Accounting and Finance

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Accounting Conservatism and Risk Disclosures
(University of Waterloo, 2021-07-22) Wang, Xiaoqi
This thesis adopts a broad view of conservative financial reporting—managers can use two ways to communicate business uncertainties to outsiders, namely, conservative accounting via timely loss recognition and narrative risk disclosures about a firm’s downside risk. I posit that managers trade off conservative accounting and risk disclosures because they both can alleviate information asymmetry about downside risk and reduce shareholder litigation, and they both impose significant costs on firms. Using a sample of U.S. industrial firms from 1995 to 2018, I find support for this substitutive (trade-off) relation when narrative risk disclosures were voluntary but not when they were mandatory in annual reports. Moreover, I hypothesize and find evidence that firms have stronger incentives to make such trade-offs in order to reduce overall reporting cost, when they are planning seasoned equity offerings, are closer to debt covenant violations, face higher proprietary costs, or have greater needs for debt financing. Additional tests show that external monitoring, by financial analysts or by shareholders through litigation threats, constrains firms’ flexibility in making such trade-offs. For the period after 2005 when the U.S. Securities and Exchange Commission (SEC) has mandated risk factor disclosures in annual reports, I find firms with lower analyst following or lower litigation risk exhibit a significant substitutive relation between these two accounting choices. Stock return tests show that, while investors fully anticipated managers to make such trade-offs when risk disclosures were voluntary, they reacted negatively to firms that appear to have made trade-offs between these two choices in the period after the SEC has mandated risk disclosures. Collectively, my research suggests that firms trade off conservative accounting recognition and risk disclosures, especially in the period when qualitative risk disclosures were voluntary, even though investors appear to prefer consistent information between quantitative accounting numbers and qualitative risk disclosures.
Accounting Conservatism and the Consequences of Covenant Violations
(University of Waterloo, 2011-12-20T17:14:07Z) Li, Yutao
Recent studies document that covenant violations intensify the conflicts of interest between lenders and borrowers, and lead to greater restrictions on borrowing firms’ financing and investment activities (Chava and Roberts, 2008; Roberts and Sufi, 2009b). Motivated by this literature, I investigate whether accounting conservatism, specifically conditional conservatism, mitigates the adverse consequences of debt covenant violations. I argue that conservative reporting can potentially ameliorate the conflicts of interest between lenders and borrowers. Therefore, I predict that accounting conservatism reduces the adverse impact of covenant violations on borrowers’ financing and investing activities and exhibits a positive association with operating and stock market performance after covenant violations. I obtain a sample of 312 violating and 5,327 non-violating firm-quarters observations from U.S. non-financial public firms during the period of 1998 – 2007 to test my hypotheses. Using three measures of conditional conservatism and a composite measure of the three individual measures, I find that the degree of increase in borrowing firms’ conservative reporting between loan initiation and covenant violation is associated with smaller reductions in firms’ financing and investing activities in the post-violation period. Furthermore, my analyses provide some evidence that firms that increase conservative reporting exhibit better stock market performance, implying that conservative reporting is beneficial for shareholders after covenant violations. I find no evidence that increased accounting conservatism affects operating performance after covenant violations. My results continue to hold after controlling for pre-contracting unconditional and conditional conservatism. Overall, my dissertation provides evidence that conservative accounting practices followed by borrowing firms ease the adverse consequences of debt covenant violations. My dissertation contributes to the emerging literature on the effects of accounting quality on re-contracting outcomes after covenant violations.
