archives@tulane.edu / 1 / Ruizhong Zhang

Psychological biases in the form of sentiment can affect various economic decisions including accounting choices. Broadly defined, the term sentiment refers to unjustified beliefs about the future cash flow prospects of the firm (Baker and Wurgler 2006). Asymmetric timely loss recognition (ATLR) is particularly prone to managerial sentiment because the decision to recognize economic gains and losses is based, in part, on managers’ beliefs about the likelihood of future economic events affecting the firms. In this study, I examine the effect of psychological biases about future performance on current accounting choices via the effect of market-level managerial sentiment on ATLR. I find that ATLR decreases with managerial sentiment and that periods of high managerial sentiment are associated with lower concurrent write-offs but higher subsequent write-offs. This study enhances the implications of sentiment on firms’ accounting choices by identifying a time-varying macroeconomic determinant of ATLR that is based on psychological biases about future performance.

This paper uses the collapse of the junk bond market in the early 1990s as a natural experiment to examine the effect of asymmetric timely loss recognition (ATLR) on speculative-grade (SPG) firms' access to private debt markets and underinvestment. For a sample of 450 firm-years over the period 1988-1991, I find that SPG firms that recognize economic losses in a timelier fashion experience a smaller reduction in debt financing and investment from the pre- to post-collapse period relative to SPG firms that recognize economic losses in a less timely fashion. I also document that the effect of ATLR on debt financing and investment is more pronounced for SPG firms that lack collateral and are not followed by sell-side equity analysts. These findings support the notion that ATLR improves a firm's ability to access private debt markets, thereby attenuating underinvestment. They also suggest that both collateral and sell-side equity analysts serve as substitutes for ATLR to facilitate SPG firms' access to private debt markets. Further analyses reveal that ATLR increases for SPG firms from the pre- to post-collapse period and this increase is more pronounced for SPG firms with net issuance of debt. This evidence suggests that firms adjust ATLR to obtain debt financing in response to private lenders' demand for it.

IFRS allows firms to choose between fair-value accounting and historical cost accounting with impairment testing for property, plant and equipment (PPE). This study examines the effect of firms' accounting choices for this group of non-financial assets on over-investment after IFRS mandatory adoption in the European Union (EU). My results indicate that over-investment in PPE (or capital expenditures) is lower following IFRS adoption among EU firms that used historical cost accounting with impairment testing in the post-IFRS period, consistent with EU firms having more timely loss recognition for PPE under IFRS strict impairment rules. In my analysis of United Kingdom (UK) firms, I find that most UK firms elected to use historical cost accounting with impairment testing for PPE after IFRS mandatory adoption. I also find that UK firms that previously used fair-value accounting under UK GAAP and then switched to historical cost accounting with impairment testing under IFRS exhibit greater reductions in over-investment relative to other EU firms that used historical cost accounting with impairment testing prior to IFRS adoption. Additional analysis suggests that the reductions in over-investment after IFRS mandatory adoption are greater as the severity of agency conflicts increases, consistent with outside shareholders demanding timely loss recognition as a means of addressing agency conflicts with managers.

This thesis consists of three related essays that examine the role of information in the market for corporate debt. The three essays collectively examine the role of information produced by the firm and its agents on alleviating information asymmetries facing public debtholders. In particular, the thesis examines the impact of bondholders' demand for reputation and information on the firm's disclosure choices and accounting attributes; and the impact of information produced by monitoring the firm's private debt before its entry to the public debt market on the yield spread of its initial bond. The first essay investigates the influence of public corporate debt on the willingness of UK firms to issue profit warnings. UK firms operate within a legal environment that is less litigious compared to their US counterparts. This setting allows for motives other than fear of litigation to affect UK companies' decision to warn. The results of this essay indicate that UK firms with public debt are more forthcoming with the disclosure of permanent negative news. Also, the results show that UK firms without public debt are more likely to hide bad news when they are closer to financial distress. However, for firms with public debt, the results indicate that the effect of closeness to financial distress on the willingness to warn is attenuated. These findings suggest that firms with public debt are deterred from hiding negative news for fear of damaging their reputation for truthful and timely disclosure. Public debt appears to act as a disciplinary mechanism on corporate disclosure policy.The second essay examines the impact of the initial public debt offering (IPDO) on the timeliness properties of the firm's accounting income. Firms are more likely to communicate with private lenders on a private, insider-basis, while they are more likely to communicate with bondholders using public information. Therefore, bondholders, compared to private lenders, are expected to be more sensitive to the quality of public information. The results indicate that firms adopt a timelier policy of economic loss recognition after their initial public debt offering using Basu's (1997) time series measure of timely loss recognition. These findings suggest that firms face higher demand for public information from a large number of external and dispersed bondholders.The third essay investigates the impact of information associated with prior private debt financing on the yield spread of companies' initial public debt offerings. Specifically, this essay focuses on information produced through monitoring by credit rating agencies and monitoring by banks. The findings indicate that IPDOs with the same or upgraded credit ratings enjoy significantly lower yield spreads. This finding suggests that changes in credit ratings could convey new information to investors regarding the firm's commitment to maintain a high credit quality. In addition, the findings of this essay indicate that strong banking relationships significantly reduce yield spreads for initial public debt offerings. This suggests that a strong banking relationship conveys a positive signal to bondholders regarding the bank's assessment of the quality of the firm.

