Research seminars

Director Risk Exposure and Board Turnover: A Pre- and Post-Crisis Analysis

Accounting & Management Control

Speaker: Gaizka ORMAZABAL
Director Risk Exposure and Board Turnover: A Pre- and Post-Crisis Analysis , IESE Business School, University of Navarra

13 December 2013 - HEC Room T015 - From 2:00 am to 4:00 am

This paper examines the effect of corporate directors’ risk exposure on the supply for director talent. I measure a director’s risk exposure by the stock volatility of her directorships. An analysis of board departures in the years 2006 to 2011 reveals that, in the post-crisis period, directors are more likely to resign from their riskiest directorships. Board resignations related to risk exposure are associated with lower announcement returns, future decreases in profitability, and more conservative risk-taking. The market reaction to subsequent appointments is also decreasing in the probability of experiencing board turnover related to risk exposure. Additional evidence suggests that the outgoing board members at these firms are replaced by directors willing to accept a risky board position to increase their visibility and network opportunities. Overall, my results suggest that (i) after the financial crisis, director risk exposure plays an increasing role on director turnover, and that (ii) the post-crisis emphasis on risk management could be introducing costs to firms more sensitive to risk-related board turnover

The expressive role of performance measurement systems: A field study of a mental health development project

Accounting & Management Control

Speaker: Matt HALL
London School of Economics

22 November 2013 - HEC Campus, salle T022 - From 2:00 pm to 4:00 pm

In this paper we examine how performance measurement systems (PMS) can be used within organizations to help organizational members to express their values and beliefs. This use of PMS, which we term its expressive role, is important as pluralistic and expressive forms of organization are becoming more prevalent. Furthermore, prior research indicates that enabling the expression of values and beliefs by organizational members can generate energy and commitment that are important to the achievement of organizational objectives. In a field study of a mental health development project, we draw on Huy’s (1999) concepts of display freedom and playfulness to examine the design and operational characteristics that are important in the development of an expressive role for PMS. We also examine the interplay
between the expressive role and other uses of PMS, and identify circumstances in which these roles can clash and/or be complementary. This study of the expressive role of PMS study broadens understanding of the functioning of PMS in organizations (Burchell et al., 1980; Ansari & Euske, 1987), the way in which management control systems can be used to signal values and preferences, and the use of PMS in NGOs to help manage potential tensions between service delivery and humanitarian values.

The Role of Earnings Forecast Uncertainty in Explaining Zero and Small Positive Earnings Surprises

Accounting & Management Control

Speaker: David VEENMAN
Erasmus University Rotterdam

15 November 2013 - HEC Campus, salle T004 - From 2:00 pm to 4:00 pm

Prior studies link zero and small positive earnings surprises to earnings management. In this study, we examine earnings forecast uncertainty as an alternative explanation. Specifically, we argue that rational analysts trade off the benefits and costs of forecast bias and that earnings forecast uncertainty (the inverse of the precision of analysts’ information) is negatively associated with the net benefits of pessimistically biased short-term forecasts. Accordingly, we predict and find that earnings forecast uncertainty is significantly negatively related to the likelihood of small positive versus small negative earnings surprises, holding constant incentives for earnings management. Similarly, we find that earnings forecast uncertainty is significantly related to the likelihood of zero and small positive earnings surprises. Our results have important implications for studies that categorize firms as "suspect" based on the sign and magnitude of earnings surprises. We highlight the potential importance of empirically controlling for earnings forecast uncertainty in studies that employ the "meet/just beat dichotomy" to capture constructs related to earnings quality.

Predictive Ability and Valuation of Fair Value Earnings Components

Accounting & Management Control

Speaker: Igor GONCHAROV
WHU – Otto Beisheim School of Management

4 October 2013 - HEC Campus, salle T004 - From 2:00 pm to 4:00 pm

This study uses closed-end investment funds from the U.K. and U.S. to investigate the
predictive ability and market pricing of realized and unrealized components of fair value
earnings. We test whether fair value components of earning are transitory or display predictable
patterns that signal future fund performance. We find that realized gains are negatively related
with future fund performance due primarily to the fact that realized gains/losses in period t are
strongly negatively related to unrealized gains/losses in period t+1. This finding is consistent with
closed-end fund managers’ tendency to sell winners and hold on to losers. This tendency is
consistent with two competing hypotheses in the literature: The disposition effect behavioral bias
hypothesis and the market timing hypothesis. Consistent with the market timing hypothesis, we
find that realized gains are a strong predictor of future market-wide stock market declines. To
further support the market timing hypothesis, we predict and find a number of changes to fund
investment strategies that coincide with realized fair value gains and subsequent stock market
trends. Our market pricing tests reveal that investors in closed-end funds do not fully impound
the signaling information conveyed by realized fair value gains/losses, and as a result, closed-end
fund shares exhibit systematic mispricing of the realized and unrealized components of fair value