Calibration and Model Uncertainty of a Two-Factor Mean-Reverting Diffusion Model for Commodity Prices
(University of Waterloo, 2013-08-28T19:41:05Z) Chuah, Jue Jun
With the development of various derivative instruments and index products, commodities have become a distinct asset class which can offer enhanced diversification benefits to the traditional asset allocation of stocks and bonds. In this thesis, we begin by discussing some of the key properties of commodity markets which distinguish them from bond and stock markets. Then, we consider the informational role of commodity futures markets. Since commodity prices exhibit mean-reverting behaviour, we will also review several mean-reversion models which are commonly used to capture and describe the dynamics of commodity prices. In Chapter 4, we focus on discussing a two-factor mean-reverting model proposed by Hikspoors and Jaimungal, as a means of providing additional degree of randomness to the long-run mean level. They have also suggested a method to extract the implied market prices of risk, after estimating both the risk-neutral and real-world parameters from the calibration procedure. Given the usefulness of this model, we are motivated to investigate the robustness of this calibration process by applying the methodology to simulated data. The capability to produce stable and accurate parameter estimates will be assessed by selecting various initial guesses for the optimization process. Our results show that the calibration method had a lot of difficulties in estimating the volatility and correlation parameters of the model. Moreover, we demonstrate that multiple solutions obtained from the calibration process would lead to model uncertainty in extracting the implied market prices of risk. Finally, by using historical crude oil data from the same time period, we can compare our calibration results with those obtained by Hikspoors and Jaimungal.
Calibration Committees and Rating Distribution Guidance Effects on Leniency Bias in Subjective Performance Evaluations
(University of Waterloo, 2023-04-19) Patterson, Katharine
Firms use both calibration committees and rating distribution guidance to reduce leniency bias in subjective performance ratings. Leniency bias is the tendency to provide subordinates with higher ratings than deserved which can weaken the link between incentives and effort, leading to suboptimal and subordinate performance. I employ a 2x2 online experiment to assess how the presence versus absence of peer calibration committees [PCCs] and rating distribution guidance [RDG] affects leniency bias present in supervisors’ ratings of subordinates’ performance. I find support that supervisors may display more leniency in ratings prepared in anticipation of a PCC, especially among low performers. As the increased bias appears to impact low-performers, this may create additional fairness concerns for moderate and high-performers, which could demotivate these subordinates. Next, I find support that rating distribution guidance does have a main effect of reducing the leniency bias displayed among low and high performers. Further, using planned contrast testing, I find support for my predicted pattern of results for low performers. That is, the presence of a PCC has a main effect of increasing leniency bias, the presence of RDG has the main effect of reducing leniency bias, and the interactive effect such that when a PCC is present, the presence of RDG weakens the effect of PCCs on leniency bias. This finding indicates that rating distribution guidance may be helpful in settings with a PCC.
Can Elicitation Methods Increase the Precision of Fair Value Estimates?
(University of Waterloo, 2016-12-21) Timoshenko, Lev
This dissertation is motivated by recent changes in financial reporting regulation effected by the adoption of IFRS in Europe, Australia, and Canada, and SFAS 142 (FASB 2001) and SFAS 157 (FASB 2007 and 2011) in the U.S., that significantly increased users’ exposure to fair values. The implementation of the fair value hierarchy, as well as the switch from amortization to impairment testing of goodwill, highlighted problems with auditing highly complex, judgment-dependent and inherently uncertain fair values. There is a concern that such fair values may not always be auditable, and that requiring auditors to provide positive assurance on them may necessitate changes to the financial reporting model. The dissertation consists of two parts, the process study and the elicitation study. The process study, using the audit of goodwill/cash generating unit (CGU) impairment under IFRS as a specific example, provides quasi-experimental evidence about the fair value auditing process which can help to better understand and improve the auditing of complex fair values. The study relies on an analysis of verbal protocols to develop an understanding of how auditors and valuation specialists deal with the task. The study finds that for all of the participants who developed an auditor’s range, the width of the range is many times the audit materiality, and intervals for the experienced auditors are narrower on average than those for junior auditors. There are signs of possible issues with both interpretation and application of fair value auditing and accounting standards across all groups of the participants. At least some of the issues with application of the standards appear to be related to judgmental shortcuts (heuristics) which have not been researched in a valuation task context in prior auditing literature. Some of the experienced and junior auditors do not appear to have a complete grasp of the applicable valuation methodology. Finally, the results shed light on the division of responsibilities between assurance and valuation groups and the use of third party experts when auditing fair value impairments. The process study contributes to the literature by obtaining direct quasi-experimental evidence on auditors’ and valuation specialists’ process when they perform a fair value auditing task, and investigating the process differences among auditors with different levels of experience and experts. The objective of the elicitation study is to develop techniques that can be used by auditors and valuation specialists when auditing complex fair values, by experimentally testing elicitation methods for fair value models’ parameters. The study tests two probability distribution elicitation methods - the cumulative distribution function (CDF) method and the credible interval (CI) method. Quantitative analysis performed in this study indicates that the CDF method has a potential to improve the participants’ unaided judgment regarding fair value intervals, at least for junior auditors, while the CI method does not yield similar improvement. When the two methods are compared to each other, the CDF method proves to be more effective for experienced and junior auditors, while the opposite is true for valuation specialists. The distributions developed with the help of the CDF method are subjected to the effects of anchoring heuristic to a lesser degree than those built using the CI method. Qualitative analysis based on verbal protocols in the elicitation study indicates that the CDF distribution elicitation method surpasses the CI method for the purposes of quantification of uncertainty inherent in complex fair value estimates. The study contributes to the literature by combining auditing and elicitation research in fair value auditing settings, and has a potential to improve the practice of auditing of goodwill and possibly other complex fair values, by providing information for the development of relevant decision aids.
