Abstract

Keywords

1. Introduction

2. Literature review

3. Data

4. Methodology

4.1. Network metrics

4.1.1. Centrality

4.2. DebtRank

4.3. Beyond inter-bank exposures

4.4. Reconstruction of firm-to-firm network

4.4.1. Binary adjacency matrix via the fitness model

4.4.2. Assigning weights via the RAS algorithm

4.5. Building a network of effective exposures of banks towards firms

5. Results

6. Conclusions and further work

Declaration of Competing Interest

Appendix A. Additional results

References

Abstract

We propose to use a systemic risk metric for an extended network which includes the inter-bank network, the banks-firms bipartite network, and the intrafirm exposures network in Uruguay. This is the first work, to the best of our knowledge, in which the intra-firm exposures network is estimated with good accuracy by using information from a firm survey. Given that the survey only includes the three most relevant debtors and creditors, we complete the full intra-firm exposures matrix by resorting to Maximum Entropy, Minimum Density and a new method which takes into account the known entries of the matrix obtained from the survey. We show that ignoring intra-firm exposures results in an important underestimation of systemic risk. Moreover, if the marginal liabilities are used as an indicator of the systemic relevance of firms, important network effects are ignored. To conclude, the paper contributes with a precise estimation of the impact of intra-firm exposures to overall systemic risk.

1. Introduction

The increasingly complex and interrelated connections in the financial system are considered one of the main sources of risk amplification and propagation of shocks. This was made evident in the worst possible way during the Global Financial Crisis (GFC) after the fall of Lehman Brothers. Since then, macroprudential policies and the interconnections in the financial system have taken central stage in the financial stability agenda.

These interconnections among financial entities have been modelled by resorting to network theory and models. Subsequently, researchers have modeled financial entities and their relationships by financial networks. Extensive literature exists on the structure of these networks and the effects of these structures on the propagation of both microeconomic and macroeconomic shocks (see Battiston, Martinez-Jaramillo, 2018, Martinez-Jaramillo, Carmona, Kenett, 2019) for an introduction.

Nevertheless, contagion through commercial indebtedness among firms or economic sectors has received less attention (Acemoglu et al., 2016), mainly due to the lack of information. However, this situation has recently changed, and now it is possible to find works that include the real sector of the economy and its relationship with the banking system: Poledna et al. (2018) and Silva et al. (2018).

This work aims to contribute to filling this gap as well by building a commercial and financial debt network for Uruguay. We resort to a firm-level survey that included questions on the main debtors and creditors for each firm that participated in the survey (see Baron et al., 2020). Additionally, the links between the firms and the banking system are also known from the credit registry. Finally, even though the inter-bank market is small and we find low contagion through this channel, the exposures network among banks is also considered.

Abstract

JEL Classification

Keywords

1. Introduction

2. The Spanish fish canning industry: dimensions and the relevance of WCM

3. Literature review and proposal of hypotheses

4. Methodology

5. Empirical results

6. Conclusions

CRediT authorship contribution statement

References

Abstract

Credit restrictions, such as those happening in the current context shaped by the crisis derived from COVID-19, make working capital management (WCM) a driving force behind SME performance. This paper analyses whether WCM policies affect the economic and financial profitability of Spanish companies in the fish canning industry. Spain leads the EU’s production of canned seafood and the seafood industry is a key sector for the Spanish economy. To assess the WCM-profitability relationship, we applied a dynamic panel data methodology in a sample consisting of 377 companies during the period 2010–2018. We can conclude that the economic profitability of fish canning companies is related to the collection period (Days Sales Outstanding or DSO) and the inventory conversion period (Days Inventory Outstanding or DIO). Moreover, empirical evidence reveals the existence of an optimal level of receivables that balances the benefits of increasing sales and the opportunity costs of customer funding. The findings also identify a convex relationship between investment in inventory and economic profitability.

1. Introduction

The literature on corporate finance has traditionally focused on long-term financial decisions [38], [4], leaving short-term finances behind (i.e., working capital investment and financing policies). Nevertheless, the latter conditions the day-to-day activities of companies and, in turn, their financial outcomes, especially in small and medium-sized enterprises (SMEs). Along this line of reasoning, Howorth and Westhead [25] highlight that working capital management (WCM) has a greater impact on SME profitability than in larger companies due to the high percentage of current assets, the insufficient amount of liquidity, and the highly volatile cash flows that often characterise SMEs [43]. Additionally, since SMEs face more difficulties in accessing long-term debt, they increase their reliance on short-term liabilities through spontaneous financing and short-term bank loans [13], [17]. All of these SME characteristics underline the importance of an efficient WCM to enhance financial outcomes such as firm profitability and survival [17], [25], [41].