Forecasting as a process of collective sense-making: Insights from a micro-level study

Accounting & Management Control

Speaker: Martin MESSNER
University of Innsbruck

14 June 2013 - HEC Campus, salle Z003 - From 2:00 pm to 4:00 pm

One of the main challenges for the operational management of firms is to align demand and supply. It seems commonly acknowledged that a well-functioning sales forecasting process is critical for achieving such alignment. Sales forecasting often relies upon statistical forecasting techniques, but it is not restricted to such a technical dimension. Rather, the forecasting process potentially involves actors with different interests and knowledge who come together to make decisions and coordinate their work. Techniques do play a role in facilitating this process, but they will often be mediated by interpretation, judgment and communication. Existing literature has been rather silent about these organizational and social micro-dynamics of forecasting. In this paper, we address this gap in the literature and explore forecasting at the micro-level. We investigate how organizational actors, in their effort to align demand and supply, establish and talk about forecasting numbers. We discuss the ways in which different actors contribute to this process and how forecasting thereby emerges as a collective sense-making process. To look at forecasting in this way does not only fill an empirical gap in the literature, as shown above; it also allows addressing a theoretical question of wider interest to accounting researchers: the question of how uncertainty is managed and what role numbers play in this process.

Sticky Covenants

Accounting & Management Control

Speaker: Florin VASVARI
London Business School

31 May 2013 - HEC Campus, salle T004 - From 2:00 pm to 4:00 pm

This study examines the factors that explain the level of protection provided by covenant
packages in public bond contracts. We employ a unique covenant dataset constructed by
Moody’s that allows us to measure the restrictiveness of bond covenant packages beyond the
bond covenant inclusion measures used in prior literature. We find that measures capturing
information asymmetry about the borrower and bondholders’ bargaining power are associated
with more restrictive covenants, but that the effect of these measures is relatively modest. In
contrast, we find that the covenant restrictiveness of a bond is very sticky over time: it is
primarily determined by the covenant restrictiveness of the borrower’s previous bond issues. We
also find that covenant restrictiveness is affected by the restrictiveness of the covenant packages
in previous bonds issued by industry peers, the previous bonds arranged by the firm’s
underwriter and the previous bonds advised by the firm’s and underwriter’s legal counsels. The
latter results are consistent with the idea of bond contract rigidity and “boilerplate” economics
proposed by the corporate law literature

Capital-Market Effects of Securities Regulation: Hysteresis, Implementation, and Enforcement

Accounting & Management Control

The University of Chicago Booth School of Business

15 May 2013 - HEC Campus, salle T201 - From 2:00 pm to 4:00 pm

This paper examines capital market effects of changes in securities regulation. We analyze two key directives in the European Union (EU) that tightened market abuse and transparency regulation and its enforcement. All EU member states were required to adopt these two directives, but did so at different points in time. Our research design exploits this differential timing of the same regulatory change to identify the capital-market effects. We also use cross-sectional variation in the strictness of implementation and enforcement as well as in prior regulation to analyze the role of these factors for regulatory outcomes. We find that, on average, market liquidity increases as EU countries tighten market abuse and transparency regulation. The effects are larger in countries that implement and enforce the directives more strictly. They are also stronger in countries with traditionally stricter securities regulation and with a better track record of implementing regulation and government policies in general. The results indicate that the same forces that have limited the effectiveness of regulation in the past are still at play when new rules are introduced, leading to hysteresis in regulatory outcomes. The findings also illustrate that imposing the same regulation in countries with different initial conditions can make countries diverge more, rather than move them closer together, which has important implications for global regulatory reform.

