quarterly (10-Qs) and annual (10-Ks) reports of US companies, the authors find no evidence that the incidence of CAEs in 10-Ks or the number of firms reporting CAEs are significantly different in the pre-pandemic and pandemic periods, but the incidence of CAEs in 10-Qs is significantly higher in the pandemic period than in the pre-pandemic period. The authors also find that the number of CAEs related to revenue recognition increase significantly in the pandemic period, but CAEs in other categories decrease, with the sharpest drop seen in the liabilities category. Further investigation suggests that although the dollar impact of 10-K CAEs on current financial statements is higher during the pandemic period, firms with CAEs, especially positive CAEs, in either 10-Ks or 10-Qs are less likely to use CAEs to boost earnings in the pandemic period. However, the authors find evidence that firms tend to use CAEs to “big bath” current earnings and create reserve for future period. The authors have not observed any significant differences in how the various phases of the pandemic affect the reporting of CAEs. Additionally, there is no evidence to suggest that financially distressed firms report more or fewer CAEs during the pandemic.Practical implicationsThe results are consistent with the notion that, during the pandemic, firms exercise greater caution in their CAE disclosures, refraining from using CAEs as a means of boosting earnings but as a strategy to create reserve for future period. The paper highlights the challenges that various stakeholders face when assessing a company's current and future financial performance based on management's accounting estimates.Originality/valueThis study captures the impact of the COVID-19 pandemic on the incidence of CAEs and CAEs' impact on the financial performance and financial reporting quality of firms during the pandemic.

Economic and financial developments of the USA before and after the pandemic of covid-19

The global pandemic of Covid-19, being an unpredicted event, has caused a collapse in the entire world economy. Different countries have taken different approaches to deal with the economic problems derived from it. This paper aims to make an analysis of the economic and financial developments of the USA by figuring out the condition before and after the pandemic. An important stress will be put on the monetary policy followed by the government of the USA. For a good analysis, a comparison between economic indicators and their behavior, before and after the pandemic, will be done, ft will be discussed about the economic activity, the labor market, inflation and the economic and financial stability. These unusual conditions have their effect also in the financial market. The credit quality of firms as well as the performance of financial institutions is mostly affected. The yields on securities and the spread of yields of bonds in comparison with treasury bills is also an important indicator to be studied. Given the problematic situation the government of the USA tried to influence through the monetary and the fiscal policy. The increase on the money supply by keeping the FED interest rates near to zero has been one of the measures for recovering the economy. Another important measure to address the problem has been the safeguarding of the market functioning. On the other hand, the help of the government by the fiscal policy has been immediate, even though it is expected to increase the government outlays. The methodology used by this paper will be a theoretical comparison of economic development before and after the pandemic, based on row data generated by the reports of Federal Reserves. Statistical data will also be used in order to support the analysis. ft concludes that the pandemic has affected the entire world, not only from the health viewpoint bat economically as well. The USA, as the leading economy in the world faced the challenge of finding the most appropriate measures to recover from the downturn. The effects of its policies will continue in the long run and there is needed some time to overcome them.

Does Earnings Quality Affect Investment Efficiency? Evidence from Listed Firms in the Nairobi Securities Exchange of Kenya

Aim/purpose – This paper aims at examining the impact of earnings quality on investment efficiency. The motivating factor is occasioned by poor financial reporting quality standards, higher costs of investment that characterize most developing countries and in particular Kenya where agency problems and insufficient information sent to the public by managers are rather severe and likely to lead to inefficient investment. Design/methodology/approach – This study uses a sample of 28 Non financial firms listed in the Nairobi Securities Exchange and data for the period 2010-2020. Data was analyzed through fixed effects regression analysis. Findings – The study finds a positive link between earnings quality and investment efficiency of firms listed in the Nairobi Securities Exchange. Specifically, high earnings quality increases investment efficiency and improves investment project selection by reducing information asymmetry between managers and shareholders. Research implications – Based on the results, the study recommends that since earnings quality enhances investment efficiency, firms need to strengthen internal mechanisms and increase earnings quality. Besides, corporate shareholders should pay more attention to the earnings quality to gain more return on their investment opportunities. Further, it is necessary for shareholders to continuously monitor the firm's activities and prevent adverse activities from harming their interests.