Besides, the financial constraints and high dependence on bank lending often experienced by SMEs [24] have led them to encounter a drastic shortage of liquidity in the aftermath of the Great Recession [7]. Responding to this challenge, European governments have increased efforts towards facilitating access to finance for SMEs [14], implementing strategies to ensure timely payments among other actions. The current context shaped by the crisis derived from the COVID-19 pandemic suggests a liquidity shortage similar to that experienced during and after the financial crisis of 2007.

This paper examines the association between the presence of female tainted directors on corporate boards and audit committees and (1) financial reporting quality and (2) audit fees. Female tainted directors are defined as female directors who have been directors of the firms that have previously been involved in financial failures and integrity indiscretions. Using real earnings management and audit fees as proxies for effective governance and board reputation, we find that firms with female tainted directors have higher real earnings management and higher audit fees. However, since prior literature has demonstrated that audit fees are higher for firms with female directors because female directors demand better auditing, we corroborate a supply-side effect of auditors charging higher audit fees when female tainted directors exist. We demonstrate this by showing that while there is an association between audit fee and real earnings management, this association is higher for firms with female tainted directors. Arguably, the governance and reputational benefits of female directors on boards are negated if such directors have tarnished professional reputations.

Introduction

This paper deals with the impact of female tainted directors on corporate boards and audit committees on the financial reporting quality and audit fees of US-listed firms.2 Female representation on corporate boards has long been the subject of research and remains an important issue for academics, professionals and policy-makers. Many academic researchers have argued that men and women have different ethical orientations (Singh et al., 2002). Women are believed to have values and interests that make them more sensitive to unethical behaviour than men (Betz et al., 1989; Limerick and Field, 2003; Stedham et al., 2007). Accounting researchers have found that female directors have better oversight of managers (Adams and Ferreira, 2009) because they do not belong to the old-boy networks; this facilitates more independent thinking in decision making (Adams et al., 2010). Further, firms with female directors facilitate more informed discussion (Daily et al., 2000), which reduces information asymmetry and increases earnings quality (Srinidhi et al., 2011). While each of the abovementioned studies has its own merits, none of the previous gender diversity studies differentiate the ethical orientation of female directors. To ensure that we capture the ethical orientation of these directors, we draw our evidence from the actual professional history of each director, based on the definition stated above.

We investigate the comparative effectiveness of board independence in constraining Real Earnings Management (REMs) in family and non-family firms in the context of corporate governance reform in Bangladesh. In contrast to the pre-reform period, we find that independent directors are more effective in restricting REMs in family firms compared to non-family firms, post reform. Further, we find that the relationship between family ownership and REMs varies significantly between strong and weak corporate governance firms during the post-reform period. This nuanced impact of regulation extends the literature and may be generalised to similar domains with weaker institutions and investor protection.

Introduction

We examine the comparative effectiveness of board independence in restraining REMs in family and non-family firms in an emerging economy, Bangladesh. Bangladesh has its legal origin in common law, but the country suffers from relatively poor enforcement of the legal codes (Rashid, 2011; Siddiqui, 2010). It provides an appropriate setting as family ownership remains a dominant form of ownership in Bangladesh with family firms making up around 64% of the economy (Muttakin et al., 2011). This context also provides us a unique opportunity since Bangladesh has changed its corporate governance regulation in 2012 to a stricter “comply” basis from its earlier “comply or explain” basis (Bangladesh Securities and Exchange Commission, 2012). One of the conditions imposed in the notification is that the minimum proportion of independent directors on the board has to be at least one-fifth (1/5) that doubled the previous requirement of a minimum one-tenth (1/10) of the board (Bangladesh Securities and Exchange Commission, 2012; Bangladesh Securities and Exchange Commission, 2006). This exogenous shock offers a unique opportunity to investigate the effectiveness of family firm boards’ independence in an emerging economy during the pre-reform and post-reform periods. Of the different features of corporate governance, board independence is one important aspect that has drawn significant attention with regard to its effectiveness in ensuring higher quality earnings (Davidson et al., 2005; Peasnell et al., 2005; Xie et al., 2003). The presence of independent non-executive directors on the board wielded a significant influence in reducing the magnitude of earnings management (Davidson et al., 2005; Peasnell et al., 2005). In addition to the board’s independence, Xie et al. (2003) examine the effectiveness of other board characteristics, i.e. number of board meetings, CEO and chair duality, size of the board, etc., and find that board independence has a significant restraining impact on firms’ earnings management.

