We investigate the value relevance of two different accounting methods, predecessor vs. acquisition, for business combination under common control (BCUCC) in China. Based on the return and price models, we find that net income under the predecessor method is of higher value relevance than that under the acquisition method. Further analysis suggests that the difference appears to be driven by uncertainties in fair value estimation surrounding the BCUCC and that net incomes under predecessor method can better predict future earnings and future operating cash flows than under the acquisition method. Our research provides some initial evidence to support the use of the predecessor method in China, and at the same time, we discuss implications for the IASB standard setting project for the BCUCC.
Business combination under common control (BCUCC)
the acquisition method
the predecessor method
The European Accounting Review
Previous research on whether the market responds to auditors' opinions has provided mixed results. We revisit this issue in China, where individual investors who are more likely to neglect value-relevant information dominate the stock market. In addition to going concern opinions (GCOs), China permits modified audit opinions (MAOs) on violations of accounting standards or disclosure rules (GAAP/DISC MAOs), providing an opportunity not available in the literature to enrich the study of audit-opinion pricing. We find that, ceteris paribus, MAO recipients underperform in the future and have a higher incidence of adverse outcomes such as misreporting and stock delisting, and the market reacts negatively to MAOs during the short window around MAO disclosure. Importantly, MAO disclosure is not followed by negative long-term stock returns, suggesting stock price adjustments to MAOs are speedy and unbiased. These findings hold for both GCOs and GAAP/DISC MAOs. Together, our findings support the informativeness of audit opinions and cast doubt on the argument that investors inefficiently price audit opinions due to information-processing bias.
Capital market efficiency
Australian Journal of Management
This study finds that stronger market control (measured as fewer anti-takeover provisions) and more effective boards (measured as boards that are more independent and for which independent directors have more outside directorships) are both associated with higher R&D valuation. Furthermore, stronger market control (more effective board governance) is associated with higher R&D valuation only in the presence of weaker board governance (market control). Taken together, the results are consistent with the interpretation that both the market for corporate control and effective boards mitigate agency conflicts arising from R&D investments and improve the market valuation of R&D. Furthermore, the two mechanisms act as substitutes in doing so.
market for corporate control
European Accounting Review
Based on 16,604 observations between 1994 and 2006, this study revisits the ‘horizon problem’ by examining how CEO retirement affects conditional accounting conservatism. We hypothesize and find that firms become less conservative in their financial reporting before the retirement of their CEOs, and that strong corporate governance mitigates the effect of CEO retirement. The literature concerning the horizon problem has suggested that CEOs manipulate earnings to boost short-term performance before they leave their companies (Dechow, P. M., & Sloan, R. G. (1991). Executive incentives and the horizon problem: An empirical investigation. Journal of Accounting and Economics, 14(1), 51–89; Smith, C. W., & Watts, R. L. (1982). Incentive and tax effects of executive compensation plans. Australian Journal of Management, 7(2), 139–157), but the evidence is mixed. By examining conditional conservatism, we avoid some of the methodological difficulties that confront researchers when examining either real or accrual earnings management. Ours is the first study to provide evidence on how the horizon problem shapes conditional accounting conservatism.
Journal of Corporate Finance
Speakers of strong future time reference (FTR) languages (e.g., English) are required to grammatically distinguish between future and present events, while speakers of weak-FTR languages (e.g., Chinese) are not. We hypothesize that speaking about the future in the present tense may result in the belief that adverse credit events are more imminent. Consistent with such a linguistic hypothesis, weak-FTR language firms are found to have higher precautionary cash holdings. We report additional supportive results from changes in the relative importance of different languages in a country's business domain, evidence from within one country with several distinct languages, and results related to changes following a severe financial crisis. Our evidence introduces a new explanation for heterogeneity in corporate savings behavior, provides insights about belief formation in firms, and adds to research on the effects of languages on economic outcomes.
Corporate savings behavior