Standard empirical models of operating efficiency (OE) and managerial ability (MA) assume a symmetric linear relation of OE and MA with firm performance. However, OE and MA metrics are likely to respond faster to a demand decrease than a demand increase due to cost stickiness and respond faster to negative returns than to positive returns due to accounting conservatism. As predicted, I find large asymmetries in the behavior of OE and MA measures. OE and MA in levels (changes) are 2.4 (1.4) times and 1.5 (1.6) times more sensitive to demand decreases than demand increases. Similarly, OE and MA levels (changes) are 1.7 (1.5) times and 3.6 (2.3) times more sensitive to negative returns than to positive returns. The incremental explanatory power of modeling asymmetry in OE and MA levels (changes) is 20.9% (39.5%) and 263.3% (27.6%), measured as incremental adjusted R2. Cross-sectionally, asymmetry in OE and MA varies with the determinants of cost stickiness: (1) asset intensity and (2) employee intensity. Moreover, the degree of asymmetry also varies with the determinants of accounting conservatism: (1) book-to-market value of equity, (2) leverage, and (3) market capitalization. In addition, demand decline (i.e., cost stickiness) and bad news (i.e., accounting conservatism) during prior and successive periods have an incremental impact on the asymmetry in OE and MA. The standard models of OE and MA do not control for these correlated-omitted variables or incorporate the cost stickiness and accounting conservatism asymmetries, which yield biased measurements and render incorrect regression estimates and inferences. / Business Administration/Accounting

Globalization has led to the growth of international financial markets, as one of the results, the EU adopted IFRS in 2005 to meet the need of accounting globalization and harmonization. This action has triggered a debate about whether the adoption of IFRS is beneficial to accounting quality and information comparability. Meanwhile, China, playing a key role in the global economic development stage, realizes the importance of accounting harmonization and attempts to move towards the IFRS as well. However, to reach the goal that the Chinese companies produce financial statements that are the same as those that apply IFRS, there is still a long way to go. The purpose of this thesis is to examine whether the adoption of IFRS by EU has enhanced the quality of financial reporting and accounting information comparability. Additionally, the thesis further identified the seminal undertakings for the convergence of IFRS in Europe and pointed out the implication for China’s convergence with IFRS. The empirical findings in this thesis were obtained through qualitative interviews. The empirical findings suggest that accounting quality and information comparability has been enhanced with EU’s strong and full enforcement with IFRS. With the confidence in IFRS which is gained from the success of the EU’s adoption of IFRS, a coherent result was found that the convergence towards IFRS would also benefit China in accounting quality and information comparability, and further lead to more international investments. However, when it comes to the question whether China should emulate EU’s example to adopt IFRS directly or keep CAS (Chinese Accounting Standards) which is similar to IFRS, two mixed opinions were obtained basically from Europe side and China side. Through in-depth analysis with these empirical findings, the conclusion is that it is necessary for China to take steps to build intensive programs to enhance its capacity of the adoption of IFRS, so that it could adapt itself to the fact that the IFRS is already making its way around the world as a single set of high quality global accounting standards.

本研究以美國證券市場為樣本，探討銀行業之法規開放是否對非金融業公司之會計穩健性造成影響。銀行法規開放可使銀行透過併購於州內擴張，借款公司可能面對之銀行議價能力上升，使得銀行要求融資顧客出具高品質之財務報表。另一方面，州際銀行法規開放可能使他州銀行進入本地金融市場，進而提高金融市場之競爭度。由於會計穩健性可降低管理階層與投資人的資訊不對稱，被視為高品質的財務報表，本文推測銀行業法規鬆綁會影響公司會計穩健性。實證結果顯示，州內銀行法規開放與會計穩健性間具有顯著正向關係；然而，州際銀行法規開放與會計穩健性間具有顯著負向關係。額外分析顯示，大型企業更傾向於對銀行法規開放作出反應，而較依賴發行公司債融資方式之公司在面對銀行法規開放時則減少財務報導中認列損失之即時性。 / This study uses US banking deregulation as a research setting to examine whether banking deregulation has an impact on the degree of accounting conservatism of non-financial firms. Since banking deregulation would enable large banks expand within states through merge and acquisition, bank’s bargaining power to lenders may increase. Banks may require their clients to provide higher quality of financial statements. On the other hand, banking deregulation may increase competition in local financial markets by enabling large banks to enter into local markets. As accounting conservatism could alleviate information asymmetry between management and investors, and serves as an indicator of high quality of financial statements, I expect that banking deregulations would have an impact on firms’ reporting conservatism. I find that there is a significantly positive relationship between intrastate banking deregulation and firms’ timely loss recognition. In contrast, interstate banking deregulation has a significantly negative influence on firms’ timely loss recognition. Additional analyses reveal that large firms are more likely to respond to the banking deregulation and that firms that rely more on public debt financing respond to the banking deregulation by decreasing their degree of timely loss recognition in financial reporting.