We investigate the dynamics of earnings management (EM) in IPOs and the role of venture capitalist (VC) in hampering such practice. We study the behavior of EM in four phases: Pre-IPO, IPO, Lock-up and Post-lock-up. We find that VC-sponsored firms tend to do more EM in the PreIPO period, and less in two subsequent periods. These results are distinct for those of Wongsunwai (2013), for which, VC-sponsored firms do less EM only in the IPO period. We also find that VC and non-VC-sponsored firms do EM around the IPO in distinct fashions. Non-VCsponsored firms inflate earnings during the IPO period and deflate in the Lock-up and Post-lockup periods. VC-sponsored firms inflate earnings in the Pre-IPO period and deflate earnings only in the Lock-up period. Our results are robust with respect to how one measures EM and the statistical methods used.

Introduction

This paper examines the role of venture capital-sponsorship (VC-sponsorship) in hampering earnings management (EM) in IPOs. EM is a wide variety of changes in financial reporting that affects an entity’s earnings, not motivated by the need to represent the reality intrinsic to the business. Although not illegal, EM can distort the information content of the financial statements in a way that can harm shareholders. The IPO process gives entrepreneurs both motivation and opportunities to engage in EM. If earnings were artificially inflated, investors who are unaware of this procedure can be lead to pay an artificially high price. There is high information asymmetry between investors and issuers at the time of the IPO. Prospectuses are the main source of information for IPOs. However, prospectuses usually contain financial statement for only some few quarters preceding the IPO. Consequently, investors cannot rely on historical data to estimate the extent to which firms engage into EM at the time of the IPO. Thus, managers of issuing firms have both the opportunity and the motivation to manipulate earnings in order to inflate offering price. Several authors studied EM at the time of public offerings. Teoh et al. (1998b) relate the poor long-term return of IPOs detected by Ritter (1991) to EM. They find that EM around the IPO is higher for IPO issuers as compared to non-issuing firms. VCs have incentives to force their invested firms to adopt good corporate governance practices. Kaplan and Strömberg (2002) document that VCs impose complex control rights when they sponsor a company, and put in place strong monitoring and advisory mechanisms. Hellmann and Puri (2002) find that VC-sponsorship is related to a variety of professionalization measures, such as the adoption of stock options plans, the hiring of a marketing or sales vice-president and the formulation of human resources policies.

This paper investigates whether stock-for-stock acquirers undertake real activities to manage earnings before merger announcements. Our results show that stock-for-stock acquirers present unusually high levels of credit sales and overproduction in the quarter immediately before the merger announcement. We also find that the accruals feature of real earnings management can explain the stock-for-stock acquirers’ high discretionary current accruals. In addition, stock-for-stock acquirer firms that accelerate their credit sales experience subsequent market underperformance. Overall, we provide a novel insight into the accruals feature of real earnings management.

Introduction

In a stock-for-stock merger, the higher stock price of the acquirer firm on the agreement date benefits the acquirer by lowering the number of shares used to purchase the target firm, thus reducing the cost of the acquisition. Previous studies show that acquirers exhibit higher discretionary current accruals (DCA) in the quarter immediately before their stock-forstock merger announcement, suggesting engagement in managing current accruals, and attribute acquirers’ subsequent underperformance to the reversal effects and litigation costs of the upward current accruals (Erickson and Wang, 1999; Gong et al., 2008; Louis, 2004). In this paper, we reinvestigate the upward management of current accruals of stock-forstock acquirers (stock acquirers) from the perspective of real earnings management (REM). Our motives for this investigation stem from the fact that merger announcements are important events that attract attention from market participants (Liu and McConnell, 2013; Louis and Sun, 2010; Maksimovic and Phillips, 2001; Schoar, 2002). Acquirers come under market scrutiny and have limited ability to engage in accrual-based earnings management (AEM) (Burnett et al., 2012; Chi et al., 2011; Cohen and Zarowin, 2010; Graham et al., 2005; Zang, 2012). Therefore, it is of interest to investigate whether stock acquirers use an alternative mean to boost their pre-merger earnings.

