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(2009)ThesisWhilst extensive research has been done on the association between corporate governance and firm performance, the empirical evidence is inconclusive. This thesis argues that the failure of past studies to establish a positive association between corporate governance and performance might be caused by the use of conservative accounting in firms. If firms with stronger corporate governance adopt more conservative accounting procedures, then tests of the relationship between corporate governance characteristics and performance will be biased downwards. If market participants fail to recognise a link between conservative accounting and corporate governance, then firms with stronger corporate governance might also be systematically undervalued. Therefore, studying the relationship between selected corporate governance attributes and the extent of conservative accounting does more than just extend our understanding of the link between governance characteristics and accounting quality. It also provides useful insights for interpreting the existing literature on the association between corporate governance and performance. In this thesis, detailed investigation is undertaken of the link between several governance characteristics (as well as an aggregate index) and the extent of conservatism evident in Australian firms’ financial reporting. Overall, the results provide only weak evidence that firms with certain governance characteristics report more conservatively. Evidence of any such link is restricted to measures of board composition and leadership, and even then the results are sensitive to the method used to measure the extent of conservatism in financial reporting. There is no systematic evidence of an association for measures of audit committee composition, nor board size. Finally, there is only weak evidence that use of a Big 5 auditor affects the extent of conservatism and the results are sensitive to the period investigated. These results are all robust to explicitly recognizing possible endogeneity between the extent of conservative accounting and the governance attributes examined. Overall, the results raise important questions about the extent to which widely advocated corporate governance attributes result in accounting outcomes which accelerate the revelation of relatively poor economic news, at least for Australian firms in the years examined (1998 and 2002). However, beyond the immediate relationship examined, the results also suggest that caution is appropriate before dismissing the absence of a link between governance attributes and firm performance as being attributable to accounting conservatism.
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(2009)ThesisThis thesis examines the relationship between tax-loss selling (TLS), where investors with taxable gains sell stocks that have declined in value just before the fiscal year-end to generate offsetting tax losses, and managers’ incentives to influence stock prices, either through increased disclosure or by engaging in upwards earnings management. Firms whose stock prices represent greater potential tax losses in investors’ portfolios at year-end are predicted to increase their disclosure level in June to prevent further share price falls due to TLS, and have higher levels of accruals. Using the number of discretionary, market-sensitive news releases in the Signal G announcement database to measure disclosure frequency, this thesis finds that, for a sample of 14,713 firm-year observations drawn from all ASX firms for the years 1994 to 2007, stocks with larger negative returns have higher disclosure in June, after controlling for size, performance, risk and external financing dependence. This is particularly true of small mining and exploration companies that are more reliant on voluntary disclosure as a vehicle for lowering information asymmetry. This increased disclosure does not appear to contribute to the higher July returns earned by stocks that experienced significant TLS in June. Disclosure frequency is negatively associated with the magnitude of operating and total accruals, suggesting that earnings management is less likely for firms with higher disclosure. There is also evidence that smaller firms with poor stock price performance have higher levels of operating accruals and thus may be more likely to engage in earnings management.
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(2009)ThesisThis thesis investigates the accounting and other practices performed as part of trials experienced by interested actors in forming a Public Private Partnership (PPP) scheme. Prompted by the high visibility of PPP schemes and a lack of understanding about the situated roles and effects of accounting and other practices in motivating and appraising such schemes, two practice-oriented research problems are investigated. Firstly, how does an ambition for a PPP scheme form in particular times and places. Secondly, what is the agency of accounting and other appraisal processes in trialling a proposed PPP scheme. Following an introductory section, this thesis proceeds via three papers. The first paper reviews the extant accounting-related literature on PPP schemes along five research themes adapted from Broadbent & Laughlin (1999, 2004), highlighting the literary contributions and future research opportunities in this area. The second and third papers focus on the experiences of interested actors in trialling possibilities for a public housing PPP in the Australian state of New South Wales (NSW), using field-based research. The aim of the second paper is to understand how an ambition for a PPP can become accepted through efforts to ‘envisage value’ for such schemes in particular times and places. The third paper investigates the roles and effects of accounting and other appraisal practices mobilised to translate an ambition for a PPP scheme into an agreement that promises a ‘Value for Money’ (VFM) outcome. Collectively, these papers contribute to extant knowledge about the involvement of accounting and other practices in the performance of ‘value’ in PPP schemes by: (i) illustrating how an ambition for a PPP scheme forms through ‘envisaging value’ (ii) explicating the agency of accounting and other practices in conferring VFM with situated meaning; (iii) contradicting the dominant status attributed to the involvement of accounting calculations in PPP schemes; and (iv) highlighting the various ways in which interested actors can cope with and act in the face of significant uncertainties. Overall, these contributions further our understanding of how proposed PPP schemes are (per)formed through the complex of activities (including accounting) and interests tied to the achievement of such schemes.