Corporate Innovation Strategy and Narrative Disclosures
(University of Waterloo, 2024-07-04) Che, Yixing
In this thesis, I examine how firms with different prioritizations of innovation strategy utilize narrative disclosures in their 10-K filings to communicate information about their innovation activities. I hypothesize and find that firms with a greater focus on exploratory innovations (versus exploitative innovations) disclose less narrative innovation information based on a cost-benefit tradeoff. Conducting a content analysis of the quality of narrative innovation disclosures, I find that exploration-focused firms tend to disclose fewer details but use a more positive tone in their disclosures compared to exploitation-focused firms. The tendency for exploration-focused firms to employ a more positive tone in narrative disclosures may be due to managerial overconfidence rather than management opportunism or firm performance. I also find that product market competition and technology spillover have opposite effects on narrative innovation disclosures due to their different proprietary cost implications. The negative relation between exploration-focused firms and narrative innovation disclosures is more pronounced when product market competition intensifies, while it becomes less pronounced when technology spillover becomes more prominent. Finally, I find that narrative innovation disclosures enhance investors’ understanding of innovative activities and reduce misvaluation and future stock price crash risk for exploration-focused firms. My thesis contributes to the disclosure and innovation literature with insights into how firms’ innovation strategies affect their narrative innovation disclosure decisions, which helps investors better evaluate corporate innovation strategy.
Determinants of Undetected Unintentional Errors in Audited Financial Statements
(University of Waterloo, 2014-12-18) Hayes, Beverly Louise
This dissertation investigates the associations between financial restatements and characteristics of the parties responsible for preventing and detecting unintentional errors, i.e., boards (through their audit committees), management (through chief financial officers (CFOs)), and auditors. To conduct this investigation, I developed a theoretical model of restatement determinants that is more complete than models used in previous archival research as it includes characteristics of all three parties and the moderating effects of chief financial officers’ financial expertise and influence on the disruptive effects of organizational change. To identify restatements that correct unintentional error, I conducted automated text searches of over 10,000 restatement disclosures for language asserting or implying lack of intent. This language-based proxy is automated, direct, transparent, easily replicable, scalable, and classifies as error-correcting a smaller proportion of restatements as error-correcting than other proxies. I validated this proxy by contrasting the characteristics of the unintentional error restatements against other restatements based on theory-derived expectations. I find that annual financial statements restated to correct unintentional error(s) for years with Sarbanes Oxley Act of 2002 (SOX) Section 404 auditor’s opinions exhibit less net income smoothing, less earnings persistence, and less positive accruals than such firm-years of other restatements. Finally, I tested the theoretical model using logistic regressions and data from financial statements, proxy statements, and auditor’s SOX 404 opinions of 346 companies (i.e., 121 companies that restate to correct unintentional error; 121 companies without restatement matched by year, industry, and company size; and 104 companies with other restatements that proxy for restatements of intentional misstatement). Results show that of the three parties responsible for financial reporting quality, the CFO plays the major role with respect to unintentional error: The likelihood of restatement to correct unintentional error is decreasing in CFO financial expertise and influence, but only when companies are undergoing organizational change. Results also show that CFOs’ (audit committees’) financial expertise is more strongly associated with restatements that correct unintentional error (intentional misstatement) than intentional misstatement (unintentional error). However, I find no evidence of significant associations between auditor quality and either restatements that correct unintentional error or intentional misstatement. This research contributes to the emerging literature that examines variation in associations between type or severity of restatements and the influence of parties responsible for financial reporting quality. The new language-based proxy for restatements that correct unintentional error developed in this thesis will facilitate future research that uses type of restatement to proxy for constructs of interest.