This study develops and tests a research model to analyze the overall effects of minimum wage policy implementation on hotel employees’ overall perception of the minimum wage policy in relationship to satisfaction with compensation, work behaviors, and perceived quality of life. An electronic survey was developed, and data were collected from hotel employees who worked at three-, four-, and five-star hotels in Malaysia. Results from the structural equation modelling analysis and the bootstrap mediational effects analysis offered significant empirical findings that will enable understanding of the overall effects of minimum wage increases on Malaysian hotel employees. Employee perception of minimum wage policy significantly influenced their satisfaction with compensation and work motivation. Additionally, employee satisfaction with compensation significantly influenced their work motivation, job satisfaction, and perceived quality of life. Limitations and future research directions are discussed.

Introduction

In 2009, the Ministry of Human Resources Malaysia found 40% of private sector employees had incomes below the poverty level (Guie, 2012). Knowing that the poverty rate could be reduced by increasing employee income (Yusof et al., 2016), Malaysia government took steps similar to other countries and implemented a minimum wage policy in 2013. The policy was implemented throughout all businesses and was set monthly at RM900 (USD215) for Peninsular Malaysia and RM800 (USD191) for other regions (Attorney General’s Chambers of Malaysia, 2012). In 2016, the monthly minimum wage was increased by 10% to RM1,000 (USD236) for Peninsular Malaysia and RM920 (USD217) for other parts of Malaysia (Attorney General’s Chambers of Malaysia, 2016). Given the National Wages Consultative Council (NWCC) review of the Minimum Wages Order of 2016 and current economic conditions, another increase in the minimum wage (RM1,100 per month) started January 2019; this rate was standardized throughout the country (Attorney General’s Chambers of Malaysia, 2018). The minimum wage policy objectives in Malaysia include assuring basic needs of employees and their families are met and giving social protection to employees through minimum acceptable wages (http://minimumwages.mohr.gov. my/). The minimum wage policy aims to improve the living standards of Malaysian and non-Malaysian employees and reflects the Malaysian government’s commitment to overcoming poverty.

This study examines the impact of accounting comparability on financial reporting quality and the extent to which financial statement users understand the implications of firms’ accruals. We predict that comparability improves the information environment, which not only enhances the ability of managers to estimate accruals more accurately and signal their private information, but also improves investors’ comprehension of accruals. Utilizing restatements, the mapping of accruals into cash flows, earnings persistence, and audit fees as measures of financial reporting quality, we find that prior-period comparability is associated with higher financial reporting quality. We also provide evidence that comparability is positively associated with managerial forecast accuracy and precision, consistent with comparability improving the ability of managers to predict future firm performance. Furthermore, we find that when prior-period comparability is higher, current period discretionary accruals are less positively correlated with contemporaneous returns and less negatively correlated with future returns, consistent with our prediction that comparability improves the pricing efficiency of accruals. Our results are robust to controlling for the endogeneity of accounting comparability and several different empirical model specifications. Overall, our findings suggest that enhanced accounting comparability is beneficial to both preparers and users of financial statements.

Introduction

Regulators argue that comparability increases accounting information’s usefulness and enables financial statement users (hereafter users) to identify the similarities and differences between economic phenomena (Financial Accounting Standards Board (FASB), 2010). The Financial Accounting Standards Board (FASB) (1980) states that “investing and lending decisions…cannot be made rationally if comparative information is not available.” Financial statement analysis textbooks also stress the importance of comparability in judging a firm’s performance (e.g., Revsine, Collins, Johnson, & Mittelstaedt, 2011). Existing research on accounting comparability primarily focuses on its benefits to financial statement users such as financial analysts and creditors (e.g., De Franco, Kothari, & Verdi, 2011; Kim, Kraft, & Ryan, 2013). Very few studies have examined the implications of comparability for managers, an important party in the information production and dissemination process. Also, the implications of comparability for users have not been fully explored. To fill these gaps in the literature, we examine the impact of comparability on the quality of managers’ financial reporting and the extent to which investors understand the implications of firms’ accruals, given the impact of comparability on financial reporting quality.1 Following the Financial Accounting Standards Board (FASB) (2010) and De Franco et al. (2011), we define comparability as the extent to which similar economic transactions are accounted for similarly, and dissimilar transactions are accounted for differently.