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(2009)ThesisThis thesis examines the extent to which benchmark beating by Australian firms around the earnings level and earnings changes thresholds can be reliably interpreted as evidence of earnings management. A number of recent academic papers challenge the earnings management explanation for the observed kinks in the distribution of net Income. In response to this criticisms, this thesis is motivated to conduct tests of earnings management with a refined methodology of selecting a subset of firms immediately above the threshold that have a priori incentives to achieve the benchmark. This approach allows for investigations to focus on benchmark beating observations where earnings manipulations would be more prevalent and thereby provide a powerful test for the existence of opportunistic reporting. The paper uses a number of unexpected accruals measures including the Kothari et al. (2005) performance matched models. In testing the hypotheses, this thesis utilises two approaches which were; the regression approach and the test of difference of means approach. Based on a broad sample drawn from all listed Australian firms for the years 1995-2007, small profit firms and small increase firms with high price-to-sales ratio were found to have evidence consistent with opportunistic benchmark beating behaviour. Similar results are also documented for benchmark beating firms with low book-to-market (high market-to-book) ratio. This thesis also finds that firms with equity offering incentives who reported improvement in earnings display unexpected accruals consistent with earnings management. In addition, the accounting behaviour of firms which previously incurred a loss is consistent with earnings management explanation. Firms with long strings of earnings increases also appear to use accounting discretion in order to avoid earnings deterioration. Similarly, evidence of earnings management are also displayed by small profit firms which have consistently reported negative earnings. Finally, this thesis provides evidence that resolves the apparent paradox that benchmark beating is evidence of earnings management which is devoid of the statistical artefact argument posited by Durtschi and Easton (2005) and Durtschi and Easton (2008).
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(2009)ThesisOne of the main objectives of financial reporting is to provide information about enterprise resources, claims to those resources, and changes in those resources (Statement of Financial Accounting Concepts No.1). However, this role of financial reports in fully reflecting firms' underlying fundamentals can be distorted by intentional or unintentional errors. This thesis aims to extensively study such accounting distortions via three separate yet interconnected research papers that (i) model such distortions in a general setting and provide theoretical validity to the way in which the literature has measured such distortions; (ii) understand the impact of such distortions on accounting information; and (iii) estimate and validate an empirical way to measure one aspect of such distortions, conditional conservatism, on a firm-year level within the context of Australia financial reporting.
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(2010)ThesisThe study examines the impact of the Global Financial Crisis (GFC) on changes in auditor reporting behaviour in Australia, in particular, whether auditors change their likelihood of issuing a going concern opinion and change their audit effort in response to a challenging audit environment. Using non-financial Australian listed companies over the period 20052009, I test whether the propensity of going concern modifications issued by auditors, audit report lag and audit fees vary in the financial crisis period (2007-2009) compared with the pre-financial crisis period (2005-2006). I find an increase in the propensity to issue going concern opinions by auditors during the period 2008•2009 compared with the period 20052006; that Big N auditors respond to the GFC earlier than non-Big N auditors; and that all Big auditors increase their propensity to issue going concern opinions in response to the GFC, though the degree of increase varies between Big N auditors. However, variation between Big N auditors in propensity to issue going concern opinions is sensitive to model specification and definition of the GFC period. I also find evidence of increased audit fees but no evidence of longer audit report lags during the crisis period relative to the pre-crisis period. Overall, I provide evidence on to what ex tent auditors exercise their professional scepticism regarding particular issues and how much resources they invest in conducting audit engagements during the GFC. My findings are of interest to regulators, auditors and financial information users because it assists auditors and regulators to assess the appropriateness of the strategies implemented and it also informs financial information users of the extent to which audit opinions are informative during the financial crisis. Also, the study informs the policy and law makers as to the impact of shareholder actions on auditor opinion issuance.