Disciplinary directors: Evidence from the appointments of outside directors who have fired CEOs
(Elsevier, 2018-11-01) Cai, Jay; Nguyen, Tu
By examining board appointments of outside directors who have previously fired a CEO, we study how directors’ willingness to take disciplinary actions is related to a firm's performance and risk-taking. Such directors (‘disciplinary directors’) appear to benefit firms with weak monitoring, but hurt firms in innovative industries. Firms appointing a disciplinary director subsequently exhibit lower idiosyncratic risk, leverage, and R&D expense, make fewer acquisitions, and are more likely to replace poorly performing CEOs. Overall, disciplinary directors appear to influence managerial behavior and shareholder wealth.
Does ESG-linked Executive Compensation Improve Responsible Sourcing?
(University of Waterloo, 2024-08-20) Kuang, Yifei
With the rising importance of firms’ environmental, social, and governance (ESG) performance, an increasing number of firms have adopted ESG-linked compensation that ties managers’ compensation to the firms’ ESG performance. Responsible sourcing is an important dimension of firms’ ESG engagement. In this thesis, I investigate whether firms’ adoption of ESG-linked compensation improves their responsible sourcing. To construct my sample, I identify customer-supplier relationships between 2010 and 2020 from FactSet Revere, and firms’ use of ESG-linked compensation from ISS Incentive Lab. Using a staggered difference-in-difference design, I find limited evidence that customer firms’ adoption of ESG-linked compensation affects supplier firms’ ESG performance, regardless of the length of customer-supplier relationships. Cross-sectionally, I find some weak evidence that customer firms’ adoption of ESG compensation leads to improved ESG performance amongst their large suppliers, suppliers with greater market share, and customers in the manufacturing industries. However, customer firms do not exhibit a greater tendency to terminate their low-ESG performance suppliers. My study extends the ESG literature by examining the effect of ESG-linked compensation on responsible sourcing, a specific dimension that is part of firms’ overall ESG performance. My findings imply that stakeholders need to find alternative ways to promote responsible sourcing practices due to the limited effect of customer firms’ ESG-linked compensation on supplier firms’ ESG performance.
Does the Financial Reporting Transparency of Securitization Affect Bank Lending Decisions?
(University of Waterloo, 2018-11-06) Mamo, Kaleab
This thesis examines the effect of financial reporting transparency for securitization on banks' mortgage lending decisions. Prior research (e.g., Mian & Sufi 2009, Keys, Mukherjee, Seru, & Vig 2010} shows that securitization reduces banks' incentives to screen and monitor borrowers. I posit that transparency plays a significant role by affecting bank stakeholders' ability to monitor and discipline bank lending decisions. I identify three specific channels for monitoring and discipline, namely corporate governance, regulatory oversight, and market discipline by uninsured depositors. I hypothesize that transparency affects bank risk-taking in mortgage lending, and that monitoring and discipline from external stakeholders moderates this effect. I test my hypotheses using difference-in-differences tests around five FASB pronouncements relating to securitization, issued since 1996, of which one decreases and the others increase transparency. I obtain loan-level data to construct new measures of bank risk-taking in mortgage lending based on the borrower income, loan amount and property location. I validate the proposed measures using bank-level future mortgage delinquencies and charge-offs. The main results generally do not support my hypotheses. I find that, in most cases, the effect of transparency on risk-taking is either insignificant or in the opposite direction of the prediction. These findings are robust to multiple sensitivity tests. However, I find some evidence supporting my hypotheses when comparing bank lending decisions during the least transparent period to those during the most transparent period within my sample. As a whole, my findings support the null hypothesis that transparency does not affect banks' risk-taking in their mortgage lending decisions. This conclusion is counter-intuitive and contrary to the commonly held view that transparency promotes better stakeholder monitoring of bank risk-taking. I identify alternative explanations for the null results, including: (i) whether the accounting pronouncements affect transparency as expected, (ii) the complexity of the setting, and (iii) potential noise in the data sources and the development of my measures. This thesis contributes to the literature in multiple ways. The proposed risk-measures might prove useful to future researchers examining risk-taking in mortgage lending. My findings are also relevant to the branches of literature examining the effect of securitization on bank lending decisions, the effect of transparency on bank risk-taking, and the real effects of accounting standards. This thesis might also be useful to standard setters and regulators in their attempt to improve financial reporting quality and to promote better decision making.