This study examines whether auditor industry specialist duration (i.e., the cumulative number of years an audit firm can be deemed an industry specialist) affects earnings management. Using a sample of 17,546 observations during the period of 2006 to 2014, we find that audits performed by firms with longer industry specialist durations are associated with lower levels of earnings management, as proxied by the absolute value of discretionary accruals. This finding enhances the industry specialization literature by showing that, in the long run, specialist auditors constrain the accrual management activities of their clients. However, we also find that audits performed by firms with longer industry specialist durations are associated with greater levels of real earnings management. In turn, this is consistent with real earnings management surfacing as an unintended consequence of specialist auditors being able to better constrain the accrual management activities of their clients (Chi, Lisic, & Pevzner, 2011).

Introduction

This study investigates the role of time relative to industry specialization and auditor performance. Specifically, we examine whether auditor industry specialist duration (i.e., the cumulative number of years an audit firm can be deemed an industry specialist) affects earnings management. Obtaining a better understanding of the impact of specialist duration on auditor performance is important due to the tacit and transient nature of industry expertise. While prior studies recognize that expertise takes time to develop (Bonner & Lewis, 1990; Bonner & Walker, 1994; Goodwin & Wu, 2014), the effects of the auditor “seasoning” process has been largely ignored by preceding studies based on industry market share dominance (Gaver & Utke, 2019). Furthermore, several elements of the expertise puzzle, such as the dynamic environment of the audit profession and the challenges/opportunities associated with prolonged auditor tenures, further accentuate the importance of time as a determinant of the association between industry specialization and auditor performance. In this study, we distinguish between industry specialist duration (i.e., specialist tenure) and the current status of audit firms as industry specialists. We posit that there are two possible outcomes regarding the impact of specialist duration on earnings management. The first prospect is a negative association between duration and earnings management. This would suggest that an audit firm’s history as an industry specialist provides its staff with additional insights about its clients’ operations and industry, leading to more effective audits. That is, auditors with larger or dominant market shares benefit from greater exposure to clients from the same industry over time. This prediction is based on the notion that industry expertise follows market share dominance.

1- Introduction

2- Related literature

3- Case study

4- Dynamic pricing

5- Load optimizer

6- Numerical experiments

7- Discussion

References

Abstract

We propose an heuristic approach to the vehicle ferry revenue management problem, where the aim is to maximize the revenue obtained from the sale of vehicle tickets by varying the prices charged to different vehicle types, each occupying a different amount of deck space. Customers arrive and purchase tickets according to their vehicle type and their willingness-to-pay, which typically increases over time because customers purchasing tickets closer to departure tend to accept higher prices. The optimization problem can be solved using dynamic programming but the possible states in the selling season are the set of all feasible vehicle mixes that fit onto the ferry. This makes the problem intractable as the number of vehicle types and ferry size increases. We propose a state space reduction, which uses a vehicle ferry loading simulator to map each vehicle mix to a remaining-space state. This reduces the state space of the dynamic program. Our approach allows the value function to be approximated rapidly and accurately with a relatively coarse discretization of states. We present simulations of the selling season using this reduced state space to validate the method. The vehicle ferry loading simulator was developed in collaboration with a vehicle ferry company and addresses real-world constraints such as manoeuvrability, elevator access, strategic parking gaps, vehicle height constraints and ease of implementation of the packing solutions.

Introduction

Vehicle ferries are used to transport passengers and their vehicles and, for many island populations, they can be the sole means of transporting goods, as well as providing a service to commuters and tourists. The global ferry market in 2012 was valued at over $15 billion, carrying more than 2 billion passengers and 350 million vehicles. Space on the vehicle deck is typically the binding constraint and managing prices to ensure efficient use of the available space is an important problem. In this article we describe an heuristic pricing algorithm that takes into account the efficiency of the packing, and practical considerations such as vehicle manoeuvrability when setting prices for different vehicle types, ranging from large freight vehicles to motorcycles. Customer arrivals into the booking system are stochastic and a customer will purchase a ticket with a probability dependent on the price, their vehicle type and the time left until departure. This assumption allows us to use price as a lever of demand to push towards more efficient and profitable vehicle mixes, where a vehicle mix is defined as the number of vehicles of each type. While this article is focused on vehicle ferries, a similar problem is encountered in other industries, e.g., sale of advertising time on radio or television channels, setting costs for bespoke manufacturing, and other freight transportation applications. We use dynamic programming to set prices, where the state of the dynamic program gives an indication of the space remaining on the ferry. To obtain an exact solution, the states of the dynamic program should correspond to the mix of vehicles that have already purchased tickets for the ferry and in other work we describe how to obtain exact solutions using a combination of mixed integer linear programming and dynamic pricing (see MartinezSykora, Currie, So, Bayliss, & Bennell, 2017).