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(2010)ThesisI investigate market reactions to a star resource analyst Keith Goode’s recommendations over daily and intraday horizons. Goode is a well known analyst with a strong media presence, specialising in gold and precious metals, and unique in that he is an independent commissioned analyst. In daily analysis, I find size and industry matched mean buy-and-hold abnormal returns of 8.7% over a short run window, mostly coming from gold stock performance. I argue he is a valuable information intermediary in a high information asymmetry setting, being the Australian mining industry. I also contribute to the literature in relation to Development Stage Enterprises (DSE) and analyst ‘learning-by-doing’ (LBD) theory by measuring the differences between performance of recommended stocks partitioned on a DSE-like criterion and on time-based measures of experience. I find no significant results that an alternative informational signal is move valued by DSE-like firms; nor do I find evidence for LBD in relation to this star analyst. I pose a general, non-parametric method for measuring abnormal values of a wide range of intraday metrics capturing various microstructure features, while controlling for idiosyncratic stock-metric effects. Using this method, I detect abnormal trade frequency, volume, traded value and amount of limit order book activity during the first hour, and trade imbalance during the first 2 hours, of the market opening following Goode’s recommendations. I am unaware of any prior research which measures intraday reactions to analyst recommendations.
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(2010)ThesisThis dissertation examines how well auditors triangulate audit evidence in an electronic audit workpaper environment. Evidentiary triangulation is an audit evidence evaluation technique argued to help auditors face the challenges of the contemporary audit environment. It is a technique formally proposed by Bell, Peecher and Solomon (2005) and involves the simultaneous consideration of evidence from three sources (Entity Business States, Management Information Intermediaries, Management Business Representations) that differ in their specificity and source. In particular, it is a technique argued to increase the likelihood that financial statement fraud will be prevented and/or detected. It is, however, a cognitively onerous technique, one that auditors will likely struggle to successfully apply. The proliferation of electronic audit workpaper systems, however, presents an environment with the potential to reduce (or increase) the cognitive demands of evidentiary triangulation. In particular, the way in which electronic workpapers are linked (i.e., the hyperlinking structure) may help or hinder auditors in their efforts to identify important relationships between evidence items. Evidentiary triangulation performance was investigated across three types of hyperlinking structures (indexed, embedded, combined) and two levels of experience (manager, senior) in a controlled experiment. Analysing the judgments made by 32 managers and 69 seniors, the results revealed that different hyperlinking structures were associated with superior and inferior triangulation performance across different experience levels. Inexperienced auditors’ (seniors’) triangulation performance was inhibited by the simultaneous provision of both indexed and embedded hyperlinks, but facilitated by the individual presentation of each structure. The opposite was the case for experienced auditors (managers), whose triangulation performance was facilitated by a combined hyperlinking structure but inhibited by the individual presentation of each structure. Possibly reflecting a lack of training and experience in applying the evidentiary triangulation technique, the facilitating characteristics of different hyperlinking structures were not reflected in improved judgments. The results were also not consistent across differences in the directional implications of the Entity Business State evidence. The findings of this dissertation have implications for accounting firms both in terms of the ability of their auditors to triangulate audit evidence and the way in which they should structure their electronic presentation of workpapers.