The Effect of Canadian Tax Policy on Executive Equity Grants: Corporate Tax Planning and Managerial Power
(University of Waterloo, 2018-08-20) Hlaing, Khin Phyo
This study examines how the tax treatment of corporate tax-deductible restricted share units and employee tax-favoured stock options at the employer and employee level affect the extent of their use in executive equity compensation packages among public firms. I appeal to two theories, namely, corporate tax planning and managerial power, to address the research question. I hand-collect executive compensation data of 143 top non-financial Canadian firms traded on the Toronto Stock Exchange for the 2005-2015 period. I find some evidence that firms expecting a high tax rate use the proportion of executive equity compensation via corporate tax-deductible RSUs to a greater extent compared to firms expecting a low tax rate at the vesting year. The results are consistent with the inference that managers demanding a higher level of employee tax-favoured options in their total equity compensation when they have power to influence the executive compensation. The results also support that managerial power weakens the positive association between firms expecting a high tax rate at the vesting year and the use of corporate tax-deductible RSUs in executive equity compensation. The findings suggest that tax policy that artificially distinguishes among types of equity compensation, such as the current Canadian legislation, affects executive equity compensation design.
The Effect of Group Identity on Sabotage Induced by Relative Performance Information
(University of Waterloo, 2017-08-29) Liu, Weiming
Organizations commonly provide relative performance information (RPI) as part of their management control systems to motivate employees. Despite the benefits of RPI that have been well-documented in the literature, RPI can lead to unhealthy competition where employees sabotage their co-workers’ performance so as to outperform, and thus be ranked higher than their co-workers. Organizations could strengthen group identity, an informal management control, to reduce sabotage. However, there is limited previous evidence that strengthening group identity actually reduces sabotage. This study aims to fill that gap. Additionally, this study investigates whether the effect of strengthening group identity depends on the type of compensation contract assigned. I used an experiment in a laboratory setting because it is difficult to observe incidences of employee sabotage behavior in real organizations since sabotage is often conducted covertly and concealed carefully. I manipulate compensation type at two levels (piece rate versus flat wage), and group identity at two levels (strong versus moderate). Both sabotage and effort are measured as dependent variables. I find evidence that strengthening group identity increase sabotage. In addition, I predict and find that employees sabotage co-workers to a greater extent under a piece-rate contract than under a flat wage contract. However, my results do not support the arguments that the effect of strengthening group identity on sabotage depends on compensation type. In addition, although I find that suspicion of having been sabotaged by others increases the frequency at which employees sabotage others, I find mixed evidence on whether the suspicion of having been sabotaged affects employees’ effort.
The Effects of Audit Methodology and Audit Experience on the Development of Auditors? Knowledge of the Client?s Business
(University of Waterloo, 2005) Berberich, Gregory
This dissertation examines how differences between the strategic-systems audit approach and the traditional, transaction-based audit approach affect the content and complexity of client business knowledge in long-term memory, how these mental representations develop with experience, and how the representations affect risk assessment. Knowledge of the client?s business is essential to conducting an effective and efficient audit, but researchers have devoted little attention to how this knowledge is represented in memory and what effect it has on audit judgment. Moreover, proponents of the strategic-systems approach argue that this approach leads to the formation of a more-complex client business model and results in better audit judgments than the transaction-based approach. The study?s results contradict these claims, with the strategic-systems auditors having less-complex models than their TBA counterparts. Also, no experience-related differences were found in the client models, and risk assessments were only weakly affected by content and complexity differences between client models. After a variety of supplemental analyses, it was concluded that there is no evidence from this dissertation to suggest that the SSA methodology does not result in an auditor possessing an enhanced knowledge of the client?s business compared to that possessed by an auditor employing a traditional audit approach.