Testing the limits of Structuration Theory for Accounting Research

Accounting & Management Control

Speaker: John ROBERTS
University of Sydney Business School, Australia

10 May 2013 - HEC Campus, salle T004 - From 2:00 pm to 4:00 pm

In 1985 I published a paper in Accounting Organizations and Society with Bob Scapens titled Accounting Systems and Systems of Accountability; understanding accounting practices in their organisational contexts. The paper suggested the potential usefulness of Anthony Giddens’ structuration theory for efforts to understand accounting in its organisational contexts. Rather than engage in a further review of the use of structuration theory in accounting, this paper sets out to test our original proposition as to the usefulness of Giddens ideas for accounting research. I explore three points of possible criticism in the paper. That structuration theory does not take the ‘agency’ of accounting sufficiently seriously; that Foucault and Lacan allow us to get much closer to the ways in which accounting information works back upon human subjects; and that Giddens and accounting share a lack of ethics.

Veils of Ambiguity: Professionals’ Categorization of Oil and Gas Reserves

Accounting & Management Control

Speaker: David COOPER
University of Alberta School of Business, Edmonton, Canada

1 March 2013 - HEC Campus, salle T004 - From 2:00 pm to 4:00 pm

Our paper concerns the categorization and commensuration processes around oil and gas reserves. On a practical level, the definition of the type of reserves owned and exploitable by oil and gas companies is crucial for both corporate and national strategies. Different actors such as organizations (oil companies, regulators, and consultants) and professionals (engineers, auditors, lawyers, and financial analysts) struggle to stabilize (and change) these category definitions, in relation to their perceived interests. The extent to which members of a group share the same meaning systems will determine how they create and interpret categories of products. Shared meanings provide the means to sort products and define the economic exchange structure among producers and consumers. For oil and gas reserves to be categorized, professionals – especially engineers and accountants – need to agree which technologies can be used to characterize the resource, how to establish the certainty of producible volumes, and what defines ‘commerciality’. Once these categorical definitions have been established, the regulatory focus moves to commensuration, making qualities into quantities. Drawing on regulatory materials and interviews with accountants, engineers and oil and gas executives, we analyse the development of regulations that categorize and value reserves and the inter-professional relations that produce and change them. We find that categorization and commensuration processes may be problematic due to ambiguity over: which technology is to be used, the interpretation of regulation, professional knowledge, or legitimate authority. Professional groups seek to enhance, overcome and use this ambiguity in their struggles

Earnings Targets and Annual Bonus Incentives

Accounting & Management Control

Speaker: Wim A. Van der Stede
London School of Economics and Political Science

25 January 2013 - HEC Campus, salle T015 - From 2:00 pm to 4:00 pm

. We examine the extent to which firms use past performance as a basis for setting earnings targets in their bonus plans and assess the implications of such targets for managerial incentives. We find that high-profitability firms commonly reduce earnings targets when their managers fail to meet prior-year targets but rarely increase targets. Conversely, we find that low-profitability firms commonly increase earnings targets when their managers meet or exceed prior-year targets but rarely decrease targets. This target-revision process yields a serial correlation in target difficulty in that targets remain relatively easy (or difficult) through time. We also find that firms are reluctant to revise earnings targets below zero resulting in an unusually high frequency of zero earnings targets that are abnormally difficult to achieve. Collectively, our findings suggest that firms incorporate past performance information into targets yet they do so only to a limited extent. This is consistent with theoretical arguments that highlight the benefits of contractual commitments.

Dark Trading Under Blue Skies: Regulatory Regimes in the OTC Markets

Accounting & Management Control

Speaker: Christian LEUZ
Editor, Journal of Accounting Research , Booth School of Business, University of Chicago & NBER

18 January 2013 - HEC Campus, salle T004 - From 2:00 pm to 4:00 pm

In this paper, we analyze a comprehensive sample of more than 10,000 U.S. stocks in the OTC market. Many of the issuers provide hardly any information to investors and are often viewed as “dark.” As little is known about this market, we characterize firms and venues as well as provide evidence on survival, the frequency of venue changes, and trading activity. We analyze how market liquidity and price efficiency relate to OTC venues and regulatory regimes. We show that OTC firms that are subject to stricter federal, state, and/or venue-specific regulation have higher market liquidity and price efficiency. In particular, we highlight that aspects of state securities laws, i.e., merit reviews and publications in recognized securities manuals, are associated with better market liquidity and price efficiency. In sum, our results suggest that OTC market investors recognize the information and regulatory environment when determining which stocks to trade.