Auditors Independence and Audit Quality of Health-Care Firms in Nigeria

This study examines the effect of auditor independence on audit quality of twenty industrial goods companies in Nigeria for a period of ten years spanning 2012 to 2021. The objectives were centered on assessing possible effect of client importance, auditor reputation, audit opinion and auditor professional qualification on audit quality of health care companies in Nigeria. To achieve this set objectives, this study employed ex-post-facto research design based on data sourced from selected firm’s yearly reports for time period that ranged from 2012 to 2021. Adopting an ex-post factor and longitudinal research design, the secondary data collected were subjected to some preliminary data tests such as descriptive analysis, Pearson moment correlation matrix and multi-collinearity analysis using Variance Inflation Factor (VIF). The research used panel least square procedure based on fixed and random effect framework and houseman test was equally employed in selecting the best model to estimate parameters contained in the model. Emanating from the review of relevant literature and theories on auditor’s independence and audit quality and based on the data collected, analyzed and the hypotheses tested the study found that auditor reputation and auditor professional qualification recorded a positive and significant effect on audit quality which was statistically significant at 5% level of significance. On this basis, therefore, it may be recommended that there is need for the audit firm to protect its independence by working within its statutory duties. The management of health care companies is hereby advised to always source for the services of reputable audit firms with professional qualification and expertise to ensure quality of audit in their firms

The Impact of Ethics on the Audit Quality of Firms in Sub-Sahara Africa

Sub-Saharan Africa (SSA) is a region characterised by unique challenges related to weak governance structures, inadequate regulatory frameworks, and limited resources. These challenges pose significant risks to audit quality, as they can compromise the independence, objectivity, and professional judgment of auditors. Moreover, the ethical values of the region can also have a significant impact on audit quality, as they shape the behaviour and attitudes of auditors and the firms they audit. The aim of this study was to investigate the impact of ethics on audit quality among firms in SSA. The study uses a sample of 323 firms from 12 sub-Saharan African countries, covering the period from 2012 to 2021. The research design is quantitative, employing a panel data approach and regression analysis. The econometric model used to estimate the impact of ethics on audit quality was based on variables such as audit quality, ethical values, tenure, audit size, auditor reputation, firm size, return on assets, ownership structure and board independence. The data was collected from the World Economic Forum, Bloomberg Database and other sources. Regression results demonstrated a negative and insignificant impact of ethical values on audit quality. However, the tenure of auditors had a positive impact on audit quality. The results of this study suggest the importance of promoting ethical behaboiur and strengthening ethial standards in auditing profession in SSA.

International Patent Cooperation, Patent Prosecution Highway Agreements, and Export Product Quality

AbstractThis paper investigates how international cooperation for patent examination using Patent Prosecution Highway (PPH) agreements has affected the quality of firms' exports. Taking the PPH agreements signed between China and the export destinations as a quasi‐natural experiment, we established a difference‐in‐difference‐in‐differences model. We found that international cooperation for patent examination caused firms to increase export quality to PPH partners in patent‐intensive industries to a greater extent. This effect was more profound among PPH partners with stronger intellectual property protection, differentiated products and core products, and agreements along with the Patent Cooperation Treaty. We also found that PPH agreements increased the number of Chinese patent applications filed in PPH partners, patent applications by PPH partners in China, and the level of innovation, all of which constitute the major channels through which export quality to PPH partners increases. Our findings demonstrate that international patent cooperation has played an important role in promoting international trade quality.

Financial reporting quality and investment efficiency: The role of strategic alliances

We study firms that engage in strategic alliances and investigate the link between a firm’s investment and the accounting quality of its partners. Given the view of the firm as a nexus of contractual relationships, we expect that alliance partner information will help investors monitor the firm. In line with this expectation, we show that partner firms’ accounting quality reduces both over- and underinvestment in the focal firm. We also test the role of partner firms’ accounting quality in multisegment firms, in which agency conflicts are more acute. We find that the accounting quality of partner firms reduces the diversification discount in these firms.

Mandatory Disclosure of Corporate Social Responsibility and the Quality of Earnings Management

Using the exogenous shock caused by the mandatory corporate social responsibility (CSR) information disclosure policy in 2008, this paper examines the impact of mandatory CSR information disclosure on the earnings management activities of listed firms in China from the perspective of external corporate regulation based on the Difference-in-Differences (DID) method. The results show that mandatory CSR information disclosure can significantly improve the quality of firms’ earnings management. The mechanism analysis shows that the policy’s enhancement of the effectiveness of external regulation by regulators and the media played an important role in curbing firms’ earnings management activities. The heterogeneity analysis shows that the inhibitory effect of mandatory CSR disclosure policy on firms’ earnings management activities is better in firms with lower analyst coverage and lower institutional ownership. The study further extends the mechanism of the impact of mandatory CSR disclosure on firms’ earnings management activities, and provides practical guidance on how to improve the quality of firms’ earnings management and enhance the efficiency of corporate governance.