The Effects of Narcissism and Perspective-taking on Managers’ Escalation of Commitment
(University of Waterloo, 2020-02-19) Stapleton, Andrea
Companies often have the opportunity to invest in capital assets. Unfortunately, the benefits of such investments are not always realized and managers are challenged with deciding whether they should withdraw their support for a failing endeavour. Termed “escalation of commitment”, this phenomenon describes situations in which managers continue to fund a failing course of action despite having an opportunity to withdraw (Staw 1976). While management accounting research has largely focused on designing controls to influence the behavior of employees, more recently, researchers have begun exploring how managers’ personalities impacts their decision-making and their response to management control systems (for a brief review, see Young et al. 2016). In this dissertation, I examine the effect of an individual difference, specifically narcissism, on managers’ escalation of commitment. I also investigate the effect of prompting individuals to consider the perspective of an outside manager to reduce individuals’ support for an underperforming project and whether this prompt interacts with managers’ narcissism. Based on prior research, I predict that narcissistic managers are less likely to reinvest in an underperforming project when they can withdraw and invest in an alternative project that offers the potential for higher returns. I also predict that managers who view negative investment feedback from the perspective of an outside manager will be less likely to reinvest. Based on my expectation that narcissistic managers exhibit reduced escalation tendencies, I predict that perspective-taking will be less effective in mitigating their commitment to an underperforming project relative to managers with low narcissism. Results of an experiment completed by 228 managers do not provide support for an effect of either narcissism or perspective-taking on managers’ support for an underperforming project. Interestingly, results indicate that perspective-taking increases the escalation tendencies of narcissistic managers while having no statistically significant effect on less narcissistic managers. Given these results, I propose a theory-based explanation for narcissistic managers’ response and suggest future research opportunities. Overall, this dissertation contributes to the growing literature examining how manager’s narcissism influences decision-making in organizations and is a first step in understanding how individual differences may influence the success of management control systems.
The Effects of Performance Incentives and Creativity Training on Creative Problem Solving Performance
(University of Waterloo, 2015-11-09) Huo, Kun
I investigate the effect of different incentive schemes on employees’ effort and performance in a creative problem-solving task because current literature is divided on the effect of performance-based incentives on creative problem solving. Using an experiment, I compare two types of performance-based incentives (piece-rate pay and fixed wage plus recognition) with fixed wage alone and examine whether creativity training can moderate the relationship between performance-based incentives and creative problem-solving performance. Extending the theoretical predictions from Bonner and Sprinkle’s (2002) incentive-effort-performance model to creative tasks, I predict that the effect of performance-based incentives on creative problem-solving performance will be more positive in the presence of creativity training than in its absence. One hundred and twenty participants attempted to solve six creative insight problems under time constraint. Creative problem-solving performance is measured as the number of insight problems solved. As predicted, significant performance incentive by creativity training interactions are found for both the piece-rate pay and the fixed wage plus recognition. Without training, piece-rate pay produces lower performance than fixed wage alone. With training, however, performance is higher under piece-rate pay than under fixed wage alone. Relative to fixed wage alone, fixed wage plus recognition has no effect on performance without training, but fixed wage plus recognition generates higher performance with training. Supplemental analysis reveals that individuals receiving performance-based incentives (piece-rate pay or fixed wage plus recognition) and training spent less time solving each problem than those receiving performance-based incentives and no training, suggesting that the combination of performance-based incentives and training increases individual efficiency. Further, regardless of incentive scheme, individuals display a similarly high level of interest in the task, suggesting that intrinsic motivation was not negatively affected by tying incentives to task performance. Findings from this study have implications for organizations that seek to motivate creative performance using either monetary or non-monetary incentives.