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(2010)ThesisAuditors have been shown to subconsciously bias the processing of audit evidence towards the views held by their supervisor, a phenomenon referred to as predecisional distortion (Wilks 2002). Given its subconscious nature, predecisional distortion in an audit setting is of particular concern. Unlike conscious distortion which can be responsive to external interventions such as those aimed at increasing the level of effort applied to the task, predecisional distortion might be difficult to mitigate because it occurs without the awareness of auditors. While predecisional distortion may not be responsive to external interventions, certain environmental factors may decrease or increase the extent of the distortion, thereby improving (or detracting from) the quality of audit judgments. This dissertation reports on two studies examining one such environmental factor, namely, the hierarchical distance between the supervisor and the subordinate auditor making the judgment. Study One examines the impact of hierarchical distance on the level of predecisional distortion. Two aspects of hierarchical distance are examined, namely, the position of the auditor’s supervisor (hierarchical status) and the extent to which the auditor’s national culture emphasises hierarchical authority (hierarchical culture). When analysing data collected from auditors employed in a single Big 4 international practice in Australia and South Korea, predecisional distortion was found to be a phenomenon confined to superior-subordinate relationships, suggesting that hierarchical distance is a necessary condition of predecisional distortion. Unexpectedly, the level of distortion exhibited by the South Korean auditors working in a strong hierarchical culture was less than that exhibited by the Australian auditors working in a weak hierarchical culture. Interviews conducted with a number of participants following the conduct of Study One suggested that the South Korean auditors might perceive their supervisors to have lower levels of expertise than is the case for Australian auditors. Study Two investigates whether the unexpectedly low levels of predecisional distortion exhibited by South Korean auditors can be explained by variations in the perceived expertise of the supervisor. The results revealed that predecisional distortion is a phenomenon restricted to situations where there is no information that suggests the supervisor lacks expertise. Predecisional distortion was most pronounced when there was clear evidence that the supervisor was an expert. Further, where there was an absence of information about the supervisor’s expertise, predecisional distortion was most pronounced when the supervisor’s view encouraged a more conservative audit approach. The results from the two studies reported on in this dissertation highlight that while predecisional distortion is a pervasive phenomenon in audit settings, the consequences of predecisional distortion of audit evidence may not be as negative as previously thought, and in fact, may even facilitate audit efficiency.
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(2010)ThesisThis thesis examines the role of backdoor listing transactions (BDL) as an alternative route for private firms to go public in the Australian market. In addition, it examines the motivations and performance of firms engaging in such activities. Based on a hand-collected sample of 200 backdoor listing transactions completed during 1992-2007, it is found that Australian BDL transactions are characterised by a high proportion of concurrent equity raisings, information disclosure by way of a prospectus and re-meeting of the re-admission requirements of the listing rules. Public companies that participate in BDL transactions are mostly defunct, with the mining sector being the largest supplier of shell companies. The backdoor-listed private firms are mostly small, development-stage firms, engaging in high-tech businesses. Using three different constructs of shareholder return (viz., buy-and-hold abnormal return, expert-based return and implied shell premium), public firm shareholders are found to gain substantially, with returns ranging from 32 to 49 percent. Multivariate analysis confirms that the measured shell premium is positively related to the pre-event shareholder base and the invocation of regulatory impediments to the takeovers process. Results from an empirical choice model indicate that BDL firms are less liquid, less profitable and more at a development stage than their initial public offering (IPO) counterparts. BDL transactions generally take longer to complete than IPOs and are associated with more cashing-out activity and lower retained ownership by private firm owners. However, no significant difference in the degree of underpricing (first-day return) between the matched BDL and IPO sample is found. BDL firms are found to underperform, in terms of both accounting and stock price measures, a control sample of IPO firms in the three years subsequent to listing, although this underperformance seems to attenuate over longer horizons. The average buy-and-hold abnormal return (BHAR) of BDL firms by the end of the 36-month holding period is −37.0, −62.6 and −87.7 percent relative to three benchmark portfolios of IPOs and value- and equally-weighted market indices. The underperformance in BHARs is robust to tests based on a calendar-time portfolio approach.