INDEPENDENSI AUDITOR, PEMAHAMAN GOOD GOVERNANCE DAN KUALITAS AUDIT: BUKTI PADA KANTOR AKUNTAN PUBLIK DI WILAYAH BEKASI

The purpose of this study was to determine the existence of (1) the impact of auditor independence on the audit quality of public accounting firms in the Bekasi area, (2) the impact of good governance on the audit quality of public accounting firms in the Bekasi area. This study uses a quantitative method with a deliberate sampling technique to choose the use used, namely 60 samples selected by KAP in the Bekasi area. The data collection technique in this study used a questionnaire method which was distributed directly to auditors working at Public Accounting Firms in the Bekasi area. The data were analyzed using multiple regression analysis using SPSS version 25. The results of this study are (1) auditor independence has a positive and significant effect on the audit quality of KAP in the Bekasi area. (2) The understanding of good governance has no effect on the audit quality of KAP in the Bekasi area.

The Impact of the Banking Sector and Its Heterogeneity on the Scale and Quality of China's Exports

Abstract: Using data of export transactions and the regional distribution of banking branches in China, this article examines the effect of bank development on the export scale and quality of firms. The results show that these factors are significantly enhanced by bank development. Compared to large state-owned commercial banks and rural financial institutions, the development of city commercial banks and joint-equity commercial banks has a more significant impact on improving the export scale and quality of firms. This article also examines the channels through which bank development benefits the export performance of firms. Indeed, bank development significantly increases firms' access to credit and reduces their credit costs, leading to improved export performance. These findings have important implications for financial development and export upgrading.

The effect of key audit matters on the association of credit risk and earnings quality

PurposeThe purpose of this study is to examine whether the required disclosure and the high frequency of key audit matters (KAMs) are likely to moderate the effect of higher credit risk on earnings quality.Design/methodology/approachThis study uses 15,106 Taiwanese firm-year observations to explore the relationship between earnings quality and credit risk during the 2011 to 2020 period. We use the two-stage least squares method to test whether the presence of KAM disclosures moderated the association between earnings quality and credit risk and also to examine whether higher KAM frequency moderates the association between earnings quality and credit risk.FindingsOur results provide evidence that the presence of a KAM disclosure requirement moderates the impact of firms with higher credit risk on earnings quality. In addition, there is significant evidence that the higher the frequency of KAM disclosures the greater the moderation impact that is found.Originality/valueThis research investigates whether the disclosure and high frequency of KAMs moderates the effect of credit riskiness on earnings quality. This study improves our understanding of whether more KAMs disclosures would improve earnings quality of firms with higher credit risk. In addition, we also use Beneish M-SCORE, as an alternative earnings quality proxy, to reinforce our empirical results. This markedly differentiates this paper from other studies.

Investment, inflation, and the role of internal information systems as a transmission channel

We examine whether the quality of firms' internal information systems influences the relation between inflation shocks and corporate investment, as posited by imperfect information models. Inconsistent with RBC models’ prediction that nominal variables (e.g., inflation) do not affect real variables (e.g., corporate investment) but consistent with the presence of information frictions, we first document a positive relation between inflation shocks and firm-level investment. Next, we show that higher internal information system quality, measured through responses to the World Management Survey, mitigates the positive relation between inflation shocks and firm-level investment. This result suggests that internal information quality serves as a channel through which aggregate-level nominal variables affect firm-level real variables. We then document that firms with higher internal information system quality make relatively more efficient investment decisions following inflation shocks. Our inferences are robust to using the 8th EU Company Law Directive as a shock to internal information system quality and to several additional tests.

Pengaruh Kompleksitas Tugas dan Kompetensi Audit Terhadap Kualitas Audit dengan Integritas Auditor sebagai Variabel Moderating

This article proves the influence of the Influence of Task Complexity and Audit Competence on Audit Quality moderated by Auditor Integrity. The results tested, the effect of Task Complexity and Audit Competence on Audit Quality with Auditor Integrity as Moderating Variable. The research population is all Auditors of Public Accounting Firms in Jakarta City with a total of 100 auditors as research samples. The quality of audits is still widely questioned by the public because there are still various public assessments in assessing public accounting firms, this assessment can be measured from the competence of the auditors who are the spearhead in the audit process. In addition to issues related to auditor competence, the same thing with integrity and ethics of auditors is one of the factors to determine the audit quality of public accounting firms. This study aims to assess the effect of auditor competence, integrity and auditor ethics on audit quality. The analysis uses Structural Equation Modelling to test this research model. Next, examine the effect of the Effect of Task Complexity and Audit Competency Education on Audit Quality moderated by Auditor Integrity.

Mandatory pollution abatement and firm export product quality

This study investigates the effect of mandatory pollution abatement on the export product quality of firms. Using the chemical oxygen demand reduction targets specified in the 11th Five-year Plan of China as an exogenous shock, we document that firms under stringent environmental regulation experience an upgrading in their export product quality, and our findings remain robust under a battery of tests. Plausible mechanisms are reduced wastewater emissions, the adoption of sewage treatment facilities, and promoted innovation. We show that the effect is highly pronounced in non-state-owned enterprises and firms located in downstream cities. Our findings provide policy implications on unintended consequences of environmental regulation on local firms’ product quality.