The Effects of Reward Type and Relative Performance Information on Budget Slack and Performance
(University of Waterloo, 2014-01-07) Presslee, Charles Adam
To motivate effort, organizations commonly use budget-based tangible rewards (e.g., gift cards, merchandise) in lieu of or in addition to cash rewards and they can distribute tangible rewards to employees either directly (employees are given merchandise directly) or indirectly (via a redeemable points program). In conjunction with various budget-based financial rewards, employees can receive feedback about how they performed relative to other employees. However, employees can intentionally misstate their expected performance (i.e., create budget slack) when participating in the budgeting process, impairing the usefulness of budgets for planning and motivation. This dissertation investigates the effects of different types of budget-based rewards (cash, tangible, or redeemable points) on budget slack creation and performance, and whether relative performance information [RPI] moderates these effects. As predicted, results from an experiment completed by 166 undergraduate students show that participants eligible to earn redeemable points create less slack (i.e., set more difficult performance budgets) than those eligible for cash or direct tangible rewards. Further, RPI provides participants with a descriptive norm that slack creation is socially acceptable, resulting in more slack. Although I do not find support for the predicted indirect relationship between reward type or RPI on performance via their effects on budget slack, I do find that the provision of RPI has a direct positive effect on performance. Finally, supplemental analysis shows that those provided with RPI and cash rewards outperform all others. These results suggest that firms choosing to provide budget-based tangible rewards and allowing employees to participate in the budgeting process should consider using a redeemable points system rather than providing rewards directly to eligible employees. Further, before deciding whether to provide RPI to employees, firms should weigh the positive direct effects of RPI on performance against its negative effects on budget slack creation. Last, if a firm does choose to provide employees with RPI because of its positive effects on employee effort, firms may be well-advised to offer employees budget-based cash rewards instead of budget- based tangible rewards or budget-based points rewards.
The Effects of Situated Client Identity and Professional Identity Salience on Auditor Judgments
(University of Waterloo, 2011-11-29T18:34:01Z) Bauer, Tim
Recent accounting research suggests that auditor identification or familiarity with their clients may be an additional threat to auditor independence, which may be mitigated by a strong professional identity (King 2002; Bamber and Iyer 2007). However, social identity theory suggests that a strong professional identity will only be effective if it is highly salient and thus readily activated. Yet, professional identity salience is argued to have diminished in recent years (Warren and Alzola 2009). I examine if the level of professional identity salience moderates the positive association between auditor agreement with the client and client identity strength, or the negative association between auditor agreement with the client and professional identity strength. I address these research questions using two experiments completed by experienced professional auditors. In the first experiment with an ambiguous audit judgment task, I examine client identity strength and professional identity salience at two levels each and measure professional identity strength. Results show that auditors with stronger client identities agree more with the client, but only when professional identity salience is not heightened. I do not find that auditors with stronger professional identities agree less with the client, even when professional identity salience is heightened. In the second experiment with an unambiguous audit judgment task, I examine client identity strength at two levels when professional identity salience is not heightened. Results are inconclusive as to whether auditors with strong client identities differ in their agreement with the client, relative to auditors with weak client identities. My research contributes to literature on auditor identification and independence by demonstrating the importance of professional identity salience, not just professional identity strength, on auditor judgments. I also show that threats to auditor objectivity can arise from client identity that develops even without a familiar client relationship.
Equity financing restrictions and the asset growth effect: International vs. Asian evidence
(Elsevier, 2019-10) Huang, Alan Guoming; Sun, Kevin Jialin
This paper investigates the driver of asset growth to explain the cross-country variation of the asset growth effect. We find that institutional restrictions on equity financing constrain firms' abilities to grow assets, and the degree of such restrictions is associated with the observed cross-country variations of the asset growth effect. Specifically, the asset growth effect is weaker in countries with more restrictions on stock issuance and buyback. In horserace tests, equity financing restrictions supersede legal system, stock market development, and information transparency in explaining the cross-country differences of the effect. We highlight our results through a comparison of two Asian countries—Korea and China—with the United States. Our results provide evidence that country financial regulations dampen certain sources of risks in asset prices.
An Examination of the Impact of Disclosure Regulations on the Market Reaction to TSX Open Market Repurchase Program Announcements
(University of Waterloo, 2010-01-11T19:39:13Z) Moore, James
This thesis investigates open market repurchase announcements by Toronto Stock Exchange (TSX) listed firms. First, I develop a comprehensive database of normal course issuer bids (NCIB) and report descriptive data on repurchasing activity between 1994 and 2005. I find that repurchase programs peak in 2000 and then decline. I also find evidence that repurchase programs are concentrated in certain industries. Next, using Compustat data, I investigate the characteristics of firms announcing repurchase programs. I find evidence that firms who announce repurchase programs are large in size and have high operating cash flows, low leverage, low share turnover and low dividend yields. I extend the repurchases literature by demonstrating that firms with low trading volume are more likely to initiate repurchase programs, consistent with an attempt to improve sell side liquidity. Finally, I investigate the market reaction to NCIB announcements. The results indicate that TSX firms experienced a significant market reaction to repurchase announcements between 1994 and 2005 as measured by both return and volume tests. I extend the repurchases literature by showing that announcement returns are higher for firms who followed through on their previous repurchase announcements. Little evidence exists of investor response to the disclosed reasons for repurchase programs.
Examinations of the Relations Between Tax-Motivated Income Shifting and Private and Public Country-by-Country Reporting
(University of Waterloo, 2024-08-09) Adams, Jillian
Multinational corporations’ (MNCs’) tax-motivated income shifting concerns governments and policymakers worldwide. In this thesis, I examine how disclosure can address this concern by studying the relation between mandatory private country-by-country reporting (CbCR) disclosure, voluntary public CbCR disclosure, and MNCs’ tax-motivated income shifting. Extant research has failed to find robust evidence that mandatory private CbCR disclosure to the tax authorities has significantly decreased MNCs’ tax-motivated income shifting. These results have been widely cited and interpreted as evidence that MNCs’ income shifting did not decrease in the post-CbCR implementation period. I revisit this question by replicating the results of prior research, lengthening the sample period, and expanding the sample beyond the European Union. Using affiliate-level income shifting models, I find robust evidence that MNCs shift significantly less income in the post-CbCR implementation period. On average, MNCs have decreased their income shifting by half since the implementation of CbCR, and these decreases are monotonic across MNC size and not concentrated amongst MNCs subject to mandatory private CbCR. Altogether, I show that the objective of CbCR in reducing income shifting was achieved around the time CbCR was implemented; however, I provide compelling evidence that the CbCR consolidated revenue threshold did not matter, making it unlikely that it was the CbCR disclosure to the tax authorities that resulted in the decrease in income shifting. Consistent with the overarching focus of the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting (BEPS) framework, I find that MNCs headquartered in countries with strong regulatory environments, an interest deduction limitation consistent with BEPS Action 4, and no preferential tax regimes named in BEPS Action 5, exhibit greater decreases in income shifting relative to MNCs headquartered in countries with weak regulatory environments and not compliant with Action 4 or Action 5. These findings have important implications for governments and policymakers worldwide as they work to curb MNCs’ income shifting and implement BEPS action items. Then, I consider MNCs that voluntarily disclose CbCR publicly to determine whether this disclosure is a credible signal of their tax behavior. I use a unique hand-collected dataset of MNCs that disclose CbCR in their sustainability reporting, consistent with the Global Reporting Initiative’s sustainability-tax reporting standard. After explicitly modelling the endogenous disclosure decision and controlling for the post-CbCR implementation period, I find that MNCs that voluntarily disclose CbCR publicly significantly decrease tax-motivated income shifting in conjunction with disclosure, relative to the pre-disclosure period. The propensity for reduced income shifting is greater amongst MNCs that provide detailed CbCR disclosure, which is consistent with the costliness of such a detailed disclosure. Overall, I find that sustainability reporting is a mechanism within which MNCs differentiate themselves, consistent with a separating equilibrium, by demonstrating that the voluntary disclosure of complex tax information that is not easily verifiable can be a credible signal of the underlying tax behavior. This evidence has important implications for stakeholders interested in utilizing voluntary tax disclosures.

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